First of all, we hope you and your families are healthy and safe. This year brought challenges and disruptions that significantly impacted your personal and financial situations – COVID-19, economic relief measures, new tax laws and political shifts. Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money.
With the elections in Georgia yet to be determined, there is a lot of tax reform speculation. The general consensus seems to be that there will not be sweeping income tax changes; however, tax rates are likely to rise over the next few years, so that should be considered as part of your tax planning analysis.
In addition to income tax changes, there could be significant changes to the estate tax regime coming soon. Please call if you have not discussed your estate plan with your lawyers or us recently.
The following is a look at some issues to consider as we approach year-end.
Unique to 2020, individuals who do not itemize their deductions can take an above-the-line charitable deduction of up to $300. Such contributions must be made in cash and made to qualified organizations.
For those itemizing, the adjusted gross income limitation for cash donations was increased to 100% for 2020 (excluding Sec. 509(a)(3) supporting organizations and donor-advised funds, for which the limitation remains at 60%).
Consider gifting appreciated securities rather than cash. When you gift appreciated securities, you receive a charitable deduction for the fair market value of the securities without having to recognize the capital gain on your return. The adjusted gross income deduction limitation for property donations remains at 30% for 2020.
If you are a qualified individual you may be able to take up to $100,000 in coronavirus-related distributions from retirement plans through the end of the year without being subject to the 10% additional tax for early distributions. The tax on qualified distributions can be paid over three years.
Additionally, required minimum distributions (RMDs) are temporarily suspended for 2020. If your retirement assets have taken a hit, not having to take an RMD may allow those assets to recover some value before you liquidate them.
Those of you that have experienced deductible losses from flow-through business activities for 2020, or otherwise have an NOL carryforward, you may want to consider converting traditional IRA funds to Roth IRAs. If you have recognized business losses, the income on such a conversion could be offset by those losses. Roth IRA conversions can also be used to take advantage of lower tax brackets and insure you utilize all of your itemized deductions, if applicable.
Review Your Investment Portfolio
Review your holdings to determine if you need to rebalance and take advantage of any tax planning opportunities at the same time. For example, if you have an overall capital loss for the year you could sell some gain positions to offset the loss and then buy back the same asset you sold to create the gains. This strategy can reduce your capital loss carryforwards, increase your income to desired levels, and step-up up your basis in assets that you want to hold.
Business Income And Expense Planning For Cash Basis Activities
Review your yearend receivables and upcoming expenditure needs. IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2020 prepayments cannot go into 2022. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule. Don’t surprise your landlord by paying all of next year’s rent, as they would need to recognize the income this year, but you could consider prepaying subscriptions or stocking up on supplies.
Consider purchasing company assets that will be need in the near future. We do not promote purchasing assets just to reduce your tax liability, but with today’s 100% bonus depreciation and increased Section 179 deductions you may be able to fully deduct the cost in 2020 if the assets are received and placed into service (used) prior to year-end.
Purchases on credit cards are considered paid for when charged, even for cash basis taxpayers. As such, using your credit card to pay upcoming bills can secure your 2020 tax deduction and allow you to defer the cash payment until 2021.
Please note that these strategies can create a snowball effect, reducing next year’s deductions or requiring you to take similar measures on an ongoing basis.
Paycheck Protection Program
If your business received a payment from the paycheck protection program the related expenses are currently thought to be nondeductible. The American Institute of Public Accountants and other groups continue to advocate for the deductibility of these expenses. If the expenses end up being deductible the cash receipts would not be taxable and the business owners would be able to deduct all the related costs, a most favorable outcome.
As a reminder, eligible employers are entitled to receive a payroll tax credit in the full amount for the wages paid for qualified sick leave and family leave offered through the Families First Coronavirus Response Act (FFCRA) which was taken during the period beginning April 1, 2020 through December 31, 2020. This credit is allowed against the Social Security and Railroad Retirement tax (IRC §3111(a) and §3221(a)) on all wages and compensation paid to the affected employees. If the amount of the credit exceeds the employer portion of these federal employment taxes, the excess is treated as an overpayment and can be refunded to the employer.
State Tax Obligations Related To Teleworking Arrangements For Employees
As the COVID-19 outbreak continues, many employers are encouraging or requiring their employees to work from home (i.e., telework). Such remote working arrangements could potentially have tax implications that should be considered.
Importance Of Retirement Planning
We recommend you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company provided retirement plans. Depending on your age and income level a Roth conversion may be advisable. It’s also advisable to take advantage of health savings accounts that can help you reduce your taxes and save for your future.
Virtual currency transactions are becoming more common. There are many different types of virtual currencies, such as Bitcoin, Ethereum and Ripple. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services or holding such currencies as an investment generally has tax consequences.
Fraudulent Activity Remains A Significant Threat
Our firm takes security seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:
- Receive a notice or letter from the Internal Revenue Service (IRS) regarding a tax return, tax bill or income that doesn’t apply to you
- Get an unsolicited email or another form of communication asking for your bank account number or other financial details or personal information
- Receive a robocall insisting you must call back and settle your tax bill
Make sure you’re taking steps to keep your personal financial information safe. Let us know if you have questions or concerns about how to go about this.
Please also continue to send us sensitive information using the secure upload link on our home page.
There are many other opportunities to discuss as year-end approaches. We are here to help. Please call with any questions so we can discuss your specific situation.
Using appreciated stock held over a year to fund a significant contribution to a public charity instead of cash can result in a “double play”. You can get the benefit of a deduction equal to the full fair market value of the shares and at the same time avoid paying capital gains tax on the appreciation.
Making a charitable contribution using publicly traded stock is fairly simple. For contributions of more than $5,000, you must attach Form 8283 with a description of the shares contributed, their fair market value, how you acquired the shares and your cost basis. In addition, as is true for all contributions over $250, you must obtain written contemporaneous acknowledgement of your contribution from the charity, which must include a statement that you did not receive anything of value in return for making the contribution.
The same result can be attained with a charitable contribution of non-publicly traded shares. However, for gifts valued at more than $10,000, there is an additional requirement. In order to secure a deduction, you must get a “qualified appraisal”. A qualified appraisal is a complex and detailed document, which must be prepared and signed by a “qualified appraiser”. While it generally does not have to be attached to your tax return, the appraisal must be obtained before the due date, including extensions, for filing your income tax return on which the deduction is claimed.
We are often asked about charitable contributions involving non-publicly traded stock and business interests, where the appraisal requirement seems redundant and completely unnecessary. Consider a contribution of an interest in a partnership whose units are freely exchangeable for shares of publicly-traded stock; or, a contribution of shares in a corporation whose shareholders are subject to a “buy-sell” agreement, which clearly sets the value of the shares; or, a contribution of shares in a closely-held corporation whose shares have traded in many arms-length transactions during the year. Unfortunately, even when an appraisal is redundant, the Code and Regulations strictly require that you get an appraisal.
What if you have made a significant charitable contribution of appreciated non-marketable securities in 2016 and you have not yet obtained a qualified appraisal? You should consider requesting an extension to file your 2016 income tax return before the April 18, 2017 deadline, so you have until October 15 to get your qualified appraisal. No appraisal means no deduction, or at best, your deduction will be limited to your cost basis instead of the fair market value.
CONSULT YOUR TAX ADVISER — this article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. George Ashley is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He may be reached at 775-831-7288, and welcomes comments at [email protected]
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