Here at Stees, Walker & Company, LLP, we make it our responsibility to help our clients navigate the complexities of personal and business finances and maximize their tax savings, so they have more money to enjoy their lives and invest toward their financial futures. To fulfill this deeply rooted responsibility, every year at about this time, we offer our clients a complementary mid-year planning meeting. During each one-hour session, we discuss the client’s goals and any changes to their personal and/or business lives, identify ways to help them save money on taxes, answer any questions they have, and ensure that we are all working together toward the same financial goals.

Whether you’re a client of ours or another financial planning firm, you should engage in a midyear tax and financial planning session because the financial decisions and actions you take over the coming months can have a significant impact on your finances for years to come. However, very few people engage in such planning or they do so without professional guidance. As a result, we suspect that many people miss out on opportunities to reduce their taxes and have more money to invest toward their financial futures.

This year, we have a sense that more people might neglect their finances due to COVID-19. With the spring filing deadline postponed to July 15, many people are still focused on filing their 2019 tax returns. However, early preparation is key to taking advantage of future tax-saving opportunities, so we encourage you to meet with a qualified tax advisor or financial planner to explore opportunities to improve your finances.

In this post, we cover some of the recent changes in tax legislation and present a list of tax moves that you and your advisor may want to discuss.

Recent and Future Changes Likely to Impact Your Taxes

Several changes in tax legislation occurred near the end of 2019 and early in 2020 that are likely to provide tax-saving opportunities:

  • The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, provides several tax-savings benefits for both individuals and businesses. Additional COVID-19-related tax changes could be implemented as the year progresses.
  • The Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act), passed in December 2019, extended (retroactively to 2018, in some instances) many beneficial provisions in the tax law that had expired or were set to expire.
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was also passed in December 2019, provides incentives for small businesses to offer retirement plans to their employees and to increase retirement savings overall.

Also, keep in mind that 2020 is an election year. While we don’t anticipate significant tax law changes if the President is reelected, a new occupant of 1600 Pennsylvania Avenue NW in Washington, DC, would almost certainly lead to tax reform (potentially with higher tax rates). Any change in the Oval Office will almost certainly impact any approaches to tax-saving you currently have in place.

Individual Income Tax Opportunities

As we always are, here at Stees, Walker & Company, LLP, we’re paying close attention to the ever-changing tax environment to discover financial planning opportunities that could reduce your personal income tax, put more cash in your pocket, and improve cash flow. Here are five actions you and your financial advisor may want to consider:

  • Adjust Your Tax Withholding or Estimated Payments. Avoid any nasty surprises when you file your next tax return by reviewing and, if necessary, adjusting the amount of income tax withheld from your paychecks. Use the IRS’s Tax Withholding Estimator to get a general idea of how much you should have withheld or have your advisor perform a more accurate assessment. Then, complete a revised Form W-4 and submit it to your employer. Be sure to inspect your next few paychecks to ensure that your employer is withholding the correct amounts.
  • File an Amended Return for 2018 or 2019. Ordinarily, an amended tax return is filed only when an error or omission is discovered after a return has been filed. With the current COVID-19 situation, any opportunity to put a little money back in your pocket may be worth pursuing. All three of the major tax laws passed within the last six months contain retroactive provisions that could make amending your 2018 and/or your 2019 return (if already filed) worth the time, effort, or cost.
  • Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0 percent, 15 percent, and 20 percent for most investments. The rate is determined by your taxable income. If possible, ask about lowering your reported income enough to qualify for the 0 percent rate (ask your advisor to look into ways to lower your reported income). If your income is too high to benefit from the 0 percent rate, consider gifting investments (such as appreciated stock or mutual fund shares) to children, grandchildren, or other loved ones. Chances are good that these individuals will be in the 0 percent or 15 percent capital gains tax bracket. If they later sell the investments, any gain will be taxed at one of the lower rates, as long as you and your loved one owned the investments for more than one year. However, beware of the “Kiddie Tax,” which applies to all children under age 18 and most children age 18 or to full-time students age 19–23. The “Kiddie Tax” may limit your opportunity to take advantage of this strategy.
  • Revisit Your Retirement Plan. If you’ve been affected by COVID-19 and find yourself in need of additional cash flow, the CARES Act contains several taxpayer-friendly provisions for taking retirement plan distributions up to $100,000 prior to the end of 2020. If you have funds in a traditional IRA and have been considering converting the account to a Roth IRA, 2020 might be a great year to execute that plan.
  • Check Your Approach to Deductions. Review your personal expenses to determine whether itemizing or claiming the standard deduction would optimize your tax savings. For 2020, joint filers can claim a standard deduction of $24,800. The standard deduction for heads of household is $18,650, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,400. If you’re able to itemize, please note that the Tax Cuts and Jobs Act (TCJA) (a major tax reform bill passed in December 2017) suspended or limited many itemized deductions. However, some planning techniques may help to overcome these limitations to some degree.

Tax Planning for Small Businesses

If you own a business, consider the following to minimize your tax bill for 2020:

  • Carry Net Operating Losses (NOLs) Back Instead of Forward. To assist small-business owners who may have incurred losses due to COVID-19, the CARES Act temporarily removed the Tax Cuts and Jobs (TCJA) Act limitation on NOLs. Because the new law is retroactive, you can now carry losses that originated in 2018 through 2020 back five years. This means you could carry a 2018 NOL back as far as 2013. Since tax rates were higher in 2017 and earlier years, carrying back an NOL should be much more beneficial than carrying that loss forward.
  • Claim Excess Business Losses for 2018 and 2019. The CARES Act retroactively removed the limitation on Excess Business Losses (EBLs) implemented for 2018 through 2020. Under the TCJA, beginning in 2018, taxpayers were unable to deduct business losses from sole proprietorships or pass-through entities, such as partnerships and S corporations, if the combined loss exceeded $250,000 ($500,000 for married joint fliers). (Those amounts were adjusted annually for inflation after 2018.) The excess loss was converted to an NOL and carried forward, subject to certain limitations. If your business losses were limited in either 2018 or 2019 (if that return has already been filed), strongly consider asking your CPA about the prospect of filing an amended return to generate a refund.
  • Maximize Your Business Interest Expense Deduction. The CARES Act relaxed the limitation on the deductibility of business interest expense. Under the TCJA, the deduction was generally limited to 30 percent of Adjusted Taxable Income (ATI). For 2019 and 2020, that limit is generally increased to 50 percent of ATI. Ask your financial advisor about special rules that apply to partnerships and their partners.
  • Take Advantage of the Better Depreciation Rules for Real Estate Qualified Improvement Property (QIP). The CARES Act includes a technical correction to the TCJA that is retroactive to 2018. The new rule allows much faster depreciation for real estate QIP that is placed in service after 2017.

Schedule Your Complimentary Midyear Tax Planning Meeting

Summer’s the perfect time for a financial planning “check-up” with us — your tax and financial planning firm. Now’s also a great time to consider handcrafted ideas that may give you peace of mind, increase your net worth, and ultimately cut your taxes. That’s what our complimentary mid-year meeting is all about. During this one-hour session, we will review your finances, help you identify potential tax-saving opportunities, offer guidance on how to meet your financial goals, and address any questions or concerns you may have.

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Disclaimer: The information in this blog post about preparing for your annual financial tune-up is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at Stees, Walker & Company, LLP, nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.