Only two months remain between now and the end of the fourth and final quarter of 2020. Many of us will be happy to be looking back at 2020 in our rearview mirrors, but in regard to taxes — now is the time to start looking forward to 2021 and beyond. The next two months are just as important as the next two years for maximizing your tax savings.

Schedule a Year-End Tax Projection Meeting

This two-month period is the best time to review any changes in state and/or federal tax law and regulations that could affect how, when, and how much you pay in taxes. During our scheduled tax projection appointment, we will review your current personal, family, and business situations; identify tax-saving opportunities for the coming year; and address any tax questions or concerns you may have.

In addition, if you’re concerned about your tax balance due April 15, 2021, our year-end tax projection can give you a sense of what you can expect to owe or get back in 2020 taxes and consider some year-end techniques that can trim your tax bill or boost your tax refund.

You don’t want to be blind-sided by a tax bill you can’t pay. And if you paid enough (or too much) in estimated taxes, that’s good to know, too — not only for your peace of mind, but also so you can leverage that knowledge for additional tax savings and for your future business and personal financial planning.

Whether you’re a client of ours or another tax planning or financial strategy firm, you should engage in a year-end tax projection 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.

Looking Back at 2020 and Forward to 2021

2020 has been quite a challenge, to say the least. The global health pandemic — brought on by the virus named “SARS-CoV-2” and the disease it causes, named coronavirus disease 2019 (COVID-19) — led to business closures and slowdowns, high unemployment, and a significant amount of uncertainty. As a result, your 2020 finance and tax forecasts from late 2019 may not have gone according to plan, with unexpected events complicating your projections.

Thankfully, here at Stees, Walker & Company, LLP, the majority of our clients chose to participate in a mid-year meeting with one of our CPAs, and together we were able to make thoughtful moves based on mid-year economic projections and realities — moves that saved our clients a lot of worry and money.

Now, as we approach the end of the year, it’s time to discuss anything that may have derailed your tax and financial planning for 2020 and get it back on track, as well as review any changes in state and/or federal tax law and regulations that could affect how, when, and what you pay in taxes.

The past 12 months have seen several major tax law changes. In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in March of this year. In addition — and unrelated to COVID-19 — the Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act were passed in December 2019. The Disaster Act extended many beneficial provisions that had expired or were set to expire. Barring additional extenders, many of these will expire again at the end of 2020. The SECURE Act, on the other hand, made significant changes to federal retirement rules. Below, we’ll highlight planning techniques stemming from these recent bills, as well as other year-end planning ideas that you should take into consider sooner and not later.

Also, let’s not forget that this week’s election. While we don’t anticipate significant tax law changes if President Trump is re-elected, a victory by former Vice President Joe Biden would almost certainly lead to tax reform (with potentially higher tax rates for those earning $400k or more per year, as well as for corporate entities). It’s also possible that we’ll see additional COVID-19-related legislation. As always, we’re paying close attention to the ever-changing tax environment to discover tax planning opportunities.

Year-end Planning Moves for Individuals

Here are some approaches that may lower your individual income tax bill for 2020.

  • Take Advantage of Generous Standard Deduction Allowances. For 2020, the standard deduction amounts are $12,400 for singles and those who use married filing separate status, $24,800 for married joint filing couples, and $18,650 for heads of household. If your total annual itemizable deductions for 2020 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.
  • Cancellation of Debt (COD) Relief. Individuals can exclude up to $2 million ($1 million if not married or filing jointly) of COD income from qualified principal residence indebtedness that is cancelled in 2020 because of their financial condition or decline in value of the residence. Debt cancelled after Dec. 31, 2020 still qualifies, but only if discharged according to a written binding agreement entered into prior to Jan. 1, 2021.
  • Traditional IRA Contributions for All. The SECURE Act removed the age restriction on making traditional individual retirement account (IRA) contributions. Individuals over the age of 70 1⁄2 who are still working in 2020 are no longer prohibited from contributing to a traditional IRA. However, if you’re over age 70 1⁄2 and considering making a charitable donation directly from your IRA (known as a Qualified Charitable Distribution or QCD) in the future, making a deductible IRA contribution will affect your ability to exclude future QCDs from your income.
  • Carefully Manage Investment Gains and Losses in Taxable Accounts. If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2020 is only 15 percent for most people, although it can reach a maximum of 20 percent at higher income levels. The 3.8 percent Net Investment Income Tax (NIIT) also can apply at higher income levels.
  • Take Advantage of 0% Tax Rate on Investment Income. For 2020, single people can take advantage of the 0 percent income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts if their taxable income is $40,000 or less. For heads of household and joint filers, that limit is increased to $53,600 and $80,000, respectively. While many of our client’s income may be too high to benefit from the 0 percent rate, you may have children, grandchildren, or other loved ones who will be in the 0 percent bracket. If so, consider giving them appreciated stock or mutual fund shares that they can sell and pay 0 percent tax on the resulting long-term gains. However, if securities are given to someone who is under age 24, the kiddie tax rule could cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to the individual’s parent.
  • Convert Traditional IRAs into Roth Accounts. Now may be the perfect time to make that Roth conversion you’ve been thinking about. The current tax rates are still relatively low compared to a couple of years ago. And while the rates are scheduled to remain that way until 2026, depending on the results of the November election, they could increase much sooner. Also, your income may be lower in 2020 due to the financial fallout of the health pandemic. On the bright side, that means you’re likely in a lower tax bracket than you normally find yourself. Since the CARES Act suspended Required Minimum Distributions (RMDs) for 2020, if you already budgeted to pay tax on your RMD, rolling that distribution to a Roth IRA could be a perfect move. No RMD for 2020 also means that 100 percent of the distribution can be classified as a rollover.
  • Consider Intrafamily Loans. Interest rates are at a historic low and continue to decrease. This scenario creates an attractive opportunity for those interested in assisting family members financially and transferring assets in a tax-efficient manner. Intrafamily loans, along with proper gift tax planning, may be a smart move.

Year-end Planning Moves for Small Businesses

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

  • Net Operating Losses (NOLs). The CARES Act temporarily relaxed many of the NOL limitations that were implemented under the Tax Cuts and Jobs Act (TCJA). If your small business expects a loss in 2020, know that you will be able to carry back 100 percent of that loss to the prior five tax years. If you had an NOL carried into 2020, you can claim a deduction equal to 100 percent of your 2020 taxable income.
  • Establish a Tax-favored Retirement Plan. If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions and credits. If this is of interest to you, please make a note now to bring it up with us during your Year-End Tax Projection Appointment.
  • Take Advantage of Generous Depreciation Tax Breaks. One hundred percent first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar-year 2020. That means your business might be able to write off the entire cost of some or all of your 2020 asset additions on this year’s return. Thanks to the CARES Act, Qualified Improvement Property (QIP) is now eligible for bonus depreciation (or can be depreciated over 15 years rather than 39 years). So, consider making additional acquisitions, including QIP acquisitions, between now and year-end.
  • Cash in on Generous Section 179 Deduction Rules. For qualifying property placed in service in tax years beginning in 2020, the maximum Section 179 deduction is $1.04 million. The Section 179 deduction phase-out threshold amount is $2.59 million. (Unfamiliar with Section 179? That’s okay. Here’s what you need to know: Section 179 of the U.S. Internal Revenue code allows for immediate expense deductions that business owners can take for purchases of depreciable business equipment (as opposed to capitalizing and depreciating the asset over a period of time. Section 179 deductions may be taken if the piece of equipment is purchased or financed and the full amount of the purchase price is eligible for the deduction.)
  • Time Your Business Income and Deductions for Tax Savings. If your business is conducted via a pass-through entity, the traditional approach of deferring income into next year — while accelerating deductible expenditures into this year — makes sense if you expect to be in the same or lower tax bracket next year. On the other hand, if you expect to be in a higher tax bracket in 2021 (which could be the case due to COVID-19 and/or the results of the presidential election), you may want to take the opposite approach — accelerate income into this year (if possible) and postpone deductible expenditures until 2021.

Scheduling Year-End Tax Projection Appointment

This post covers only some of the year-end tax planning moves that could benefit you, your loved ones, and your business. That’s why it’s so important to schedule your year-end tax projection appointment now. To schedule your appointment, please take the following steps:

  1. Open our online Appointment Scheduler
  2. Choose: “Year-End Tax Projection Appointment”
  3. Scroll down to choose a date and time and enter additional preferences.
  4. Click the Book button.

For your convenience and everyone’s safety, this Year-End Tax Projection Appointment takes place online using Zoom.

Preparing for Your Year-End Tax Projection Appointment

Once your meeting is scheduled and confirmed, make a list of any changes in your life that might impact your taxes — such as marriage or divorce, buying a new home, inheritances, having a new baby (or expecting), sending a child off to college, or retirement. List any major life changes, even if you think there’s no way they might impact your taxes.

Schedule your meeting today and mark it on your calendar. We look forward to meeting with you, addressing any questions or concerns you may have, and helping you maximize your tax savings for 2021 and beyond.