One of our main goals as holistic financial professionals is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component to help our clients benefit from potential tax reduction strategies.
2020 was an unusual year that had several major legislative bills passed that could have an impact on your taxes. It is also a presidential election year, so investors might want to think about potential future tax strategies. Although it will take more than a change in president to enact tax laws changes, it is always wise to educate yourself in advance. This report includes sections on possible tax law changes if there is a change in administration (based on the current proposals) and notable CARES Act and SECURE Act changes that you should be aware of. The main focus of this report is on what individual taxpayers can do to potentially save money on their 2020 taxes.
The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. One big uncertainty for all taxpayers is what will happen to the Tax Code after 2025. The way the Tax Cuts and Jobs Act is set up, the changes to the corporate side of the tax code are permanent while many provisions for individuals that took effect in 2018 are currently set to expire after 2025.
The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.
Income Tax Rates for 2020
For 2020 there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Under current law this seven-rate structure will phase out on January 1, 2026.
For 2020 there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Under current law this seven-rate structure will phase out on January 1, 2026.
| Tax Rate | Single | Married/Joint & Widow(er) |
Married/Separate | Head of Household |
| 10% | $0 to $9,875 | $0 to $19,750 | $0 to $9,875 | $0 to $14,100 |
| 12% | $9,876 to $40,125 | $19,751 to $80,250 | $9,876 to $40,125 | $14,101 to $53,700 |
| 22% | $40,126 to $85,525 | $80,251 to $171,050 | $40,126 to $85,525 | $53,701 to $85,500 |
| 24% | $85,526 to $163,300 | $171,051 to $326,600 | $85,526 to $163,300 | $85,501 to $163,300 |
| 32% | $163,301 to $207,350 | $326,601 to $414,700 | $163,301 to $207,350 | $163,301 to $207,350 |
| 35% | $207,351 to $518,400 | $414,701 to $622,050 | $207,351 to $311,025 | $207,351 to $518,400 |
| 37% | $518,401 or more | $622,051 or more | $311,026 or more | $518,401 or more |
Year-end Tax Planning for 2020
2020 is the third year for the new tax laws and new tax forms that were created by the 2017 Tax Cuts and Jobs Act (TCJA). One of our primary goals is to help our clients try to optimize their tax situations. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.
Everyone’s situation is unique but it is wise for every taxpayer to begin their final year-end planning now! Choosing the appropriate tactics will depend on your income as well as a number of other personal circumstances. As you read through this report it could be helpful to note those strategies that you feel may apply to your situation so you can discuss them with your tax preparer.
Some items to consider include:
— Evaluate the use of itemized deductions versus the standard deduction
For 2020, the standard deduction amounts will increase to $12,400 for individuals and married couples filing separately, $18,650 for heads of household, and $24,800 for married couples filing jointly and surviving spouses.
As a reminder, in 2018, the Tax Cuts and Jobs Act roughly doubled the standard deduction. It’s reported that this helped decrease tax payments for many of those who typically claim this standard deduction. Although personal exemption deductions are no longer available, the larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take itemized deductions.
The TCJA still eliminates or limits many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately.
— Consider bunching charitable contributions or using a donor-advised fund
For many taxpayers, the larger standard deduction and changes to key itemized deductions resulted in them no longer itemizing. It was estimated that about 15 million filers used the charitable contribution write-off in 2018, a sharp decline from the 36 million who utilized it in 2017. For those taxpayers who are charitably inclined it makes sense to think about a plan. One way to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount. (wsj.com 2/15/2019)
Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It can be a win-win situation. If you are charitably inclined and need some guidance, please call us and we can assist you.
— Review your home equity debt interest
For mortgages taken out after October 13, 1987, and before December 16, 2017, mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt. The threshold has been lowered to the first $750,000 or $375,000 (married filing separately) on homes purchased after December 15, 2017. All interest paid on any mortgage taken out before October 13, 1987 is fully deductible regardless of your mortgage amount (called “grandfathered debt”). This change under the TCJA law applies to all tax years between 2018 and 2025. Many mortgage holders refinanced for lower rates in the last few years so remember for larger mortgages, that could change your situation.
Home equity lines of credit (HELOCs) are deductible as well, but only if the funds were used to buy or substantially improve the home that secures the loan. Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible.
— Revisit the use of qualified tuition plans
Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount.
Contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2020 up to $15,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above $15,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($11.58 million in 2020).
There is also an option to make a larger tax-free 529 plan contribution, if the contribution is treated as if it were spread evenly over a 5-year period. For example, a $75,000 lump sum contribution to a 529 plan can be applied as though it were $15,000 per year, as long as no other gifts are made to the same beneficiary over the next 5 years. Grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy. If you want to explore setting up a 529 plan, call us and we would be happy to assist you.
— Maximize your qualified business income deduction (if applicable)
One of the most talked about changes from the Tax Cuts and Jobs Act is still the qualified business income deduction under Section 199A. Taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. Please be careful because this deduction is subject to various rules and limitations.
There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of tax legislation would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.