Dive into Withum’s Tax Planning Guide for your one-stop shop for annual year-end individual and business tax planning tips, new opportunities under the CARES Act and top planning considerations for specific industries.
At a glance, key changes include:
Lower income tax rates, a larger standard deduction, severely limited itemized deductions, and no personal exemptions.
The corporate tax rate is currently a flat 21% rate, there is no corporate AMT, and there are very generous expensing and depreciation rules.
*Disclaimer: The following advice may change based upon rates in effect next tax year due to the income presidential administration.
Below is our curated year-end tax planning checklist for 2020. It includes actions that may help you save tax dollars if you act before year-end. Reach out to your Withum Tax Professionals to discuss planning ideas that may be applicable to your situation.
Individual Tax Planning
2020 Tax Brackets and Rates
||For Unmarried Individuals
||For Married Filing Jointly
||For Heads of Households
|Taxable Income Over
Married, Filing Jointly
Head of Household
Capital Gain Brackets and Rates
||For Unmarried Individuals
||For Married Individuals Filing Joint Returns
||For Heads of Households
|Taxable Income (including Capital Gains) Over
2020 Year-End Tax Planning Checklist
General Income Tax Planning
- Postpone income until 2021 and accelerate deductions into 2020.
- Doing so may enable you to claim larger deductions, credits, and other tax breaks for 2020 that are phased out over varying levels of adjusted gross income (AGI).
- Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
- Long-term capital gain from sales of assets held for more than one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term, appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate, if applicable.
- The 3.8% Net Investment Income (NII) tax will apply depending on a taxpayer’s modified adjusted gross income (MAGI) and NII for the year. Taxpayers should consider ways to minimize or eliminate (e.g., through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than NII.
- The 0.9% additional Medicare tax applies to individuals for whom the sum of their wages received with respect to employment or self-employment income exceeds a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in other cases). Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Thus, planning opportunities may exist with respect to eliminating this tax by deferring income to a later year.
- Consider asking your employer to increase withholding of state and local taxes (or you can pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2020. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2020 state and local tax payments to exceed $10,000.
- Many taxpayers will claim the standard deduction because of the increased standard deduction and the limits on itemized deductions that apply for 2020:
- No more than $10,000 of state and local taxes (including real estate taxes) may be deducted;
- Miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible;
- Interest paid on home mortgage debt (subject to a grandfathering rule) is deductible to the extent of debt up to $750,000; and
- Personal casualty and theft losses are deductible only if they are attributable to a federally-declared disaster, and only to the extent the $100-per-casualty and 10%-of-AGI limits are met.
NOTE: You can still itemize medical expenses, but only to the extent they exceed 10% of your AGI. Permissible itemized deductions would need to cumulatively exceed the standard deduction applicable to your filing status in order to lower your taxes.
- Relocation of residency and domicile for the purpose of reducing or eliminating individual state taxation. For example, common states where people move to reduce state taxes are Florida, Texas, Wyoming and Nevada.
- Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
- If you become eligible in December of 2020 to make health savings accounting (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2020.
- If you were in a federally-declared disaster area, you might want to settle an insurance or damage claim in 2020 to maximize your casualty loss deduction this year.
Capital Gain Planning
- Should I sell stocks/bonds now or wait for the new year? Capital gain rates are always top of mind for clients, especially for those with substantial unrealized gains or business owners looking to sell their business. An increase in capital gain rates, even by a few percentage points, could make the difference between selling now or later (See Election Comparison later).
- If you expect capital gain rates to rise, you could sell stock now and reestablish the position immediately after the sale. With publicly-traded stock, recognizing the gain can be done with an actual sale or a constructive sale, such as a short sale against the box. The wash sale rules do not apply to recognized gain, so there is no risk of having the gain deferred as there would be with selling stock at a loss and then buying it back.
- If you expect capital gain rates to fall, holding appreciated stock may make sense, though this exposes you to downside risk. If you execute a hedging strategy to mitigate the economic risk, consider the effect of the straddle rules and the constructive sale rules to avoid any unintended consequences.
Estate Tax Planning
- To give or not to give? The estate tax is becoming a hot button issue once again, even with the lifetime exemption currently set at $11.58 million per person. The question is whether any gift given now that uses up the exemption will be grandfathered if there is a future change to the exemption amount. The IRS has issued favorable proposed regulations, so no claw-back is expected. If you have not done so already and are comfortable surrendering control of assets to the next generation, it might be a good idea to take advantage of the $11.58 million per individual lifetime exemption in 2020, or $23.16 million for a married couple. The prevailing view is that the current lifetime exemption amount is as good as it gets, and using it up before it’s gone might be your best bet regardless of who wins in November.
- It may make sense to convert all or part of your eligible retirement accounts (e.g., traditional IRA) to a Roth IRA before year-end. However, such a conversion will increase your AGI for 2020 and possibly reduce tax breaks tied to AGI (or MAGI).
- Taking versus delaying required minimum distributions (RMDs) from your IRA or 401(k) (or other employer-sponsored retirement plans).
- Consider bunching charitable deductions in the current year with a donor-advised fund, so you increase your charitable deduction and therefore your itemized deductions above the standard deduction. The benefit is that you can deduct the charitable contribution today and allocate charitable funds from the donor-advised fund in later years.
- Make gifts sheltered by the annual gift tax exclusion before the end of the exclusion applies to gifts of up to $15,000 made in 2020 to each of an unlimited number of individuals.
- Consider making 2020 charitable donations via qualified charitable distributions from your When you reach age 70½, the contribution is neither included in your gross income nor deductible as an itemized deduction. And the amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.
- If Democrats win the election, you should consider accelerating gifts into 2020 and taking advantage of lower asset valuations available in 2020 due to the pandemic.
Business-Related Planning for Individuals
- QBI Deduction
- Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). If the taxpayer’s taxable income exceeds a certain threshold amount, the deduction may be limited based on: whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting); the amount of W-2 wages paid by the trade or business; and the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. [fix formatting]
- Taxpayers may achieve significant savings with respect to this deduction by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end.
- N.J. Business Alternative Income Tax
State Tax Credits
- States offer various tax credits and incentive programs to attract businesses and stimulate investment and retain businesses currently operating within their borders.
- Determining the best market for your business to incorporate or operate is a critical decision – do not overlook the tax credits and incentives that may be available.
- Common opportunities from state-to-state may target—
- Small & mid-sized businesses
- Larger businesses
- Innovative businesses
- Job creation
- Capital investments
- Angel investors
- Specifically targeted industries, such as technology, manufacturing, agriculture, or film
- Geography, such as distressed zones, enterprise zones, or tax-increment finance districts
- Energy credits
Year-End Tax Planning for Businesses
The corporate tax rate is currently a flat 21% rate. This tax rate may change based upon the result of the presidential election.
Limits on Deduction of Business Interest
Regardless of its form, every business is generally subject to a disallowance of a deduction for net interest expense over 30% of the business’s adjusted taxable income (ATI), and under the CARES Act, 50% for 2019 and 2020, as discussed above. The net interest expense disallowance is determined at the tax filer level; however, a special rule applies to pass-through entities, requiring the determination to be made at the entity level, for example, at the partnership level instead of the partner level.
- For tax years beginning after December 31, 2017, and before January 1, 2022, ATI is generally computed without regard to deductions that allow for depreciation, amortization, or depletion.
- Exemptions from Limits on Deduction of Business Interest:
- An election to be excepted from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year ending with the prior tax year that does not exceed $26 million.
- Real property trades or businesses can elect out of the provision, but they must use ADS to depreciate applicable real property used in a trade or business instead of bonus depreciation.
- An exception from the limitation on the business interest deductions is also provided for floor plan financing (i.e., financing for the acquisition of motor vehicles, boats or farm machinery for sale or lease and secured by such inventory).
- Using cash to expand your business, as opposed to accrual, is a method to help small businesses. To qualify as a small business, a taxpayer must, among other things, satisfy a gross receipts test (during a three-year testing period, average annual gross receipts cannot exceed $26 million).
NOTE: If a taxpayer can meet the small business gross receipts test, there may be certain benefits in using the below methods of accounting. Please discuss this with your Withum tax professional.
- UNICAP – not required to capitalize additional costs to inventory
- Treat inventory as non-incidental materials and supplies, or any method that represents financial accounting treatment of inventory
- Percentage-of-Completion Method is not required for long-term construction contracts
Year-End Planning Resources
- Cash method taxpayers may find it a lot easier to shift income, e.g., by deferring billings until next year or by accelerating expenses, e.g., paying bills early.
- Consider making expenditures that qualify for the liberalized business property expensing
- For tax years beginning in 2020, the expensing limit is $1,040,000, and the phaseout starts at $2,590,000. This means there is a dollar-for-dollar reduction in the expensing limit after spending exceeds $2,590,000, and the entire deduction would disappear once you reach $3,630,000. Bonus depreciation generally can still be taken after you reach the spending cap.
- Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and business-use vehicles (though restrictions apply).
- Expensing is also available for “qualified improvement property” (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), as well as roofs, HVAC, fire protection, alarm, and security
- The expensing deduction is not prorated for the time that the asset is in service during the Thus, property acquired and placed in service during the last days of 2020, rather than the beginning of 2020, can result in a full expensing deduction for 2020.
- 100% Bonus First-Year Depreciation – Businesses are permitted a deduction for machinery and equipment bought new or used (with some exceptions) if such purchases are placed in service this The 100% write-off is permitted without any proration based on the length of time an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2020.
- De Minimis Safe Harbor Election – Also known as the book-tax conformity election, this election is an administrative convenience that allows businesses to deduct small-dollar (i.e., up to $2,500 or $5,000 per invoice) expenditures for the acquisition or production of property that otherwise would have to be capitalized, other than amounts paid for inventory or land.
- Cost Segregation Benefits – Cost segregation studies allocate building costs to tangible personal property so that depreciation deductions can be taken sooner rather than later. A building generally is non-residential real property (39-year property) or residential real property (27.5-year property) eligible for straight-line depreciation. Equipment, furniture and fixtures are tangible personal property that is generally depreciated over 5 or 7 years and is eligible for accelerated depreciation (e.g., double declining balance, bonus depreciation, and §179 expensing). By segregating the costs between the building and the tangible personal property, the costs allocable to the tangible personal property can be written-off sooner than the costs allocable to the building.
- Income Acceleration – Certain corporations (other than large corporations) that anticipate a small net operating loss (NOL) for 2020 and substantial net income in 2021 may find it worthwhile to accelerate just enough of its 2021 income (or to defer just enough of its 2020 deductions) to create a small.