9.30.20 | Client Alert
COVID-19 … a fiery presidential election … widely divergent tax proposals … ongoing attempts at massive reform … the changes and opportunities presented by the Tax Cuts and Jobs Act (TCJA) … and uncertainty about the future of the TCJA. Despite all of this, there are still steps that can be taken to protect and enhance one’s financial position, while remaining flexible enough to adjust and pivot as conditions change.
Berdon’s 2020-21 Tax Planning Guide provides an overview of some of the most significant tax law changes and other key tax provisions you need to be aware of to develop your strategy and to minimize your tax liability in the current environment. Use it to work closely with your tax advisor to identify the best strategies that will align with your particular situation today and that will be flexible to enable you to plan for the potential changes on the horizon.
This valuable reference tool is available in electronic form — which updates as tax laws change — and in hardcopy. The guide is segmented into important areas of interest such as Income & Deductions, Family & Education, Investing, Business, Retirement, and Estate Planning. The guide provides charts and case studies to clarify complex concepts and help identify opportunities to pursue.
While the guide covers existing tax law, the presidential election is weeks away and the candidates’ tax policies stand in stark contrast with one another. To assist in processing these disparate views, Berdon’s Tax Team compiled a chart highlighting the respective campaigns’ positions on the main components of their tax plans and provided links for further analysis of the impact of the candidates’ plans on individuals, families and businesses. To access this content, click here.
Among the areas covered in Berdon’s Tax Guide include:
State and Local Tax Deduction Limitation. Under the TCJA, through 2025, a taxpayer’s entire itemized deduction for state and local taxes — including property tax and the greater of income or sales tax — is limited to $10,000 ($5,000 for married filing separately). Deducting sales tax instead of income tax may be beneficial if you reside in a state with no, or low, income tax or you purchased a major item, such as a car or boat.
Mortgage Interest Deduction Limitation. Taxpayers generally can deduct interest on mortgage debt incurred to purchase, build, or improve their principal residence and a second residence. Points paid related to one’s principal residence also may be deductible. Through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 (married filing jointly) for debt incurred after December 15, 2017, with some limited exceptions.
Charitable Donations (2020 Opportunity). Making large cash donations to charitable organizations in 2020 might be beneficial because the Coronavirus Aid, Relief, and Economic Security (CARES) Act increased the 2020 deduction limit for such gifts to public charities from 60% of adjusted gross income (AGI) to 100% of AGI. Also, the CARES Act allows taxpayers who claim the standard deduction to deduct up to $300 of cash donations to qualified charities in 2020.
“Kiddie Tax”. This generally applies to unearned income beyond $2,200 (for 2020) of children under age 19 and of full-time students under age 24 (unless the students provide more than half of their own support from earned income). The TCJA made the tax harsher, taxing income subject to the tax according to the tax brackets used for trusts and estates. Before 2018, such income was generally taxed at the parents’ tax rate. In many cases, the TCJA would have caused children’s unearned income to be taxed at higher rates than their parents’ income, because higher rates kick in at much lower income levels for trusts and estates. Opportunity: The change is retroactive for the 2018 tax year, which means that taxpayers may amend their 2018 tax returns to take advantage of the shift back to ordinary income tax levels.
Tax Relief on Student Loans (2020 Opportunity). Under the CARES Act, employers can provide up to $5,250 toward employee student loan payments on a tax-free basis in 2020. The payment can be made to the employee or the lender.
Section 199A Deduction for Pass-through Businesses. The TCJA provides, through 2025, the Section 199A deduction for sole proprietorships and owners of pass-through entities with certain exceptions. The deduction generally equals 20% of qualified business income (QBI), subject to limits that can begin to apply if 2020 taxable income exceeds the applicable threshold — $163,300 or, if married filing jointly, $326,600. The limits fully apply when 2020 taxable income exceeds $213,300 and $426,600, respectively. Consult your tax advisor for more information.
Section 179 Expensing Election. You can currently deduct the cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software, and, under the TCJA, qualified improvement property, certain depreciable tangible personal property used predominantly to furnish lodgings, and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Bonus Depreciation. This additional first-year depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, and water utility property. Important: Under the TCJA, in some cases, a business may not be eligible for bonus depreciation on certain assets. Examples include real estate businesses that elect to deduct 100% of their business interest and dealerships with floor-plan financing, if they have average annual gross receipts of more than $25 million for the three previous tax years. Opportunity: The CARES Act includes a technical correction to fix a drafting error in the TCJA. Now, restaurants, retailers and other businesses that have made qualified improvements during the past two years can claim an immediate tax refund for the bonus depreciation they missed due to the error.
Net Operating Losses. For NOLs that arise in 2018 and later tax years, the TCJA generally reduces the maximum amount of taxable income that can be offset with NOL deductions from 100% to 80%. Also, the TCJA generally prohibits NOLs incurred in 2018 and later tax years from being carried back to an earlier tax year — but it allows them to be carried forward indefinitely (as opposed to the 20-year limit under pre-TCJA law). Opportunity: Under the CARES Act, taxpayers are now eligible to carry back NOLs arising in 2018 through 2020 tax years to the previous five tax years. The Act also allows taxpayers to potentially claim an NOL deduction equal to 100% of taxable income for prior-year NOLs carried forward into tax years beginning before 2021.
Payroll Tax Credit. Under the CARES Act, this credit is generally available to employers whose operations were fully or partially suspended due to a COVID-19 related governmental shutdown order. Employers whose gross receipts dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter) are typically eligible.
Interest Expense Deduction. Generally, under the TCJA, interest paid or accrued by a business is deductible up to 30% of adjusted taxable income (ATI). Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years generally are exempt from the interest expense deduction limitation.
Pass-through Entity “Excess” Business Losses. Through 2025, the TCJA limits deductions to current-year business losses incurred by noncorporate taxpayers. Such losses generally cannot offset more than $250,000 ($500,000 for married filing jointly) of income from other sources such as salary, self-employment income, interest, dividends, and capital gains. Excess losses are carried forward to later tax years and can be deducted under net operating losses rules. Important: The CARES Act temporarily lifts the limit–enabling taxpayers to deduct 100% of business losses arising in 2018, 2019, and 2020.
Required Minimum Distributions (RMDs) (2020 Opportunity). Historically, after a taxpayer reaches age 70½, he or she was required to begin to take annual RMDs from his or her IRAs (except Roth IRAs) and, generally, from any defined contribution plans. However, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the age has now increased to 72 (for taxpayers born after 6.30.49) and the RMD rule has been waived for 2020.
Berdon’s 2020-21 Tax Planning Guide is a resource for tax planning ideas and tax savings opportunities that can be revisited throughout the year. After identifying potential opportunities, contact your tax advisor to review the specifics and/or discuss other opportunities that may result in significant benefits to you, your family, and your business. Berdon professionals are always available to assist. If you are interested in connecting with one of our tax specialists, please email firstname.lastname@example.org.
Follow the links below to download or request a hardcopy of the tax planner.
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