|Tax legislation enacted at the end of 2019, as well as new tax laws enacted in 2020 in response to the coronavirus pandemic (COVID-19), will affect your 2020 income tax return. These legislations contain many new provisions which are likely to minimize your 2020 tax liability. As a result, there are actions you may need to take before December 31 to ensure you take full advantage of all the opportunities presented by these legislations. Additionally, amended returns, which could generate significant refunds to some taxpayers or businesses could be a consideration. |
In December of 2019, the Further Consolidated Appropriations Act, 2020, was signed into law. The SECURE Act of 2019 was included in that new law, which not only extended certain expiring tax credits, such as the employer credit for paid family and medical leave, it also made favorable changes to certain provisions relating to employer-provided retirement plans.
In 2020, the first COVID-19 legislation signed into law was the Families First Coronavirus Response Act (Families First Act), which responded to the coronavirus pandemic by providing, among other things, payroll tax credits for leave required to be paid under the newly enacted Emergency Paid Sick Leave Act (EPSLA) and Emergency Family and Medical Leave Expansion Act (EFMLEA). The Families First Act was followed by the biggest legislation for the year, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Included in the CARES Act was the Paycheck Protection Program (PPP), a program authorized by the Small Business Administration (SBA) to guarantee $349 billion in new loans to eligible businesses and nonprofits affected by COVID-19. The loans may qualify for tax-free loan forgiveness.
The following are some of the areas you could explore to gain tax breaks to help you minimize your tax liability as part of your year-end tax savings strategy.
Impact of CARES Act Rebate on Your 2020 Tax Return.
Under the CARES Act, individuals with income under a certain level are entitled to a recovery rebate tax credit, referred to as stimulus checks. The correct calculation of the rebate will be part of your 2020 tax return. If your 2020 tax return indicates a rebate larger than your stimulus check because, for example, your income went down or you had another child, any additional amount can be claimed as a credit against your 2020 tax due. On the other end, if the 2020 rebate calculation shows an amount more than what you were entitled to, you do not have to repay that excess.
Generally, married filing separately is not beneficial for tax purposes because certain credits and deductions are not allowed. However, in some unique cases, such as when one taxpayer earns substantially less or when one taxpayer may be subject to IRS penalties for issues relating to their tax reporting, it may be advantageous to file as married filing separately. Further, if one spouse was not a full-year U.S. resident, there is an election available to file a joint tax return where such joint filing status would otherwise not apply and this may help reduce a couple’s tax liability.
Income from Repayment of Student Loan Debt.
Certain student loan debt repaid by an individual’s employer is excluded from income by the CARES Act. Thus, if an employer repaid some or all your student loan debt after March 27, 2020, and before 2021, the repayment, which would otherwise be taxable income to you, is not included in your income.
Standard Deduction versus Itemized Deductions.
For 2020, the standard deduction amounts are: $12,400 (single); $18,650 (head of household); $24,800 (married filing jointly); and$12,400 (married filing separately). If the total of your itemized deductions in 2020 will be close to your standard deduction amount, you should evaluate whether alternating between grouping itemized deductions into 2020 and taking the standard deduction in 202, or vice versa, could provide a net-tax benefit over the two-year period. For instance, you might consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses, and state income and property taxes (subject to the $10,000 deduction limitation on such taxes that applies to both single individuals and married couples filing jointly; and the $5,000 limitation on such expenses for married filing separately returns), exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be advantageous.
Medical Expenses, Health Savings Accounts, and Flexible Savings Accounts.
For 2020, your medical expenses are deductible as an itemized deduction to the extent they exceed 7.5 percent of your adjusted gross income. To be deductible, medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. Deductible expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.
Depending on what your taxable income is expected to be in 2020 and 2021, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2020 or defer them until 2021. The right approach depends on your income for each year, expected medical expenses, as well as your other itemized deductions.
You may also want to consider health saving accounts (HSAs) if you do not already have one. These are tax-advantaged accounts which help individuals who have high-deductible health plans (HDHPs). If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. These contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses. For 2020, the annual contribution limits are $3,550 for an individual with self-only coverage and $7,100 for an individual with family coverage.
Several CARES Act provisions affect health care related rules. For example, under the CARES Act, an HDHP temporarily can cover telehealth and other remote care services without a deductible, or with a deductible below the minimum annual deductible otherwise required by law. The CARES Act also modified the rules that apply to various tax-advantaged health-related accounts so that additional health-related items are “qualified medical expenses” that may be reimbursed from those accounts. Under the new rules, which apply to amounts paid after 2019, over-the-counter products and medications are now reimbursable without a prescription.
Put Your Children on Your Payroll.
If you have a child under the age of 18 and you operate your business as a Schedule C sole proprietor or as a spousal partnership, you might need to consider having that child on your payroll because this strategy could lower your tax liability. 1) Neither you nor your child would pay payroll taxes on the child’s income, and 2) With a traditional IRA, the child can avoid all federal income taxes on up to $18,400 in income. If you operate your business as a corporation, you can still benefit by employing the child even though both your corporation and your child pay payroll taxes.
Each taxpayer’s situation is different. You should consult with us or your tax professional to discuss your particular situation to determine the best course of action for you or your business.
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