The following are some of the areas you could explore as tax breaks to help you minimize your taxable income as part of your year-end tax planning strategy.
Child and Dependent Tax Credit.
For 2020, you may claim as much as a $2,000 credit for each child under age 17. The amount of the credit is reduced for taxpayers with modified adjusted income over $200,000 ($400,000 for married filing jointly) and eliminated in full for taxpayers with modified adjusted gross income over $240,000 ($440,000 for married filing jointly). In addition, you may be eligible for a $500 credit for certain dependents. The $500 credit applies to two categories of dependents: (1) qualifying children for whom a child tax credit is not allowed, and (2) certain qualifying relatives.
Education-Related Deductions and Credits.
Certain education-related tax deductions, credits, and exclusions from income may apply for 2020. Tax-free distributions from a qualified tuition program, also referred to as a Section 529 plan, of up to $10,000 are allowed for qualified higher education expenses. Qualified higher education expenses for this purpose include tuition expenses in connection with a designated beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school. It also includes expenses for fees, books, supplies, and equipment required for the participation in certain apprenticeship programs and qualified education loan repayments in limited amounts.
A special rule allows tax-free distributions to a sibling of a designated beneficiary (a brother, sister, stepbrother, or stepsister). As a result, a 529 account holder can make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account. Additionally, if your modified adjusted gross income level is below certain thresholds, the following are also available for 2020: 1) a deduction of up to $4,000 for qualified tuition and related expenses, an exclusion from income for education savings bond interest received, 2) a deduction for student loan interest, and 3) a lifetime learning credit of up to $2,000 for tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution.
Deductions for Excess Business Losses.
The CARES Act removed the loss limitation deduction applicable to non-corporate taxpayers who incurred excess business losses in 2018, 2019, and 2020. An excess business loss for the tax year is the excess of aggregate deductions attributable to your trades or businesses over the sum of your aggregate gross income or gain plus a threshold amount. The threshold amount for 2020 is $259,000 or $518,000 for joint returns. If this provision affects you, you can file amended returns and claim refunds for the years affected.
Do not Bill Customers, Clients, and Patients.
Assuming that your business is on a cash basis and operates on the calendar year, do not bill customers, clients, and patients until after December 31, 2020. This commonly known tax savings and tax deferred strategy has been used successfully for years. Customers, clients, patients, and insurance companies generally do not pay until they are billed.
Among the changes made by the CARES Act, the one which may have the most impact, is the correction of a technical error made in the Tax Cuts and Jobs Act of 2017 (TCJA). That error resulted in the 15-year recovery period that applied to qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property being eliminated for such property placed in service after 2017. After the TCJA, the depreciation period for such property, now referred to as “qualified improvement property,” was 39 years and, as a result, did not meet the requirements for additional first-year depreciation (i.e., bonus depreciation). Under the CARES Act, qualified improvement property is now depreciated over a 15-year life and meets the criteria for taking bonus depreciation. The change is effective as if it were included in the TCJA. Thus, if your business is affected by this change, you can file amended returns to claim refunds for the deductions that should have been available to you had the technical error not happened.
Relaxed Rules for Deducting Net Operating Losses.
The CARES Act temporarily removes the 80 percent limitation on taxable income for deducting net operating losses (NOLs) for 2020. In addition, the CARES Act amended the rules for NOLs to provide for a five-year carryback of any NOL arising in 2018, 2019, and 2020. As a result, if applicable, a business can take such NOLs into account in the earliest tax year in the carryback period and carry forward unused amounts to each succeeding tax year. Alternatively, a business can waive this carryback period and instead carry forward any NOLs to offset income in future years. Depending on expected tax rates and cash flow in future years, this waiver option may make more sense than carrying back any NOLs.
Each taxpayer’s situation is different. You should consult with us or your tax professional to discuss your particular situation and determine the best course of action for you or your business.
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