Tax planning is all about how to best make the moving parts match up. Attention to your investment portfolio and the opportunities that exist to take gains or losses should always be part of your year-end tax planning strategy. 

Year end tax planning for 2020

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Cheryl Dickerson, CPA

Suffice it to say, 2020 is not one most people will look back on and say it was a really good year. I really cannot point to any conversation that I’ve had where someone has said to me “wow the year is going great”!  What I have heard is people are ready for the year to end and to start all over again in 2021.  With the end of the year rapidly approaching we may be ready to let out that big sigh of relief, however there are still tax planning opportunities we do not want to overlook before the year ends.

The COVID-19 pandemic resulted in significant legislation under the CARES act. A significant provision within the act was the extension of a carryback provision related to net operating losses. Legislation prior to the CARES act changed the net operating loss provision to allow only a carryforward and limitation on the amount of the deduction. Under the CARES act, losses that arise in tax years 2018, 2019 and 2020 may be carried back five years. The carryback provision allows the taxpayer to decrease income in prior years thus resulting in a refund of tax. If you experience a net operating loss in 2020 there has never been a better time to plan on filing early. The carryback of your net operating loss can not be done until your 2020 tax return is filed.

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Tax practitioners had been hopeful and waiting for a fix to the glitch on bonus depreciation as it applied to qualified improvement property. Due to the drafting of prior legislation while the intent was for the property to qualify for bonus depreciation the actual legislation did not allow that treatment. All it took was a worldwide pandemic to fix the glitch. The CARES Act fixed the technical problem and qualified improvement property was now eligible for bonus depreciation. In general, qualified improvement property is improvement to the interior of a building that is either owned or leased. The CARES legislation made the fix retroactive to January 1, 2018. Amended returns can be filed if you had qualified improvement property that at the time was not eligible for bonus depreciation but under this legislation now qualifies. As an alternative a change in accounting method can be used to reflect the additional retroactive deduction entirely in the 2020 year. The strategy should be discussed with your tax professional at Henry+Horne to reap the most tax benefit from the change.

As the standard deduction increased many taxpayers found that their itemized deductions were no longer pertinent to their tax position. Charitable contributions are part of itemized deductions and as many taxpayers no longer received any tax benefit from their contributions, they developed different strategies with their charitable giving. In 2020, everyone whether you itemize or take the standard deduction, is entitled to an above the line charitable contribution of up to $300 for cash contributions. Arizona has a similar provision in that non-itemizers are allowed a charitable deduction of 25% of your charitable contributions on your state income tax return.

Arizona also have several tax credits that can be used to decrease your state tax liability on a dollar for dollar basis. The credit for contributions to certified school tuition organizations has increased in 2020 to a maximum credit of $583 for single, heads of household and married filing separately and $1,186 for married filing joint.  The additional credit referred to as the switcher credit has been increased in 2020 to a maximum of $590 for single, heads of household, married filing separately and to $1,179 for married filing joint. The dollar amount of credits for qualifying charitable organizations, foster care organizations and public schools remain at the same amounts as in prior years.

If you received a stimulus payment in 2020 you may not have seen the last of it when you deposited or cashed your check. The payment represented an advance rebate payment and was based either on your 2018 adjusted gross income or your 2019 return if it had been filed. The good news is that if your advance payment turns out to be more than what you would have received based on your 2020 adjusted gross income you do not have to pay back the excess amount. If on the other hand your payment was less than what is calculated based on 2020 adjusted gross income you may claim the additional benefit on your 2020 return filing.

I know many of you reading this have experienced declines in your income in 2020 due to pandemic related issues. This may be an ideal time for you to consider a ROTH conversion. A conversion from your traditional IRA to a ROTH results in taxable income. If you are in a substantially lower bracket in 2020 due to declines in your income a conversion now could result in lower or in some situations no tax on the conversion. The benefits of the ROTH IRA are that future qualifying distributions are not subject to tax, there are no required minimum distributions and you have the ability to leave to your heirs an asset that does not become taxable to them. Consultation with your Henry+Horne tax advisor is imperative in making this decision. Once a conversion is made it can not be undone as the ability to recharacterize a conversion was eliminated in 2018.

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In addition to the impact of the Coronavirus we also are facing an election year. The results of the election will likely be known by the time you read this article. I have had a lot of conversations with individuals who anticipate that tax rates will increase based on the outcome of the election. I feel that if we really want to be honest with ourselves, we need to face the reality that it is unlikely that tax rates can stay the same regardless of who prevails in the election. As of the end of September 2020 the U.S. deficit was $3.1 trillion an increase of more than triple the fiscal year 2019. At some point in time this will have to be reckoned with. Increasing tax rates should they occur would encourage a strategy of accelerating income and deferring deductions. However, this all should be viewed in correlation to how this may impact a net operating loss deduction, ROTH conversion opportunity etc. Tax planning is all about how to best make the moving parts match up. Attention to your investment portfolio and the opportunities that exist to take gains or losses should always be part of your year-end tax planning strategy. Be sure to review your withholding or estimated payments to make sure  there are no changes that need to be made to reach a position where you are protected from any under payment penalties. If you received unemployment benefits remember those are taxable income and generally do not have income tax withheld. Tax surprises are not something enjoyed by the taxpayer or the tax practitioner. Your Henry+Horne tax professional is ready to assist you with any questions you may have, and I encourage you to reach out.

Cheryl L. Dickerson, CPA, Senior Manager, specializes in the preparation, review, planning and research for both individual and business tax returns. She can be reached at (480) 483-1170 or CherylD@hhcpa.com.