2020 is a year like no other.
In the last six months our nation has seen the passage of three major pieces of legislation that made tax planning opportunities available and provided financial relief during extreme economic uncertainty. The COVID-19 pandemic is likely to change business practices at all levels and force the closure of many local businesses. In addition, 2020 is a national election year with the possibility of a presidential change.
All of these unusual conditions make this year’s mid-year tax planning novel and extremely important for correctly positioning your finances and reducing your tax liabilities.
Background
These three significant legislative Acts may have an effect on the taxes you pay this year.
1. The Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act). Passed in December 2019, this Act provided an extension of tax benefits that had either expired or were about to expire.
2. The Setting Every Community Up for Retirement Enhancement (SECURE) Act. Also passed in December 2019, the SECURE Act significantly changed many tax-saving retirement rules.
3. The Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act became legal on March 27, 2020 and provided immediate economic relief as well as a variety of tax saving opportunities.
It’s also worth noting that if President Trump loses his office after this year’s election, there is a strong likelihood of considerable changes to tax law.
Five Income Tax Opportunities for Individuals
1. Reexamine Your Tax Withholding or Estimated Payments. It may be possible to improve your cash flow by adjusting the withholding on your W-4 so you are not overpaying.
2. Consider Amending Your 2018 or 2019 Returns. Normally permitted only if an error or omission is discovered, amending your returns is now possible because the three major Acts each contain provisions allowing retroactive amendment. This could put tax money, which you’ve already paid, back in your pocket.
3. Benefit from Lower Tax Rates on Your Investment Income. When you hold an investment for more than one year, you usually receive preferential tax rates on your capital gains. For most investments, those rates are now 0%, 15%, and 20%, and are based on your taxable income. When possible, reduce your taxable income so you are eligible for the 0% rate. If you find your income still too high, consider gifting some of your investments, such as appreciated stock, to your children or grandchildren. These individuals are likely to be in the 0% or 15% capital gains tax bracket. Should they sell the investments after a year of ownership, any capital gains will also have the lower tax rates applied. Be mindful of the “Kiddie Tax” which may limit the benefits of this strategy.
4. Beef-Up Your Retirement Plans. If COVID-19 has affected your cash flow, you’re in luck because the CARES Act permits several provisions for limited retirement fund distributions taken before December 31, 2020. This is also a good time to consider transferring your funds from a traditional IRA to a Roth IRA, should tax rates become higher after the national election.
5. Analyze Your Deduction Strategy. Itemizing your income tax deductions could be right for you if your personal expenses are significant. Do some calculations and compare your itemized deductions against the standard deduction to make a wise decision. The 2020 standard deduction for joint filers is $28,400, for heads of household it’s $18,650, and single taxpayers are entitled to a standard deduction of $12,400. If you’re considering itemizing your deductions, keep in mind that the Tax Cuts and Jobs Act (TCJA) of 2017 suspended or reduced a number of itemized deductions, so make sure the deductions you’re planning to take are still allowed.
Next month’s blog post will review several tax planning strategies for small businesses which may also help you reduce your tax bill in 2020.
Finding ways to reduce your taxes is always rewarding because taxes are the largest predator to your wealth. If you would like to review your tax situation with our specialists and wish to explore the possibilities of a tax-advantaged investment policy, please contact us for a conversation. Our primary focus at Synergy Financial Management is building and preserving your wealth.
Thank you!
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
Synergy Financial Management, LLC
13231 SE 36th Street, Suite 215
Bellevue, WA 98006
ph: 206.386.5455
fx: 206.386-5452
