November 30, 2020
A Year-End Update
I hope you had a wonderful Thanksgiving holiday! For me, it took on a special meaning this year to truly reflect on all things to be grateful for. There’s no doubt that 2020 has been a tumultuous year for many of us wrought with personal challenges, business disruptions and financial uncertainty.
And, with the close of another year upon us, here are a few financial items to keep in sight:
- Review your paycheck withholding and/or estimated tax payments, to avoid any unpleasant April 15 tax surprises.
- Check your retirement plan contributions to 401ks, IRAs and budget to maximize your allowable 401k contributions by December 31.
- For business owners, consider purchasing equipment and paying business expenses in advance prior to Dec 31 to secure a tax deduction for this year. Also, employee W2s and Forms 1099 are both due by Jan 31 this year. .
- Review your investment portfolio, charitable giving, estate and gift planning strategies and be sure estate and trust documents, asset titles, and beneficiary designations are updated
I’m also attaching a general year-end tax planning letter with some other hot-button issues for this year.
I invite you to contact me to discuss any year-end tax questions or concerns or to take a fresh look at your current and future financial health.
Also, I’d like to announce that I’ll be distributing 2020 tax return Organizers and my 2021 service proposal engagement letters in early January.
Re: Year-end letter for individuals and businesses
Dear Valued Clients and Friends,
As we wrap up 2020, year-end tax planning has never been more crucial. This year brought challenges and disruptions that significantly impacted your personal and financial situations – COVID-19, economic relief measures, new tax laws and political shifts. Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money.
I’m here to help you take a fresh look at the health of your tax and financial well-being. Please feel free to contact me at your earliest convenience to discuss your tax situation so we can develop a customized plan. In the meantime, here’s a look at some issues to consider as we approach year-end.
Key tax considerations related to COVID-19
Many tax provisions were implemented under the Coronavirus Aid, Relief and Economic Security (CARES) Act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption.
You may have experienced a surprise the past few years when you filed your tax return. This was likely because your paycheck withholding adjustment may not have reflected your actual tax situation. Now is a great time to look at your projected tax. Doing this will help avoid unwanted penalties/interest as well as help you plan for cashflow needs. There is time to adjust your withholding before the end of the year.
Stimulus/Economic Impact Payment (EIP)
Eligible individuals received a payment of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child, with payments phased out based on adjusted gross income. The payments are treated as advance refunds of a 2020 tax credit. If you received an EIP, you should have received IRS Notice 1444, Your Economic Impact Payment. Keep this for record-keeping purposes. If you did not receive an EIP, you may be eligible to claim it on your 2020 tax return.
Unique to 2020, individuals who do not itemize their deductions can take an above-the-line charitable deduction of up to $300. Such contributions must be made in cash and made to qualified organizations.
You can take up to $100,000 in coronavirus-related distributions from retirement plans through the end of the year without being subject to the 10% additional tax for early distributions. Additionally, required minimum distributions (RMDs) are temporarily suspended for 2020. If your retirement assets have taken a hit, not having to take an RMD may allow those assets to recover some value before you liquidate them.
You may also wish to consider Roth IRA conversions prior to December 31, considering that income tax rates are expected to rise in the future.
State tax obligations related to teleworking arrangements for employees
As the COVID-19 outbreak continues, many employers are encouraging or requiring their employees to work from home (i.e., telework). Such remote working arrangements could potentially have tax implications that should be considered.
Fraudulent activity remains a significant threat
My firm takes security seriously and I think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:
- Receive a notice or letter from the Internal Revenue Service (IRS) regarding a tax return, tax bill or income that doesn’t apply to you
- Get an unsolicited email or another form of communication asking for your bank account number or other financial details or personal information
- Receive a robocall insisting you must call back and settle your tax bill
Make sure you’re taking steps to keep your personal financial information safe. Let me know if you have questions or concerns about how to go about this.
The Affordable Care Act (ACA) and your taxes
The U.S. Supreme Court is expected to rule on the constitutionality of the ACA in 2021. Though many questions remain, the penalty that the ACA imposes on individuals who do not have health insurance was repealed. However, other aspects of the ACA are still in place. Contact me if you have questions about how this affects you.
Importance of retirement planning
I recommend you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs, and company retirement plans. It’s also advisable to take advantage of health savings accounts that can help you reduce your taxes and save for your future. I can help you determine whether you’re on target to reach your retirement goals.
Virtual currency transactions are becoming more common. There are many different types of virtual currencies, such as Bitcoin, Ethereum and Ripple. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services or holding such currencies as an investment generally has tax consequences. I can help you understand those consequences.
Business tax matters
- Small Business Administration (SBA) Economic Injury Disaster Loans- Small businesses could apply for an Economic Injury Disaster Loan grant of up to $10,000 that does not have to be repaid but is considered taxable income.
- Paycheck Protection Program (PPP)- This SBA program is designed to help provide capital to cover the cost of retaining employees. If certain criteria are met, the loan can be forgiven. There is still uncertainty around the deductibility of expenses related to loans that have been forgiven that should be considered before submitting the forgiveness application and may impact the timing of filing 2020 tax returns.
- Purchases of property and equipment – With tax-favorable options available to businesses, many purchases can be completely written off in the year they are placed in service. Plus, there were tax-favorable rules passed in the CARES Act that permit qualified improvement property to qualify for 15-year depreciation and, therefore, also be eligible for 100% first-year bonus depreciation.
- Choice of entity —Given the potential for changes in federal tax policy next year, it may be time to reconsider your type of business entity. This is a complex decision that has more than tax implications. I can help you walk through the pros and cons.
- Sales and use tax considerations – As a result of the economic downturn, it is expected that the states will step up their enforcement of sales tax collections. If you have multi-state sales, the 2018 U.S. Supreme Court ruling in the case South Dakota v. Wayfair, Inc. affects where some businesses must file and pay sales and use tax. States are still making changes to their laws and filing requirements.
- Retirement Plans- Have you revisited your company’s retirement plan lately? Take a look at the many retirement savings options in order to make sure that you are taking advantage of tax deductions as well as providing opportunities for owners and employees to save for retirement.
Year-end planning equals fewer surprises
There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral of income, prepayment of expenses, etc., that can help you save taxes. I am here to help.
Whether it’s working toward retirement or getting answers to your tax and financial questions, I’m here for you. Please contact our office today at 702-941-7787 or firstname.lastname@example.org to discuss or schedule your year-end review. As always, planning ahead can help you minimize your tax bill and position you for greater success.
Eric Johnson, CPA