Personal Tax Planning Strategies
I hope that you and your loved ones are safe as you deal with the current COVID-19 crisis. What an incredibly difficult year this has been! This most recent tax season was unlike any we’ve ever experienced. With the spring deadline postponed until July 15, it may seem odd to discuss 2020 midyear planning while you might still waiting to file your 2019 tax return, there are many opportunities that should be addressed sooner rather than later.
In response to the COVID-19 emergency, President Trump signed into law on 3/27/20 the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is a massive piece of legislation aimed at providing much needed relief during an uncertain time in our country. Among its many provisions, the Act offers some immediate tax-saving opportunities.
In addition to the CARES Act, the Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act, both passed in December 2019, provide tax planning opportunities for this year. The Disaster Act extended (retroactively to 2018, in some instances) many beneficial provisions in the tax law that had expired or were set to expire. The SECURE Act, on the other hand, made significant changes to the retirement rules. I’ll highlight planning techniques stemming from these recent bills, as well as other midyear planning ideas.
It’s possible that additional COVID-19-related tax changes could be implemented as the year progresses. We also need to keep in mind that 2020 is an election year. While I don’t anticipate significant tax law changes if President Trump is reelected, a new occupant of the Oval Office would almost certainly lead to tax reform (with possible higher tax rates). As always, we’re paying close attention to the ever-changing tax environment to discover tax planning opportunities that could put more cash in your pocket. In the meantime, here are some ideas to evaluate this summer while you have time to think about them.
Here is a brief discussion of some strategies that may lower your individual income tax bill and help with cash flow for 2020.
Consider Adjusting Your Tax Withholding or Estimated Payments.
If you owed taxes for 2019, you may want to revise your Form W-4. To help you do this, consider using the IRS’s “Tax Withholding Estimator.” If you make estimated tax payments throughout the year (you’re self-employed, for example), we can take a closer look at your tax situation for 2020 to make sure you’re not underpaying or overpaying. Also, if your 2019 return applied an overpayment to 2020, but you would now prefer a refund, you have until 7/15/20 to file a superseded return and request a refund.
Ordinarily, an amended tax return is only filed when an error or omission is discovered after a return has been filed. With the current COVID-19 situation, any opportunity to put a little money back in your pocket is worth pursuing. All three of the major tax laws passed within the last six months contain retroactive provisions that could make amending your 2018 and/or your 2019 return (if already filed) worth the cost.
Take Advantage of Lower Tax Rates on Investment Income.
Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. The rate that applies is determined by your taxable income. If possible, you should get your income low enough to qualify for the 0% rate. If your income is too high to benefit from the 0% rate, try gifting investments (like appreciated stock or mutual fund shares) to children, grandchildren, or other loved ones. Chances are these individuals will be in the 0% or 15% capital gains tax bracket. If they later sell the investments, any gain will be taxed at the lower rates, as long as you and your loved one owned the investments for more than one year. However, beware of the “Kiddie Tax,” which applies to all children under age 18 and most children age 18 or age 19–23 who are full-time students. It may limit your opportunity to take advantage of this strategy.
If you’re affected by COVID-19 and find yourself in need of additional cash flow, the CARES Act contains several taxpayer-friendly provisions for retirement plan distributions up to $100,000 taken prior to the end of 2020. If you have funds in a traditional IRA and have been considering converting the account to a Roth IRA, 2020 might be a great year to execute that plan.
Check Your Deduction Strategy.
It’s best to itemize your deductions if you have significant personal expenses. However, don’t rule out the standard deduction. For 2020, joint filers can enjoy a standard deduction of $28,400. The standard deduction for heads of household is $18,650, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,400. If you’re able to itemize, please note that the Tax Cuts and Jobs Act (TCJA) (a major tax reform bill passed in December 2017) suspended or limited many of the itemized deductions.