Year-End Tax Planning in a COVID World - Blog Post

Like everything else in 2020, tax planning at the end of this year will include some challenges and unknowns. The political climate gives rise to a lot more questions than answers and sets the stage for last-minute planning alterations. Combine that with PPP loan forgiveness lacking in clarity, and taxpayer’s heads are definitely spinning as the year draws to a close.

Even though some big unknowns are on the horizon, we have put together some considerations that you can still take a look at before the clock strikes twelve on December 31st.

  1. Roth conversions: Unfortunately, most Americans are anticipating a rise in tax rates from what the tables are currently. In a year where both your income and your rate may be lower than in the future, consider whether a conversion from a Traditional IRA or your 401(k) to a Roth may make sense. You will have to pay the income taxes on the conversion, but you will be spared the 10% early withdrawal penalty. Your withdrawal from the Roth later on, including from the investment earnings in your Roth, will come out tax-free, unlike Traditional IRAs and 401(k)s that are taxed at the time the funds are taken out. Additionally, Roth IRAs do not have required minimum distributions, meaning if you do not need the funds when you reach retirement age, you do not have to take them out.
  2. Considerations for capital gains rates: If your income has dipped in 2020, it could be a good year to look at selling off appreciated assets. The capital gains rates vary but go down to 0% for taxpayers in the 15% income tax bracket or lower. For higher-income filers, if your adjusted gross income dipped below $400,000 this year, your capital gains rate could go from 20% to 15%, giving you some savings on recognizing those gains before 2020 is up.
  3. PPP loan planning: With the IRS staying steadfast that expenses paid for with forgivable PPP loan funds cannot be deducted, many businesses are now scrambling to update their tax planning to account for the change in their bottom line. It is important for sole proprietors and partnerships to consider the owner’s draws carefully and how they are strategically being factored into the PPP forgiveness applications. Owner draws are not traditionally tax-deductible, so having them forgiven as part of the PPP loan process does not impact the business’s taxable income. Ensure that these payments are prioritized up to the maximum allowable on your forgiveness applications before using salaries and wages paid to employees.
  4. Accelerate deductions in a loss year: This is the opposite of normal tax advice. Typically, we advise clients not to take bonus depreciation or accelerate other deductions into a year where there is already a loss if we can potentially use those deductions against future taxable income. However, the CARES Act allows for net operating losses generated in 2018, 2019, or 2020 to be carried back to the previous five tax years. Accelerating deductions in 2020, if it is already a loss year, can potentially help cover income that was generated as far back as 2015 and can potentially turn around some quick refunds for taxpayers looking to preserve cash.

Each of these strategies are suggested for consideration purposes only. Each individual taxpayer is unique in their circumstances, and not every strategy may be the best to employ for all. If you have tax planning questions or think one of these scenarios may benefit you, please reach out to our tax team to schedule a call. We recommend connecting with us before December 15th to allow for any year-end decisions to be implemented.

 

Written by:

Christine DeAngelis
Year-End Tax Planning in a COVID World - Blog Post

Like everything else in 2020, tax planning at the end of this year will include some challenges and unknowns. The political climate gives rise to a lot more questions than answers and sets the stage for last-minute planning alterations. Combine that with PPP loan forgiveness lacking in clarity, and taxpayer’s heads are definitely spinning as the year draws to a close.

Even though some big unknowns are on the horizon, we have put together some considerations that you can still take a look at before the clock strikes twelve on December 31st.

  1. Roth conversions: Unfortunately, most Americans are anticipating a rise in tax rates from what the tables are currently. In a year where both your income and your rate may be lower than in the future, consider whether a conversion from a Traditional IRA or your 401(k) to a Roth may make sense. You will have to pay the income taxes on the conversion, but you will be spared the 10% early withdrawal penalty. Your withdrawal from the Roth later on, including from the investment earnings in your Roth, will come out tax-free, unlike Traditional IRAs and 401(k)s that are taxed at the time the funds are taken out. Additionally, Roth IRAs do not have required minimum distributions, meaning if you do not need the funds when you reach retirement age, you do not have to take them out.
  2. Considerations for capital gains rates: If your income has dipped in 2020, it could be a good year to look at selling off appreciated assets. The capital gains rates vary but go down to 0% for taxpayers in the 15% income tax bracket or lower. For higher-income filers, if your adjusted gross income dipped below $400,000 this year, your capital gains rate could go from 20% to 15%, giving you some savings on recognizing those gains before 2020 is up.
  3. PPP loan planning: With the IRS staying steadfast that expenses paid for with forgivable PPP loan funds cannot be deducted, many businesses are now scrambling to update their tax planning to account for the change in their bottom line. It is important for sole proprietors and partnerships to consider the owner’s draws carefully and how they are strategically being factored into the PPP forgiveness applications. Owner draws are not traditionally tax-deductible, so having them forgiven as part of the PPP loan process does not impact the business’s taxable income. Ensure that these payments are prioritized up to the maximum allowable on your forgiveness applications before using salaries and wages paid to employees.
  4. Accelerate deductions in a loss year: This is the opposite of normal tax advice. Typically, we advise clients not to take bonus depreciation or accelerate other deductions into a year where there is already a loss if we can potentially use those deductions against future taxable income. However, the CARES Act allows for net operating losses generated in 2018, 2019, or 2020 to be carried back to the previous five tax years. Accelerating deductions in 2020, if it is already a loss year, can potentially help cover income that was generated as far back as 2015 and can potentially turn around some quick refunds for taxpayers looking to preserve cash.

Each of these strategies are suggested for consideration purposes only. Each individual taxpayer is unique in their circumstances, and not every strategy may be the best to employ for all. If you have tax planning questions or think one of these scenarios may benefit you, please reach out to our tax team to schedule a call. We recommend connecting with us before December 15th to allow for any year-end decisions to be implemented.

 

Written by:

Christine DeAngelis

Written by:

Christine DeAngelis