Post-Election Tax Planning

As you know, most media outlets are declaring Biden as the victor of the presidential election, and additionally, control of the Senate may not be decided until the state of Georgia has their two run-off elections this coming January.  

As a result, we may be looking at a split government which means that getting any new tax legislation enacted into law may be a challenge.  Please email or give us a call to discuss any of these strategies.  2020-2021 Tax Planning Guide

In addition to the planning guide, below are some specific actions that you may want to take depending on your tax situation:

Year-end tax planning for 2020 takes place against the backdrop of the COVID-19 pandemic and the government's efforts to help individuals and businesses weather the disaster. In addition, taxpayers still have to deal with the changes wrought by the Tax Cuts and Jobs Act (TCJA).

Under the TCJA, individuals face severely limited itemized deductions and eliminated personal exemptions, along with lowered income tax rates, a substantially increased standard deduction, an increased child tax credit, a credit for other dependents, and a watered-down alternative minimum tax (AMT), among many other changes. For businesses, the corporate tax rate has been cut to 21%, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-throughs may be entitled to a unique deduction

Despite this atmosphere of change, the time-honored approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of "bunching" expenses into this year or the next to get around deduction restrictions.

While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, may want to consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect. For instance, a cash method professional who wants to accelerate income can do so by speeding up their business's billing and collection process instead of deferring income by slowing down that process. Or, a cash-method taxpayer who sells property in 2020 on the installment basis and realizes a large long-term capital gain can accelerate income by electing out of the installment method.

Some of the key considerations to take into account when formulating a year-end tax saving plan include the following:

Capital gains. Capital gains. Long-term capital gains are taxed at a rate of 0%, 15% or 20%. And, the 3.8% surtax on net investment income may apply.

Low- taxed dividend income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. However, the 3.8% surtax on net investment income may apply. Converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income.

Expensing deduction. For qualified property placed in service in tax years beginning in 2020, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $1,040,000, and the beginning-of-phaseout amount is $2,590,000. ( Code Sec. 179(b) )

First-year depreciation deduction. Most used as well as new machinery and equipment bought and placed in service in 2020 qualifies for a 100% bonus first-year depreciation deduction.

Qualified business income deduction. Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2020, if taxable income exceeds $326,600 for a married couple filing jointly, $163,300 for single taxpayers and heads of household and $163,300 for married separate filers, the deduction is subject to multiple limits based on the type of trade or business, the taxpayer's taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and/or the unadjusted basis of qualified property held by the trade or business. 

Changes in individual's tax status may call for acceleration of income. Changes in an individual's tax status, due to, e.g., divorce, marriage, or loss of head of household status, must be considered.

Alternative minimum tax (AMT). The vast majority of individuals no longer have to factor in the AMT when conducting general tax planning or year-end tax planning. That's because the TCJA increased the exemption amounts (and the amounts used to determine the phaseout of the AMT exemption amounts), and most of the AMT preferences and adjustments for individuals effectively have been eliminated. And, corporations don't have to deal with the AMT at all. 

Time value of money. Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.

Estimated tax. For how the estimated tax rules can be affected when taxable income is shifted from one tax year to another.

Obstacles to deferring taxable income. The Code contains several rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain larger businesses use the accrual method, and limitations on the deduction of investment interest.

Charitable contributions.  The timing of charitable contributions can have an important impact on year-end tax planning. Individual taxpayers who are at least 70½ years old can contribute up to $100,000 annually to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduce their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity.