The year is coming to a close, and, for many, saying goodbye to 2020 couldn’t happen fast enough. It has been a year of “unprecedented” (to use a 2020 cliché) events. Many of these events impacted our finances and, therefore, our taxes.
The CARES Act of 2020 brought about so many changes that it was nearly impossible for tax professionals, let alone taxpayers, to keep up. This act passed quickly in late March, with little detailed guidance (and, apparently, forethought). We are still awaiting regulatory interpretation of some of these changes, even as the year ends.
The number of CARES Act initiatives make it is easy to overlook other changes made by recent legislation. We are still digesting nuances in the Tax Cut and Jobs Act of 2017 and 2019’s Secure Act.
In today’s newsletter, I’ll share some changes that may impact your 2020 income tax return and some last-minute, tax-cutting tips.
TABLE OF CONTENTS
- New Net Operating Loss Rules (AGAIN)!
- Retirement Penalty Waiver & Tax-Free Payback
- Retirement Required Minimum Distributions (RMDs) Waived for 2020
- Crypto-Currency Changes
- New “Above-The-Line” Charitable Deduction
- Payroll Protection Loans Remain “Backdoor” Taxable
- Remember: Unemployment is Taxable
- Confusion Alert: COVID Stimulus Checks
What is it: Net Operating Losses (NOL) commonly occur when business losses exceed income on a tax return (it’s a bit more complicated, but that’s the basics).
Prior-Prior Rule: Before passage of the Tax Cuts and Jobs Act of 2017 (TCJA), an NOL could get carried back two years then forward twenty until used up.
Prior Rule: The TCJA changes this rule so that NOLs occurring after 2017 could no longer be carried back to a previous year, only forward.
New Rule (kind of): The CARES Act modified the NOL rules so that losses occurring in 2018, 2019, and 2020 can now get carried back five years (only). Then they can be carried forward indefinitely.
The Problem: The law set an October 15, 2021 deadline for taxpayers having NOLs in 2018 and 2019 to elect out of the carryback. Does this mean that 2018 or 2019 NOLs filed before the CARES act passed (or knowledge of the change disseminated) have to get amended? As of right now. Yep!
The Cares Act waives the 10% penalty on 2020 early covid-related withdrawals up to $100,000. Coronavirus-related means:
- You were diagnosed with SARS-CoV-2 or with COVID-19,
- Your spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19, or
- You experienced adverse financial consequences due to quarantine, furlough, layoff, reduced hours, or inability to work due to lacking child care (nearly everyone experienced at least one of these).
COVID-related distributions can also get reported as income over three-years. Additionally, if you re-contribute the funds within three years, you can avoid taxes altogether!
The CARES Act waived the RMD rules for most retirement plans and IRAs during 2020 but defined benefit plans (pensions). We shared this information earlier in the year.
The IRS knows about those who have purchased or sold crypto-currency, such as Bitcoin. Those who thought these nontangible assets wouldn’t get reported to the Treasury Department are in for a surprise if they fail to report transactions involving them. Two years ago, a virtual currency question got added to a return schedule that all taxpayers had to answer under penalty of perjury. This year it is on the very first line of Form 1040!
If you traded or made purchases with the currency, it must get reported in much the same way as stock sales. BUT, it’s more complex & convoluted than stocks. In short – it’s a mess, but we have to deal with it.
The CARES Act added a new (up to) $300 charitable deduction for individuals who do not itemize. The deduction reduces adjusted gross income and, therefore, many state incomes. This is not a freebee write off. You must still be able to prove you donated the funds to a qualified charity via a receipt or statement.
As Brett wrote in May in IRA Announces Payroll Protection Loan Forgiveness is Backdoor Taxable, the IRS declared that expenses paid with forgiven PPL funds could not be deducted. Unfortunately, the hope that the IRS would retract this stance and follow congressional intent has not materialized. Last month, the IRS released Notice 20-32, doubling down on their position that expenses paid with forgiven PPL are not deductible for federal tax purposes.
What does this mean? There is no difference between taxing forgiven debt and denying the deduction of expenses paid with that debt. So, PPL forgiveness remains “back-door” taxable.
Not all is lost, however. A last straw of hope remains. The Small Business Expense Protection Act got introduced in May of 2020. If passed, the bill will make expenses paid with forgiven PPL proceeds deductible.
Bottom Line: Businesses receiving Payroll Protection loans may want to extend their 2020 tax returns or be prepared to amend them. Congress - as it does way too often – may pass this legislation retroactively in 2021.
If you were one of the millions of taxpayers who received unemployment benefits in 2020 as part of COVID relief, please remember unemployment income is taxable. Hopefully, you had federal and state income tax withheld on these (rather generous) proceeds. If not, please prepare yourself for the possibility of owning some taxes this year.
You should receive a 1099-G by January 31st of 2021, showing your 2020 unemployment income and any federal and state withholdings. Be sure to include it with your tax materials!
So much has happened this year! You may have forgotten that you (probably) received a stimulus check from the US Treasury in 2020. “Stimulus” was but one title given to the payout; it was also called Relief Checks, COVID Checks, and Economic Impact Payments.
Remember? If you were single, you received $1,200, $2,400 if married and filed jointly. You also received $500 for each dependent.
2020 Complication: The amount received in 2020 was based on your most recently filed tax return - 2018 or 2019. This amount, however, is not necessarily the amount to which you are entitled. It was the advance payment of a refundable credit, a credit calculated on your 2020 federal income tax.
There is also an income phaseout, which Brett discusses in this article. You can also estimate your credit using the Tax Foundation’s CARES Act Rebate Calculator.
The Bad News: We MUST have the amount of stimulus you received in 2020 to correctly prepare your tax return. You should have received a Notice 1444 from the IRS listing the amount of your payment shortly after disbursement. If you have it, please provide it with your tax materials. If you do not, we need to know the amount you received to avoid potential income tax return errors.
The Good News: If you did not receive all of the advance credit to which you are entitled based on your 2020 return, you will receive it with your 2020 filing.
The Gooder-Good News: If you received too much of an advance, you do not have to pay it back!!
It’s not too late for some last-minute tax savings. Here are some suggestions. If you can’t do them in 2020, add them to your 2021 tax-cutting checklist!
If you’re 70 ½ years old, you can make direct contributions to a qualified charity, and the distribution will not count as income. It’s called a Qualified Charitable Distribution (QCD) and is a great deal for many because of the higher standard deduction. In states that use your AGI as your income starting point for your deduction, the tax savings from QCDs are more significant than itemizing.
Most IRAs eligible for QCDs—Traditional, Rollover, and Inherited. SEP and SIMPLE IRA can also qualify, but there are special rules.
Here are the requirements:
- The contributions must be made directly from the IRA to the charity – you cannot wake a withdraw, then donate the funds.
- You must be 70½ or older to be eligible to make a QCD. In a pretty cool twist, the Tax Cut and Jobs Act of 2017 raised the age for minimum distributions to 72 (if you were born after June 30, 1949), but NOT the age for QCD’s.
- QCDs are limited to amounts that would have gotten taxed on your return. In other words, distributions of IRA contributions you made with after-tax dollars (which we also call “basis”) do not qualify.
- The maximum annual amount that can qualify for a QCD is $100,000 per taxpayer per calendar year. If you and your spouse each have an IRA and qualify, each can make QCDs of up to $100,000.
- For a QCD to count towards the current year’s RMD, the funds must come out of the IRA by your RMD deadline, generally December 31.
Because the standard deduction has significantly increased, relatively few taxpayers now itemize deductions. They’re not itemizing because the standard deduction is now higher than the total of their allowable itemized deductions. However, the higher standard deduction does not mean there is no way to generate even more tax savings. Consider using the “bunching strategy” to minimize tax due.
The Bunching strategy bunches itemized deductions in one tax year. For example, instead of contributing to church each week, hold off one year and pay the whole year’s tithe in January of the following year. Then, continue to tithe weekly the next year. The result - doubling your charitable deductions in a single year, enabling itemization and tax-savings.
If you have a Health Savings Account, it’s mandatory to deposit some amount into it and maintain a minimum balance. The savings benefits are also incredible.
Every year we hear the following statements: “I pay too much in taxes,” or “I want some of the tax loopholes that rich people get.” One response addresses both statements. Rich people get no more tax deductions or “loopholes” than anyone else. They take advantage of the same legal deductions to which others are entitled.
The most significant tax “loophole” that they use, which few others use, is the 401-K. If you have a 401-K through your employer, you can use it to defer nearly $20,000 in income each year. If you have a 401-K and are not making the maximum deferral, there is no reason to consider other planning ideas. Plus – Your employer’s match is 100% free money!
Check your handbook to see what employer-provided fringe benefits are available. You may be surprised at the tax-free benefits offered.
We sold our former office in 2020, so the dropbox at 1636 Rock Cliff Drive will no longer be available to deliver your 2020 tax information. We are looking for an alternative drop-off location that is equally secure and convenient. We’ll let you know as soon as it is up and running!!
2020 filing season is quickly approaching. Be sure to Download your 2020 $50 Coupon!!
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If you would like to receive your new client or personalized return client tax organizer, please shoot us an email, and we’ll add you to the list!
If you’re a Real Estate Agent and haven’t checked out Overnight Accountant’s Real Estate Agent Tax Cut Library, check it out. The tax savings more than covers the investment cost.
Our free Real Estate Agent Organizer draws from the library’s resources and links to over 20 articles covering every possible deduction an agent can take on Schedule C.
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