With a turbulent 2020 drawing to a close, it may seem like the end of year is already here and there’s nothing left to be done for your finances. However, there are some tax planning strategies you can still put into action to set yourself up for a solid tax savings for year 2020.
- Qualifying for a QBI Deduction: For owners of many pass-through businesses, including architects and engineers, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a new tax break. The Qualified Business Income deduction is generally 20% of qualified business income, subject to 50% of W-2 wage. To get the maximum deduction, the W-2 must be adjusted by December 31.
- Establishing Profit Sharing and Defined Benefit Plans: Due to the COVID-19 stimulus Paycheck Protection Program, business owners received money from the government, which does increase overall taxable income. While the deadline for establishing a Safe Harbor 401(k) has passed, there is still time to set up a 401(k) Profit Sharing or Defined Benefit plan for 2020. As contributions are not due until the business tax filing deadline, which may be as late as September 15 with an extension, this is a viable option. A self-employed individual aged 50 or older can contribute up to $193,000 into a plan, and the money is completely tax deductible.
- Analyzing Cost Segregation: To make the most of tax deductions for real estate property, cost segregation is a tax planning tool that accelerates the rate of depreciation of property components to thereby lower the amount of taxable income. A cost segregation analysis will allow for an optimization of write offs, increasing cash flow and reducing tax liability. Updates to the law allow both new and used property to qualify and for certain deductions to be applied in the first year of ownership.
- Carrying Back Net Operating Losses: The CARES Act of 2020 included legislation that affects net operating losses and their application to business taxation. Now instead of just the unlimited carryforward for tax years after 2017, there is the option of a maximum five-year carryback of net operating losses to previous years. The period of losses incurred is between 12/31/2017 and before 1/1/2021, so 2020 is the only year to benefit from this carryback option by allowing business owners to potentially claim a refund from previous years to help with cash flow challenges this year.
- Converting to a Roth IRA: If you have an IRA account, converting to a Roth IRA before December 31 may save you money on income taxes. If your income is lower this year but you have an expectation of a future increase, a Roth conversion can capitalize on the lower income of this year, then the money will grow tax-free in the Roth IRA, and future qualified withdrawals from the account will also be tax-free.
- Transferring to an Irrevocable Trust: Reducing the amount of your estate tax, which is the financial levy on an estate based on current value at time of the owner’s death, can start with transferring assets into an irrevocable trust. Assets in the trust are not considered part of the estate for tax purposes, and they can grow tax-free. Under current laws, high net worth couples can transfer almost $22 million into an irrevocable trust.
- Funding an Employer-Sponsored 401(k) Plan: If you are already contributing to an employer-sponsored 401(k) plan, keep in mind that you can contribute up to $19,500 plus an additional $6500 as a catch-up if you’re over the age of 50. The deadline to reflect deferrals on your W-2 is December 31.
- Claiming Disaster Loss Funds: As all 50 states, the District of Columbia, and five U.S. territories were declared disaster areas resulting from the COVID-19 pandemic, every U.S. business may be eligible for refunds from certain types of disaster losses. Under current tax rules that allow businesses to claim certain disaster losses on a prior year tax return, a business could claim a COVID-19 related disaster loss in 2020 on a 2019 amended tax refund. This could result in a quicker refund. To qualify, the loss must have been caused by COVID-19, but this loss could fall under many categories, including closing of offices or stores and loss of inventory or supplies.
- Setting Up a Charitable Trust: For an option that benefits the donor and the charitable organization of their choice, consider establishing a charitable trust. A donor can deduct up to 60% of the adjusted gross income if in cash or 30% of adjusted gross income if there are appreciated assets in the trust, such as stocks. However, the donor can carry over the deduction for up to give additional years if it cannot be written off in a given year. The deadline to contribute cash or other properly is before the close of the tax year.
- Looking into Tax-Loss Harvesting: If you’ve been watching the S&P 500, you’ve likely observed that it is near a record year- to- date high. As a result, before the end of December, many actively managed funds will pay high taxable dividends and capital gains distributions. Tax-loss harvesting provides you the ability to minimize those gains and lower your tax liability by selling securities, especially if they’re short term.
- Contributing to 529 Plans: In many states, residents can claim deductions for a certain amount for 529 Plan contributions made during the year. This lowers state tax liability. As an example, a married couple filing jointly making contributions to a New York 529 plan may claim up to $10,000 per year as deductions when calculating New York taxable income. Contributions must be made by December 31 to use this deduction in 2020.
- Accelerating AMT Refunds: The CARES Act accelerated the timeline of the TCJA repeal of the corporate alternative minimum tax (AMT), allowing corporations to claim all their unused AMT credits in either 2018 or 2019. This gives companies a few options of filing for quick refunds, but corporations must file by December 31 to claim an AMT credit under this current legislation at the accelerated rate.
- Maximizing Flex Savings Account (FSA) Funds: To make sure you maximize the benefit of your annual FSA contribution, it is important to use your FSA funds for related medical expenses and to submit a reimbursement for that amount to ensure the amount is not forfeited. Keep in mind, you can rollover up to $500 of unused funds to the following year, should you not use the entire balance by December 31.
- Gifting Funds to Children and Grandchildren: Married couples can gift up to $30,000 (individually $15,000) to their heirs without incurring a gift return tax in 2020. Gifts like this are a smart way to reduce the taxable amount of your estate while passing wealth to the next generation, or even to your grandchildren. To qualify for the 2020 tax year, the gift must occur by December 31.
“To know which of the strategies best fit your personal situation, and how to best implement them to have the greatest benefit in your tax planning, it’s best to work with an experienced financial advisor to talk over your unique circumstances and future goals, as they will be know the complex rules and regulations that govern financial planning and can advise you accordingly.” said Syed Nishat, Partner at Wall Street Alliance Group. Working with a financial advisor you trust will prepare you up for success, allowing you to make the most of the 2020 advantages to put you in a good position for 2021.
About Wall Street Alliance Group- Wall Street Alliance Group is a nationally recognized wealth management firm headquartered in Manhattan, New York. The firm operates on a Fiduciary capacity serving high net worth clients and is on a mission to empower first-generation immigrants achieve financial well-being. Wall Street Alliance has a team of advisors with expertise in areas such as Tax Planning, Estate Planning, Asset Protection, Portfolio Management, 401(k) plans, Defined Benefit plans, Special Needs planning, Physician Financial planning and Trust services. Please visit www.wallstreetag.com.
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