As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2020 takes place in the midst of speculation that the impending change in leadership in the White House and Congress may well lead to some tax law changes in 2021. We are a phone call or email away if you would like to schedule a consult to discuss how one or more of the following may apply to your situation.
Roth IRA Conversion:
Unlike traditional IRAs, all future earnings in Roth IRAs are tax free! Roth's are also not subject to Required Minimum Distributions. The drawback is that contributions to Roth IRAs are made with after-tax dollars. However, some taxpayers may be able to take advantage of years when they have low (or no) other taxable income and convert Traditional IRAs (and other tax deferred retirement accounts) to a Roth IRA with minimal tax consequences. Doing so may help taxpayers significantly reduce their tax burden once they reach age 72 (the RMD age used to be 70 1/2).
Max-out existing retirement plans:
Year-end is a good time to review your contributions and, if cash flow (and the plan) allows, modify your withholdings to ensure you max out your contributions to your employer retirement plan. Key maximums are:
401k: $19,500 ($26,000 for ages 50 and up)
SIMPLE IRA: $13,500 ($16,500 for ages 50 and up)
SEPIRA: 25% of wages (or self-employment income) up to a maximum of $57,000
Advanced Premium Tax Credits (APTC):
If you obtained health insurance through the exchange and elected to take the APTC for 2020, you need to review your income and make sure that you do not exceedt the maximum allowable income that would result in repayment of the APTC. Careful planning can save you significant tax.
If you have kids, it is never too soon to start considering ways to save for their college. Tools like 529 plans and Roth IRAs can be a great way to put money aside and avoid tax on the earnings. Your state may also provide an incentive such as Oregon, which allows a credit for contributions to the Oregon 529 plan.
PPP Loan Forgiveness:
If you took a PPP loan in 2020 and any (or all) of it was forgiven, that amount will become taxable. This happens because the US Treasury has taken the position that expenses paid with PPP funds will not be deductible. So, if your business net income for the year is $250,000 but you also received a $150,000 PPP loan that was 100% forgiven, your taxable business income will actually be $400,000. We are always available to help clients run projections and take action before year-end to mitigate the impacts of this unfavorable tax rule.
UPDATE: December 20, 2020 - Congress is poised to pass a bill that will change this treatement allowing PPP borrowers to deduct expenses paid for with PPP proceeds!
Qualified Business Income Deduction (QBI):
This is a great deduction for many small business owners. However, the rules and computations are complex and proper planning can help you maximize your tax savings by evaluating trade-offs such as salaries vs. business income, maximizing the use of employer retirement plans, etc.
Self Employed Health Insurance Deduction (SEH):
The SEH deduction is a great tax savings opportunity for small business owners. However, if you operate as an S-Corporation, the procedures to take this deduction are a bit complex. If you are not familiar with them, you should definitely set up a consult before year-end to be sure you take the necessary steps to qualify for this deduction.
The very favorable depreciation rules of the Tax Cuts and Jobs Act (TCJA) are still in effect for 2020. This enables business owners to buy "ordinary and necessary" furniture, fixtures, equipment, etc. and write off 100% of the cost. Before you ask, no this doesn't mean you should go out and buy a new SUV or Truck. The rules for deductibility of those kinds of assets are complex. Always consult us before using vehicles as a year-end tax saving strategy.
With year-end comes another 1099 filing season. Now is a great time to review the vendors you've paid and, for anyone you've paid over $600 to for services (such as an attorney, social media expert, independent contractor), you should request they provide you with a W9 to ensure you can document your filing requirements. If you need help with this, let us know as soon as possible so that we can have you on our docket for the work in January. Note; a new form 1099 NEC has been implemented by the IRS this year. Be sure you're using the right form!