This year has thrown all of us curveballs. First, it was this COVID-19 pandemic. Second, wildfire. And thirdly, the election year!! Along the way, we had Cares Act signed into law as of March 27th. Now, you may be planning for 2020 tax impacts considering all these events. I hope the below tips can help you prepare for your 2020 tax situation and potentially reduce overall tax liabilities.
Increase the beginning date of RMDs
As you probably know, it is beneficial to contribute as much as possible to qualified retirement accounts such as 401(k) and 403(b) to reduce taxable income. If you are older than 70 ½ years old, you may want to change your RMDs (required minimum distributions). The recent SECURE Act of 2019 increased the RMD age to 72 from 70 ½ years old. Cares Act removed RMDs for the 2020 tax year, so if you do not need to withdraw from IRA accounts to sustain your lifestyle, you can stop IRA distribution in 2020 to avoid additional taxes. Under the old law, you could not contribute to your IRA accounts if you were older than 70 ½ years old. However, this age restriction has been removed by SECURE Act, and now you can keep contributing to your IRA account no matter how old you become.
Now you may be affected by COVID-19 and needed some cash distribution from a qualified retirement account. You can distribute up to $100,000 for qualified reasons without 10% early distribution penalties. You can pay income taxes ratably over three years on those distributions. However, if you repay the distribution, you do not have to pay the taxes. Is your head spinning? Here’s more in-depth IRS guidance: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers
If you use this provision to your advantage, you may be able to fund some short-term investment to earn handsome ROI.
Tax-loss harvesting
Do you have a large amount of capital gain this year? It is time to harvest some loss from your brokerage account. When you sell your investments at a declined value compared to the purchase price, these investment losses can offset your investment gains. This strategy is known as tax-loss harvesting. Let’s say you sold your rental properties without 1031 exchange and don’t invest in opportunity zones, and can’t avoid capital gain. You happened to find some airline stocks that significantly declined in value this year due to the pandemic.
Using this strategy could reduce your capital gain and neutralize some tax impact.
Charitable contribution planning
Since TCJA increased the standard deduction to $12,000 for a single taxpayer, many people using the standard deduction did not have a write-off on charitable contribution. 2020 tax year will be a little different in this regard. Cares Act changed charitable contribution up to $300 to be deductible as above-the-line item even if you are taking the standard deduction taxpayer.
Donor-advised accounts are a popular way to plan for a larger charitable contribution in one year and alternate between standard and itemized deductions. Advanced tax strategies are also available involving charitable remainder trust, charitable LLC, or even grantor trust to achieve more significant tax savings for income and estate tax purposes.
Health saving account and side business claim deductions
If you have opted for a high deductible medical plan, you can contribute to a health savings account. These contributions are tax-deductible and can be withdrawn tax-free for qualified medical expenses. You can invest inside HSA and grow the investment over time. You can carry over the remaining balance at the end of the year to the next year.
If you have a side hassle, you can deduct business expenses as long as they are ordinary and necessary to run your business per IRC Sec 162(a). It’s possible to maximize your business deductions and create business losses to offset some earned income.
Maintain good records
When you get audited by tax jurisdictions, you would have to show your support documents such as invoices and payment receipts to substantiate your deduction claim. One taxpayer inquired about our service for IRS audit representation. We discovered the taxpayer mistakenly deducting full bonus depreciation twice on the same vehicle in that particular tax year and also deducted other expenses without support documents. We maximized the deductions to the extent possible but had to witness the IRS brutally disallowing baseless deductions.
When you claim certain deductions like charitable contributions and other business deductions, you must be ready to provide tax authorities the good substantiation documents. It may be a pain in the neck but will save you some headache in the long run.
Professional Tax Planning Services in Oregon – Hoshi CPA LLC
If you feel that all this is too much work and you need help, don’t look any further. We offer expert tax planning services to business owners, executives, and independent professionals in Oregon and throughout the United States. Hire our services if you are seeking a professional accountant in Portland, Oregon. We are ready to provide you with multi-entity, multi-year, multi-state, highly effective tax plans so you can redeem taxes and reinvest cashback to business and lifestyle.
Do you have more questions about what we can do? Please call us at (503) 388-6580 or reach out via our contact form or schedule a strategy session. Looking forward to hearing from you.
