November 20, 2020
Dear Clients and Friends:
Hallelujah! The end of 2020 is finally near. Welcome to Houser, Cook & Associates' annual tax planning letter, where we share our insights into what we believe to be the most important tax topics of 2020 and how planning before year end can provide some wonderful tax benefits. Once 2021 hits, it is often too late to take advantage of most tax planning approaches.
Houser, Cook & Associates, PC: Before we begin blowing your minds with all the planning topics, we would like to share that as of July 1, 2020, Ryan Cook became a shareholder in Houser, Cook & Associates, PC (F.K.A. Houser & Associates, PC). Ryan and Mary's styles of practicing their craft are very similar and the journey that started just one year ago has blossomed into what we believe to be a great partnership for both our clients and our staff.
Of course, all of this hasn't come without the challenges related to COVID-19. The focus of this letter is tax planning so we won't get too deep into all things COVID-19. What we want you to know is that we have adapted to the current environmentand no matter what the virus throws at us, we will be able to provide the excellent service our clients have grown to expect. We may have to work remotely periodically and our face-to-face meetings may have to be limited, but our service will still remain top-notch.
New this year, we have a client portal where we can upload information and store tax returns securely. Our clients can also securely upload their information and have access to their returns wherever they have the internet. We will be asking you for your preference for your return delivery this year - paper, electronic, or both. You have options!
Effect of CARES Act Rebate on Your 2020 Tax Return
Under the CARES Act, individuals with income under a certain level are entitled to a recovery rebate tax credit ("stimulus check"). Most, but not all, of these stimulus checks have already been sent out to eligible individuals during 2020.
Single individuals and joint filers are entitled to a payment of up to $1,200 or $2,400, respectively, plus $500 for each qualifying child (under age 17).
The amount of the stimulus check phases out for income over a certain level. The amount is reduced by 5 percent of the amount by which the taxpayer's adjusted gross income exceeds (1) $150,000 in the case of a joint return, (2) $112,500 in the case of a head of household, and (3) $75,000 in the case of a single taxpayer or a taxpayer with a filing status of married filing separately.
If you didn't get your stimulus already, you will get it with your 2020 return filing. The government issued the rebates based on 2019 income tax returns, or 2018 returns for individuals who had not yet filed their 2019 tax return. The calculation for the correct amount of the rebate will be part of your 2020 tax return. If your 2020 tax return indicates a rebate larger than your stimulus check (because, for example, your income went down or you had another child), any additional amount can be claimed as a credit against your 2020 tax bill. On the flip side, if the 2020 rebate calculation shows an amount in excess of what you were entitled to, you do NOT have to repay that excess.
Charitable Contributions 2020 - Four Things:
1. For 2020 only, you can deduct up to $300 of qualified charitable contributions, even if you don't itemize your deductions.
2. If you do itemize your deductions, you may give up to 100% of your adjusted gross income (AGI) in cash contributions in 2020 and deduct it all. The normal limit is 60% of AGI. This does not apply to charitable gifts of appreciated stock or other non-cash contributions such as household goods.
3. If you give appreciated stock as a charitable contribution, you are still limited to 30% of your AGI for a deduction this year; any excess can be carried over for 5 years. The deduction allowed is the value of the stock on the gift date, and you pay no tax on the appreciation of the stock since you bought it.
4. The age eligibility for Qualified Charitable Contributions from your IRA is still 70½, even though IRA minimum required distributions now begin at age 72 (except there are no required distributions for 2020). You may give up to $100,000 annually directly from your IRA to charities, and not pay income tax, federal or state, on the contributions.
Expenses Incurred While Working from Home. Although more people have been working from home this year due to the pandemic, related expenses are not deductible if you are an employee of a company - you receive a W-2. However, if you are self-employed and worked from home during the year, tax deductions are still available. Thus, if you have been working from home as an independent contractor, we should discusswhat expenses you have incurred that might reduce your taxable income.
Medicare Premiums - When High Income is a Disadvantage
Every year, Social Security looks at your tax return. If your income is high enough, you will pay more for your Medicare premiums for Part B and Medicare prescription drug coverage. If you are married joint and your income is more than $174,000, you and your spouse will both pay an increased premium. You will pay more if you are Single and your income is more than $87,000. The premium increase slides higher the more income you make. If you have a one-time big income year, you will pay increased premiums for a year, and then they will look at income again for the next year. We mention this because people are often surprised when the premium increase happens the first time.
The Social Security website, ssa.gov, covers this topic well if you need more information. The important thing to be aware of is that choices like Roth conversions, IRA distributions and capital gain harvesting can affect both your taxable income and your Medicare premiums, too.
Health Saving Accounts (HSAs) are good for you. If you are eligible to set up such an account (it requires a high deductible health plan), you can deduct the amount you contribute to the account in computing adjusted gross income. Thus, the contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses). For 2020, the annual contribution limits are $3,550 for an individual with self- only coverage and $7,100 for an individual with family coverage. 2020 contributions can be made as late as April 15, 2021as long as the HSA account is set up by December 31, 2020. If you have an HSA at work that your employer contributes to, and your employer does not max out your allowable HSA contribution for this year, you can add to it yourself and get a 2020 tax deduction with your contribution, plus you have until April 15, 2021 to do it. If you are over 55, you can contribute an extra $1,000 over these limits.
Credit for Sick Leave for Self - Employed Individuals. Under the Families First Act, if you are considered an eligible self employed individual, you may be eligible for an Income tax credit for a qualified sick leave equivalent amount. You are an eligible self-employed individual if you regularly carry on any trade or business and either had COVID, were required by a health professional to quarantine, provided care to family members who had COVID or were required to quarantine, or cared for children due to school closing or daycare closing. If this sounds like you, tell us about it. In addition, if you have appropriate documentation, the credit is refundable.
Credit for Family Leave for Certain Self-Employed Individuals. Another income tax credit that may be available to you under the Families First Act is a credit for a qualified family leave equivalent amount. The qualified family leave equivalent amount is an amount equal to the number of days (up to 50) during the tax year that you could not perform services for which you would be entitled, if you were employed by an employer, to paid leave under the Emergency Family and Medical Leave Expansion Act.
Takeaway: If you are self-employed and could not work due to COVID, there are potential credits available. We need to talk about it.
Employee Retention Credit
The CARES Act created the employee retention tax credit. This credit is fully refundable for eligible employers and is equal to 50 percent of qualified wages (including allocable qualified health plan expenses) paid to employees after March 12, 2020, and before January 1, 2021. If you received a PPP loan then you would not qualify for this credit. If you did not receive a PPP loan and would like to discuss the other qualifications to be eligible for this credit please let us know.
CARES Act and SECURE Act Changes. Several taxpayer-favorable changes were made in the CARES Act and the SECURE Act with respect to retirement plans and distributions from those plans including the following:
1. The required minimum distribution rules for 2020 are waived so no one is required to take such a distribution and include it in taxable income in 2020.
2. The age limit for making contributions to a traditional individual retirement account (IRA), previously 70½ years old, was repealed in 2020. Thus, anyone who is otherwise eligible may make a contribution to a traditional IRA.
3. A new type of retirement plan distribution was added to the list of early distributions that are excepted from the 10-percent penalty for early withdrawals. You can now receive a distribution from an applicable eligible retirement plan of up to $5,000 without penalty if the distribution is either a qualified birth or adoption distribution.
4. Taxpayers impacted by the coronavirus (which is essentially anyone) can withdraw up to $100,000 from a retirement plan without penalty and is generally includible in income over a three-year period and, to the extent the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan within a three-year period, is not includible in income.
5. The required beginning date for required minimum distributions has been increased to 72 years old from 70½ years old. The former rules apply to employees and IRA owners who attained age 70½ prior to January 1, 2020. The new provision is effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after December 31, 2019.
Depreciation Deductions - Leasehold Improvements, Restaurant Improvements, Retail Improvements - Big News!
Among the many changes made by the CARES Act, the one which may have the most impact is the correction of a technical error made in the Tax Cuts and Jobs Act of 2017 (TCJA). That error resulted in the 15-year recovery period that applied to qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property being eliminated for such property placed in service after 2017. After the TCJA, the depreciation period for such property, now referred to as "qualified improvement property," was 39 years and, as a result, did not meet the requirements for additional first - year depreciation (i.e., bonus depreciation). Under the CARES Act, qualified improvement property is now depreciated over a 15-year life and meets the criteria for taking bonus depreciation. The change is effective as if it were included in the TCJA. Thus, if your business is affected by this change, we can file amended returns to claim refunds for the deductions that should have been available to you had the technical error not happened.
Employee Payroll Tax Deferrals
In a Payroll Tax Memorandum issued in August, President Trump directed Treasury Secretary Mnuchin to use his authority to defer the withholding, deposit, and payment of employee social security taxes, as well as taxes imposed under the Railroad Retirement Tax Act (RRTA) on railroad employees, for the period of September 1, 2020, through December 31, 2020. Because these taxes are not forgiven, and must be repaid at the end of the year, such a deferral could result in numerous practical challenges, such as what happens if an employee leaves before he or she repays the payroll taxes. If you have deferred an employee's payroll taxes under this Presidential directive, we need to discuss your options.
Extension of Time to Pay Employment Taxes
Under the CARES Act, a business can delay payment of applicable employment taxes for the period beginning on March 27, 2020, and ending before January 1, 2021(i.e., the payroll tax deferral period). Generally, under this provision, the business is treated as having timely made all deposits of applicable employment taxes that would otherwise be required during the payroll tax deferral period if all such deposits are made not later than the "applicable date," which is (1) December 31, 2021, with respect to 50 percent of the amounts due, and (2) December 31, 2022, with respect to the remaining amounts. For self-employed taxpayers, the payment for 50 percent of the self employment taxes for the payroll tax deferral period is not due before the applicable date. For purposes of applying the penalty for underpayment of estimated income taxes to any tax year which includes any part of the payroll tax deferral period, 50 percent of the self-employment taxes for the payroll tax deferral period are not treated as taxes to which that penalty applies.
If your business obtained funds through the PPP program, we should discuss the steps and documentation necessary to ensure that your loan is fully forgiven. We should also discuss the income implications related to the PPP loan. Currently, Treasury has stated that expenses paid with PPP loan proceeds are not deductible. This could create unexpected income for some. Nobody likes surprises. If you have a PPP loan, and have not already talked to us, call.
Talk to us! We find over and over that the more we know about our clients, the more we can help them. We need you to tell us about new businesses, marriages, second homes, new babies, children in college, how many months a year you spend in Florida (where there is no income tax) and so on. If you have a life event and you wonder if it might affect your taxes, shoot us a quick email, or give us a call. This is planning season, and if you are concerned about your tax circumstances for 2020 and don't want to be surprised in April or pay potential underpayment penalty, let us look at it and see where you are. There are actions we can take now to help.
Be sure to send us any correspondence you get from IRS or States. It is not payable until we say it is. The mistakes we see on these notices are numerous.
Our 2020 tax organizer will arrive in January. Returning clients will receive a personalized organizer which will contain information from last year's return. We hope the organizer will make it easier to collect your information. New clients will receive a generic organizer for their use.
Thank you for allowing us to be your tax professionals. Stay safe this Holiday Season! We look forward to hearing from you soon.
Very truly yours,
Mary, Ryan, Rainie and Sue