There’s Still Time! Top 10 Items to Discuss with your Tax Advisor Before Year End
With the end of 2020 in sight, don’t miss out on last-minute tax planning items that could impact your financial situation for years to come.
- Suspension of Required Minimum Distributions
- The CARES Act suspended Required Minimum Distributions (RMDs) from retirement accounts for 2020.
- RMDs will likely resume in 2021 for taxpayers who turned 70 ½ before January 1, 2020. Taxpayers under this age will not be required to take RMDs until age 72.
- If you typically have taxes withheld from your RMDs you may need to make this up by making quarterly tax payments. Both the IRS and state taxing authorities assess interest if minimum payment amounts are not met during the year. Interest continues to accrue until payments are received, so paying late is better than waiting until your return is filed.
- Qualified Charitable Distributions (QCDs) can still be made this year even though RMDs are suspended. Individuals can give up to $100,000 per year and donations must be made directly from your IRA to a qualified charity. The amount of the QCD is excluded from taxable income and is not deductible. QCDs must be made by December 31st.
- Retirement Planning & Roth Conversion
- 401(k) contributions for employees and employee contribution elections for Solo 401(k) plan owners are due by December 31st. Plans must also be established by the end of the year. For 2020, employees can contribute up to $19,500 into a 401(k). Solo 401(k) plan owners can also contribute up to an additional 25% of their net self-employment income as a profit-sharing contribution, this contribution is not due until the due date of their tax return, including extensions. Total contributions into a Solo 401(k) are limited to $57,000 for the year.
- Taxpayers age 50 or above can also make catch-up contributions of up to $6,500 to a 401(k) plan or Solo 401(k) plan.
- SEP contributions for self-employed individuals can be made up to the filing date of the tax return, including extensions. SEP contributions are limited to the lesser of 25% of net self-employment income or $57,000.
- Consider converting IRA funds to a Roth IRA and paying tax now if you expect to be in a higher tax bracket in the future. However, be cautious of other items that may be impacted by a conversion, such as capital gains tax rates and taxable Social Security income.
- Working Remotely Due to COVID-19
- The Tax Cuts & Jobs Act eliminated the deduction for employee business expenses, including home office expenses for wage-earners. If you are a W-2 employee, the home office expense deduction will likely not be available to you even if you are working from home this year due to the pandemic.
- Self-employed taxpayers may be able to take a home office deduction against their business income. To qualify the space must be regularly and exclusively used as a home office, and it must be the principal place of your business. A desk in your guest room or your dining room table likely will not qualify.
- Taxpayers with a qualifying home office can use the Simplified Method, deducting $5 per square foot up to 300 square feet total, or prorate their actual expenses based on the square footage of the home used for business.
- Be aware of potential state tax implications of remote work. Employees who live and work in different states should look for state guidance regarding where this income will be taxable. Check with your employer to ensure that they are aware of your remote location and that tax is being withheld to the correct state.
- Employers should also check with their state taxing authority regarding withholding compliance. Employees working remotely could also impact state tax nexus and trigger a filing requirement for companies in states where they have employees located.
- Tax Loss Harvesting
- If taxpayers have recognized capital gains in their portfolio this year, consider tax loss harvesting before year-end to reduce the net realized gains. If net capital losses exceed net capital gains, deductible losses are limited to $3,000 per year. Any remaining capital losses are carried forward indefinitely. Short-term capital gains are generally taxed at a higher federal income tax rate than long-term capital gains, so offse