By Colin Boyle, ALL CPAs Associate
Have you been struggling to keep up with changing tax laws and how they apply to your bottom line in this time of uncertainty? This past year has produced many changes that may impact your tax return. The good news, there are moves you can make to optimize your tax planning. Here is a list of actions based on current tax rules that may help you reduce your tax liability before year-end.
Problem: Higher-income earners must be wary of the 3.8% surtax on certain unearned income.
The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year.
Resolution:
Consider ways to minimize (for example, selling investments that have a loss) additional NII for the balance of the year. You can also try to reduce MAGI other than NII by deferring income to next year or accelerating deductions into this one. An important exception is that NII does not include distributions from IRAs and most other retirement plans but these are included in MAGI.
Problem: Do you anticipate being in a lower tax bracket next year due to a changed financial position and circumstances?
If so, individuals should postpone income until 2021 and accelerate deductions into 2020. By doing so, it will enable you to claim larger deductions, credits, and other tax breaks for 2020 that are phased out over varying levels of adjusted gross income. Some of these include deductible IRA contributions, child and education tax credits, and deductions for student loan interest. The opposite will be true for someone who anticipates being in a higher tax bracket for 2020 or who will have a more favorable filing status this year than next (head of household versus single filing status). In this case, it will pay to accelerate income into 2020.
Problem: Taxpayers will not be able to itemize due to the high standard deduction amounts that apply for 2020 ($24,800 for joint filers, $12,400 for singles and for marrieds filing separately, $18,650 for heads of household), and because many itemized deductions have been reduced or abolished.
This year, for example, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (tax preparation fees, investment fees, and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualy and 10%-of-AGI limits are met.
Resolution:
Taxpayers can still itemize medical expenses but only to the extent, the expenses exceed 7.5% of AGI, state, and local taxes up to $10,000, charitable contributions, plus interest deductions in a restricted amount of qualifying residence debt. Payments of those items will not save taxes if they do not cumulatively exceed the applicable standard deduction.
Problem: A taxpayer would like to make charitable deductions, but they will not exceed the standard deduction.
Resolution:
A taxpayer who will be able to itemize deductions this year but not next year will benefit by making two years’ worth of charitable contributions this year, and none next year, instead of spreading out donations over 2020 and 2021. The COVID-related increase for 2020 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy, especially for higher-income individuals with the means and disposition to make large charitable contributions. The 60% limit for some cash contributions has been eliminated for certain qualified contributions, and it now allows an individual to contribute up to 100% of his or her income.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, individuals making cash gifts directly to qualified charities can claim a deduction of up to 100% of their adjusted gross income, basically eliminating their income tax liability for 2020. If you have made charitable pledges, consider funding those pledges in 2020 to take advantage of the once-in-a-lifetime unlimited charitable contribution deduction using cash. Keep in mind, you need to review the impact this has on any charitable contributions that are being carried over from prior years, particularly if those carryovers involved gifts of capital gain assets that have lower limits on deductibility. Also, you should weigh the benefit of using charitable contributions to reduce income tax in 2020 with the impact of using the deduction in future years against income taxed at higher rates.
One last thing to consider: Under the CARES act, taxpayers who are not able to itemize, can still deduct charitable cash donations of up to $300 in 2020. However, if a married couple files a joint tax return without itemizing and each spouse contributes $300 in cash to a charity, their deduction is limited to $300.
In closing, adapting to these changes and the way of life has been a challenge for all of us. This short guide should be of assistance to you and your year-end planning and will help you maximize your savings in these uncertain times.
If you have any questions, please contact your ALL Tax Advisor or call the office at 617-738-5200.
About the Author
Colin Boyle
Colin Boyle is an Associate at ALL CPAs. Colin earned his Bachelors in Management with a concentration in accounting and finance from the University of Massachusetts Boston. Prior to joining the firm full-time, Colin was a tax season intern helping to prepare tax returns. Colin is interested in all forms of tax planning and tax law. In his free time, Colin enjoys playing hockey and reading books.
