How to Finish Strong this Tax Planning Season

tax season, tax planning, financial planning

Like gardening or working out, tax planning is one of those activities where you get out of it what you put into it. Plenty of us have a weight bench gathering dust in the garage that hasn’t gotten us into any better shape, or a plot in the backyard that just won’t grow anything because we never weed it. Tax planning is similar in the sense that you can put work in on the front end that you’ll reap benefits from later.

Many of us just do tax preparation, dropping off a shoebox of documents with a CPA for the weekend; then we’re surprised when our returns are only so-so. Tax planning, not just tax prep, is an intentional act that can reduce your tax footprint and optimize your tax picture.

Let’s look at those lingering tax checkboxes for 2020, and see how you can optimize your tax plan for return time.

Minimum Standard Deduction or Itemizing?

This initial question will help you put together the rest of your tax planning strategies. Planning has changed a lot since the Tax Cuts and Jobs Act nearly doubled the minimum standard deduction to $12,400 for single filers and $24,800 for married-filing-jointly (for 2020).

Getting your itemized deductions above that threshold no longer applies to a large part of the population and will affect your overall tax strategy. Some estimates say only 10% of Americans still itemize. That said, it’s within your interest to reduce your taxable income no matter whether you utilize the standard deduction or itemize.

There are Still Ways to Optimize Your Taxes

It’s important to remember that we’re still in the tax planning season. If you haven’t hit the ceiling for the accounts below, there’s time to contribute, which can lower your taxable income for 2020.

Until April 15

  • IRA – $6,000 contribution limit; $1,000 catch-up contribution if over 50
  • Health Savings Account (HSA) – $3,550 single, $7,100 married contribution limit; $1,000 catch-up contribution if over 55

Until October 15 (if you file an extension!)

  • Solo 401(k) – $19,500 contribution limit; $6,500 catch-up contribution if over 50
  • SEP IRA – 25% of employee’s compensation or $57,000 contribution limit
  • Simple IRA – $13,500 contribution limit; $3,000 catch-up contribution

These are the kind of tax moves that take you from simple tax preparation to tax planning. Looking back over this last year, if you’ve received stimulus checks or saved money because required minimum distributions (RMDs) were canceled, you can still find shelter for that money in these accounts.

2020 Items to Mention to Your CPA

2020 is over, and none of us are too sad to see it go. While there are some tax items with more flexible deadlines as we just mentioned, the ball drop at midnight generally marks a hard stop. Let’s look at the items that were part of your financial life last year and that you want to make sure your CPA knows about when prep time comes.

Stimulus Checks

Many received a check from the government in 2020. Billions have been sent to the American public to restart a depressed economy and help us recover, and there is additional stimulus being discussed in the halls of power.

Stimulus checks were based on tax returns from 2018 or 2019, and phased out benefits if you made $75,000 a year (or $150,000 for couples) or more. However, the IRS is shoring up stimulus checks that were missed in the last year. If your circumstances changed – lost job, lost business, etc. – and your income changed dramatically in 2020, you can still receive stimulus checks you may have missed.

There’s also no clawback provisions if your tax picture changed. In other words, if your income exceeded the threshold for the stimulus in 2020, you don’t have to give back any stimulus money received.

Work this out with your CPA and make sure you discuss your Form 1444 and all paperwork is in order.

Charitable Giving

The deadline for charitable giving ends when the year ends, but you want to make sure you’ve reported clearly to your CPA what you gave last year.

Qualified Charitable Distributions (QCDs)

In past years, investors have been able to make the connection with their RMDs and QCDs to give the money directly to charity and avoid the tax hit. This worked well with those who were already giving to these charities and now could realize the full advantage of the tax maneuver.

In 2020, RMDs were suspended, which disrupted this connection for some. Many people gave anyway as part of their lifestyle, and solid records of your giving will help with your tax plan.

This year or any year, your distributions from your retirement plans are reported on your 1099-R form, but the form doesn’t specify how much went to a QCD. You need to discuss this directly with your CPA to make sure that whatever portion of your distributions went to charity isn’t reported as taxable income. The responsibility is on you to make sure that’s clear with your CPA.

Giving to Your Church or Faith Community

Your worship community (church, synagogue, mosque or other organization) should send you an annual statement for your giving in 2020 to prepare you for tax time. If they haven’t, they will most likely have this on file and can send you a contribution letter.

However, it’s worth noting that there is no law requiring that they send you a record of your contributions. Although it is decidedly a best practice, it’s not legally binding. It is ultimately the donor’s responsibility if you want to keep a record and itemize.

Other Items

Again, given the standard deduction, many aren’t itemizing anymore. But if you are, there are some items you don’t want to forget in your tax planning strategy.

Medical Expenses – If you’re itemizing, anything above 7.5% of your Adjusted Gross Income (AGI) can be deductible.

Mortgage Interest – This is still deductible, with a few caveats.

529 Plans – The deadline for contributions is December 31. Remember that these offer breaks only on state tax, not federal.

Life Changes

This may seem obvious, but this disorienting year has a lot of us overlooking the details. Has your family changed this year, changing your tax picture?

As the joke goes, did quarantine result in any new mouths to feed? Do you have shared custody and claim children as dependents in alternating years? Did you have any deaths in the family that changed the way you file?

The tax implications of these changes may not be top of mind, so make sure you have a full check-in with your CPA.

Net Operating Losses

For business owners, Net Operating Losses (NOLs) have made it onto the legislative floor this year as well. The Tax Cuts and Jobs Act eliminated the carry back provision for NOLs, but the CARES Act has loosened this restriction for the time being.

Businesses that need an infusion of cash now have an extended carryback period covering 2018, 2019 and 2020. The carryback period is five years, so, for example, a 2018 loss could be carried back to 2013.

Tax Planning, Not Just Preparation

Here’s hoping all of us will put some sweat equity into our tax planning strategies so the year pays off. We can also start putting practices in place for 2021 to plan ahead.

Remember: These are only a few of the tips and details to keep in mind. Make sure you’re in conversation with your financial advisor and CPA to take advantage of opportunities available. It’s about tax planning, not just tax preparation – get in touch and let’s start the conversation today.

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For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

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