Tax Planning Guide

2020 2021 TAX PLANNING GUIDE Year-round strategies to make the tax laws work for you Tax planning in unprecedented times t has become a cliché in 2020, but what word other than “unprecedented” can be used to describe the events we’ve experienced this year? During such times, tax planning is far from I top of mind. But it’s still important. Smart tax planning can soften the impact of an uncertain economy and provide much-needed relief to owners of struggling businesses. To take advantage of all available breaks, you need to be aware of some major changes under this year’s Coronavirus Aid, Relief and Economic Security (CARES) Act and last year’s Setting Every Community Up for Retirement Enhancement (SECURE) Act. You also can’t forget about the massive Tax Cuts and Jobs Act (TCJA) that generally went into effect two years ago but still impacts tax planning. Plus, it’s possible that there could be more tax law changes before year end — or that the potential for changes next year could affect 2020 planning. This guide provides an overview of some of the most significant tax law changes going into effect this year and other key tax provisions you need to be aware of. It offers a variety of strategies for minimizing your taxes in the current tax environment. Use it to work closely with your tax advisor to identify the best strategies for your particular situation. He or she also can keep you apprised of any new tax law developments that might affect you. Contents Income & Deductions ...............................................2 Executive Compensation ..........................................6 Investing ...................................................................8 Real Estate ..............................................................12 Business Ownership ................................................14 Charitable Giving ...................................................16 Family & Education ................................................18 Retirement ..............................................................20 Estate Planning .......................................................22 Tax Rates .................................................................24 2 Income & Deductions Control the timing of income and deductions to your tax advantage ax rates on “ordinary income” y U.S. Treasury bill income, and Suspension of miscellaneous itemized are higher than those that deductions subject to the 2% floor. y Retirement plan distributions, to T apply to much of your This deduction for expenses such as the extent they won’t be subject investment income. Ordinary income certain professional fees, investment to early-withdrawal penalties and generally includes salary, income from expenses and unreimbursed employee aren’t required. (See page 20.) self-employment or business activities, business expenses is suspended through interest, and distributions from tax- 2025. While this eliminates the home Some expenses with potentially deferred retirement accounts. Some of office deduction for employees who controllable timing are mortgage it may also be subject to payroll tax, work from home (even if your employer interest, investment interest expense or you may have to pay the alternative has required it during the pandemic), and charitable contributions. minimum tax (AMT), under which if you’re self-employed, you may still be different tax rates apply. This is why able to deduct home office expenses. careful planning for ordinary income Impact of the TCJA (See page 12.) and deductible expenses continues to on timing strategies be important. The TCJA has made timing income More-restricted personal casualty and and deductions more challenging theft loss deduction. Through 2025, this Timing income and expenses because some strategies that tax- itemized deduction is suspended except Smart timing of income and expenses payers used to implement no longer if the loss was due to an event officially can reduce your tax liability, and poor are making sense. Here’s a look and declared a disaster by the President. timing can unnecessarily increase it. some significant changes that have When you don’t expect to be subject affected deductions: Increased standard deduction. The to the AMT (see page 3) in the current TCJA nearly doubled the standard year or the next year, deferring income to Reduced deduction for state and deduction. While many higher-income the next year and accelerating deductible local tax. Property tax used to be a taxpayers will still benefit from itemiz- expenses into the current year may be popular expense to time. But with the ing, some — such as those in low-tax a good idea. Why? Because it will defer TCJA’s limit on the state and local states, who don’t have mortgages or tax, which usually is beneficial. tax deduction, property tax timing who aren’t charitably inclined — may will likely provide little, if any, benefit now save more tax by claiming the But when you expect to be in a higher for higher-income taxpayers. (See standard deduction. (See Chart 1 for tax bracket next year — or you expect Case Study 1 at right.) If you reside the 2020 standard deduction amounts.) tax rates to rise — the opposite approach in a state with no, or low, income tax, may be beneficial: Accelerating income this change might be less relevant. Tax-advantaged will allow more income to be taxed at But keep in mind that deducting sales saving for health care tax instead of income tax may be your current year’s lower rate. And defer- If medical expenses not paid via beneficial, especially if you purchased ring expenses will make the deductions tax-advantaged accounts or reimburs- a major item, such as a car or boat. more valuable, because deductions save able by insurance exceed a certain more tax when you’re subject to a higher tax rate. CHART 1 2020 standard deduction Whatever the reason behind your desire to time income and expenses, Filing status Standard deduction1 you may be able to control the timing Singles and separate filers $12,400 of these income items: Heads of households $18,650 y Bonuses, Joint filers $24,800 1 Taxpayers age 65 or older or blind can claim an additional standard deduction: $1,300 if married, y Consulting or other self-employment $1,650 if unmarried. income, Income & Deductions 3 FSA. You can redirect pretax income CASE Factor state and local tax to an employer-sponsored Flexible STUDY 1 deduction limits into timing strategies Spending Account up to an employer- determined limit — not to exceed $2,750 Last year, Justin earned a promotion along with a significant salary increase and in 2020. The plan pays or reimburses you bonus, and his state income tax liability increased accordingly. When he filed for qualified medical expenses. What his 2019 tax return, he was surprised to find that he could no longer deduct all of his state and local income and property taxes. This meant that prepaying his you don’t use by the plan year’s end, you 2019 property tax bill due in early 2020 hadn’t helped him. He’d always done his generally lose — though your plan might income taxes himself, but he decided it was time to consult a tax professional. allow you to roll over up to $550 to 2021. Or it might give you a 2½-month grace She told Justin that, through 2025, under the TCJA, his entire itemized deduction period to incur expenses to use up the for state and local taxes — including property tax and either income or sales previous year’s contribution. In response tax — is limited to $10,000 ($5,000 for married taxpayers filing separately). The to the COVID-19 crisis, the IRS has downside of Justin’s raise and bonus was temporarily made FSAs a little more flex- that his 2019 state and local tax liability ible. Contact your employer for details. exceeded $10,000, so a portion of this If you have an HSA, your FSA is limited liability was no longer deductible. to funding certain permitted expenses. The tax advisor went on to explain that the limit significantly impacts higher-income Smaller AMT threat taxpayers with large state and local income The top AMT rate is 28%, compared tax and/or large property tax bills. She to the top regular ordinary-income tax advised that Justin take this into account in rate of 37%. But the AMT rate typically his income and deduction timing strategies applies to a higher taxable income base. going forward. You must pay the AMT if your AMT liability exceeds your regular tax liability. percentage of your adjusted gross If one spouse has high medical The TCJA substantially increases the income (AGI), you can claim an expenses and a relatively lower AMT exemptions through 2025. (See itemized deduction for the amount AGI, filing separately may allow Chart 8 on page 24.) This means fewer exceeding that “floor.” This floor that spouse to exceed the AGI floor taxpayers will have to pay the AMT. In can be difficult for higher-income and deduct some medical expenses addition, deductions used to calculate taxpayers to exceed. that wouldn’t be deductible if the regular tax that aren’t allowed under the couple filed jointly. Warning: Because AMT can trigger AMT liability, and The TCJA had reduced the floor from the AMT exemption for separate there aren’t as many differences between 10% to 7.5% for 2017 and 2018, and returns is considerably lower than what’s deductible for AMT purposes last year the 7.5% floor was extended the exemption for joint returns, filing and regular tax purposes. (See Chart 2 to 2019 and 2020. But it will return to separately to exceed the floor could on page 4.) This also reduces AMT risk. 10% for 2021 unless Congress extends trigger the AMT. However, AMT will remain a threat for the lower floor again. (Check with your some higher-income taxpayers. tax advisor for the latest information.) You may be able to save taxes without having to worry about the medical So before timing your income and Eligible expenses may include expense deduction floor by contributing expenses, determine whether you’re health insurance premiums, to one of these accounts: already likely to be subject to the long-term-care insurance premiums AMT — or whether the actions (limits apply), medical and dental HSA.

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