Why 2020 Tax Planning Should Start Now

Tax planning may serve you well in reaching your financial goals, whether those goals are personal or business-related. And, while it may seem premature to begin planning now, it’s important for us to remember the 2020 tax year isn’t what you would call “run-of-the-mill.”

Whenever I’m working with a client, my goal is to maximize their benefits and minimize their tax exposure. The complexity of tax planning differs greatly from client to client and year to year, but it’s important for all taxpayers to consider their financial goals and related tax advantages, as well as some of the differences for 2020, as we near the close of the tax year. This year has been a wild ride for many of us, and things are not quite over yet. With the presidential election approaching fast, there are certainly going to be more changes coming.

Using Your Financial Goals to Uncover Tax Advantages

What if your personal goal is to purchase a home in 2021? Will it be prudent to explore methods that show the most income for 2020, or will it be more beneficial to focus on an expense strategy that minimizes your 2020 tax burden? The choice depends on your personal needs and circumstances. The same is true for a business owner with a goal of financing new equipment in the coming year. That is where we come in to help create a plan that centers around your goals, and one that yields the best possible outcome for your family and your business. There are times when taking as many deductions as you legally can actually hurts your bottom line, especially when it comes to financing choices, so it may make sense not to take bonus depreciation. At other times, bonus depreciation is a great way to match your cash flow with your deductions.

If you’re self-employed, perhaps your goal is simply to maximize profit. There are a number of ways to reach this goal through proper tax planning. We can assist you with maximizing deductions, for example, such as those for your home office, vehicle, applicable health insurance premiums, or for your single-participant 401(k) contributions. Maximizing profit does not have to mean maximizing your tax liability!

Recent Legislation Helping Individual Taxpayers

Income may be less than the norm for many of us in 2020, so it’s important to explore all avenues of tax relief, such as the provisions offered by the CARES Act legislation. Many individual taxpayers have found that itemizing just isn’t passing muster the way it did prior to the Tax Cuts and Jobs Act (TCJA), as it changed the benefits we associate with charitable contributions, for example. You definitely need to revisit the conversation for 2020, however, as up to $300 in charitable contributions may be deducted in addition to the standard deduction. Should it be more prudent for you to itemize for 2020, the limitation of 60% of AGI has been removed.

If you have reached the age of 72, the CARES Act also allows you the option to hold onto your 2020 required minimum distribution (RMD) as an asset, which may be used to reduce taxable income and be restored for its value in the future. And skipping your RMD in 2020 may also result in a less taxable amount for your Social Security benefits. For those who are under the age of 59, the CARES Act also removed the 10% early withdrawal penalty on your retirement savings accounts, giving you access to some of the accumulated wealth. Now may be a good time to explore other investment avenues.

Recent Legislation Helping Business Taxpayers

For business owners, the CARES Act temporarily suspended the 80% limitation of taxable income set for net operating losses (NOLs), which may also now be carried back for up to five years. Historically, these carryback provisions were a great way to pump money back into struggling businesses, but they were removed by the 2017 TCJA. We can assist with the correct tax forms and amended filings, which will allow you to claim refunds for loss carrybacks and help infuse cash to your struggling business. We can also help corporations free up much-needed cash due to the temporary availability of accelerated refunds for alternative minimum tax (AMT) credits.

The CARES Act has increased the business interest deduction limitation from 30% to 50% for 2019 and 2020. This legislation also allows you to use your 2019 ATI to calculate your 2020 business interest limitation, which can increase your interest expense deduction due to a lower net income in 2020. Recent legislation has also provided other business provisions and tax credits for employers. In strategizing for 2020, it’s important to look at how all available tax relief measures affect tax planning for the year, as some of these are not available for those taking SBA loans. 

Contact Abbott & Company

Tax planning is a multidimensional process, and it’s a key part of your financial success. The tools and strategies outlined above are not all-inclusive, as the tax plans that are best for individuals and their businesses depend on very specific circumstances. Self-employed individuals and businesses will have an additional level of tax planning needs, for example, if they received a PPP loan. No matter what level of planning you or your business need, we want to help implement a tax plan that best suits your financial needs and goals. Contact us today to get started.

Edited by Joe Desantis, MBA