Even during a Pandemic, it’s still prudent to take steps to minimize your tax bill. Plus, this year we are faced with the prospect of higher tax rates starting in 2021.
As the year winds down, now is the time to take steps cut your 2020 tax bill while also not pushing too much taxable income into 2021 in anticipation of higher tax rates. Prior to December 31st:
- Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put up to $19,500 into your 401(k) or 403(b) plan at work. Anyone 50 or older by December 31st can put away an additional $6,500 for a total of $26k. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
- If you’re self-employed, consider setting up a Solo 401(k) by 12/31. A Solo 401(k) plan lets a self-employed person hit the $57k retirement plan max with less income than a SEP IRA, and also allows a person aged 50 or older to put away $63.5K into a retirement plan for 2020 versus $57k into a SEP IRA.
- Take a look at your withholdings and instruct your employer to withhold additional taxes to avoid getting hit with an underpayment penalty if you haven’t had enough taxes withheld during the year. (Take a look at the IRS’ Withholding Calculator to set your withholdings for 2021.)
- Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including capital gain distributions from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income while any losses still remaining get carried over to next year. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the “wash sale” rules.
- Consider selling your investments held more than one year that have increased in value if you are in the two lowest tax brackets since the long-term capital gains rate for you will be 0%. You can then buy back those securities, and the “cost-basis” will be the higher amount. Wash sale rules don’t apply to securities sold at a gain. This strategy will save you taxes down the road when you sell these securities. Just make sure that the capital gains realized don’t push you out of the 22% tax bracket since you’ll be taxed on those long-term capital gains that fall outside that bracket at 22%.
- Send in your January 2021 mortgage payment early enough so it will be processed prior to 12/31/20. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier if you will be itemizing your deductions.
- Clean out your closets and donate your clothing and household items to a charitable organization, since “non-cash” contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, along with its condition, and snap a few photos as well. Remember, only donations of clothing and household items in “good condition or better” qualify for a deduction.
- For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2021. And you always have the option of donating appreciated investments to charities or a Donor Advised Fund. You get to claim your donation based on the value of the assets donated without paying any capital gains taxes on the appreciation. (Use this IRS tool to confirm a charity as legitimate.) Don’t donate investments that have decreased in value. Instead, sell them first, take the loss on your taxes, and donate the money received from the sale.
- Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and will have less than $10k in state income taxes and real estate taxes combined..
- Pre-pay and pay off your medical bills if your total medical expenses exceed 10% of your income and you itemize.
Lastly, as a bonus year-end planning tip, don’t forget that you have 180 days from the date you realize a capital gain to invest up to the full amount of the capital gain into an Opportunity Zone fund and defer paying income taxes on your realized gain.
And, as always, evaluate whether you’ll save any taxes by postponing 2020 income or deductions into 2021 or by accelerating 2021 income or deductions into 2020. With Biden taking office in January, don’t overlook that tax rates will most likely be increasing starting next year.
For Schedule C individuals (sole proprietors and single member LLC’s), the days between Thanksgiving and Christmas are the perfect time of year to review your business’s “bottom line” for the year.
If you find your net income significantly ahead or behind compared to your prior year net income – reach out to your tax preparer to discuss if you may need to revise your quarter 4 estimated tax payments. Also, if you collected Pandemic Unemployment Assistance (PUA), be aware this governmental aid is taxable income. As the Pandemic has turned so many peoples’ financial situations upside down this year, taxpayers should take this final month of the year as an opportunity to plan for 2020 as well as 2021.
Are you reaching your milestone birthday of turning age 50 in 2021?
If so, don’t forget about the “catch-up” provision for 401k and 403b salary deferral retirement plan contributions. For 2021, the max salary deferral into your retirement plan is $19,500. However, if you are age 50 or older, you can make an extra “catch-up” contribution into your retirement plan via your salary deferral in the amount of $6,500 annually.
No need to wait until your birthday to increase your allowed contribution amount – taxpayers qualify for the full amount of the “catch-up” contribution in the year they turn 50. Thus, you can increase your deferral amount beginning in January 2021 even if you do not turn age 50 until later in the year.
And if you turned 50 in 2020, you can take advantage of the “catch-up” deferral in the last month of the year if you missed out on this “bonus” contribution earlier in the year.
For 2020 there is a new $300 charity deduction that will benefit taxpayers who claim the standard deduction.
Typically, charitable donations are allowed as a tax deduction only to taxpayers who itemize their tax deductions on their tax return and not allowed to taxpayers claiming the standard deduction. However, beginning in 2020, taxpayers who do not itemize their tax deductions can claim a charity deduction, capped at $300, regardless of filing status. Only cash donations paid directly to qualified charities will qualify for this deduction. Non-cash donations do not qualify nor do donations to Donor Advised Funds. If you take the standard deduction on your tax return, be sure to let your tax preparer know if you made any cash donations in 2020.
An alternative to donating cash to charitable organizations, is to donate long-term appreciated marketable securities.
This strategy allows individuals to avoid the capital gains tax they would incur by selling an appreciated investment and then donating the proceeds. When donating appreciated stock, bonds, mutual funds and other similar investments taxpayers can claim a tax deduction equal to the market value of the security as of the date of the charitable donation.
If installing solar power panels for your residence was a consideration for 2020 or 2021, now is the time to act.
The Federal Solar Investment Tax Credit has been one of the larger tax credits taxpayers have benefitted from the past few years. Prior to 2020, taxpayers were allowed a tax credit on their tax return equal to 30% of the total installation and product costs of solar panels on their residence. For the 2020 tax year that credit is now 26% of such costs. And in 2021 the tax credit will drop again to 22% of the total cost.
Completion date is the key, not the date the project begins. Taxpayers claim this tax credit in the year the project is completed and placed in service in your home. Unless the credit is extended by the government, 2021 will be the final year individual taxpayers can claim this tax credit. Thus, if you have been thinking about adding solar to your residence – now is the time to plan to be sure to have the job completed by the end of 2021, before this significant tax credit disappears.
With COVID-19 sadly on the increase, employers are asking us more questions than ever about their responsibilities to pay their staff who cannot come to work for COVID related reasons.
Basically, if you have an employee who cannot come in to work for COVID related reasons, the Federal Government has enacted the Families First Coronavirus Response Act (FFCRA) which is currently law through December 31, 2020. Please Note: FFCRA applies to businesses that are open and have staff not able to work for various COVID reasons. More info is available at: https://www.dol.gov/agencies/whd/pandemic/ffcra-employer-paid-leave.
If your practice pays FFCRA wages, you are eligible to receive an immediate dollar-for-dollar reimbursement of the FFCRA wages paid through payroll tax credits. Your payroll service should be able to help you with this.
If you have an employee who can’t work due to COVID reasons:
If the leave is for one of the following three reasons, then you are required to pay a full-time employee for up to 80 hours of leave and a part-time employee for the number of hours of leave that the employee works on average over a two-week period. Employees taking leave shall be paid at either their regular rate or the applicable minimum wage, whichever is higher, up to $511 per day and $5,110 in the aggregate (over a 2-week period). This provision applies if your employee:
- is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- has been advised by a health care provider to self-quarantine related to COVID-19;
- is experiencing COVID-19 symptoms and is seeking a medical diagnosis.
If the leave is for one of the following two reasons, then a full-time employee is eligible for up to 80 hours of leave, and a part-time employee is eligible for the number of hours of leave that the employee works on average over a two-week period. Employees taking leave shall be paid at 2/3 their regular rate or 2/3 the applicable minimum wage, whichever is higher, up to $200 per day and $2,000 in the aggregate (over a 2-week period). This provision applies if your employee:
- is caring for an individual subject to order #1 or #2 above;
- is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
If the leave is for the following reason, then a full-time employee is eligible for up to 10 weeks of additional leave at 40 hours a week, and a part-time employee is eligible for leave for the number of hours that the employee is normally scheduled to work over that period. Employees taking leave shall be paid at 2/3 their regular rate or 2/3 the applicable minimum wage, whichever is higher, up to $200 per day and $10,000 in the aggregate. This provision applies if your employee:
- is caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19.
Practices with fewer than 50 employees might be exempt from this provision of the FFCRA. More info is available at: https://schwartzaccountants.com/2020/10/are-you-required-to-pay-staff-who-cant-work.-due-to-childcare-issues/.
Please note that if a business is shut down, then employees will file for unemployment instead of having the business owners pay their wages under FFCRA.
On November 17th, the IRS issued guidance on how the PPP Loan forgiveness impacts how businesses will deduct expenses paid with the PPP funds. According to the IRS Bulletin at: https://content.govdelivery.com/accounts/USIRS/bulletins/2acfa3f:
Revenue Ruling 2020-27 provides guidance on whether a Paycheck Protection Program (PPP) loan participant that paid or incurred certain otherwise deductible expenses can deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan. The revenue ruling also provides guidance if, as of the end of the 2020 taxable year, the PPP loan participant has not applied for forgiveness, but intends to apply in the next taxable year.
Revenue Ruling 2020-27 available at: https://www.irs.gov/pub/irs-drop/rr-20-27.pdf provides a variety of examples, and comes to this conclusion:
HOLDING A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.
There is still a chance that Congress will clarify their intent that the PPP should NOT be taxable to small businesses who received these loans. Even so, with the prospect that nothing will happen on this matter until after Biden takes office on January 20th, we’re assuming that expenses paid with the PPP loan that will be forgiven will essentially be non-deductible to practice owners in 2020.
Code Section 139 starts with this general rule: Gross income shall not include any amount received by an individual as a qualified disaster relief payment. In other words, your practice deducts any money paid out to you and selected staff under Section 139 while you and those staff members owe no taxes on amounts received.
For purposes of this section, the term ‘‘qualified disaster relief payment’’ means any amount paid to or for the benefit of an individual—
- to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
- to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster,
- by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or
- if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare,
but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.
Bloomberg Tax posted a very informative article about Section 139, including expenses that your practice can pay to you and your employees as a tax-free benefit, at: https://news.bloombergtax.com/daily-tax-report/insight-disaster-relief-payments-tax-efficient-assistance-to-employees-impacted-by-covid-19.
Dental Economics also posted a very informative article, including a template of a form to use to document the reimbursements you make to yourself and your staff at: https://www.dentaleconomics.com/money/tax-strategies/article/14186221/utilize-taxfree-covid19-reimbursements-for-you-and-your-dental-office-staff
Please read through these two articles and consider having your practice issue checks prior to December 31st reimbursing you and selected staff for unreimbursed medical expenses, home office expenses, increased childcare expenses, and other expenses that are considered “Ordinary and Necessary” during these unprecedented times. Please note that you are not required to prepare a written plan for this valuable employee benefit and can choose which employees to include in this tax-free benefit.
Presented by Andrew Schwartz, CPA, Founder of The MDTAXES Network
Wednesday, December 16, 2020 – from 12 Non – 12:45 pm
2020 has been one of the most challenging years for practice owners. Join Andrew Schwartz, CPA, as he discusses actions to take before December 31st to lower your tax liabilities and get your practice’s financial house in order for year end. Andrew will also cover steps you can take as a practice owner now to ensure 2021 is successful.
Most years, the government bumps up the maximum Social Security taxes that you can pay. For 2021, the maximum wage base jumps to $142,800, an increase of $5,100, or 3.7%, over the max of $137,700 that was in place for 2020.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $8,854. This is $317 higher than the 2020 max of $8,537.
How is this increase calculated? According to the Social Security Administration, the annual change is based on the National Wage Index.
Higher Medicare Taxes Due To The Affordable Care Act:
Starting back in 2013, the employee portion of the Medicare tax jumps from the current rate of 1.45% to 2.35% on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer will continue to match their employees’ Medicare taxes at a rate of 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers. This tax is reported on the Form 8959.
For example, if you’re single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013 and beyond.
To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income (except for when you rent office space you own to your practice) beginning in 2013. You will pay this tax in addition to any federal and state income taxes due on this income. This tax is reported on the Form 8960.
Calculating the Self-employment Tax:
If you’re self-employed and earn more than $400 in net profit from your business, you’re subject to social security and Medicare taxes as well. Known as the “self-employment tax”, you’ll need to complete a Schedule SE to calculate this tax, and then report the amount due on your Form 1040.
The self-employment tax is based on a social security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee’s portion and the employer’s portion of both taxes. Remember, when you work as an employee, your employer matches the Social Security and Medicare taxes withheld from your pay.
Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes. If you earn income as an employee and as an independent contractor, and your combined income exceeds $137,700 in 2020, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you’ll end up overpaying your self-employment taxes.
Do You Work For More Than One Employer in 2020 and Earn More Than $137,700?
For 2020, each of your employers withholds social security taxes from the first $137,700 that you earn from them. If you work for more than one employer and your total salary from all sources exceeds that threshold, you’ll have excess social security taxes withheld. Make sure to claim a credit for these excess taxes on your 1040 as additional federal taxes paid in.
Let’s say you work for two employers and earn $100,000 from each employer. Employer #1 withholds $6,200 in social security taxes ($100,000 * 6.2%). Employer #2 also withholds $6,200 in social security taxes – for a total of $12,400 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2020 is limited to $8,537, the excess of $3,863 counts as additional federal income taxes paid in by you.