Welcome to your 2020 year-end tax update. Let’s dive right in, shall we?
Are we going to see federal tax law changes with Biden as president?
Possibly, but probably not soon. I previously discussed some of Biden’s tax-related leanings in this article. In short, we may see potentially higher taxes for higher earners, potentially expanded personal deductions and tax credits for lower-mid earners, some unfavorable estate tax changes, and possibly odd results relating to payroll taxes. Before we get there, though, the stars need to align to see significant federal tax changes in the near term:
- A strong interest from the executive and legislative branches for tax law changes during a pandemic.
- If Georgia Democrats take the two senate seats in January’s runoff, all House and Senate Democrats must vote the same way on proposed tax-related bills.
- If #2 doesn’t happen, all Democrats would still need to vote the same way plus at least a small number of Republican votes will be needed.
With this in mind, might we see tax law changes that could impact 2020, 2021, and beyond? What seems reasonable to me* is that we could see Congress issue another relief package containing favorable clarification regarding PPP loan forgiveness and possibly something tax-related to put money in the pockets of low and middle-income taxpayers, but increases on higher income taxpayers are unlikely. At least for now. By and large, tax commentators are also not expecting significant tax law changes impacting 2020 or 2021. 2022, on the other hand, is fair game.
2020 year-end tax strategies
If 2020 and 2021 federal tax rates and rules stay pretty much where they are, but 2022 could see some changes, what are some moves to consider?
- Income timing. For business owners, those selling appreciated investments, and really anyone with some level of control over the timing of their taxable income:
- If you expect income to go up sharply in 2021 over 2020, you may want to accelerate income into 2020 and defer deductions into 2021. For example, if you’ll be in the 22% federal tax bracket in 2020, but could be in the top 37% bracket in 2021, moving income into 2020 may create a permanent tax savings by having income taxed at a lower rate.
- If you expect 2021 taxable income to be at or lower than 2020 levels, pushing income into 2021 may make more sense. Even if you’ll be in the same tax bracket for both years, pushing income into 2021 makes it next year’s problem and lets you hold onto your cash a bit longer.
- This time next year, if not before, is when you should look hard at 2021 vs 2022 taxable income timing depending on proposed/enacted tax-related legislation that may hit later in 2021. We’re hearing “no new taxes” for many, but we’ll have to wait and see what new tax laws actually make it to the books.
- Make sure you’re prepared to maximize 2020 HSA and/or IRA contributions by April 15th, 2021. For those receiving a W-2, make sure you’ve maximized your employer-sponsored retirement plans such as 401(k)s by December 31, 2020 – don’t forget catch up contributions.
- Charitable giving. Consider “bunching” multi-year contribution into one year to take advantage of itemized vs standard personal deductions. You may want to consider establishing a donor-advised fund to accomplish this. For 2020 only, deductible cash charitable contributions are allowed up to 100% of Adjusted Gross Income – this limit is normally 60%. Also, for 2020 only, those who are taking the standard deduction, a $300 charitable contribution deduction will be allowed in addition to the standard deduction, so keep your receipts.
- Business owners should address any Qualified Business Income deduction limitations now. Also consider COVID-related payments to employees under Internal Revenue Code 139, which are a deduction for you, but not taxable income to employees.
- Biden has put forth ideas on increasing death-related taxes – both by lowering the level of assets exempt from estate taxes and by doing away with the step-to market value rules that allow heirs to avoid capital gains taxes on the inheritance of appreciated assets. Although it’s a bit early to know exactly where this will go, moves to consider include triggering capital gains before death if in a low tax bracket, donating highly appreciated property to charitable organizations before death if in a high tax bracket, and making life insurance part of your estate plan to help your heirs pay taxes.
As always, nothing happens in a vacuum, and a small change to your financial situation could result in a large change to your tax situation. Don’t make any sudden moves without first consulting your tax and financial advisors.
PPP loan forgiveness
The Treasury Department announced in late November its firm position that expenses covered by PPP loan proceeds remain non-deductible in the year the loan was received regardless of the year of forgiveness, assuming the loan will indeed be forgiven. Almost immediately, the Senate Finance Committee responded back that regardless of the law’s language, there was no intention for the forgiven proceeds to negatively impact taxpayers and for Treasury to back down. Additionally, the treatment for Schedule C filers without employees remains unclear – for these taxpayers PPP funding was not tied to specific business expenses such as employee wages, but rather 2019 taxable profit. How their forgiveness will be taxed, if at all, hasn’t yet been addressed.
It will literally take an act of Congress to set all this straight. Which I am hopeful will happen with any further economic relief packages that pass. Regardless of who ultimately gets their way here – the Treasury Department or taxpayers – the timing of applying for PPP loan forgiveness no longer appears to matter, so pushing off forgiveness applications into 2021 is likely a moot tax strategy.
Let’s says you’re a business owner and you have an Accounts Receivable department because customers owe you money and you want that money. You know that for every $1 of your annual budget allocated to the A/R department, you collect about $5-$7 of revenue. Not a bad ROI, right? This is about what the IRS brings in for the federal government. However, instead of increasing the IRS’ budget as the intersection of ever-changing tax law and technology becomes increasingly complex, the IRS’ budget has been consistently decreased over the past decade. To be clear, this is counter-productive to federal tax receipt collections and does not align with the principles of effective tax policy.
So, while I’m definitely on Team #fundtheIRS, they aren’t winning many over with their current non-budget-related tactics:
- As of this writing, while sitting on millions of unprocessed tax returns, tax payments, and pieces of correspondence from the spring shutdown, they are – you guessed it – sending out notices to taxpayers for lack of filing, lack of payment, and lack of taxpayer response. Seriously, I can’t make this up. This is similar to your A/R folks saying they’re overworked and understaffed, but at least some of it is because the department is handling complaints from customers who they’ve hit up for collection while customer checks are sitting in the office uncashed.
- The IRS isn’t budging on its position on COVID-related penalty assistance. In a nutshell, it won’t be offering any. Not automatic waiver of penalties, not additional phone service for taxpayers and tax practitioners to receive support handling penalty notices, nothing.
- A recent audit of the IRS – yes, it gets audited, too – by the Treasury Inspector General found the IRS left an estimated $45 billion on the table for the years 2014-2016 by not investigating higher-earners who do not file tax returns. I understand if the IRS simply doesn’t have the budget for tax return exams. I also somewhat understand if the tax returns of the ultra-wealthy are more resource-intensive to examine than others. I don’t, however, understand not at least insisting taxpayers who likely have significant taxable earnings to, you know, just file a tax return.
- And, of course, refer to the previous section regarding non-deductibility of PPP-paid expenses contrary to Congress’ intention.
In summary, I continue to hold the opinion that the IRS needs more funding and needs to put some commonsense, taxpayer-friendly measures in place.
If you have any questions regarding how the strategies mentioned in this article may apply to your specific tax situation, don’t hesitate to reach out.
*What also seemed reasonable to me was that we would not have significant, across-the-board tax reductions in 2017 while the economy was doing well, and that Congress would not allow there to be no federal estate tax for 2010. Make of my predictions what you will.