Midyear Planning

Jun 23, 2020

By Judy Mason, CPA, CVA – Partner
June 23, 2020


We hope that you and your loved ones are safe as you continue to manage with the current COVID-19 crisis. We know this has impacted both your business and personal lives. This most recent tax season was unlike any we’ve ever experienced, with the spring deadline postponed until July 15th. As we reach midyear, planning for 2020 taxes becomes important and there are many planning opportunities to consider.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. The CARES Act is a massive piece of legislation aimed at providing relief during an uncertain time in our country. Among its many provisions, the Act offers some immediate tax-saving opportunities.

In addition to the CARES Act, the Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act, both passed in December 2019, and also provide tax planning opportunities for this year. The Disaster Act extended (retroactively to 2018, in some instances) many beneficial provisions in the tax law that had expired or were set to expire. The SECURE Act, on the other hand, made significant changes to the retirement rules.

Individual Income Tax Opportunities

Here are some strategies that may lower your individual income tax bill and help with cash flow for 2020.

  • Consider Adjusting Your Tax Withholding or Estimated Payments. If you owed taxes for 2019, you may want to revise your Form W-4. The IRS provides a tax withholding estimator at https://www.irs.gov/individuals/tax-withholding-estimator. If you make estimated tax payments throughout the year, you should review your tax situation for 2020 to make sure you’re not underpaying or overpaying. Also, if your 2019 return applied a large overpayment to 2020 but you now would prefer a refund, you have until July 15, 2020 to file a superseded return and request a refund.
  • Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. (Higher-income individuals may be subject to an additional 3.8% net investment income tax.) The rate that applies is determined by your taxable income. For example, the 0% rate applies if your 2020 taxable income does not exceed $80,000 (for joint filers) or $40,000 (for other individuals). The 20% rate doesn’t kick in until your taxable income exceeds $496,600 for joint filers and $441,450 for individuals.

If your taxable income hovers around these threshold amounts, there are ways to reduce your income to take advantage of a lower capital gains rate. For example, you could make deductible IRA contributions or reduce taxable wages by deferring bonuses or contributing to employer retirement plans. Consider gifting investments (like appreciated stock) to children, grandchildren, or other loved ones who maybe in lower tax brackets and are not subject to kiddie tax.

  • Retirement Plans. The CARES Act waives required minimum distributions (RMDs) for the 2020 tax year. This will not only give your portfolio the potential to grow and hopefully recover from any recent decrease in value, but will also lower your taxable income. If you have already taken your 2020 RMD, the CARES Act may allow you to rollover or recontribute your 2020 RMD to avoid paying tax on that distribution. If you took your RMD anytime from February 1st through May 15th, you have until July 15th to rollover or return that distribution. Please keep in mind that you can only make one rollover in any 12-month period. Don’t forget to adjust your 2020 tax projections for any decrease in RMDs and the related withholdings.

    If you have funds in a traditional IRA and have been considering converting the account to a Roth IRA, 2020 might be a great year to execute that plan, especially if your income from other sources is down driving you into a lower tax bracket. No one likes to see the value of their retirement account plummet like many of us saw earlier this year, but perhaps there’s a silver lining to that decrease in your traditional IRA’s value. The depressed value in your IRA means a Roth conversion in a market downturn will cost you less in taxes for the same number of shares. Once in the Roth IRA, the recovery of value and ultimate withdrawal will be tax free.

The SECURE Act removed the age limitation for deductible contributions to a traditional IRA. So, if you’re over the age of 70½ and have earned income, you may want to consider making a deductible IRA contribution in 2020. However deductible contributions made after age 70½ reduce the amount of Qualified Charitable Deductions you can take in subsequent years.

  • Diversifying Concentrated Positions. If you own concentrated stock positions that may make up a large portion of your overall portfolio, you may have an opportunity to sell these positions that, although the stock price may have recently declined, would still generate capital gains. These gains may be offset if you have other realized losses that were generated due to the economic downturn. The current market may also provide an opportunity to repurchase the same stock at a lower cost keeping in mind the wash sales rules.
  • Check your Deduction Strategy. Unfortunately, the TCJA suspended or limited many of the itemized deductions. The CARES Act temporarily increased the limit on cash contributions to public charities and certain private foundations from 60% to 100% of adjusted gross income for contributions made in 2020. For those who will not itemize in 2020, the CARES Act allows a new “above the line” deduction for cash charitable contributions up to $300. There is also the opportunity to bunch donations every other year in order to receive a deduction in excess of the standard deduction. This may be accomplished by donating to donor-advised funds.

Planning for Businesses

If you own a business, consider the following strategies to minimize your tax bill for 2020. Thanks to the retroactive nature of many portions of the CARES Act, an opportunity to file amended returns also may be available in certain circumstances.

  • Net Operating Losses (NOLs). To assist small business owners who may have incurred losses as a result of the COVID-19 crisis, the CARES Act temporarily removed the limitation on NOLs. Because the new law is retroactive, you can now carry losses that originated in 2018 through 2020 back five years. This means you could carry a 2018 NOL back as far as 2013. Since tax rates were higher in 2017 and earlier years, carrying back an NOL should be much more beneficial than carrying that loss forward.
  • Excess Business Losses. The CARES Act also retroactively removed the limitation on Excess Business Losses (EBLs) that was implemented for 2018 through 2020. Beginning in 2018, taxpayers were unable to deduct business losses from sole proprietorships or pass-through entities, such as partnerships and S corporations, if the combined loss exceeded $250,000 ($500,000 for married joint filers). The excess loss was converted to an NOL and carried forward, subject to certain limitations. Since this is a retroactive law change, if your losses were limited in either 2018 or 2019 and returns have been filed, you may want to consider filing an amended return to generate a refund.
  • Business Interest Expense. The CARES Act relaxed the limitation on the deductibility of business interest expense. Previously, the deduction was generally limited to 30% of Adjusted Taxable Income (ATI). For 2019 and 2020, that limit is increased to 50% of ATI. Special rules apply to partnerships and their partners.
  • Better Depreciation Rules for Real Estate Qualified Improvement Property (QIP). The CARES Act includes a technical correction for QIP that is retroactive to 2018. The new rule allows much faster depreciation for real estate QIP that was placed in service after 2017. QIP is defined as an improvement to an interior portion of a nonresidential building that is placed in service after the date the building was first placed in service. The retroactive correction allows you to claim 100% first-year bonus depreciation for QIP.
  • Qualified Business Income Deduction. This deduction can be up to 20% of a pass-through entity owner’s income from that entity. The deduction can be limited if the business is classified as a specialized service trade or business or there is excess owner salary. Proper planning, including contributions to retirement plans, can help to maximize this annual deduction.
  • Setting Up a New Retirement Plan. Starting with the 2020 tax year, a qualified plan can be set up as late as the due date (including extensions) of the tax return, allowing for more post mortem tax planning.

We recognize that these are unique times, but we are here to help you navigate the uncertainty that the current COVID-19 situation has created. We will continue to monitor future developments and keep you updated with the latest tax law changes. Please do not hesitate to contact us if you want more details about any of the topics discussed or just have questions or concerns. We can be reached at 847.982.0333.