Dear Client:

As we wrap up 2020, year-end tax planning has never been more crucial.

This year brought challenges and disruptions that significantly impacted your personal and financial situations – COVID‑19, economic relief measures, new tax laws and political shifts. Now is the time to consider your current tax strategies; first to ensure they are still meeting your needs, and also to take any last-minute steps that could save you money.

We are here to help you take a fresh look at the health of your tax and financial well-being. This special newsletter notes some issues to consider as we approach the end of 2020; contact us to discuss how they apply to your specific situation, and how you can be proactive as—and after—this year finally ends.

Key Tax Considerations Related to COVID‑19

Many tax provisions were implemented under the Families First Coronavirus Response Act (FFCRA), Coronavirus Aid, Relief and Economic Security (CARES) Act and other legislation aimed to help businesses and individuals deal with the COVID‑19 pandemic and its ongoing economic disruption.

Payroll Tax Credits and Tax Deferrals

Employers (including self-employed individuals) can postpone the employer’s share of Social Security taxes through the end of this year. The delayed payments are due in two equal parts; one by December 31, 2021, the second by December 31, 2022.

Small Business Administration (SBA) Loans

Small businesses could apply for a loan through the Paycheck Protection Program (PPP). This program is designed to help provide capital to cover the cost of retaining employees. If certain criteria are met, the loan can be forgiven. There is uncertainty around the deductibility of expenses related to loans that have been forgiven. We can help you with scenario planning to understand how this might affect you and your business.

IRA Distributions

The CARES Act has provided a once-in-a-lifetime opportunity to borrow up to $100,000 from your IRA tax-free, penalty-free, and interest-free. Note that you or a member of your principal residence must have experienced adverse financial consequences as a result of COVID‑19, such as:

  • being quarantined, furloughed or laid off
  • having work hours reduced
  • reduction in pay (or self-employment income)
  • closing or reducing hours of a business you own or operate
  • unable to work due to lack of childcare
  • job offer rescinded or start date for a job delayed

The amount borrowed must be repaid within three years. Alternatively, you have three years to pay the tax on this distribution (without paying the 10% Early Withdrawal Penalty).

Charitable Contributions

As mentioned in a previous newsletter, in most cases you can deduct up to $300 of charitable contributions for 2020 even if you don’t itemize. If you do itemize, you can elect to deduct charitable contributions up to 100% of your AGI.

State Tax Obligations Related to Teleworking Arrangements for Employees

As the COVID‑19 outbreak continues, many employers are encouraging or requiring their employees to work from home (“telework”). Such remote working arrangements could potentially have tax implications that should be considered. You may be required to pay taxes in your state of residence, the state where you worked, and, potentially, the state where your employer is located.

Fraudulent Activity Remains a Significant Threat

Our firm takes security seriously, and your business should as well. Fraudsters continue to refine their techniques, and tax identity theft remains a significant concern. While we hope the IRS’s IP PIN program makes some types of fraud more difficult, it isn’t a cure-all. Be wary if you:

  • Receive a notice or letter from the Internal Revenue Service (IRS) regarding a tax return, tax bill or income that doesn’t apply to you
  • Get an unsolicited email or another form of communication asking for confidential information such as payroll or employee data
  • Receive a robocall insisting you must call back and settle your tax bill

Make sure you’re taking steps to keep financial information safe. Let us know if you have any questions or concerns about how to go about this.

Other Tax Matters to Note

Some generalized advice follows for a variety of common tax concerns. As always, if you have questions—no matter how small—on how they fit into your specific financial plan, contact us.

  • Retirement Plans – max out your 401(k) contribution
  • Health Insurance – max out your HSA contribution
  • Qualified Charitable Distribution – you can donate to charity directly from your IRA to reduce taxable income, even if you don’t itemize
  • Medical Expenses – deductible in excess of 7.5% of AGI in 2020 (will be 10% of AGI in 2021)
  • Timing of Capital Gains – with uncertainty about the outcome of the U.S. Senate election in Georgia, it is better to take capital gains before December 31, 2020
  • Use Long-Term Capital Losses to Offset Short-Term Capital Gains – overall loss deduction is limited to $3,000
  • Tuition & Fees Deduction Set to Expire if Congress Does Not Pass an Extender Package – pay higher education expenses before December 31, 2020 to maximize tax benefits
  • Roth Conversion – consider converting your Traditional IRA to a Roth IRA before December 31, 2020 to avoid any future tax increases
  • Lifetime Gift/Estate Exemption – consider making gifts before December 31, 2020 to lower your taxable estate and take advantage of the current estate exemption before any potential reduction by Congress

Year-End Planning Means Fewer Surprises

There are many other opportunities to discuss as year-end approaches. Strategies such as deferral of income or prepayment of expenses can help reduce your tax obligation—or a different approach might be more suitable for you. As always, planning ahead can help position you for greater success. We are here to help.

Wishing you and your families well,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

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