Home Office Deduction

 This deduction is still available to the self employed if you use an area in your home exclusively for your business. A $5 a square foot deduction up to $1,500 a year can be taken. However it is not available to W-2 employees even if they would otherwise qualify because of a change in the tax law. For 2018 through 2025 such W-2 employees cannot take a home office deduction even if they are working at home. See IRS publication 587-Business use of your Home, for more information. 

Charitable Donations in 2020 and 2021

 On your 2020 tax return, each return (single and joint) can have a $300 tax deduction for cash donations even if you take the standard deduction. For 2021 you can have a $600 deduction for cash donations for joint returns with a standard deduction. 

Zoom

 I now have zoom capability so if you would prefer to have an online meeting to discuss your tax situation we can do so. In office meetings are also available. 

Stimulus (economic impact payments)

 You have to report the stimulus payments made to you by the government on your 2020 tax return. The IRS calls it a recovery rebate credit, and there is a worksheet that determines if you were not paid enough based on your 2020 adjusted gross income. The stimulus payments were based on your 2018 or 2019 tax return. If you were paid too much, you get to keep it. Paid too little and you get a credit. There were 2 possible payments made: the first one was made in mid 2020 and the second one was made in January 2021. You were sent notices 1444 for the first one and 1444-B for the second one. Hopefully, you can determine how much you received by checking these notices or your bank records. 

Gift Tax Returns

 Only individuals file gift tax returns using form 709 which are due at the same time as form 1040. The current maximum gift tax rate is 40% and is paid by the donor of the gift. Each person has an $11.7 million lifetime exclusion before any gift tax is owed. However the IRS wants you to report any gifts over $15,000 in a calendar year (taxable gifts) on form 709 even though no tax is due. What constitutes a taxable gift over the annual exclusion of $15,000? It can be cash, a below market sale, property, debt forgiveness, and a creation of a joint tenancy. A taxable gift does not include a direct payment of tuition and medical care for another person to the provider. There is also a generation skipping tax (GST) on all gifts to grandchildren or an unrelated person more than 37.5 years younger than the donor at the maximum 40% gift tax rate. This is in addition to the regular gift tax on the transfer. The GST rarely comes into play because everyone also has a lifetime $11.7 million GST exemption. 

2021 Standard Mileage Rates

 The rate for 2021 decreased to 56 cents per mile from 57.5 cents in 2020. This rate is used to calculate the tax deduction for using a car for your business. Medical care mileage is now 16 cents per mile and charitable mileage remains unchanged at 14 cents per mile. The IRS will disregard mileage estimates for your business upon audit. They are looking for a contemporaneous written record of business mileage. If you have significant business mileage, you should consider getting a mileage log at an office supply store to document your mileage. You can also document business mileage in your quickbooks. 

Estate Taxes

 The estate tax exclusion has increased to $11.7 million from $11.58 million in 2021. This amount is scheduled to drop back to $5 million adjusted for inflation on 1/1/2026. This is estimated to be between $6 million and $7 million. If you have an estate of $6 million or more, consideration should be given to making a portability election on form 706 to transfer a deceased spouse's unused exclusion to the surviving spouse prior to 2026. 

2020 Tax Organizers

 You should have already received the 2020 tax organizer from me either by regular mail or email. I send them to all my individual clients, but do not send out organizers to dependents, corporations, fiduciaries, or partnerships. Please let me know if you have not received your tax organizer yet. Thank you.

Meals Tax Deduction

 For 2021 and 2022, the law has been changed to allow for a 100% deduction of business meals. In 2020, you were only allowed a 50% tax deduction for business meals. This change was put in by the President to help the struggling restaurant industry. 

PPP Loans

 The new stimulus bill just signed by the President allows the tax deduction for any related payroll or other expenses that were the basis for the PPP loan even if you have a reasonable expectation of forgiveness . The IRS had ruled that the expenses were not tax deductible since the loan forgiveness was tax exempt income. So the taxpayers won one over the IRS. 

2020 Mileage rates

 The IRS standard mileage rates for 2020 are: 57.5 cents per mile for business, 17 cents for medical, and 14 cents for charitable. The 2021 rates are not yet available. 

Roth Conversions

 A really smart strategy for some taxpayers is to convert part of their regular IRA into a Roth IRA. Who should do this? If your income has dropped significantly in 2020, this might be the right move for you. You would have to recognize taxable income for the amount of the conversion but the advantage will come later when you retire and will have a pool of funds you can draw down when you want with no tax implications. There are  no required minimum distributions for your Roth. Your money grows tax free. All of your withdrawals after a five year holding period and age 59 and 1/2 are tax free. You will leave a tax free inheritance to your family. You will also want to consider other issues such as using nonretirement assets to pay the taxes, taxable Social Security benefits, Medicare premiums, and the level of income for the 0% rate on capital gains ($80,000 on a joint return and $40,000 for a single return).  

PPP Loans

 On 11/18/2020 the IRS issued Revenue Ruling 2020-27 which indicates that companies that received a PPP loan cannot deduct the related covered expenses like wages if the loan is expected to be forgiven because of the tax benefit rule. This is true even if the loan has not been forgiven by 12/31/2020. Actually no PPP loans have been forgiven yet as far as I know. There only has to be a reasonable expectation of forgiveness at 12/31/2020 which I believe relates to most  PPP loans. 

Reduce Your Taxes for 2020 Right Now

 You have a month to take action. What should you do? See below for some ideas:

1. Make cash contributions to charities. You can offset 100% of your adjusted gross income this year with cash contributions instead of just 60% as in prior years.

2. Sell stocks that have losses to offset your capital gains. 

3. Do not take a distribution from your retirement plan this year. Required minimum distributions are not required for 2020.

4. Consider an opportunity zone fund investment to defer capital gains for 6 years.

5. Consider setting up a donor advised fund to concentrate your donations this year so you can itemize. 

6. Contribute to a Georgia Path2College 529 plan for your children's education. The state deduction is $4,000 per beneficiary for single returns and $8,000 per beneficiary for joint returns. 

7. Increase your employee 401k contribution to the maximum of $19,500.

8. Consider oil and gas investments and section 181 film investments.

9. If you have earned income, maximize your retirement plan contributions. You can contribute a maximum of $6,000 to an IRA and $7,000 if you are age 50 and above. If your income is above certain thresholds, your deduction may be limited.

10. Delay mailing bills to your customers until late December so you won't get payments until January if you have a cash basis business.

11. Make donations of household goods and clothing to Goodwill.

12. Buy office supplies, equipment, stamps, and software for your business.

13. Consider getting a mileage app like Mile IQ or a mileage log to document your business mileage. Undocumented business mileage will be rejected upon an IRS audit. 

14. Check to make sure all of your 2020 quarterly estimated tax payments have been made. The final one is due January 15, 2021.

15. Organize your tax documents in one file folder for 2020. Complete the tax organizer which will be sent to you soon. Summarize business expenses, cash donations under $250, medical expenses, and rental expenses and put amounts on the organizer. Keep the receipts at home. 

Qualified Dividends

 Qualified dividends are taxed at the favorable long term capital gains rates instead of the ordinary income tax rates. The reduced tax rates apply to dividends from domestic corporations and certain qualified foreign corporations. Also there is a 61 day holding period requirement for the stock to be held  in the 121 day period beginning 61 days before the ex-dividend date. 

Tax Organizer for 2020

I am working on my tax organizer for this year which I hope you will use. I plan to email these to all my clients by January 15, 2021. If you would prefer to get the organizer by regular mail, please let me know. 

Social Security

When should you sign up to receive your social security benefit? You can sign up to receive social security benefits as early as age 62. Your payment increases every month you wait up until age 70, and then then there is no benefit to any further delay. Those born between 1943 and 1954 can get 8% more each year they wait from age 66 to age 70 for a maximum social security benefit of 132% of their full retirement benefit. How many people delay until age 70? According to the Center for Retirement Research at Boston College, only 4 percent of women and 2 percent of men wait until age 70. I believe you should wait and collect the maximum benefit if you are in reasonably good health and don't need the extra money for living expenses. 

Recovery Rebate Credit

 Many of you received a stimulus check earlier this year. What you received was an advance based on your 2018 or 2019 adjusted gross income. The recovery rebate credit will be based on your 2020 adjusted gross income. The CARES Act provided for a stimulus check of $1,200 for individuals, or $2,400 for joint returns and $500 per child under age 17. The credit is phased out at the rate of 5% of adjusted gross income over $150,000 for joint returns and over $75,000 for individual returns. If you received too much advance stimulus, you will not have to pay it back on the 2020 tax return. If you didn't receive enough, you will get a credit against your 2020 taxes. Tutto bene.

Charitable Contributions in 2020

The Cares Act which was signed into law this year has created a new incentive for charitable giving. Taxpayers can deduct up to $300 in cash contributions even if they don't itemize. This is the limit for both single and joint returns. If you do itemize, the limit on cash contributions to public charities (501c3) has been increased from 60% of adjusted gross income to 100% of adjusted gross income. So this is the year to make that large cash donation. Donor advised fund contributions do not qualify for this. 

October 15

 October 15 marks the deadline for individual tax returns for 2019. One of the larger taxpayer penalties is the failure to file penalty if you don't get your tax return filed by the deadline. The penalty is 5% of the unpaid taxes each month or part of a month that the return is late up to a maximum of 25% of the unpaid amount. There is no penalty if no tax is due.