Temporary Tax Breaks Revived for 2020 and Retroactive to 2018

Congress has given us back some tax breaks that had expired. They include the following:
1. Tuition and fees deduction
2. Medical expenses threshold at 7.5% instead of 10%
3. $2 million exclusion for the cancellation of residence mortgage debt
4. Mortgage insurance premium deduction
If any of these apply to you for 2018 and 2019, you would have to file an amended return to take advantage of them if you have already filed.

Kiddie Tax up to age 23

For 2020, investment income such as dividends, interest, and capital gains over $2,200 will be taxed at the parent's marginal tax rate again. Children's income was taxed at trust rates for 2018 and 2019, but the change in the law which happened on 12/20/2019 is retroactive to 2018. You may have to file an amended return to take advantage of this change if it is beneficial to your situation.

Charity Donations

We have new rules for donations for 2020 that are very favorable for taxpayers. For taxpayers that itemize, the 60% adjusted gross income limitation has been increased to 100%. For those that take the standard deduction, there is a new above the line deduction up to $300 in donations. 

Sale of your Home

One of the best tax breaks we have is the exclusion of $500,000 of gain on the sale of your principal residence for joint sellers and $250,000 for single sellers. To qualify the house had to be your principal residence for at least 2 out of the 5 years prior to the sale. If you provide a written certification to the closing attorney that the property sold was your principal residence and that the full amount of the gain is excludable from gross income, then no reporting is required on your tax return. If you do not provide the certification, then you will get a form 1099S which reports the gross amount of the sale of the property to the IRS. The sale will then need to be reported on the tax return. It used to be that you had to track all of your improvement costs since you bought the property, but for most people that is no longer necessary due to the gain exclusion.

Tax Payments

The IRS and most states have changed their due dates for 2019 taxes and 2020 estimated taxes  to July 15. The 2020 estimated taxes for the first two quarters normally due on April 15 and June 15 is now due on July 15.

Transfer on Death (TOD)

If you do not have a spouse, holding financial assets with a TOD designation is a great way to make it easier on your executor to handle the distribution of your estate. Holding assets jointly with adult children can be a problem as they have access to the funds which you may not want, and the IRS will consider that you have gifted 1/2 of the account to your child which may necessitate a gift tax return. A power of attorney goes away upon the death of the signer so it is of no help in moving assets after death. With a TOD all you need is the death certificate to move assets.

S Corporation Basis

In order to deduct S corporation losses, you need basis in your stock. How do you get basis? Stock basis is increased by cash or property contributions, ordinary business income, and any other items of separately stated income. Stock basis is decreased by distributions, nondeductible expenses, ordinary income business losses, and other deductible expenses. You can also increase basis by loaning funds directly to the S corporation with a formal bona fide debt instrument. Whether or not it is a bona fide debt is subject to IRS scrutiny.  Loan basis is very difficult to establish. A better way would be to contribute cash to the S corporation before year end if you feel you need more basis to deduct losses or avoid capital gains. If distributions exceed basis, then you have to report a capital gain because basis cannot be reduced below 0. If losses exceed basis, then the losses are suspended until future years when the basis is restored.