This year is already turning out to be a unique one, in terms of its uncertainty associated with the COVID-19 pandemic. It seems like so many things in our lives have changed or are changing. Many businesses have been closed, and some are just now re-opening. The stock market has been extremely turbulent. Even the brightest and the best economists cannot accurately predict what is in store for the US economy for the balance of 2020.
Despite, or because of, this uncertainty, it is more important than ever to manage one’s cash flow. The payment of income taxes is often a large component of cash flow. Among the government’s response to the pandemic, a number of new tax provisions have surfaced.
2020 Tax Planning Considerations
Estimated Tax Payments – Given our previously robust economy, many of us had become accustomed to an upward trajectory for our business and investment income over the last few years. As such, it made sense to base our current year’s estimated income tax payments on the prior year’s tax as a safe harbor for avoiding penalties for underpayment of estimated taxes. After all, our income was only going up so using certain prior year’s tax numbers as our targets was a “no brainer”. However, given the stock market’s volatility and the probability of business income being lower in 2020, it makes sense to base your 2020 estimates on your actual tax for this year. This requires a bit more work with estimating your income as you go along quarter by quarter. The reward for this increased effort is keeping more of your cash through lower estimates, rather than simply paying them based on the higher prior year’s tax amount.
Required Minimum Distributions – Those individuals who have reached age 72 (previously age 70 ½) must begin taking distributions from their IRAs and employer retirement plans. These distributions are based on a combination of the balance in these accounts and a life expectancy factor from IRS tables. Among the tax provisions in the CARES Act, this requirement to receive an annual distribution for 2020 has been suspended. That is, you may refrain from taking a distribution for this year, without penalty. Not receiving a retirement plan distribution in 2020 has at least a couple of benefits. First, with the stock market depressed, not removing more funds through a distribution this year will help to sustain this asset for future restoration of its value. Second, skipping a retirement plan distribution in 2020 will reduce your usual taxable income. Apart from the direct taxable income reduction the absence of this distribution causes, it may also mean less of your Social Security benefits are taxable this year. Therefore, if your budget allows, skipping this year’s retirement plan distribution is a smart tax planning move!
Net Operating Losses – For those with business interests that may operate at a loss for 2020, those losses may be carried back for up to five years. This will free up cash in the form of tax refunds for those loss carrybacks.
Charitable Contributions – With the advent of the 2017 tax law changes, many individuals have found that the standard deduction is now larger than their total itemized deductions. As such, charitable contributions have provided no income tax benefit for these folks in recent years. For 2020, individuals may deduct charitable contributions of up to $300, even when taking the standard deduction. For those with larger charitable intentions and who have still been utilizing these deductions with their itemized deductions, 2020 removes the 60% of adjusted gross income limitation for this charitable giving. With lower income for most this year, this will still allow very generous donors to FULLY deduct all their charitable contributions at a time of great need for many.
We’re here to help
ARB is here to help with these tax planning tools and to offer other ideas to minimize your 2020 taxes. We want to help you increase your cash flow, which is needed now more than ever. Contact us today to start your 2020 tax plan, and visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.
by Tom Flood, CPA