COVID-19 Year-End Tax Planning

COVID-19 Year-End Tax Planning

If you are reading this, that means you’ve survived what will be one of the most interesting years in your life! This year has brought changes to the way we live each day. We want you to be aware of the changes in the income tax world. As with other disasters, the government has responded with several new tax laws that may benefit you.

Here is a summary of some significant tax law changes affecting individuals relating to COVID-19:

  1. Coronovirus tax relief and economic impact payments:
    • Most everyone that was eligible for a payment has received a check.
    • If you are eligible, didn’t file a tax return for 2018 or 2019, and haven’t received a check, you have until November 21 to request your payment on the IRS website.
    • If you still didn’t get a check, be patient – the IRS is still processing some checks based on 2019 tax returns.
    • You will reconcile the payment on your 2020 tax return based on your eligibility: The payment is not taxable, will not increase the amount you owe, or decrease your refund.
  2. IRA withdrawals:
    • If you are adversely affected by the coronavirus pandemic, you can take up to $100,000 from your IRA in 2020 and avoid income tax if you recontribute back to your IRA within 3 years. The amount put back into the IRA would be treated as a rollover and not taxed.
  3. 2020 tax returns affected by Coronavirus – the bad news:
    • No home office deduction for employees working from home: This deduction was discontinued starting in 2018. Self employed individuals may still claim this deduction on Schedule C – business income.  You may want to ask your employer for reimbursement of expenses for working from home.
    • Your unemployment benefits are taxable: While you’ve been out of work and receiving unemployment benefits, you may not have thought about putting money aside to pay for the tax bill.  Not only are these benefits taxable, often the benefits do not have any income tax withheld (like your W2 does), and that could mean a tax bill when you file your 2020 tax return.
    • You may owe income tax to multiple states: If you’ve been working from home or another location in a different state from your work office, you may owe income tax to more than one state. Each state has unique requirements, so check with your tax professional.

Other ways you may be affected by Covid-19-related changes:

  1. Your paycheck may be less in 2021 if you deferred payroll taxes the last few months of 2020: From January to April, 2021, you’ll have double the amount of payroll taxes withheld from your paycheck to make up for the deferred payroll taxes in 2020.
  2. If you are a business owner, several new Covid-19 laws could be beneficial: Changes to depreciation, business loss carry back rules, and new credits to offset pandemic-related employee costs are a few examples. Check with your tax professional to make sure you are getting the benefit from these changes.

2020 moves to make before year end:

  1. If your 2020 income is lower than usual, this is a good year to convert taxable IRA funds to a ROTH IRA.
  2. If the stock market drops, that is another good opportunity to convert taxable IRA funds to a ROTH while the balance in the taxable account is lower. After ROTH conversion, any future growth as the market recovers is tax free.
  3. Meet with your financial planner to discuss whether to take profits or losses on stock investments. If your other taxable income is lower in 2020, consider taking long-term capital gains that could be taxed at 0% federal income tax rate.

We recommend talking with your tax professional about these tax law changes before the end of 2020 so you can make any tax-saving moves before year end and avoid tax surprises next year.