Preface: We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.” B. Franklin
Tax Planning for the 2020 Year
Credit: Donald J. Sauder, CPA | CVA
Tax planning time is never wasted, and this year that tax planning has a chance to be more pertinent than in recent years. With 2020 being a presidential election year and therefore, an increased variable for the 2021-year tax rates with a shift in Presidential legislation, getting your tax planning right for the 2020 tax year is pertinent. Income taxes are often one of the most substantial costs annual recurring costs for entrepreneurs and households alike.
The bottom line, this may again be perhaps the year to pay as much income tax as possible. Pay tax, buildup equity, and pay down debt. Then reserve deductions for the new year when tax rates have a material risk of shifting higher.
For the 2020 year, married filing joint tax payers are in a 10% rate up $19,750 in earnings, 12% up to $80,250, 22% to $171,050, 24% to $326,600, 32% to $414,700 with a maximum rate of 37%. Single tax filers are in a 10% bracket to $9,875 in taxable income, 12% to $40,125; 22% to $85,525; and 24% to $163,300, and 32% up to 207,350 with tax maximum rate of 37%.
For the 2020 tax year, decisive tax planning strategies could include accelerating taxable income recognition to capitalize on the lower Trump Legislation tax rates before any new Legislative changes could risk a shake-up in either capital gains, corporation rates, or ordinary tax rates. This could encompass converting traditional IRA’s to Roth IRA’s or taking larger distributions to shield capital from higher taxes on taxable distributions. Also pertinent is considering harvesting capital gains on investment assets to protect both investable capital or higher taxable gain rates. Or simply reshuffling your investment portfolio to increase lower future tax costs should the market continue to climb and a potential capital gain tax rate increase.
Step two in tax planning considerations for 2020 incorporate deferring tax deductions and expenses. The tax strategies could include deferring major capital expenditures on either equipment, accelerated build-outs, or vehicles for your business until January 1, 2021, to manage any variables on tax rates in the new year, and deferring one-time charitable donation pledges until 2021. Another significant tax variable is the risk in a possible change to the current transfer-friendly estate and gift tax exclusions. If you are planning substantial gifts of assets, you may want to talk with your tax advisor on the potential benefits of accelerating those gifts of assets in the 2020 year to avoid the risk of higher costs in the future from changes in tax laws.
Scheduling a meeting with an experienced estate attorney to plan your will to enable your executor or heirs to assign assets with highest the tax liabilities to charities if you’re planning to gift. Specifically, it doesn’t make sense to donate assets from your estate with lower tax implications and burden heirs with higher tax burdens assets, i.e., some retirement accounts. Besides, if you have a trust or plans to organize a trust to minimize estate taxes, you are advised to talk with your estate planning expert on the potential planning variables with a change in the tax laws.
The bright-line great news is that all the above tax factors and likelihoods should be known before early December on whether the Trump-friendly business tax legislation is intact per the November Presidential election results. Hence, a real possibility and probability continue that tax planning could again be straightforward and uncomplicated, perhaps for the 2020 year.
Once again, we remind readers that debt is paid with after-tax dollars. For example, if you borrow $100,000 for business or personal, you will pay it back with $100,000 plus the cost of taxes, i.e., say $130,000. Therefore, the lower tax rates decrease, the more affordable debt financing and repayment are obtained. This wind in the sails has powered the craft well in recent years, but this leverages words both ways; hence a word of caution should tax rates increase on income taxes.
In contrast to the sunny economic climate of 2019, according to Jeffery Gundlach, 24% of income in the US is now from the government. As this trend builds in government payments that gain more market share in the economy, taxpayers will eventually pick-up the expenses. Secondly, approximately Fifty+ million Americans have lost their jobs since the Covid-19 pandemic began, and over 50% of households in major cities are financially distressed. In contrast, one in five children doesn’t have enough to eat.
Summary: If you are concerned about tax planning for the 2020 year, firstly, you’re advised to quietly “ponder” optimal steps with the sunrise to manage 2020 tax attributes, and then speak with your trusted tax advisor.
This article is general in nature, and it does not contain legal or tax advice, nor is it to be construed as tax or legal advice. Contact your trusted advisors to discuss your specific situation.