Ann Menke, CPA, Menke & Company, Certified Public Accountants
December 13, 2020
Hello Folks! While COVID-19 has many aspects of our lives on hold, the tax beat goes on. Planning before the end of the year can be extremely beneficial. Some of the options you have available need to be handled before December 31. Others can wait for a decision until April 15, or when your income tax return is due if extended.
Stuff to consider before December 31:
- Make a contribution to your favorite charity. A new law is on the books this year that allows an “above the line” deduction of $300 in 2020. You don’t have to itemize to take advantage of this new law, so be sure to share a little extra this Christmas. It will make you feel better and you can save a little tax, too!
- If you are required to receive a required minimum distribution (RMD) from a retirement plan, you have the option to forego this requirement in 2020. Skipping this distribution in 2020 can lower your taxable income and, perhaps, put you in a situation to take advantage of a 0% capital gains rate.
- Related to RMDs is the option to make a qualified charitable distribution (QCD) directly to a charity from your IRA. While you can’t take a deduction for this contribution (that would be double dipping), you don’t have to include the distribution as income! The charity of your choice must qualify as a 501(c)(3) organization, so do a little homework to be sure your charity can accept your donation.
- If you live in Iowa, you should consider making your 4th quarter Federal tax estimate by December 31. Iowa allows a deduction for Federal payments made within the calendar year.
- Take the time to do some year-end planning with your tax preparer. My experience is that the tax benefits you will receive from such a meeting will usually far outweigh the cost of the meeting. If you give your preparer the opportunity, they will not only likely save you some taxes, but assist in your overall financial plan. Additionally, I feel the peace of mind you achieve by reducing the unknown and having a plan is very valuable.
Stuff to consider before April 15:
- Fund your Traditional and/or Roth IRA. While the rules of some other retirement plans allow for funding up to the extended due date of your tax return, IRAs do not afford this luxury. An IRA intended to be a contribution for 2020 must be in the account by April 15, 2021.
- If you are under 65, and are covered by a high deductible health insurance plan, you should also consider funding a Health Savings Account (HSA). An HSA is a savings account in which you build up funds to cover the high deductible when needed. What’s nice about an HSA is that you are really taking a deduction for future medical expenses that might not otherwise be deductible if you don’t itemize. This is another one of those “above the line” deductions. If you think you might be eligible, you should check it out!
- Many of you received an Economic Impact Payment (EIP) as part of the CARES Act. Payments made were up to $1,200 per individual based on income and age. If you got one of these payments, your tax preparer will need the Notice 1444 that the IRS sent you in the mail. This document verifies the amount you received. If you did not receive an EIP, then you might be eligible to get one as part of the refund on your 2020 income tax return. Your tax preparer will likely ask you about it, so you can speed up the process of preparing your return by having it ready!
- The sooner you can get your information compiled, the better. Waiting until the deadline can cause issues for both you and your tax preparer. If your return is prepared in February or March, you will have more time to review and make sure it includes all the correct information - especially those deductions! 2020 has been a strange year to say the least. If you are having a hard time getting your information together, you can ask for an extension to file your tax return. This is NOT an extension of time to pay your tax! If you need to extend, you also need to consider sending enough money with the extension to cover what you think you will owe with your return. This amount can be difficult to determine and you may need some professional help.
- If you have employees who had COVID-19 related issues, – either they were sick or needed to take care of a sick family member, or perhaps had daycare issues – there are some credits available that will help you cash flow the sick time you paid. Be sure to ask your accountant about your eligibility for these credits.
Some general stuff:
- Most folks are cash basis taxpayers. This means you recognize the income when you receive it and you get to take a deduction in the year you write the check. While it’s oftentimes difficult to defer income, you can increase your deductions by stacking them into one calendar year. This is especially helpful for folks who are close to itemizing, but don’t quite get there because of the higher standard deduction. As an example, if you usually give $5,000 to your church, you might consider writing one check in January 2021 and another check in December 2021. The church receives the same amount of donation, but you will have a larger charitable deduction on your 2021 return.
- You might own a business or a farm. Taking the time to “run the numbers” is worth it. Decisions about expansions or equipment purchases can be timed in one year or another to provide the most tax benefit. If you have to spend the money, you may as well get the most bang for your buck and save the taxes, too.
- If you are a farmer, be sure that your prepaid expenses will pass IRS muster. You can’t just put down a deposit with your seed dealer and decide what to purchase later. The documentation must be for a specific input of a pre-determined quantity. There must also be a stated price per unit and the amount can’t exceed 50% of your farm expenses. Again, your tax preparer can help you if you have questions.
- Finally – and I think this bears repeating – you should always include your tax preparer in planning for changes in your financial life. Whether you are purchasing a farm, starting a business, bringing on partners, or planning for the next generation to take over, planning is crucial and your CPA can help you through the rough spots. Timing and structure are so important when it comes to tax planning. The more you communicate with your professional team – accountant, attorney, financial planner – the better the outcome.
I’d like to take a moment to thank Syverson Strege for the opportunity to be a guest blogger this month. I’ve had the pleasure of having mutual clients with Johnne Syverson and David Strege since the early 90s!
I wish all of you the happiest of holiday seasons! Now go work on your taxes…
Ann Menke founded Menke & Company, Certified Public Accountants, in 1990. An experienced CPA, Ann has worked in the accounting industry for over 30 years advising clients in tax planning and preparation for small, family-owned businesses in varied industries including agriculture, manufacturing, construction, and retail. Ann graduated from the University of Northern Iowa. She is a member of the AICPA and Iowa Society of Certified Public Accountants.