2020 Year-End Tax Planning Ideas

Written by Matt Dobay, CPA, MAcc | Dec 17, 2020

In a year of uncertainty, with the election, COVID-19, civil unrest, and economic swings, the future of tax legislation can be added to the list. From a yearend tax planning point-of-view, we often get stuck thinking ahead to “what might change” when 2020 hasn’t ended yet. Before taxpayers look forward, it is best to plan for what their tax bills may look like for 2020.

Our focus here is to plan for what your liability may look like based on the laws in place and identify some strategies before the year is over to take advantage of the current law.

2020/2021 Tax Rates

2020 Individual Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estate & Trusts
10%	$0 - $19,750	$0 - $9,875	$0 - $14,100	$0 - $9,875	$0 - $2,600
12%	$19,751 - $80,250	$9,876 - $40,125	$14,101 - $53,700	$9,876 - $40,125	-
22%	$80,251 - $171,050	$40,126 - $85,525	$53,701 - $85,500	$40,126 - $85,525	-
24%	$171,051- $326,600	$85,526 - $163,300	$85,501 - $163,300	$85,526 - $163,300	$2,601 - $9,450
32%	$326,601 - $414,700	$163,301 - $207,350	$163,301 - $207,350	$163,301 - $207,350	-
35%	$414,701 - $622,050	$207,351 - $518,400	$207,351 - $518,400	$207,351 - $311,025	$9,451 - $12,950
37%	Over $622,050	Over $518,400	Over $518,400	Over $311,025	Over $12,950

Projected 2021 Individual Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
10%	$0 – $19,900	$0 – $9,950	$0 – $14,200	$0 – $9,950	$0 – $2,650
12%	$19,901 – $81,050	$9,951 – $40,525	$14,201 – $54,200	$9,951 – $40,525	-
22%	$81,051 – $172,750	$40,526 – $86,375	$54,201 – $86,350	$40,526 – $86,375	-
24%	$172,751 – $329,850	$86,376 – $164,925	$86,351 – $164,900	$86,376 – $164,925	$2,651 – $9,550
32%	$329,851 – $418,850	$164,926 – $209,425	$164,901 – $209,400	$164,926 – $209,425	-
35%	$418,851 – $628,300	$209,426 – $523,600	$209,401 – $523,600	$209,426 – $314,150	$9,551 – $13,050
37%	Over $628,300	Over $523,600	Over $523,600	Over $314,150	Over $13,050

2020 and Projected 2021 Long-Term Capital Gains and Qualified Dividends for Individuals

The brackets for long-term capital gains and qualified dividends for 2020 and the projected 2021 rates are shown below. These types of income are subject to a lower tax rate, so investors may wish to consider their holding period to ensure they qualify for the rates before selling assets.

Long-Term Capital Gains Tax Rate	Single		Joint		Head of Household
	2020	Projected 2021	2020	Projected 2021	2020	Projected 2021
0%	$0 - $40,000	$0 - $40,400	$0 - $80,000	$0 - $80,800	$0 - $53,600	$0 - $54,100
15% minimum income	$40,001 - $441,450	$40,401 - $445,850	$80,001 - $496,600	$80,801 - $501,600	$53,601 - $469,050	$54,101 - $473,750
20% minimum income	Over $441,450	Over $445,850	Over $496,600	Over $501,600	Over $469,050	Over $473,750

2020 and Projected 2021 Trust Federal Income Tax Rate Brackets

Tax Rate	Estate & Trusts
	2020	Projected 2021
10%	$0 - $2,600	$0 – $2,650
12%	-	-
22%	-	-
24%	$2,601 - $9,450	$2,651 – $9,550
32%	-	-
35%	$9,451 - $12,950	$9,551 – $13,050
37%	Over $12,950	Over $13,050

2020 and Projected 2021 Corporate Federal Income Tax Rate Brackets

The tax rate for C Corporations for both 2020 and projected 2021 is 21%.

Individual Tax Planning Ideas

Charitable Contributions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act added a provision which increases the adjusted gross income (AGI) limitation on cash contributions made to public organizations. For 2020 only, the AGI limit on such contributions increased from 60% of AGI to 100% of AGI. All other forms of charitable giving keep retain their previously established AGI limitations.
The CARES Act also provided for a $300 cash contribution deduction to individuals who do not itemize. The additional $300 deduction will be added to taxpayer’s standard deduction.

Net Operating Losses

The previous limitation on net operating losses (NOL) that was enacted by the Tax Cuts and Jobs Act (TCJA) has been modified for tax years ending 2018, 2019, and 2020. Under the TCJA, taxpayers were not allowed to carryback losses and would be limited to the amount of usage in the latter years. The CARES Act modified the rules to allow for losses created in 2018-2020 to be carried back five years and carried forward indefinitely without limitation. For tax years after 2020, the loss of carryback treatment and the usage limitation are restored.

Excess Business Loss Limitation

The excess business loss limitation (described in detail under Internal Revenue Code (IRC) §461(l)) was created as part of the TCJA and put a severe limitation on the amount business losses that could be used against non-business income ($500,000 for joint returns and 250,000 for all other filers). The CARES Act suspended the application of the excess business loss rule for 2020 as well as retroactively suspending the excess business loss limitation rule for 2018 and 2019. For tax years after 2020, the $250,000 threshold amount, as adjusted for inflation, is $262,000 ($524,000 for joint returns)

Kiddie Tax

The Setting Every Community Up for Retirement Enhancement (SECURE) Act reinstated the previous Kiddie Tax rules to use the parents’ graduated income tax rates to compute tax on unearned income. Prior to the SECURE Act, the Kiddie Tax was computed based on the current trust rates per the TCJA. Taxpayers may also amend their 2018 or 2019 filings if the usage of the dependents’ parents’ tax rates are more favorable.

Estate and Gift Taxes

The estate and gift tax exclusion and generation-skipping transfer tax exemption is $11,580,000 per taxpayer in 2020. For 2021, the exemption is projected to increase to $11,700,000.
The annual gift exclusion for both 2020 and 2021 is $15,000.

Business Tax Planning Highlights

Depreciation

The ability to accelerate depreciation for tax purposes has been utilized over the past several years due to bonus depreciation as well as IRC §179 expensing. Generically speaking, bonus depreciation allows taxpayers to fully depreciate the asset in the year purchased regardless of whether or not the business has taxable income. Property that qualifies includes:

Personal property with a useful life of three to 20 years. This includes software, vehicles, machinery/equipment, furniture, land improvements, etc.
Qualified Improvement Property (QIP). This relates to real property that is improved and subject to a lease. There are several other requirements that need to be met in order for qualification.

IRC §179 is available to the extent there is taxable income. While there are limitations to this deduction, real property improvements such as HVAC and roofs can utilize this deduction as their useful life is greater than 20 years (and thus not eligible for bonus depreciation).

Net Operating Losses

Similar to individuals, C Corporations can tax advantage of the temporary change to NOLs. The previous limitation on NOLs that was enacted by the TCJA has been modified for tax years ending 2018, 2019, and 2020. Under the TCJA, taxpayers were not allowed to carryback losses and would be limited to the amount of usage in the latter years. The CARES Act modified the rules to allow for losses created in 2018-2020 to be carried back five years and carried forward indefinitely without limitation. For tax years after 2020, the loss of carryback treatment and the usage limitation are restored.

Revisit Allowances

When estimated allowances are booked for financial reporting purposes, taxpayers are not allowed to deduct those adjustment. As the year is coming to a close, it is important to look at bad allowances to determine if amounts will ever be collected as well as looking at inventory allowances to see if such assets can be fully disposed. Once a debt is determined to not be collectible and thus removed from the allowance, business are allowed to take the corresponding bad debt deduction. Similarly, when an inventory item previously booked to an inventory allowance is rendered obsolete and removed, the business will be allowed to deduct the cost of the initial purchase.

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