If your itemized deductions are close to the standard deduction, go ahead and prepay some stuff to get the higher itemized deduction amount.Why? Pay early and you can get a 13th month of itemized deductions like mortgage interest, property taxes, state income taxes to lower your 2020 taxes. There is a 10k limit on state and local taxes for most filers. If you refinanced your mortgage or took out a 2nd mortgage in 2020, you might already be above your standard deduction. Next up, take advantage of more generous charitable deduction benefits to increase those itemized deductions.
More bang for your charitable buck so give in 2020There’s a $300 tax deduction you can claim for giving cash to charity even if you take the standard deduction when you file. And, donors who itemize deductions (see point #1) when they file can grab a juicier tax break for cash donations for 2020 only. You can now deduct up to 100% of adjusted gross income for cash donations to public charities. Normally, you can only claim up to 60% of your AGI for a charitable donation.
Telecommuting and your state residency for state income taxesWorking out of state while riding out the pandemic? If you moved out of a high tax state, you may have savings. Even if you’re the bridge and tunnel crowd, this affects you.
Refinancing your mortgageIf you haven’t re-financed, stop reading this and go get that started. Why? If you bought your house over a year ago, you’re likely looking at getting at least a full percentage point less on your interest rate. A vaccine will also raise interest rates. Just the news of testing a vaccine raised mortgage rates. Why? Bond yields, and therefore interest rates on things like mortgages, are related to the equities markets which would move on a vaccine breakthrough.
Have you previously refinanced and paid points? You may have an unamortized — not-yet-deducted — balance remaining. If so, you may be able to deduct that entire unamortized amount when you refinance again, along with any deductible interest and amortization for points paid on the new loan. Discount points are fully deductible, regardless of the type of property you’re refinancing or whether you’re doing a regular or cash-out refi. If you finalize your refinancing on or near the date that your property taxes are due, you may end up paying those taxes at the closing. If that’s the case, you may be able to deduct the property taxes paid during a refinance on your next income tax return. However, only property tax payments that you (or the mortgage servicer) actually made during the year are deductible. You can’t deduct cash put into escrow for future property tax payments. Closing costs and homeowner’s insurance are not deductible.
Quarantine baby?Under the SECURE Act and beginning in 2020, taxpayers can take up to $5,000 (for each spouse) of penalty-free retirement plan distributions for expenses related to the birth or adoption of a child.
Make sure you’re taking advantage of any COVID related benefitsThere’s a waiver of the 10% penalty on COVID-19-related early distributions from IRAs, 401(k)s and certain other retirement plans. There’s also benefits if you took out a loan against your retirement assets. Recovery rebates (aka stimulus checks) of up to $1,200 for singles, $1,200 for heads of households and $2,400 for married couples filing jointly — plus $500 per qualifying child — subject to income-based phaseouts starting at $75,000, $122,500 and $150,000, respectively (based on 2018 or 2019 income tax return filings). If you didn’t get your $500 check for a qualifying child you’ll be able to claim a credit on the 2020 tax return.
For my freelancers and consultants, 1099s were redesigned with new filing datesForm 1099 NEC is now what is used for reporting non-employee compensation, not 1099-MISC. 1099 MISC is still being used for other purposes. Form 1099 NEC must be filed with the IRS and the recipient by Feb 1 instead of Jan 31. So if you’re a consultant or freelancer, expect a new form and expect to receive or file it (if you paid someone more than $600) by Feb 1.
Lock in that bonus depreciation for AirBnb rentalsDid you buy items like beds, furniture or appliances for your short term rental property? 100% write off. This isn’t new due to COVID, but something to take advantage of nevertheless if you are already thinking of buying stuff early next year.
Accelerate those deductions in a loss yearIt's tough out there and you may be looking at a loss year this year. The silver lining is due to the CARES Act you can carry back this years loss to the previous 5 tax years. So if you paid taxes in those years, you can get that money back! This is why you should accelerate deductions this year.
Watch out for expenses paid with PPP loansLots of people took PPP loans but few are expecting that expenses paid with PPP money can't be deducted. Structuring your owner's draw vs salaries and wages is important for your forgiveness application.
Biden Plan Impacts.The plan is just that, a plan at this point. If you rent property, the Biden plan would eliminate the $25k passive activity loss exemption and 199A pass through reductions for profitable AirBnb type rental activities. This means higher taxes, but again, this is just a plan at this point.
The child tax credit and dependent care credits are expected to be more generous under Biden’s tax plan and the first time homebuyer credit will be re-established. Caps on itemized deductions, increases in payroll tax rates, capital gains rates, individual income tax rates, dividends and changes to 199A pass through reduction for S-Corps and LLCs will only affect earners with over 400k income. If you’re above 400k, you should re-evaluate your investment allocations as tax loss harvesting could be more beneficial than ever. Of course, harvesting your winners and dumping your losers to offset the winners is a good idea for other tax brackets as well.