As 2020 draws to a close, it’s time for you to consider your 2021 plans and discuss with Perlson ways to optimize your tax planning.
Tax rates are scheduled to remain the same in 2021 except for inflation adjustments. President-elect Joe Biden campaigned on increasing corporate and personal tax rates and doubling the capital gain rates. He also wants to reverse many of the provisions of the 2017 TCJA, affecting the State and Local Tax deduction limitation, bonus depreciation, and many other itemized deductions.
Since we won’t know until after year-end if Republicans keep control of the Senate and what kind of impact (if any) a Biden presidency would have on taxes, we suggest using the following traditional year-end planning strategies except for unusually large transactions.
- Defer income and accelerate expenses to reduce your 2020 liability.
- Harvest capital losses to reduce capital gains.
- Consider investing in an Opportunity Zone to defer tax liability on large capital gains.
- Contribute appreciated stock to your favorite charity to realize a tax deduction and eliminate capital gains.
- Consider the use of a charitable trust, foundation, or donor advised fund to shelter unusually large ordinary or capital gains income.
- Contribute to a 529 Plan to save for college tuition and receive a $10,000 tax deduction ($5,000 on a single return).
- If you are in a lower tax bracket in 2020, consider a Roth conversion.
- If you are considering an asset acquisition, bonus depreciation allows for a 100% deduction but the asset must be placed in service by year’s end.
- In 2021, business losses will again be limited to $500,000 ($250,000 for single), so consider accelerating any losses.
- If you received loans under the CARES Act, the forgiveness application should be completed as soon as possible. This will result in a clearer picture of the financial and tax implications of the loan forgiveness.
Also consider the following for unusually large transactions:
- Accelerate ordinary income and capital gains in 2020.
- Accelerate large asset purchases eligible for bonus depreciation.
- Defer expenses especially state income taxes until 2021.
- Regarding sales of business assets, consider using the installment method of reporting. If the capital gain rate does not change, the income can be deferred. If the capital gain rate increases, a special election can be made as late as 10/15/21 (the extended filing date of 2020 personal tax returns) to report the income in 2020.
Stock market transactions can be controlled through the use of:
- Short sales gains which can be reported in 2020 or 2021.
- Wash sale losses which can be reported in 2020 or 2021..
As always, Perlson LLP is here to help you plan and strategize your tax savings opportunities. If you’d like to discuss your individual situation and plan for both year-end and 2021, please call us at 516-541-0022.