February 23, 2021

Working Remotely in Different States? Find out Where You Need to File Taxes

With many companies either extending their remote work timeline due to COVID-19 or permanently switching to a remote work structure, it’s important for employees to understand the various tax implications of working remotely. Some people are taking the opportunity to travel or move to other states while they can work from anywhere. But establishing presence in additional states could cause additional tax filing and withholding requirements employees should be aware of.

Understanding State Filing Requirements

Tax filing requirements vary from state to state. If you’re planning on working remotely from a different state for an extended period of time, it is best to investigate the state’s tax filing requirements. Generally, employees pay taxes based on where they work or earn income. Employees could be subject to additional non-resident income tax return filings depending on the state they’re in and whether they meet thresholds based on income generated or time spent there. So, while taxpayers may maintain their permanent home in one state and work remotely from a different state, depending on how long they work or how much income they earn in that different state will determine if they are required to file as a non-resident of said state.

California and New York State Tax Example

A California taxpayer decides to move from California back to New York to be near family while they are working remotely. The taxpayer signs a short-term lease and works remotely in New York for six months.

Assuming the taxpayer spent 184 days or more in New York, the taxpayer is now required to file a part-year resident return for both New York and California. New York requires taxpayers who spend 184 or more days in the state during the year to file in New York, whether or not the taxpayer maintained a permanent residence there.

Missouri and Illinois State Tax Example

An Illinois resident works remotely on a temporary basis from their home for a Missouri-based company. The employee does plan to go back into the Missouri office once COVID-19 is over.

Historically, the Illinois resident has worked and earned their wages in Missouri, so they were required to file a non-resident return in Missouri and pay the tax due there. Additionally, they would file an Illinois resident return as well, where they would have to calculate and pay tax due in Illinois. Please note, Illinois does allow for a credit for taxes paid to other states in their calculation of current year tax, so this helps avoid the double taxation between Missouri and Illinois.

Now in this example, the employee worked remotely from their home for a significant portion of the year. This means their work performed is in Illinois instead of Missouri which would lead us to believe that the income sourced to Illinois would not be subject to Missouri income tax. Unfortunately, Missouri currently has not provided clear guidance on this situation. It is believed that even though the Illinois resident performed services in Illinois, Missouri will still want that Illinois resident to file and pay tax as a Missouri non-resident since the change was on a temporary basis and due to the COVID-19 pandemic. Time will tell if this stance will hold true though.

Filing requirements vary by state, so it’s important to keep track of which states you have been working remotely in and for how long. Find out how working from home affects state taxes in Missouri and Illinois. If you have specific questions on a particular state filing requirements, contact an Anders advisor below.

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February 22, 2021

2021 Tax Pocket Guide

Access the 2021 Anders Tax Pocket Guide for this year’s corporate and individual tax rates, retirement plan contribution limits and more, including:

  • Estate tax and lifetime gift tax exemption increase to $11,700,000
  • AMT exemption increase
  • Standard deduction increase

View the 2021 Anders Tax Pocket Guide.

Contact an Anders advisor to learn how these rates affect you and your business.

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February 21, 2021

2021 Anders Tax Pocket Guide

February 9, 2021

Do I Qualify for the Home Office Deduction While Working from Home?

If you are like many Americans, the Coronavirus forced you to work from home for some or most of 2020. You may have had to purchase items to make your home more conducive to a work from home environment, including computers, printers, desks, basic office supplies, office chairs or even faster internet. With all of these additions to your home office, you may be wondering, “Can I deduct these expenses or take a home office credit on my 2020 tax return?”

The answer depends on if you are an employee or if you are self-employed.

Home Office Deduction for Employees

The 2017 Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home. Additionally, there is no deduction for unreimbursed work expenses.

This means you will not be able to deduct home office expenses or purchases that allow you to work from home, and you do not qualify for the home office deduction.

Home Office Deduction for Self-Employed Individuals

There are two parts of the equation for self-employed individuals: ordinary business expenses and a home office deduction. Ordinary business expenses can be taken on your return and are usually reported on a Schedule C. They include any ordinary and necessary expenses to conduct business.

The home office deduction is available to self-employed taxpayers, independent contractors and those involved with short-term contracts or freelance work.

How to Qualify for the Home Office Deduction

There are two basic requirements to qualify for the home office deduction:

  1. You must use a portion of the home exclusively for conducting business on a regular basis, and
  2. The home must be your principal place of business

“Exclusive use” means you must use a specific portion of the home only for business purposes, and for nothing else. A home office does not need to be a separate room or permanently partitioned portion of a room. Any “separately identifiable” area can serve as an office. For instance, a corner of a room with a desk and file cabinet could qualify as a home office.

According to the IRS, to claim the deduction, you must use part of your home for one of the following:

  • Exclusively and regularly as a principal place of business for a trade or business
  • Exclusively and regularly as a place where patients, clients or customers are met in the normal course of a trade or business
  • As a separate structure that is not attached to a home that is used exclusively and regularly in connection with a trade or business
  • On a regular basis for storage of inventory or product samples used in a trade or business of selling products at retail or wholesale
  • For rental use
  • As a daycare facility

The IRS, defines the term “home” as:

  • A house, apartment, condominium, mobile home, boat or similar property
  • A structure on the property, like an unattached garage, studio, barn or greenhouse
  • Not including any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business

Qualified Expenses

Deductible expenses for business use of home normally include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. In general, a taxpayer may not deduct expenses for the parts of their home not used for business; for example, expenses for lawn care or painting a room not used for business.

Claiming the Home Office Deduction

You can use either the regular or simplified method to calculate the home office deduction. The IRS describes the regular and simplified methods as:

  • Using the regular method, qualifying taxpayers compute the business use of home deduction by dividing expenses of operating the home between personal and business use. Self-employed taxpayers filing IRS Schedule C, Profit or Loss from Business (Sole Proprietorship) first figure this deduction on Form 8829, Expenses for Business Use of Your Home.
  • Using the Simplified Option, qualifying taxpayers use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to figure the business use of home deduction. A taxpayer claims the deduction directly on IRS Schedule C.

Contact an Anders advisor below to discuss the specific nuances of the home office deduction and if you qualify.

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February 2, 2021

Updating Your W-4 Can Lead to Less Surprises Come Tax Season

Tax season is fast approaching, and for many individuals that means the anticipation of a tax refund check in their bank accounts. However, many people were shocked in 2019 when they discovered their refund amount was substantially lower or they even owed the IRS money.

The 2017 Tax Cuts and Jobs Act (TCJA) significantly changed how the federal tax system works. These tax changes didn’t always work well with the traditional W-4 form, resulting in many people not having enough taxes withheld from their paychecks in 2018 to cover the taxes they owed.  As a result, there is a new version of the W-4 form for employees to use starting in 2020 which is intended to make withholding more accurate in conjunction with the TCJA.

What is a Form W-4?

For some, a W-4 was something filled out years ago when you started your first job and confusingly asked your parents if you were a “dependent” and never thought of again. In fact, a recent study by the American Institute of Certified Public Accountants (AICPA) shows that 45% percent of Americans are unsure when the last time their withholdings were updated, and 11% of taxpayers had never heard of a W-4.

A W-4 is an IRS form employees are required to fill out so that an employer can withhold the correct federal income tax from their pay. Ultimately, the goal of proper withholding is that you neither owe nor are owed when filing your yearly tax return. Too little withholding can result in a substantial tax payment and possibly even penalty payments. Too much withholding results in a refund check, which may seem nice, but essentially you allowed the IRS to hold your money interest free—money that could have been possibly better spent staying current on bills, paying down debt or being invested.

What’s Changed on the W-4?

The old Form W-4 required employees to input the number of allowances they were claiming and any additional amount they wanted to be withheld. There were worksheets designed to assist employees in entering the proper number of allowances, but many found these to be complicated.

There are no more withholding allowances on the new Form W-4. Instead, employees provide their employer with the information needed to determine the amount of income tax to withhold and the employer takes it from there and does the necessary calculations. Employees will be asked to include items such as expected filing status, family income from other jobs, number of dependents and tax deductions they plan to take. This may mean the W-4 could possibly take a little longer to fill out because the necessary information will have to be collected.

Do I Have to Complete the New Form?

The short answer to this question is “no.” Existing employees are not required to complete a new Form W-4. If employees are happy with their current withholding, the old W-4 stays in effect indefinitely. However, if individuals want their withholding to be more accurate and aligned with current tax laws, they should fill out a new Form W-4. All new hires will have to complete the updated form, as should individuals with changes to their filing status.

Contact an Anders advisor below to discuss how recent changes in tax law, withholdings, and proper planning can help you achieve your tax and financial goals.

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January 6, 2021

How Employers Can Take Advantage of the Expanded Employee Retention Tax Credit

On December 27, 2020 President Trump signed into law a new relief bill in response to the continuing COVID-19 pandemic. The Consolidated Appropriations Act (CAA) is over 5,000 pages in length and contains provisions to fund government operations, provides economic support to individuals and businesses and includes extensive tax law changes. One significant provision focuses on the changes to the Employee Retention Tax Credit (ERTC) originally part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Below we dig into the changes and expansions to the ERTC.

QUICK REFRESHER ON THE ORIGINAL ERTC

Before examining the changes to the ERTC, let’s first revisit the provisions in the original CARES Act. Enacted in the spring of 2020, the Act allowed businesses to take a credit against payroll taxes in order to help offset some of the business losses due to COVID-19. The law allowed eligible employers to take a credit of 50% of qualified wages up to $10,000 paid to employees between March 12, 2020 and January 1, 2021.  Consequently, the maximum credit for each employee was $5,000 ($10,000 in wages X the 50% tax credit rate).

However, not every business was eligible for this credit. Businesses must have been significantly impacted by COVID-19 either by a lockdown order or by experiencing a significant reduction in revenue. There were also restrictions on which wages were “qualified” if an employer employed more than 100 people. Businesses were also not allowed to take the credit if they used Paycheck Protection Program (PPP) loans to cover employee payroll costs. Learn more about the original ERTC under the CARES Act.

UPDATES AND EXPANSIONS TO THE ERTC

The passage of the newly signed relief bill is good news to many businesses who continue to feel the economic impacts of the pandemic as the law enhances and expands many provisions of the original ERTC. To start with, the newly enacted law extends the ERTC until June 30, 2021 and increases the tax credit to 70% of qualified wages for each of the first two quarters of 2021. As a result, the maximum credit for each employee in 2021 is $14,000 ($10,000 in wages X the 70% tax credit rate X two quarters).

ERTC Eligibility

More businesses will be eligible for the ERTC in 2021. The original ERTC was only available for businesses who were forced to shut down or whose gross receipts in 2020 were 50% less than the same quarter in 2019. The new law modifies this reduction in revenue by an additional 30%.  For 2021, the test is satisfied for any of the first two quarters of the year if gross receipts are less than 80% of the gross receipts for same quarter in 2019.

ERTC Wage Threshold

A change in the threshold for determining which wages “qualify” for the tax credit will also benefit employers this upcoming year. Under the old law, for businesses with less than 100 employees all wages qualified for the tax credit, regardless if the employee’s role changed or not due to the pandemic. Whereas businesses with over 100 employees could not claim the credit for employees that were still performing services for the business, even at a reduced capacity. The new law effective January 1, 2021 raises the threshold number to 500 employees. As a result, more wages will become eligible for the tax credit during the first two quarters of 2021.

Employers with PPP Loans

Initially, the CARES Act prohibited employers who had received a PPP loan from also utilizing the ERTC. The new law allows an employer to claim the credit for any wages paid beyond the proceeds of the PPP loan that have been forgiven. This change is retroactive to the effective date under the original law: March 12, 2020. A company that received a PPP loan in 2020 but paid qualified wages beyond the amount of the loan would benefit by filing an amended Form 941 and claiming the credit.

NEW ENHANCEMENTS TO THE ERTC

While many provisions of the CAA enhanced previous law, it also includes some brand new provisions as well. Businesses will now be able to take an advanced payment on their credit even if those wages have not yet been paid. Additionally, some government entities not previously allowed to take the credit are eligible, such as public universities, hospitals, federal credit unions, etc. Another important change is that wages that have been increased due to hazard pay are also now eligible for the ERTC. 

While the above highlights how changes in the recent COVID-19 relief bill have affected the ERTC, please contact an Anders advisor below to discuss your situation and recovery options. Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed. Visit our COVID-19 Resource Center for more resources.

Find out if your business is eligible for the Employee Retention Tax Credit in 2020 or 2021.

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December 29, 2020

Rehabbing a Historic Building? Historic Preservation Tax Credits Can Help

The Historic Preservation Tax Incentives Program works to revitalize communities across the country by offering a tax incentive for the rehabilitation of historic buildings. The program offers a 20% Federal tax credit to private investors who undertake substantial rehabilitation of a historic building that will be used for a business or other income-producing purpose while maintaining the historic character of the property. The 20% rehabilitation credit equals 20% of qualified expenses spent on the approved rehabilitation of a certified historic structure.

How do Historic Preservation Tax Credits work?

Only certified historic structures qualify for Historic Preservation Tax Credits. The National Park Service maintains a list of buildings that are certified as historic. The rehabilitation work must meet the Secretary of the Interior’s standards for rehabilitation, which aim to ensure the historic integrity of the building remains intact.

Taxpayers must complete a three-part application to qualify for the 20% tax credit:

  1. Part 1 presents information about the significance and appearance of the building
  2. Part 2 describes the condition of the building and planned rehabilitation work
  3. Part 3 certifies that the project meets specific standards laid out by the Secretary of the Interior

Do states offer Historic Preservation Tax Credits?

Many states also offer Historic Preservation Tax Credits. An application and approval process is required at the state level, as well. Missouri offers tax credits equal to 25% of qualified expenses of the rehabilitation to approved historic buildings. The Missouri Historic Tax Credits can be carried back 3 years or carried forward 10 years.

Find out how Anders can help with Missouri Historic Tax Credits.

Should I take advantage of Historic Preservation Tax Credits?

Yes, Historic Preservation Tax Credits are a great way for historic real estate owners to lessen their tax burden for rehabilitating or restoring their historic property. If you are considering purchasing or have already purchased a historic building for commercial use, contact an Anders advisor below to take the next steps for qualifying for these tax credits.

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December 8, 2020

How Working from Home Affects State Taxes in Missouri and Illinois

With many companies having a remote workforce for most of 2020, there are a lot of questions around the state tax treatment for employees working from home. Each state handles their withholding differently, but below we discuss how Illinois, Missouri and St. Louis income tax withholding is currently treated at the state and local level.

Illinois Income Tax Treatment

In general, Illinois withholding is based on where the employee is working. Below is an outline of common questions and answers around Illinois income tax withholding, according to the Illinois Department of Revenue (DOR) Publication 130.

When are companies required to withhold Illinois income tax from an employee’s paycheck?

Employers must withhold Illinois income tax when federal income tax is withheld from compensation. Compensation is paid in Illinois when the employee’s services are “localized” in Illinois. This statement applies to all individuals except qualifying residents of Iowa, Kentucky, Michigan, and Wisconsin and military spouses.

When is compensation considered paid in Illinois?

The following are general rules for when compensation is paid in Illinois for tax reasons.

  • If all of an employee’s services are performed in Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
  • If some of the employee’s services are performed outside Illinois, but the services outside Illinois are incidental to the services performed inside Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
  • If the employee is an Illinois resident and neither of the rules above apply and no other state’s taxes are withheld, then compensation is considered paid in Illinois and is subject to Illinois income tax withholding.
  • If the employee’s compensation is not localized to any state under any of the rules above and the employee performs significant service within Illinois for more than 30 working days, and the service performed within Illinois is nonincidental to the employee’s service performed outside Illinois, then a portion of compensation is considered paid in Illinois and subject to Illinois income tax withholding. The portion of compensation subject to Illinois withholding equals the total compensation paid to the employee multiplied by a fraction equal to the number of working days the employee spent within Illinois during the year divided by the total working days of the year.

What is considered incidental?

The Illinois DOR defines “incidental” as any service which is necessary to or supportive of the primary service performed by the employee or which is temporary or transitory in nature or consists of isolated transactions. The incidental service may or may not be similar to the individual’s normal occupation as long as it is performed within the same employer-employee relationship.

An employee who normally performs all of their service in Illinois may be sent by their employer to another state to perform services which differ from their usual work, or they may be sent to do similar work. As long as the service is temporary or consists merely of isolated transactions, it will be considered to be incidental.

What is considered a working day?

The Illinois DOR defines “working days” as all days during the tax year in which the individual performs duties on behalf of his or her employer. Days in which the individual performs no duties on behalf of his or her employer, such as weekends, vacation days, sick days, and holidays, are not working days.

A working day is spent within Illinois if:

• The individual spends a greater amount of the day performing services on behalf of the employer within Illinois rather than not, without regard to time spent traveling, or

• The only service the individual performs on behalf of the employer on that day is traveling to a destination within Illinois, and the individual arrives on that day.

Example: Jane is a Missouri resident who earned $70,000 in wages from her employer for the tax year. During the year, she performed services for her employer for 40 days in Illinois out of 250 total working days for the year. Accordingly, 16% (40 working days divided by 250) of Jane’s wages, or $11,200, was paid in Illinois and is subject to Illinois income tax withholding.

When are employers not required to withhold Illinois income tax?

According to the Illinois DOR, unless you enter into a voluntary withholding income tax agreement, you are not required to withhold Illinois income tax from the following:

  • Compensation paid to residents of Iowa, Kentucky, Michigan, and Wisconsin, due to reciprocal agreements with each of these states, and certain military spouses;
  • Compensation paid to a non-resident employee who has performed less than 31 days of service in Illinois and whose compensation is not localized in Illinois
  • Compensation paid to a non-resident employee whose service is performed entirely in another state;
  • Compensation paid to an Illinois resident whose service is performed entirely in another state, and the compensation is subject to withholding in another state;
  • Other specific situations as described in Illinois Department of Revenue Publication 130

If an employee lives in another state, are employers required to withhold income tax for that state?

If your employee is “paid in Illinois” and is a resident of Iowa, Kentucky, Michigan, or Wisconsin, you may, but are not required by Illinois law, withhold income tax for the other state. If your employee is a resident of a state with whom Illinois does not have a reciprocal agreement (i.e., Missouri), you must withhold Illinois income tax on all income that is paid in Illinois. You may be required to withhold tax for another state in which the employee works or resides. Contact those states to determine if you are required to register as a withholding agent.

Missouri Income Tax Treatment

Missouri income tax treatment is a bit simpler for remote employees than Illinois. According to the Missouri Department of Revenue (DOR), any time an employee is performing services for an employer in exchange for wages in Missouri, those wages are subject to Missouri withholding. This applies to remote workers where an employee is located in Missouri. This rule also applies when the employer instructs the employee not to work but the employee is still being paid.

If you have employees performing services for wages in Missouri, those wages are subject to Missouri withholding, regardless of where you as the employer are located.

Earnings Tax Treatment in St. Louis

According to the St. Louis Collector of Revenue, employees who have been working remotely due to COVID-19 or in conjunction with the acting City of St. Louis Health Commissioner’s Order should be treated as working at their original, principal place of work for earnings tax purposes.

The acting Health Commissioner’s Order required all non-exempt City of St. Louis employers to “facilitate employees working remotely” but is completely neutral to the location of the remote work site. It does not order employees to work outside the City nor require any individual who is employed outside the City, to work remotely in their City Home.

Employers in the city of St. Louis should continue to withhold on those employees in the same manner as they did prior to the temporary relocation of their employees.

Under these circumstances, days worked out of the city due to a temporary reassignment caused by COVID-19 or the acting Health Commissioner’s Order may not be included in the Non-Residency Deduction formula on Form E-1R when claiming a refund for tax year 2020.

Due to the COVID-19 remote working environment, state and local tax withholding is complicated and changes or clarifications can be made at any time. Contact an Anders advisor below to discuss your specific tax situation.  

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November 3, 2020

Blues Captain Leaves for Sin City: How State Income Taxes Played a Role in Alex Pietrangelo’s Departure

On January 3, 2019, no one could have predicted that the then St. Louis Blues captain, Alex Pietrangelo, would be hoisting the Stanley Cup at the end of the 2019 season. In early January 2019, the Blues were in last place in the NHL, but the team turned their season around with the help of the song “Gloria”. A little over a year later, Blues fans could not imagine Alex Pietrangelo wearing anything but a Blue Note as he headed towards unrestricted free agency. But in October 2020, the former Blues captain inked a seven-year, $61.6 million contract with the Vegas Golden Knights.

NHL Salary Cap Takes a Hit

It is presumed that one of the major sticking points in the Blues negotiation with Pietrangelo was the amount of signing bonuses included in any potential contract. The ongoing pandemic has limited the cash flow of many businesses throughout the world, and the NHL is not immune to that reality. Before the pandemic hit, the NHL salary cap was anticipated to increase substantially for the upcoming season, but the league decided to keep the salary cap flat for the foreseeable future. The flat salary cap put the Blues in a bind when it came to fitting Pietrangelo in under the salary cap for the upcoming season, which further complicated negotiations. In his deal with Vegas, he will receive $35 million of signing bonuses throughout the life of the seven-year contract, which likely has major tax benefits for the former Blue.

State Income Tax Comes into Play

Nevada is one of nine states that does not have any state income tax. Athletes’ are generally subject to a “jock tax” in states and cities in which they work.  The athletes’ salaries are commonly apportioned to various states and cities using the “duty days” method. This jock tax is levied by states and cities on athletes who play or practice while in town. Assuming Pietrangelo becomes a Nevada resident rather than remaining a Missouri resident, the structure of his contract provides major tax benefits. This means that half of Pietrangelo’s games will be allocated to Nevada, a no income tax state. In addition, signing bonuses are exempt from the Duty Day calculation provided certain criteria are met. Instead, signing bonuses are allocated to an athlete’s resident state. In this case, all of the $35 million in signing bonuses will be allocated to Nevada and not be subject to state income taxes. If he had remained a Missouri resident and signed a similar contact with the Blues, Pietrangelo’s signing bonus would result in Missouri state income taxes of roughly $1.9 million.

For professional athletes, tax compliance and planning can be an issue when it comes to filing in the proper tax authorities. The Anders Sports, Arts and Entertainment Group has the knowledge to help athletes with tax compliance and planning. Contact an Anders advisor below to learn more.

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October 29, 2020

Year-End Tax Planning for 2020: RMD Changes, Tax Law Proposals and Strategies to Consider

Being nimble has seemed like a requirement for all of 2020. We have needed to be nimble with our businesses, as we pivot product or service lines to deal with the COVID pandemic. We have needed to be nimble as Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act relief efforts and additional guidance, requirements and implementation. It comes as no surprise that year-end tax planning will also require us to be nimble during our current economic and political environment. While our planning will evolve going into 2021, below we dig into things you can do now and year-end tax planning strategies to consider.

Take Advantage of Changes to Required Minimum Distributions

There have been two big changes to required minimum distributions (RMD) over the past 12 months. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. One aspect of the bill pushed back the age at which retirement plan participants need to take their RMDs, from 70½ to 72 years of age. This extra year-and-a-half can change the landscape of which source of income to support your lifestyle, as well as, potentially providing additional opportunities for ROTH conversions.

The second big change came with the CARES Act, which was signed into law on March 27th, 2020. One piece of this bill suspended the requirement of RMDs for the 2020 calendar year. This is a great opportunity to allow the qualified retirement account to continue to grow tax deferred.

Planning considerations:

  • Have you previously had large withholdings on your RMDs to cover your federal and state tax liabilities? Don’t forget to consider making quarterly estimated tax payments if you choose not to take your RMD in 2020.
  • Are you still planning on taking a distribution? Consider utilizing a qualified charitable deduction (QCD) to fund your charitable intentions. The distribution will not be included in income, but no additional charitable deduction is available. Typically, this strategy is still more tax advantageous.
  • Will your tax bracket significantly decrease without your normal RMD? Consider a partial ROTH IRA conversion to utilize the lower tax brackets. Additional details discussed below.

Be Aware of Proposed Tax Changes

Tax laws are always evolving at their own pace. In the current political environment, differences in tax policy are on the forefront of everyone’s mind. While it is completely uncertain when, or even if, tax law changes could be implemented, here are some current proposals on the horizon and strategies to keep in mind going into the end of the year.

  • Proposal of increasing the top individual tax rate back to 39.6% and the top corporate tax rate to 28%. The normal “defer income, accelerate expenses” may not be the best strategy depending on how everything plays out.
  • Proposal on increasing net long-term capital gains tax rate on individuals making over $1 million. The current top tax rate is 23.8% when considering the net investment income tax. The top rate under this proposal could be as high as 43.4%. Careful consideration should be taken when planning for the sale of securities and recognition of capital gains.
  • Proposal to change itemized deductions. This would likely eliminate the current $10,000 limit on state and local taxes, however, would also reinstate the limitation on itemized deductions for higher-income taxpayers. This would likely limit deductions to 28% for upper income individuals. Specific scenarios should be analyzed to determine if there is a better tax benefit under current law or proposed law when considering the timing of year-end charitable giving and fourth quarter state estimated tax payments. Many factors will come into play.
  • Proposal to change current gift and estate taxes. There are many different scenarios which could ultimately transpire: The estate tax exemption could be lowered from the current $11.58 million, to pre-Tax Cuts and Jobs Act of $5.5 million, or even lower.  There is also talk about raising the top estate tax rate from 40% to 45%, as well as the possibility of eliminating the step-up in basis to the beneficiary on inherited assets.  The time is now to re-visit estate plans and consider utilizing lifetime gift tax exemptions. 

Don’t Forget Traditional Year-End Strategies

While each individual scenario warrants specific recommendations and guidance, here are some traditional items to keep in mind before 2021.

  • Qualified Business Income (QBI), also known as the “20% Business Deduction”, is a large tax planning strategy. In order to optimize the QBI deductions, careful considerations need to take place to determine year-end bonuses or if considering accelerating or deferring income/expenses.
  • Consider contributing to 529 college savings plan. Some states may allow a deduction for contributions made in this calendar year. Missouri, for example, allows up to $8,000 per taxpayer to be contributed and deducted on their return. 
  • Consider ROTH IRA conversions to utilize lower tax brackets. Whether due to COVID, RMD suspension, or if you are just entering retirement, some individuals may find themselves in a unique situation of being in a lower than usual tax bracket. This is a prime opportunity to convert some of your traditional retirement account to a ROTH retirement account. Pay a little extra tax today but will have tax-free growth going forward.  
  • Revaluate payroll deductions. Before the last paycheck of the year, see if you should make any adjustments to your pre-tax benefits. Have you contributed enough to your retirement to maximize your company’s match? Also, if you are over 50, you are eligible for an additional $6,000 catch-up contribution. Have you maximized your health savings account (HSA)? If you are over 55, you are eligible for an additional $1,000 catch-up contribution.

While I’m sure many of us are ready to put 2020 behind us, there is still time to put some of these tax planning strategies in place before the end of the year. Contact an Anders advisor below to further discuss your tax planning options, or visit our COVID-19 Resource Center for more CARES Act considerations.

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