In a few months,
we will be filing 2020 taxes. Boy, what a year this has been! Let’s run through
the important things you should be looking into.
First, assuming
that Biden has actually won, we can fairly assume he will raise taxes, meaning
it is better to earn money in 2020 than it will be in 2021. But charity
deductions might not be more valuable in 2021. One thing I read said that under
Biden charity might be capped at a 28% deduction, making charity more valuable
in 2020! You can read lots of possible scenarios of a new tax law on the
internet.
Charity
It is difficult to
itemize deductions. Without itemizing, you are not benefiting from giving
charity. Consider bunching: giving your charity every other year. I have seen
people save $2,000 every other year doing this. It’s like getting two free
tickets to Israel. Why not? People over 70 can give charity directly from IRAs,
a big benefit. An additional point: This year, non-itemizers can claim up to
$300 in charity.
Here in Maryland,
there is a big benefit in itemizing for the savings on the state return. Every
return should be reviewed for potential savings. This can be a great trick.
Capital Gains
If you are
planning to sell a significant amount of stock at a profit, consider the
following: Gift the shares to a family member (who is in a lower tax bracket) and
have them sell it. Also, donating stock to a charity is a big win. Of course,
consider selling losers.
Child Care
Credit
This is a tax
credit for preschool and day camp. This tax benefit is capped at 28% of $6,000.
But you should even out the peaks and valleys. This means that spending $8,000
in 2020 and $4,000 in 2021 is not wise. You are better spending $6,000 in each
year. Many frum issues arise, such as kids in sleep-away camp who come
home every night. (This scenario increased under COVID-19.)
College Tax
Credits
Here, too, you
need to time expenses to maximize each year’s tax benefit. The American
opportunity tax credit gives a benefit for $4,500 in college expenses. If you
need to spend more, consider pushing it to a different year. Of course, yeshiva issues are numerous, such as how
self-study courses and non-accredited colleges are treated. Questions arise
when tuition is paid with 529 funds.
529 Accounts
There has been a
big buzz on this one, especially here in Maryland. You get a state tax
deduction for money put into a 529 account. It can be withdrawn for K-12, in
addition to college. Maryland also offers a $500 matching contribution to these
accounts in lieu of this deduction.
Business Profit
Deduction (199a Deduction)
For those
operating a business (and rental real estate), the new tax law offers a benefit
since 20% of business profits are tax deductible. This is a major change and a
big handout from the government.
Deductions that
Have Ended
Causality losses, investment,
and employee deductions are gone. If you are an employee with expenses for work,
then you need to be reimbursed for your expenses and not try to claim them on
your own.
Kiddie Tax
The kiddie tax
means that children have to pay taxes on investment income. This can get
complicated.
Medical Expenses
Medical expenses
have been tax deductible since time immemorial. However, they have to exceed
7.5% of one’s income. Because of this “floor,” it’s difficult to benefit from
high medical expenses. Yet there are many workarounds. There are health savings
accounts, flexible savings accounts, medical reimbursement accounts, etc. There
are also different ways to make health insurance premiums tax deductible. There
is a new tax law allowing work reimbursements for health insurance paid personally.
More Issues
There is the
generous $2,000 child tax credit: a goodie for frum families.
Inherited IRAs
must be withdrawn within 10 years from date of death. That can be a problem if
the beneficiary is going to be bumped off of government programs such as
Medicaid. Discuss these things ahead of time.
In 2020 only, money
withdrawn from IRAs and retirement plans is not subject to the 10% penalty. However,
I would recommend withdrawing money only if you really have to. You will still
be paying taxes and wreaking havoc on your retirement plan.
Teachers can
deduct $250 for classroom supplies.
Consider IRA contributions.
For those with income under $38,000, it will give you a 50% saver’s tax credit,
plus the tax deduction. I have seen people put $13,000 in an IRA and save
$14,000 on their taxes. Amazing!!
Hopefully, with
some good planning and luck, you will not pay any more taxes than you need to.
Eli Pollock CPA can be reached at
elipollock2@yahoo.com .
