2020 Tax Highlights

The year 2020 has brought many challenges and tax changes. In late 2019, a law was passed which included many of the long-anticipated “tax extenders” and significant changes to retirement accounts. Due to the pandemic, many other tax provisions were implemented through the CARES Act and FFCRA in an effort to help lessen the financial impact felt by individuals and businesses. This letter provides an update on some changes that might affect you and other things to be aware of.
If you have questions or want to know how any of this impacts you, please do not hesitate to contact us.

Tax extenders. Several provisions that allowed for deductions and credits expired at the end of 2017. Many of the provisions have been extended for 2020 and also made retroactive for 2018 and 2019. Some of the more popular provisions include the above-the-line deduction for tuition and fees, the deduction for mort-gage insurance premiums, and the Residential Energy Credit.

Kiddie Tax. The TCJA applied trust and estate tax rates to a child’s unearned income above certain levels. This change was repealed for 2020 and beyond. The Kiddie Tax reverts to the old rules where a child’s in-come is taxed at the parent’s marginal rate. For 2018 and 2019, a choice exists for using the trust and estate tax rates or the parent’s marginal rate.

SECURE Act. Two of the more notable changes in the SECURE Act include the repeal of the maximum age for making contributions to an IRA and increasing the beginning age for mandatory distributions from an IRA. Starting in 2020, you can make deductible contributions to an IRA at any age provided all requirements are met. For distributions required to be made after December 31, 2019, if you reach the age of 70½ after this date, the required beginning age is increased from 70½ to 72. Note: The CARES act waived all RMDs for 2020.
The SECURE act also reduced the floor for deducting medical expenses to 7.5% of AGI for 2020 and 2021.

CARES Act. The CARES Act provides for direct payments (economic impact payments) based on your filing status and AGI. Payments are $1,200 for individuals, $2,400 for married couples, and $500 for each qualifying child. The payments phase out for AGIs above certain limits. The payments are based on filing status and income from either 2019 or 2018 tax returns. The economic impact payment is considered an advance credit against 2020 tax. The payment will not reduce your refund or increase any amount owed on your 2020 return. If you received an economic impact payment, the payment will be reconciled on your 2020 tax re-turn. You will receive an additional credit on your return if your filing status and income level in 2020 qualifies you for a larger payment. If your filing status and income level in 2020 would reduce your payment, you do not have to repay any amount received.

The CARES Act also allows you to deduct up to $300 in charitable contributions even if you take the standard deduction.
Things to do in 2021 that can affect 2020 taxes. There is very little that you can do to impact your 2020 taxes after December 31, 2020. However, two things that can be done, if you qualify, is making a contribution to your traditional IRA and/or your health savings account (HSA).

IRA deduction. For 2020, you may be able to contribute up to $6,000 ($7,000 if you are at least 50 years old) to an IRA. Contributions for 2020 can be made up until April 15, 2021. If the contribution is made to a traditional IRA, you may qualify for a deduction on your 2020 return. For 2020, there is no age limit on making a contribution to traditional IRA or Roth IRA. In addition, contributions to any type of IRA (traditional or ROTH), might qualify you for the Retirement Savings Contribution Credit.

HSA deduction. Similar to the IRA, you can make 2020 contributions to your HSA up until April 15, 2021. The total amount that can be contributed by you and your employer ranges from $3,550 to $9,200 based on whether you have self-only or family HSA qualifying coverage and your age.

IRS hot items. There always seems to be a number of items that the IRS is focusing on. Some of the cur-rent topics the IRS is focused on are foreign assets, cryptocurrency transactions, and unreported income.

Foreign assets. The IRS has been focused on the reporting of foreign assets for some time now and the penalties for not reporting can be severe. There are enhanced reporting requirements if you have any type of foreign asset, be it a foreign bank account, pension plan, rental property, ownership of a foreign company, etc. The income derived from these assets is includable on your U.S. tax return and the value of each of these assets might need to be reported, either with your tax return and/or separately to the IRS or Treasury Department.

Cryptocurrency transactions. Cryptocurrency (i.e., Bitcoin, Ethereum, etc.) is becoming more and more common. Transactions involving cryptocurrency have tax implications and the IRS has included the following question on Form 1040. “At any time during 2020, did you receive, sell, send, exchange, or other acquire any financial interest in any virtual currency?”

Unreported income. If you are making extra money by doing side jobs, be it driving for a ridesharing company such as Uber or Lyft, selling crafts on Etsy, delivering meals with Grubhub or DoorDash, renting out a room in your house via Airbnb, or any other way, it needs to be included on your tax return. Unless specifically excluded under the Internal Revenue Code, all income is taxable. This includes income that is not reported to you on one of the various Forms 1099, foreign income, and barter income.

Federal and state differences. When it comes to taxes, most of what you read and hear from the media has to do with federal tax law. Remember that each state has its own tax law and just because something is not allowed for federal taxes (or you do not qualify) does not mean that you are not able to include it on your state tax return.

Home-Office Deduction – General Opportunities & a Simplified Method Option

If you work out of your home you’re part of a growing trend. What’s important to you, however, is that you may qualify for some valuable federal income tax deductions. You may be able to deduct part of your home’s normal operating expenses for items such as utilities and insurance, you may be able to claim write-offs for depreciation or lease payments, depending on whether you own or rent, and you may even get some extra business car deductions. The tax-saving opportunities available to you will depend not only on the type of work you do at home, but where in the home you perform it.

You won’t get any home-office-type deductions unless you regularly and exclusively use a room or specific area in your home or apartment for business. So, for example, you don’t get deductions if you work out of a room that your family also uses as a den. In addition, generally the office must either be the principal place of your business, or a place where you meet or deal with clients or customers.

If you’re a professional such as a doctor, dentist, or consultant who regularly meets with clients or patients in the home, you probably qualify for home-office deductions, but you may benefit from help on how best to allocate “shared” personal/business expenses.

If you don’t meet with clients in your home office, qualifying for home office deductions usually still is no problem if your home is your only business location. However, the rules are more complicated if some aspects of your business are performed in the home, and others are performed outside the home. In this situation, there is a question as to whether or not the office is your principal place of business. Often, there is a fine line between qualifying and not qualifying. And the rules seem to change often.

If you’re an employee who regularly comes home from the office with a loaded briefcase, catching up on paperwork at home won’t do you any tax good. Employees qualify for home-office deductions only if they work at home for the convenience of their employer. So there are no deductions if you decide on your own to do office work during evenings and weekends, or work a couple of days a week at home because you’ll get more done. And even if your employer requires you to work at home, you don’t get any extra deductions unless you also get by the home-office hurdles.

One drawback to the home office deduction is the impact it may have upon the eventual sale of your home. If you have taken depreciation deductions on the part of your home you use as an office, that amount will not qualify for the tax-exemption you otherwise get on the gain from the sale of your house, although gain from depreciation recapture can be deferred if the residence is exchanged for like-kind business property. And if 100% of your home did not qualify as your principal residence for at least two of the five years preceding the sale, you will have to pay capital gains tax on the business portion of your house. Generally, though, if a home office is physically part of the residence, the entire residence qualifies for the home-sale exclusion. An additional consideration for the many taxpayers who now find themselves within the reach of the alternative minimum tax (AMT) is the requirement that some prior depreciation may be subject to “recapture” as additional income for AMT purposes.

A Simplified option. Early in 2013, the IRS announced the introduction of a new, simplified option for claiming the home office deduction. Starting for 2013 tax year returns filed in 2014, the simplified option allows a taxpayer to calculate the amount of allowable deductible expenses for business use of a home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of the home used in a qualified business use of the home, but not to exceed 300 feet. The prescribed rate is $5.00. Effectively, the simplified option provides a maximum deduction of $1,500 (300 square feet multiplied by $5.00). The IRS indicated that it may update the prescribed rate from time to time. Although the overall tax benefit in using the simplified option may not be as great as when all related expenses are accounted for, it may be worth exploring to reduce compliance and recordkeeping costs.

As you can see, working at home may be anything but simple from a tax standpoint. We’ll be happy to supply complete details on how the rules work in your situation, and how to make the most of them. If you need any help, don’t hesitate to call. We can help you weigh the advantages of a home office deduction against the potential for subsequent increased taxes. You should also call us if you’ve been taking a home office deduction and you’re now thinking of selling your combined home/office. With some advance tax planning, you may be able to minimize taxes on the transaction.

Items To Consider In a Lease

I was recently asked about my opinion regarding items for consideration when leasing a physical space in Summerville, SC.  Regardless of where you desire to lease, there are several general agreement terms/conditions and language to consider.  Among them, in no particular order, include:

  1. Payment: Amount, Frequency, Method, Deposit Amount, Payment Structure (this may be relevant for Financial & Tax Reporting)
  2. Provisions for Privacy/Non-Disclosure depending on the secrecy and information requirements of the business.
  3. Timing: Lease Start, Lease End, Renewal Notice, Cancellation Notice
  4. Ownership: Legal Ownership of the property, Provisions for transfer of ownership and the effect on the lease
  5. All Parties with interest to the transaction.
  6. Penalties: Penalties or interest assessed for Non Payment or Early Payment
  7. Expectations and Responsibilities: Responsibility for repairs & maintenance, landscaping, upkeep, upfit, and/or restoration at end of lease, responsibilities for tax & insurance, security
  8. Any exclusivity options for purchase, renewal or right of first refusal on additional leased properties.
  9. Future renewal requirements such as additional credit reports, financial information and background checks.
  10. Provisions/condition requirements for return of deposit at termination of lease
  11. Delinquencies and back payments due on the property (to help ensure the property does not experience foreclosure while you are under contract)
  12. Fit for purpose language to indicate intended purpose and acceptability of the use of the property.

This list of items is certainly not all inclusive. Key points will vary based on several things including location, type of business, intended use, the local market, condition of the space, and financing. Additional items should be considered when evaluating a lease for property depending on your specific circumstances. As with any business, the lease should be considered by both the CPA and the Attorney of the business owners.

If you are considering a lease and would like a CPA in or near Summerville, SC please contact Swamp Fox CPA, LLC at 843.900.6635 or [email protected].

Post Tax Season Budget

It’s the middle of the year and the pain and contempt for realizing your actual tax obligations are beginning to subside.  Now is the time to take action and help yourself avoid that same agony next year.  While it is good to take an appropriate break from the realities of family and business financial goals, now is the time to commit to leveraging the knowledge and power of today’s technology against a good old fashioned budget.

Historically accounting and bookkeeping in and of itself has been a painful process for businesses and families.  Beyond the accounting and recordkeeping, applying a budget was another layer of time and difficulty.  The results were often riddled with layers of confusing comparisons.  That is no longer the case.  Today we are able to leverage technology in way that simplifies our accounting and bookkeeping needs.  Budgets are designed and arranged for automated comparison.  With transaction recognition technology your income and expenses are semi-automatically coded in a logical and consistent manner.  The process of organizing your finances has become greatly simplified with cloud accounting software. Now more time can be spent making decisions.

When you employ semi-automated accounting information systems to your family and business finances you will finally be able to realize the value of the information rather than the burden of assembling it.  Many time people are so worn out from processing the information they forget to think critically about the result of the work.  After all, aside from preparing for the next annual tax return, the purpose of compiling all of that information is to use it for decision making.

As we all cruise into life after tax season, let’s think about how we can work smarter this year by being proactive with understanding the ins and outs of our number one resource, cash.  Leveraging technology to account for and measure our finances is the first step to taking control of our financial lives.  At Swamp Fox CPA, LLC we can assist with initial set-up, implementation, and maintenance of your family and business financial needs.  Further, we will assist with budget preparation, retirement and tax planning.

Contact us for assistance or more information.

CPA Summerville