Spring Is in the Air but Your Tax Planning Shouldn’t Have to Be

For many, spring is one of the best times of the year – mostly because of melting snow and warm sunshine, and less so because of tax filing. Throughout 2020, Boardwalk actively adjusted tax recommendations for each of our clients’ specific needs in response to the CARES Act, portfolio tax-efficiency, and changes in income for many clients. We have included a brief overview of a few impactful changes for the 2020 tax season. And should you have any questions as you file your 2020 return, please don’t hesitate to reach out to Mike or John.

Along with more typical tax planning strategies, such as building your portfolio as tax-efficiently as possible or optimizing retirement savings, there were three areas impacted by the CARES Act (March) and the Emergency Coronavirus Relief Act (December) that we wanted to highlight: charitable giving, support for businesses, and economic impact payments (stimulus checks).

Charitable Giving: In response to a difficult economic environment and greater need for community support, Congress increased the deductibility of charitable giving for taxpayers that itemize their deductions as well as the vast majority of Americans who take the standard deduction. For taxpayers with enough mortgage interest, state or local taxes, or charitable giving to itemize their deductions, the CARES Act allows up to 100% of AGI to be deducted for cash charitable donations in 2020. Ordinarily, tax law limits deductions for charitable giving to 60% of AGI for cash donations and even less for non-cash gifts. If the standard deduction ($24,800 for married filing jointly under age 65) is taken, then there is a unique above-the-line deduction of $300 for charitable giving done in 2020. There is a $600 below the line charitable deduction for married tax filers in 2021 ($300 for single), but the law does not extend this deduction into future years.

For Boardwalk clients, we consider your tax situation to find the optimal strategy for charitable giving, including gifting appreciated securities, “bunching” deductions using a charitable “donor advised fund,” or donating directly from your IRA if you are required to take annual distributions.

Small Businesses: Faced with lockdowns and dramatic swings in consumer demand, the CARES Act and subsequent Emergency Coronavirus Relief Act provided small businesses with economic relief in the form of the Paycheck Protection Program (PPP). For many businesses, PPP loans are forgivable provided that the funds were used to cover payroll and other enumerated expenses. If forgiven, the loan is not taxable income and business expenses paid by PPP funds remain deductible.

As with other business-related tax law changes in years prior (like the Qualified Business Income deduction introduced in 2017), Boardwalk has advised on how to utilize these changes to help our small business owner clients.

Stimulus Checks: Economic Impact Payments last spring and at the turn of the calendar helped many Americans through a difficult year. Both the first round of stimulus checks at $1,200 per tax filer and the second round at $600 per filer were paid in full for joint (single) taxpayers with income of $150,000 ($75,000) or less on their 2019 tax returns. Higher income earners’ eligibility was phased out. For those above the phaseout points in 2019 but with qualifying income in 2020, the Recovery Rebate Credit will ensure that you receive a refundable tax credit for these missed stimulus payments. With passage of the American Rescue Plan Act expected today, families with income under $150,000 (phased out at $160,000) will receive $1,400 stimulus checks. Unlike the last two rounds where families only received money for dependent children, adult dependents (over age 17) are now eligible for checks as well. If you have already filed for 2020, your eligibility will be based on your 2020 tax return, with an opportunity to get additional amounts credited in 2021 if your income for that year is lower than 2020.

As with other tax credits, deductions, or retirement contributions, there is often an income limitation to consider and plan around if possible. More broadly, it is also important to manage income tax brackets when possible (including thresholds that increase capital gains rates or IRMAA charges). If flexibility exists in your recognition of income and deductions, we analyze tax projections to optimize your tax position.

Please reach out to Boardwalk with any questions you may have on these specific 2020 tax items or the usual tax planning items such as IRA contributions, Roth conversions, HSA contributions, or savings to 529 plans. We are keeping close tabs on how strategies for 2021 will impact our clients, especially in the event that any significant tax law changes are enacted.