Article Highlights:

Spousal IRA
Compensation Requirements
Maximum Contribution
Traditional or Roth IRA?

One frequently overlooked tax benefit is the spousal IRA. Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation. The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse, which is $6,000 for 2020. If the non-working spouse’s age is 50 or older, that spouse can also make “catch-up” contributions (limited to $1,000), raising the overall contribution limit to $7,000. These limits apply provided that the couple together has compensation equal to or greater than their combined IRA contributions.
Example: Tony is employed and his W-2 for 2020 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limit for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $6,000 to an IRA for 2020.
The contributions for both spouses can be made either to a traditional or Roth IRA, or split between them as long as the combined contributions don’t exceed the annual contribution limit. Caution: The deductibility of the traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:

Traditional IRAs – There is no income limit restricting contributions to a traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse only if the couple’s adjusted gross income (AGI) doesn’t exceed $196,000 in 2020 (up from $193,000 in 2019).
Roth IRAs – Roth IRA contributions are never tax deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $196,000 in 2020 (up from $193,000 in 2019). The contribution is ratably phased out for AGIs between $196,000 and $206,000 (up from a range of $193,000 to $203,000 in 2019). Thus, no contribution is allowed to a Roth IRA once the AGI exceeds $206,000.

Example: Rosa from the previous example can designate her IRA contribution as either a deductible traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $196,000. Had the couple’s AGI been 201,000, Rosa’s allowable contribution to a deductible traditional or Roth IRA would have been limited to $3,000 because of the phase-out. The other $3,000 could have been contributed to a traditional IRA and designated as nondeductible.
Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning.

Article Highlights:

Unemployment Benefits Taxability
To Skip or Not Skip the 2020 Required Minimum Distribution
Special Charitable Giving Opportunities
Divorced or Separated Planning Issues
Potential State Health Insurance Penalties
Dealing with Disaster Losses in 2020
Retroactive Kiddie Tax Rules – Amended Opportunity
Retroactive Tax Benefits May Provide Refunds
Preparing for Home Sale Reporting
Avoiding Underpayment Penalties
Retroactive Bonus Depreciation Opportunities
New NOL Carryback Opportunities
Complying with Reasonable Compensation Requirements for S-Corp Shareholders
Assisting with PPP Loan Forgiveness Applications
Capital Gains Can Be Deferred
Set Up a Bunching Strategy
Defer or Accelerate Income Depending on 2020 Income
Waiting until Next Year to Change Marital Status
Take Advantage of a Low-Income Year to Sell Stocks or Exercise Options

To say COVID-19 has made 2020 a disastrous year for just about everyone would be an understatement. In response to the economic slowdown and losses of income, Congress passed several extensive laws to benefit individuals and businesses that suffered financial hardship because of COVID-19. However, 2020 has given rise to more than the usual tax-planning opportunities. Thus, you may find it appropriate to schedule a tax-planning appointment well before the close of the year to take advantage of the tax benefits and strategies available for 2020. Although everyone’s situation is unique, the following are examples of tax opportunities and strategies that may apply to your circumstances. Individual Planning Opportunities
Did You Collect Unemployment Income This Year? If you did, you should be aware that it is taxable for federal purposes and that most states also tax unemployment benefits. Even if you had taxes withheld from the unemployment payments, don’t be misled into thinking it will be enough. Generally, the tax withheld from unemployment compensation is insufficient, especially when the extra $600 weekly amount of federal benefits is considered. It may be appropriate to see what effects the unemployment income will have on your taxes and avoid any unpleasant surprises next year when your return is prepared. Did You Skip the Required Minimum Distribution (RMD) for 2020? Taxpayers were allowed to skip their RMD from their IRAs and most other retirement plans for 2020. But that might not be your best tax move, especially if you can take a distribution that will result in no or minimal taxes for this year. It may be appropriate to discuss whether you should take a distribution or not. We might be able to determine an amount that can be withdrawn tax-free. Are You the Charitable Type? If so, 2020 offers a variety of ways to make contributions, including donating unused time off from work (if your employer participates in the program). The AGI limitation for deducting cash contributions has been increased significantly, and non-itemizers can make a deductible contribution of up to $300. Of course, a taxpayer over age 70½ years can make IRA-to-qualified charity donation. We can determine the method or combination of methods best suited to your particular circumstances. Did You Have a Large Increase in Income This Year? If so, you might want to explore the benefits of a donor-advised fund, which will allow you to make a large deductible charitable contribution this year and meet your future charitable obligations by distributing the funds in the upcoming years. Divorced or Separated This Year? Divorce creates numerous issues that can have profound implications on your tax return and the amount of your tax liability. For example, who takes credit for the kids, allocating taxable income, who benefits from tax-credits and deduction carryovers, alimony, and who is responsible for the tax liabilities are just a few issues to consider. It might be appropriate to project your tax liability in advance, so you can prepare for the outcome. Do You Have Health Insurance? Although the federal government no longer penalizes individuals for not having minimal essential health insurance, some states do. The penalties can be a substantial amount of money and should be considered in year-end tax planning. Did You Suffer a Disaster Loss in 2020? There are special rules related to evaluating the losses incurred as the result of a disaster loss, and the results more than likely will be quite different from what you might imagine. This office can help you with insurance claims, determine your loss for tax purposes, and provide guidance to maximize your tax benefits. Did Your Child File a Tax Return in 2018 or 2019 under the Kiddie Tax Rules? If so, Congress has retroactively provided an alternative computation that could result in a substantial refund. You may want to consider consulting with this firm to see if it would be beneficial to amend the returns. Congress Extended Tax Benefits That Expired after 2017. Some of those benefits may apply to you for 2020. Or, you can amend your returns for 2018 and 2019, as appropriate, to take advantage of the following extenders: forgiveness of qualified principal residence debt income; deduction of mortgage insurance premiums; credit for energy-efficient home improvements; and credits for fuel cell vehicles, two-wheeled electric vehicles, and alternative-fuel refueling property. If any of these apply to you, you might consult with this firm to see if the benefits warrant filing an amended return. Did You Sell Your Home This Year? If so, and if you meet the ownership and occupancy tests, the gain from selling your main home will not be taxed, up to $250,000 ($500,000 if you file a joint return with your spouse). But if you don’t meet the requirements of both owning and using your home for 2 years in the 5 years counting back from the sale date, you may still qualify for a partial home sale gain exclusion. For example, you may qualify for a reduced exclusion if you sold your home to relocate this year because of a change in employment or due to health. We can determine the amounts of excluded income and taxable gain, and project how your taxes will be impacted. Have You Prepaid Enough Tax for 2020? One of the reasons for doing year-end tax planning is to determine if the tax you’ve already paid through withholding or estimated tax payments will be sufficient to cover your tax for the year, in order to avoid a penalty for underpayment of estimated tax. If there’s a shortfall, we can then see what appropriate steps you can take either to reduce the tax, perhaps by increasing your retirement plan contributions or bunching deductions, or increase your withholding for the rest of the year.
Business-Planning Opportunities
Did You Place Qualified Improvement Property in Service during 2018, 2019, or 2020? Congress made a retroactive law change that allows a business owner to expense the costs of qualified improvement property in the year when it goes into service. This is instead of depreciating the improvements’ cost and claiming that deduction over a number of years. Qualified improvement property generally means any improvement to an interior portion of a building that is nonresidential real property, if the improvement is placed in service after the date when the building was first placed in service. If you made qualified improvements in 2018 or 2019, it may be appropriate to review the benefits of amending your 2018 and 2019 returns or claiming the tax break for 2020. Did You Have a Business Loss in 2018 or 2019? If you incurred a net operating loss (NOL) in 2018 or 2019, changes made by the CARES Act retroactively allow taxpayers to carry those losses back 5 years. This entails amending your returns for the earlier years to deduct the loss being carried back, with the purpose of getting a refund on income taxes paid in those years. If you had an NOL in 2018 or 2019, it might be appropriate to review your situation to determine how this law revision will affect your prior returns and your 2020 situation. Are You a Working Shareholder in an S-Corporation? If so, you may not be aware of the IRS’s “reasonable compensation” requirements, which can influence your Section 199A (qualified business income) deduction and your payroll taxes. Reviewing the requirements as they apply to your particular circumstances may avoid future problems with the IRS. Did You Secure a Paycheck Protection Program Loan from the SBA? If so, you will need to apply for loan forgiveness, if you haven’t already. The SBA forgiveness applications can be quite challenging. This office can assist with completing the application and help you to maximize your forgiveness. Did You Have a Large Capital Gain in 2020? If so, you may want to consult with this firm about investing in a Qualified Opportunity Fund (QOF) to defer the taxable gain until 2026. Unlike Section 1031 tax-deferred exchanges, only the profits need to be invested in a QOF, not the entire proceeds from the sale that resulted in the capital gain.
Other Planning Ideas In addition to the situations above, some customary planning issues may also apply to you in 2020. Here are some examples.

You could bunch deductions to itemize in one year and take the standard deduction in the subsequent year.
Depending on your 2020 income, it may be appropriate to accelerate or defer your income and deductions. This will be especially crucial during 2020.
Are you considering marriage or divorce? Some circumstances might warrant waiting until after the end of the year.
If you expect your income to be abnormally low in 2020, this may be an opportunity to cash in on stock gains or exercise stock options while incurring little or no tax liability.
As always, those with large estates may find it appropriate to make annual gifts of $15,000 per recipient (no limit on the number of individuals) to reduce the value of the estate. Married couples can gift $30,000 to each recipient. Giving appreciated assets will transfer the taxable gain to the recipient.

Opportunities for tax benefits and for reducing your tax liability abound for 2020. Please contact this office for a virtual tax-planning appointment and continue to be safe during these trying times.

Article Highlights:

What is Basis? 
Cost Basis 
Gift Basis 
Inherited Basis 
Events that Adjust Basis 
First In, First Out 

In taxes, there is a saying: “Those who keep records win.” If you are an investor, you may own real property or have a variety of securities, including stocks, bonds, mutual funds, etc. When you sell the real property or those securities, undoubtedly, you’ll want to minimize your gains or maximize your losses for tax purposes. Gain or loss is measured from your tax basis in the investment (asset), which makes it important to keep track of the basis in all your investments. What is Basis? Generally, your basis in an investment begins with the price you paid to purchase the investment. However, that will not be the case if the investment was acquired by gift or inheritance. For inherited assets, the basis generally begins with the fair market value (FMV) of the asset on the decedent’s date of death or an alternative valuation date, if available to and chosen by the executor of the estate. Assets acquired by gift actually have a basis for gain (the donor’s basis) and a basis for loss (the FMV of the asset on the date of the gift). When an asset is acquired through division of property in a divorce, the asset retains the basis it had when it was owned jointly by the couple. Basis is not a fixed value; it can change during the time the asset is owned and is adjusted by certain events. For an investment asset, these events include:

Reinvested cash dividends, 
Stock splits and reverse splits, 
Stock dividends, 
Return of capital, 
Additional investments, 
Broker’s commissions and transaction fees, 
Improvements, 
Interest previously taken into income under an election under the accrued market discount rules, 
Interest taken into income under the original issue discount rules, 
Attorney fees, 
Acquisition costs, 
Depletion, 
Casualty losses, etc. 

These events can increase or decrease the tax basis in the investment, which makes adequate recordkeeping so important. Another issue associated with basis is when a portion of the investment is sold. Let’s say 100 shares of a particular stock were purchased in 2016 at $10 a share and another 100 shares in 2018 at $20 a share. The investor plans on selling 100 shares of the stock at $30 a share. Using the general rule of “first in, first out,” there would be a $20 per share gain. However, if the investor can identify each specific block of stock sold, such as the 100-share block bought in 2018, there would only be a $10 per share profit. This is known as the “specific identification” method. The following is a discussion of the more commonly encountered basis adjustments where recordkeeping is essential:

Improvements – For a home, keep records of home improvements such as room additions, kitchen or bathroom remodels, etc. 
Reinvested cash dividends – Investors are frequently given the opportunity to reinvest their dividends instead of taking them in cash. This is often the case with mutual funds, and less so with individual corporations. By participating in these plans, the investor is actually purchasing additional sales with their taxable dividends. Unless records are kept, the investor can’t prove how much he or she paid for the shares or establish the amount of gain that is subject to tax (or the amount of loss that can be deducted) when the stock or mutual fund it is sold. 
Stock dividends – It is possible to receive both taxable and nontaxable stock dividends. Stock dividends that are taxable provide the investor with additional stock with a basis equal to the taxable stock dividend. If the dividends are nontaxable, the number of shares that are owned increases, but the basis remains unchanged. If the investor can associate the dividends with a specific block of stock, then the basis of that block can be adjusted accordingly. If not, the adjustment will apply to the entire holding in that particular stock. 
Return of capital – A return of capital is a nontaxable return of a portion of the investment. Thus, a return of capital will reduce the investor’s basis in the security. Suppose an investor has 100 shares of XYZ Corporation that cost $1,000 ($10 per share), and the corporation distributes a $100 nontaxable return of capital. The investor’s basis in the stock is reduced to $900 ($1,000 – $100), or $9.00 per share. If, over a period of time, the return of capital exceeds the basis in the investment, the excess becomes taxable because one cannot have a negative basis. 
Stock splits – Stock splits can be confusing if they are not tracked as they occur. Let’s assume that an investor owns 100 shares of ABZ Corporation for which he paid $2,000 ($20 a share). Later on, the corporation splits the stock 2 for 1. The result is that he now owns 200 shares, but his basis in each has been reduced to $10 per share (200 shares times $10 equals $2,000—what was paid for the original shares). This generally occurs when the per-share value of stocks becomes too high for small investors to purchase 100 share blocks. Also watch for reverse splits, which have the opposite effect. 
Stock spin-off – Occasionally, corporations will spin off into additional companies. The classic example is the breakup of AT&T about 40 years ago when it separated into regional phone companies, who themselves later split into additional companies or merged with others. A basis-tracking nightmare for sure! Fortunately, each time one of these transactions takes place, the corporation will provide documentation on how to split the prior basis between the resulting companies. Tracking these events as they happen is very important, as it may be difficult to reconstruct the information several years down the road. 
Broker fees – Recently, several of the larger brokerage firms have eliminated the traditional commissions charged to their clients when securities are bought and sold, but they may still assess some fees for these transactions. Broker fees are generally already accounted for in most stock and bond transactions. The purchase price of a block of stock generally includes the broker fees, and the sales price reported to the IRS (gross proceeds of sale) is almost always the net of the sales costs.

Depending upon the investment vehicle, tracking the basis in an investment can be quite complicated. If you have questions, please contact this office.

If you have lost your job, there are a number of tax issues you may encounter. How you deal with these issues can profoundly impact your taxes and finances. Watch this video to learn more about some typical issues.
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