To our valued clients
As we approach the end of a very challenging year, we wanted to provide some guidance about the information we will need to prepare your 2020 income tax return. We will once again ask you to sign the annual tax return Engagement Letter and complete the Client Questionnaire. Additionally, we expect that document exchange and tax consultations may need to continue from a safe social distance – using Liscio, Zoom, U.S. mail and drop-offs to our secure lockbox.
Economic Impact Payment (Stimulus Payment)
Many of you received a “Stimulus Payment” during the summer of 2020. In some instances, the payment was less than what you were entitled to, and we can only determine any additional amount owed if you provide us with the amount you received. The IRS informed you of that amount with Notice 1444, which we will need to reconcile your payment if you received it. If you did not receive or keep the Notice we will ask you to confirm the amount you received via our Client Questionnaire.
Special Pandemic Related Issues
Local/Municipality Tax Withholdings
Ohio House Bill 197 passed in March treats employees who work from home during the COVID-19 emergency period as working at their principal place of work until 30 days after the governor's emergency order is lifted. Since we are still under that emergency order, your Ohio employer’s municipality withholdings requirement will apply through the end of 2020. If you are an employee or resident of a state outside of Ohio, we will address your specific situation at the time of tax filing.
Work-from-home related expenses
Employee work related business expenses - including expenses incurred to “work from home - are no longer deductible on the Federal return for W2 employees. However, we may still need this information for your state return. We suggest that if you incur a lot of these types of expenses, you discuss the use of an accountable plan with your employer. With many now working from home, a simple tool to help is to see if your employer has an accountable plan to reimburse you, tax-free, for the business use of your home.
We still need to accumulate the information on your 1) medical, 2) state income and property tax, 3) mortgage interest, 4) charity and other deductions in order to apply the latest rules and to complete your state tax returns. Additionally, the CARES Act allows for a special $300 deduction for cash charitable contributions that does not require you to itemize, so please let us know of all cash contributions you made in 2020.
As always, in order to prepare your 2020 return we are required to obtain all of your W-2’s, 1099’s from retirement, interest, dividends and brokers, Forms 1095 for health insurance, bank Forms 1098 and any other official IRS documents.
Here are a few tax planning suggestions to consider.
With the increased requirements to itemize deductions, we recommend a tax “bunching” strategy. Bunching allows you to maximize your deductions by taking them in one year rather than spreading them over several years. For example, for years in which your charitable contributions are low, hold off on additional contributions until the following year to increase your chances of itemizing in that year. Similarly, you incur a large expense for medical procedures in one year, try to bunch all of your other medical items such as dental and vision exams, check-ups, etc., in the same year.
If you are or will reach age 70½ in 2021, consider making a Qualified Charitable Distribution (QCD) from your Traditional IRA account in 2021. A QCD is a direct transfer of funds from your IRA to a qualified charity, and results in excluding the amount of the QCD from taxable income. Additionally, since QCDs don't require that you itemize, you may be able to take advantage of the higher standard deduction but still benefit from making a charitable contribution. QCDs can be counted toward satisfying your required minimum distribution (RMD) as long as certain rules are met. Finally, although the SECURE Act raised the required age for taking a RMD to 72, you may still make a QCD if you are or will reach age 70½ in 2021.
If you have a Health Savings Account, be sure to deposit some amount into it up to the 2020 limitations (see https://www.hsabank.com/hsabank/Learning-Center/IRS-Contribution-Limits-and-Guidelines for limits). The tax savings benefits are incredible.
One of the single greatest tax “loopholes” which few people maximize is the ability to defer $19,500 into a 401k. If your employer has a 401k and you are not putting the maximum deferral in it, consider increasing your contributions.
The estate tax may become an issue again for many individuals. If the value of your home, life insurance, retirement and savings or investments is over $1,000,000 it may be time again to do some advance planning. Please call us to do this either virtually or via email.
We are happy to communicate with you throughout the year for tax planning, retirement and similar income tax related issues, and sincerely appreciate your continued business each year.
Finally, if you aren’t already, be sure to follow us on social media and subscribe to our quick bite newsletter, The Red Fern Roundup. Visit our website at www.redfernadvisors.com to connect today.
We wish you and your family a safe, healthy and relaxing holiday season!
Your Trusted Advisors,
John, Anna, and Denise