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Alerts and Updates

2020 Year-End Tax Planning Guide

November 25, 2020

2020 Year-End Tax Planning Guide

November 25, 2020

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Important Tax Strategies for a Transitional and Untraditional Year-End

First and foremost, we hope that you, your family and all of your loved ones are remaining safe and healthy during this incredibly difficult year, which has been challenging on many different levels. While achieving tax savings is an important financial goal, 2020 has certainly emphasized how secondary or even tertiary of a concern this can be.

That being said, this past year has seen the passage of several significant tax laws – among them the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which we wrote about in this Alert and the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which we wrote about in this Alert). The SECURE Act changed many tax rules related to retirement contributions and distributions under an individual retirement account (IRA) or 401(k), while the CARES Act utilized numerous tax and other financial provisions to inject cash into a struggling economy to assist both businesses and individuals in response to COVID-19.

As we near the end of the year, there is still time to position yourself to take advantage of the opportunities presented by the new tax acts, including identification and execution, before year-end to reduce your 2020 tax liability. Our annual Tax Planning Guide is designed to highlight notable tax provisions and potential planning opportunities to consider for 2020 and, in some cases, 2021, both with tempered caution and balance this year.

With a tumultuous election (almost) behind us, we are gaining greater clarity on what tax measures may be implemented in 2021 and beyond. Based upon current projections by major news outlets while awaiting certified results, it is likely former Vice President Joe Biden will become the 46th president on January 20, 2021.

With his election, as with any new administration, there comes the eternal optimism of an incoming party being able to make broad, systematic changes to shape the government in their image. Of course, in order to make the most ambitious changes, a party would need to control the House, Senate and presidency, as the Democrats did when passing the Affordable Care Act in 2010, and as the Republicans did when passing the Tax Cuts and Jobs Act (TCJA) in 2017. As of this writing, media outlets are projecting that the House of Representatives will remain controlled by the Democrats for the 117th Congress starting in 2021, albeit with a smaller majority than they enjoyed in the 116th Congress. Regarding the Senate, currently most outlets are predicting that Republicans will control 50 seats, as compared to the Democrats’ 48. The two remaining seats in the Senate will be decided in run-off elections to occur in Georgia on January 5, 2021.

In order for Democrats to win control of the Senate, they will need to win both of the available Georgia Senate seats, which then require Democrats to utilize Vice President-elect Kamala Harris as a tiebreaker. Even in such a scenario, for any legislation to pass by a simple majority, the Democrats would need to obtain support from their entire caucus in the Senate with no dissenters. Thus, we believe it highly unlikely that ambitious and robust or even controversial legislation will be enacted in the near term. Rather, the president and Senate will likely need to build bipartisan consensus in order to get any legislation passed, as it is likely Republicans will win at least one seat in Georgia, and therefore retain control of the Senate. With the houses of Congress split in terms of political control, legislation will need to include items attractive to members on both sides of the aisle, or at least appropriate concessions to the other side. We do believe that with the ever-increasing deficit, especially in light of the trillions of dollars being spent to deal with the COVID-19 pandemic, Congress will need to act and a tax increase may (perhaps will) be needed to a certain degree. At this moment, we envision incremental, rather than sweeping, tax changes as both a divided Congress or a razor-thin controlled Congress would leave the prospects for major tax legislation remote at best.

For example, Congress has not yet passed a fiscal year 2021 budget resolution. As a result, it is possible the new Congress could pass piecemeal tax changes under a fiscal year 2021 budget in January followed by another round of tax changes later in the year when a fiscal year 2022 budget is negotiated.

The ideological differences in the Senate suggest at least two years of gridlock. However, with President-elect Biden and Senate Majority Leader McConnell’s experience negotiating with Democrats in the House, both sides are capable negotiators and likely to get some legislation through. However, the process will not be easy or swift and we forecast change will be incremental and slow. Should Democrats gain control of the Senate in the 2022 election, tax increases would likely be swift and substantial, but both scenarios remain uncertain at this time.

Furthermore and uncharacteristically, another opportunity for tax planning may exist. Typically, the longer it takes to pass tax legislation, the harder it will become for legislators to justify an effective date retroactive to January 1, 2021. While not unprecedented, retroactive tax rate increases are relatively rare. There have been six major rate increases since 1980 and only the 1993 increases in the corporate tax rate from 34 percent to 35 percent and individual rates from 31 percent to 39.6 percent were retroactive to January 1. The 1993 bill was passed in August and made retroactive to January 1, 1993. With a divided government, compounded by a pandemic, it may be difficult to match this timeline. Interestingly, it took all of 2017 to enact sweeping tax changes and President Trump and the Republicans made tax reform a top priority.

So, while tax increases are not typically effective prior to the date a bill is first introduced in Congress, if tax legislation does manage to get traction in 2021, another planning window to execute tax strategies from early January until a formal bill is introduced in the House Ways and Means Committee may exist.

As a result, we recommend the prudent approach of planning now, based on current law, and revising those plans as the need arises.

So, please check in with us and keep a watchful eye on our Alerts, which are published throughout the year and contain information on tax developments that are designed to keep you informed of significant changes in those environments.

In this 2020 Year-End Tax Planning Guide prepared by the Tax Accounting Group (TAG) of Duane Morris, we walk you through the steps needed to assess your personal and business tax situation in light of the new laws and identify actions needed before year-end to reduce your 2020 tax liability.

We hope you find this complimentary guide valuable and invite you to consult with us regarding any of the topics covered or your own unique situation. For additional information, please contact me at 215.979.1635 or, or the practitioner with whom you are in regular contact.

We wish you a joyous holiday season and a healthy and prosperous new year.

Michael Gillen signature

Michael A. Gillen
Tax Accounting Group

About Duane Morris LLP

Duane Morris LLP, a law firm with more than 800 attorneys in offices across the United States and internationally, is asked by a broad array of clients to provide innovative solutions to today’s legal and business challenges. Evolving from a partnership of prominent lawyers in Philadelphia more than a century ago, Duane Morris’ modern organization stretches from the U.S. to Europe and across Asia. Throughout this global expansion, Duane Morris has remained committed to preserving its collegial, collaborative culture that has attracted many talented attorneys. The firm’s leadership, and outside observers like the Harvard Business School, believe this culture is truly unique among large law firms and helps account for the firm continuing to prosper throughout changing economic and industry conditions.

In addition to legal services, Duane Morris is a pioneer in establishing in-depth, nonlegal services to complement and enhance the representation of our clients. The firm has independent affiliates employing approximately 100 professionals engaged in other disciplines, such as the tax, accounting and litigation consulting services offered by the Tax Accounting Group.

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TAG’s certified public accountants, certified fraud examiners, financial consultants and advisers provide a broad range of cost-effective tax compliance, planning and consulting services as well as accounting, financial and management advisory services to individuals, businesses, partnerships, estates, trusts and nonprofit organizations. TAG also provides an array of litigation consulting services to lawyers and law firms representing clients in regulatory and transactional matters and throughout various stages of litigation.

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With tax year 2020 rapidly (and for many, thankfully) coming to an end, it is time once again to consider and, where appropriate, implement year-end tax planning strategies available to you, your family and your business. With an unclear legislative future, a fragile environment due to COVID-19 and a volatile tax environment, tax-savings strategies become increasingly important and this year is no exception.

So while you can depend on TAG for cost-effective tax compliance, planning and consulting services, as well as for critical advocacy and prompt action in connection with your long-term personal and business objectives, we are also available for any immediate or last-minute needs you may have or Congress may legislate.

This year, with a lame duck Congress for the rest of the year, and both chambers of Congress likely to remain split thereafter, we do not expect sweeping tax legislation on the immediate horizon as described in our letter accompanying this planning guide. With incremental and modest tax changes likely for 2021, the tried and true strategies of deferring income and accelerating deductions may be beneficial in reducing tax obligations for most taxpayers in 2020. However, with tax increases looming, whether incremental or otherwise, the better approach may be to “time” income and deductions rather than broadly deferring income and accelerating deductions. With minor exceptions, this coming month is the last time to act for tax year 2020 to develop and implement your tax plan but it’s certainly not the last opportunity.

For example, if you expect to be in the same tax bracket in 2021 as 2020, the traditional strategies of deferring taxable income and accelerating deductible expenses can often achieve overall tax savings for 2020 and possibly for both 2020 and 2021. However, by reversing this technique and accelerating 2020 taxable income and/or deferring deductions to plan for a higher 2021 tax rate, your two-year tax savings may be higher. This may be an effective strategy for you if, for example, if you have charitable contribution carryovers to absorb, or your marital status will change next year, or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation. Examine our “Look Before You Leap” section below for additional thoughts in this regard.

For individuals, the SECURE Act pushed back the first required minimum distribution (RMD) from IRAs or defined contribution plans from age 70½ to age 72, while also removing the prohibition on IRA contributions for those over age 70½, allowing more assets to grow in these tax-deferred accounts. Additionally, the rules for distributions were relaxed, allowing up to $5,000 in penalty-free distributions from an IRA to cover child birth or adoption expenses, and $10,000 in distributions from 529 plans to repay student loans. To partially pay for these beneficial provisions, the SECURE Act also requires inherited IRAs to now be distributed within 10 years from the nonspouse owner’s date of death, instead of a usually much longer period based on the beneficiary’s life expectancy.

The CARES Act contained a number of tax provisions benefitting individuals and a number of other provisions affecting tax reporting. Perhaps most predominantly, the CARES ACT included a recovery rebate of up to $1,200 ($2,400 for married couples) while also expanding the amount and availability of unemployment insurance. In addition, many people qualify to take up to $100,000 of early distributions from a retirement plan, without penalty, while spreading the resulting income over three years. Finally, the CARES Act waived the RMD requirement for 2020 for all taxpayers.

For businesses, the CARES Act featured provisions aimed at retaining employees and allowing deduction of losses. The aptly named employee retention credit allows a payroll tax credit for 50 percent of wages paid to employees for certain businesses whose business was fully or partially suspended, or whose gross receipts decreased by 50 percent for the quarter. In addition, employers could defer the payment of the employer portion of Social Security taxes. Perhaps most significantly, the CARES Act allows net operating losses from 2018, 2019 and 2020 to be carried back up to five years, which could create valuable refund opportunities for businesses looking to increase their immediate cash flow.

With the effects of the pandemic now increasing again on a daily basis, the impact of these new tax provisions that have become effective in 2020 should be considered now in order to ensure that you take advantage of any tax savings opportunities available. This year, tax savings for individuals and small businesses may be more crucial than ever as the country tries to get back on track. Furthermore, the new approach of “timing” taxable income and deductions rather than broadly deferring income and accelerating deductions may create additional tax saving opportunities over a two-year timeline.

This guide provides tax planning strategies for corporate executives, businesses, individuals, nonprofit entities and trusts. We hope that this guide will help you leverage the tax benefits available to you presently, or reinforce the tax savings strategies you may already have in place, or develop a tax-efficient plan for 2020 and 2021 as tax changes materialize under new leadership in America.

For your convenience, below is a quick reference guide of action steps that can help you reach your tax-minimization goals, as long as you act before the clock strikes midnight on January 1, 2021. Not all of the action steps will apply in your particular situation, but you could likely benefit from many of them. Taxpayers may want to consult with us to develop and tailor a customized plan, with defined multiyear tax modeling to focus on the specific actions that you are considering as tax changes, perhaps favorable or unfavorable, undoubtedly loom. We will be pleased to help you analyze the options and decide on the strategies that are most effective for you, your family and your business.

Whether you should accelerate taxable income or defer deductions between 2020 and 2021 largely depends on your projected highest (aka marginal) tax rate for each year (with tax rates for 2020 clearly known and those for 2021 less certain). While the highest official marginal tax rate for 2020 is currently 37 percent, you might pay more tax than in 2019 even if you were in a higher tax bracket due to credit fluctuations, long term capital gains, qualified dividends or myriad other reasons.

The chart below summarizes the most common 2020 tax rates together with corresponding taxable income levels. Effective management of your tax bracket can provide meaningful tax savings, as often a change of $1 in taxable income can shift you into the next higher or lower bracket. These differences can be further exacerbated by other income thresholds throughout the code, and discussed in this guide, such as those for determining eligibility for the child tax credit and qualified business income deductions, among others. Income deferral and acceleration, while being mindful of bracket thresholds, can be accomplished through numerous income strategies discussed in this guide, such as retirement distribution planning, bonus acceleration or deferral and harvesting of capital gains and losses.

2020 Federal Income Tax Rate Schedule

Tax Rate


Head of Household

Married Couple


$0 - $9,875

$0 - $14,100

$0 - $19,750


$9,876 - $40,125

$14,101 - $53,700

$19,751 - $80,250


$40,126 - $85,525

$53,701 - $85,500

$80,251 - $171,050


$85,526 - $163,300

$85,501 - $163,300

$171,051 - $326,600


$163,301 - $207,350

$163,301 - $207,350

$326,601 - $414,700


$207,351 - $518,400

$207,351 - $518,400

$414,701 - $622,050


Over $518,400

Over $518,400

Over $622,051

While reviewing this guide, please keep the following in mind:

  • Never let the tax tail wag the financial dog, as we often preach. Always assess economic viability. This guide is intended to help you achieve your personal and business financial objectives in a “tax efficient” manner. It is important to note that proposed transactions should make economic sense in addition to saving on taxes. Therefore, you should review your entire financial position prior to implementing changes. Various nontax factors can influence your year‑end planning, including a change in employment, your spouse reentering or exiting the work force, the adoption or birth of a child, a death in the family or a change in your marital status. It is best to look at your tax situation for at least two years at a time with the objective of reducing your tax liability for both years combined, not just for 2020 in isolation… especially at this time in our lives. In particular, multiple years should be considered when implementing “bunching” or “timing” strategies, as discussed throughout this guide.
  • As we mentioned earlier herein, even if you do not expect your income to increase in 2021, there is always the possibility of tax rate increases on the horizon, with a new administration likely taking over in January and the economic pressures on the budget related to the pandemic. Of course, that economic pressure can cut both ways―it is also politically difficult to raise taxes during a difficult economic period. Since there are always uncertainties in the stock market, economy and tax environments, even now, we recommend the prudent approach of planning now and revising those plans as the need arises. As we noted earlier, another planning window to execute tax strategies from early January until a formal bill is introduced/passed may exist.
  • As has been and will be our theme throughout this guide, the threat of sweeping tax increases with a Biden victory and a Republican-controlled Senate effective January 1, 2021 seem unlikely. As a result, many important year-end planning considerations exist for taxpayers unconcerned with potential income, capital gain and dividend rate increases.
  • However, it’s important to note that while unlikely it certainly remains possible for Democrats to win the Senate and swiftly pursue tax increases. Your year-end planning challenge this year is to consider the best course of action in advance of potential tax increases which will not be absolutely known until January or later. So, if you are holding appreciated assets and planning to dispose of these assets early next year, you could consider accelerating the sale into 2020 to protect against the risk of a tax increase if the downside of such accelerated timing is not too costly. However, be very cautious about such accelerated timing in ways that you lose too much value, including the time value of money. That is, any decision to save taxes by accelerating income must consider the possibility that this means paying taxes on the accelerated income earlier, which would require you to forego the use of money used to satisfy tax liabilities that could have been otherwise invested. Accordingly, the time value of money can make a bad decision worse or, hopefully, a good decision better. A delicate balance indeed.
  • While the traditional strategies of deferring taxable income and accelerating deductible expenses are the focus of this guide, with exceptions, you can often achieve overall tax efficiency by reversing this technique. For example, waiting to pay deductible expenses such as mortgage interest until 2021 would defer the tax deduction to 2021. Or, waiting to pay state and local taxes (SALT) until 2021 if you have already paid SALT of $10,000 in 2020 could also be worthwhile not only because of potential rate increases, but also if the $10,000 SALT cap is modified or repealed. You should consider deferring deductions and accelerating income if you expect to be in a higher tax bracket next year, you have charitable contribution carryovers to absorb, your marital status will change next year, or your head‑of‑household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation.
  • Both individuals and business have many ways to “time” income and deductions, whether by acceleration or deferral. Businesses, for example, can make different types of elections that affect the timing of significant deductions. Faster or slower depreciation, including electing in or out of bonus depreciation for instance, is one of the most significant. This type of strategy should be considered carefully as it will not simply defer a deduction into the following year, but can push the deduction out much further or spread it over a number of years.
  • Keep in mind―if you have analyzed your financial and tax situation, assessed the legislative outlook and determined that it still makes sense to act before year-end, there are a number of “timing” strategies available. Some changes may offer the flexibility of making a decision when filing the tax return for the year and do not need to be performed by year-end. At the end of the day, we recommend that you examine your tax situation now and consult with us.

With these words of caution in mind, following are observations and specific strategies that can be employed in the waning days of 2020 regarding income and deductions for the year, where the tried and true timing principles of deferring taxable income and accelerating deductible expenses will result in maximum tax savings.

Below is a quick and easy reference guide of action steps that can help you reach your tax-minimization goals, as long as you act before the clock strikes midnight on January 1, 2021. Not all of the action steps will apply in your particular situation, but you could likely benefit from many of them. In addition, several steps can be taken before year-end which are not necessarily “quick and easy,” but which could yield even greater benefits, such as setting up a private foundation to achieve your charitable goals (See item 89) and reviewing your estate plan and wealth transfer vehicles to utilize the current unified credit. (See items 92-100.) Consultation with us to develop and tailor a customized plan and to focus on the specific actions that should be taken is paramount, especially as tax changes to a certain degree are expected.

10 Income and Loss Quick-Strike Strategies

  1. Invest in a Qualified Opportunity Zone before year-end to defer and exclude gains (See item 10.)
  2. Coordinate timing of your capital gains and losses to minimize tax on your gains and maximize the tax benefit from your losses. (See item 23.)
  3. As you sell securities at year end and harvest losses, ensure you do not run afoul of the wash-sale rule. (See item 26.)
  4. Make charitable gifts directly from your IRA, if you are age 70½ or older. (See item 44.)
  5. Increase your tax basis in pass-through entities so that you can deduct current year losses. (See item 49.)
  6. Defer loan modifications and the cancellation of debt until 2021. (See item 53.)
  7. Plan for worthless stock and substantiate the loss before year end. (See item 30.)
  8. Take advantage of new net operating loss (NOL) carryback rules under the CARES Act to inject much needed cash into your business. (See item 7.)
  9. Carefully plan Roth conversions. (See item 42.)
  10. Consider disposing of a passive activity to allow you to deduct suspended losses. (See item 48.)

10 Deduction and Credit Quick-Strike Strategies

  1. Claim all available employer credits under the CARES Act. (See item 1.)
  2. Time your purchases of business property and consider amending 2018 and 2019 returns to reclassify qualified improvement property (See item 67).
  3. Amend your 2019 return now to realize 2020 casualty losses from COVID. (See item 15.)
  4. Ensure that you are maximizing your retirement savings contributions in 2020 to reduce income in the current year and to achieve tax-deferred growth. (See item 39.)
  5. Defer payment of state and local taxes (income, sales and property) where possible if these payments already exceed $10,000 in 2020. (See item 18.)
  6. Prepay as many medical expenses in 2020 as possible if your unreimbursed medical expenses are close to exceeding 7.5 percent of adjusted gross income (AGI) for 2020. (See item 17.)
  7. Maximize your Qualified Business Income Deduction on pass-through income. (See item 62.)
  8. Consider purchasing qualified business property to take advantage of the $1 million business property expensing option. (See item 67.)
  9. Take advantage of expanded business interest limitation for 2020. (See item 6.)
  10. Apply a bunching strategy to itemized deductions such as medical expenses, charitable contributions and mortgage interest. (See item 46.)

1. Maximize new and expiring employer credits. With the passage of the CARES Act in March, Congress created multiple incentives for employers to hire and retain workers as they weathered the COVID-19 pandemic. First, the CARES Act created the employee retention credit, providing businesses with up to $5,000 of refundable credits per employee, based on 50 percent of the wages paid. In order to qualify, the business must not have received Paycheck Protection Program (PPP) loans and the wages must have been paid while the business was either suspended by government order or during a quarter in which receipts were down 50 percent over the prior year.

In addition, the CARES Act also allows employers to defer payment of the employer portion of social security taxes incurred between March 27 and December 31, 2020, into two equal payments due December 31, 2021, and December 31, 2022.

The Families First Coronavirus Response Act (FFCRA), enacted on March 18, 2020, created a new paid sick and family leave credit specifically to deal with COVID-19 infections and quarantines of employees as well as care for minors during school or childcare closures. While this credit is currently only available until December 31, 2020, it is entirely possible this credit will be extended as the pandemic drags on.

In addition, the family and medical leave credit created by the TCJA is also scheduled to expire on December 31, 2020. In order to qualify for this credit, employers' written policies must provide at least two weeks of paid leave for eligible full time employees and paid leave must be at least 50 percent of wages paid during a normal work week. The credit ranges for 12.5 percent to 25 percent of wages paid to qualified employees who are out for up to a maximum of 12 weeks during the year. Wages used to calculate the new paid leave credit under the FFCRA are not taken into account for purposes of calculating this credit.

Finally, the Work Opportunity Tax Credit is a nonrefundable credit for employers to take who employ certain individuals from targeted groups, such as veterans, low income individuals and ex-felons. The size of the credit depends on the hired person’s target group, the number of individuals hired and the wages paid to each. This credit is also scheduled to expire at the end of 2020.

2. Take advantage of changes to retirement contribution rules. Beginning in 2020 with the passage of the SECURE ACT, there is no longer an age limit for individuals who choose to contribute towards a traditional IRA. Previously, those who turned 70½ during the taxable year were ineligible to make any further contributions to their retirement account. Keep in mind that in order to contribute to a traditional IRA, a taxpayer needs to have earned income from a job or self-employment, so this only affects those seniors that are continuing to work after age 70½. The contribution limit for IRAs remains the same at $6,000 ($7,000 for those aged 50 and over), and the deductibility of contributions may be limited based on income or your eligibility for an employer plan.

3. Consider utilizing early withdrawals and loans from retirement plans for a needed cash injection. While removing assets from retirement accounts before retirement is always a method of last resort, as you would be giving up compounding growth, there has never been a better time to raid these plans if you are desperate for cash now. The CARES Act has waived the early retirement withdrawal tax penalty of 10 percent for those individuals who qualify in 2020. In order to qualify for the waiver of the tax, the individual must have been directly impacted by COVID-19. This means that either the taxpayer or a member of his or her family must have been infected with COVID-19 or have experienced adverse financial consequences related to COVID-19. Individuals are eligible to take up to $100,000 worth of distributions from their retirement plans before December 31, 2020. The distributions may be included as income either ratably over a three year period or fully in the year in which the distributions were made.

You could also take out a loan from an employer-sponsored plan, if the plan provides that option. You would be required to make loan repayments on a monthly basis and be responsible for any interest and taxes associated with the loan. However, the CARES Act allowed employers to increase the maximum loan amount up to $100,000 for loans made between March 27 and September 22, 2020. Also, certain repayments were delayed for up to a year for loans outstanding on March 27, 2020.

Planning Tip—If do you decide to take an early distribution from a retirement plan, you also have the option of repaying it and receiving a refund of the tax paid on any amount previously picked up as income. Let’s say you were to take a $90,000 distribution from your retirement account in 2020 and report $30,000 of income in 2020 and 2021; then in 2022 decide to pay back the distribution in full. You will be eligible to file an amended tax return and receive a refund for the tax that was paid on the $30,000 of income that was reported each year. You will also not be required to report $30,000 of income in 2022 should the distribution be paid back in full.

4. Consider special Required Minimum Distribution rules for 2020. Previously, if you were age 70½ or older, you would have been subject to the minimum distribution rules with regard to your retirement plans. Under these rules, you must receive at least a certain amount each year from your retirement accounts based on life expectancy tables. You can always take out more than the required amount, but anything less is subject to a 50 percent penalty on the shortfall amount.

Now, under the SECURE Act, if you reach age 70½ in 2020 or later, your first distribution is required by April 1 of the year after you turn 72. Additionally, due to the passage of the CARES Act in March, RMDs are not required to be taken in 2020. For individuals who turned 70½ in 2019 and were required to take their first distribution by April 1, 2020, and who did not take the distribution in 2019, they may skip this RMD as well.

While normally we do not recommend deferring income into another tax year, here it may advantageous to do so as you will allow your investment to continue to grow, reserving more capital for your later years. A careful timing assessment is needed. “Crunching the numbers” for 2020 and 2021 will help you to determine the optimal timing of any distributions, whether required or not while considering tax rate increase risk.

Observation—Certain individuals still employed at the age of 72 are not required to begin receiving minimum required distributions from qualified retirement plans (401(k), profit sharing, defined benefit plans, 403(b)s, etc.) until after they retire, representing another often overlooked method of deferral of tax on retirement savings.

5. Consider accelerating 2021 charitable pledges into 2020 whether by cash, credit card or donor-advised funds. Good news here for charitable giving: For 2020, the AGI limitation for cash contributions to public charities is raised from 60 percent to 100 percent thanks to the CARES Act, meaning that more current year contributions are available as a deduction in 2020. Contributions made to a donor-advised fund are still subject to the 60 percent of AGI limitation, but these contributions will allow you to receive a tax deduction in the year contributed while enabling you to retain control of the timing of disbursements to specific charities in a later period, at your direction. In addition, prior year carryovers remain subject to the 60 percent of AGI limitation.

Remember that regardless of form, charitable contributions of money must be supported by a canceled check, bank record or receipt from the donee organization showing the name of the organization, the date of the contribution and the amount of the contribution.

Planning Tip—Even if you do not itemize for 2020, section 2204 of the CARES Act permits eligible individuals to deduct up to $300 of qualified charitable contributions as an “above-the-line” deduction (i.e., as an adjustment in determining adjusted gross income (AGI)).
Planning Tip—The increased limitation for 2020 makes this year a great time to give. However, if you expect to claim the standard deduction in 2020, consider “bunching” your charitable contributions in excess of $300 into 2021 for maximum impact. As always, before making a large contribution, please consult with us to determine the impact on your unique situation.

6. Be sure to receive maximum benefit for business interest. Under the TCJA, the interest expense deduction was limited to 30 percent of the adjusted taxable income of the business, applicable at the entity level for partnerships and S corporations. Certain smaller businesses (less than an inflation indexed $25 million in average annual gross receipts for the three-year tax period ending with the prior tax period) were exempt from this limitation. In addition, real property trades or businesses can elect out of the limitation if they use the alternative depreciation system (ADS) to depreciate applicable real property used in a trade or business.

However, the CARES Act has changed the business interest limitation from the aforementioned 30 percent of adjusted taxable income to 50 percent for years 2019 and 2020. The switch from 30 percent to 50 percent could potentially increase available deductions and even create net operating losses (NOLs) for businesses during 2020. This could lead to potential tax savings and refund opportunities for businesses with debt or those with difficult circumstances due to the COVID-19 crisis.

A few things should be kept in mind in terms of the effect the CARES Act had on business interest. While the increase from 30 percent to 50 percent generally applies to tax years 2019 and 2020, this increase to 50 percent does not apply to partnerships in 2019, only for 2020, while also allowing deduction of 50 percent of the 2019 excess business interest expense carryforward without regard to the limitation.

Taxpayers that have already filed 2019 tax returns can amend to change from 30 percent to 50 percent in order to secure refunds (with the exception of partnerships).

7. Consider carrying back NOLs to generate immediate cash. One of the provisions contained in the CARES Act earlier this year greatly expanded opportunities with respect to NOL planning. Previously, under the TCJA, NOLs were permitted to be carried forward but not back to prior years. In addition, the deductible amount was limited to 80 percent of a taxpayer’s taxable income.

Now, under the CARES Act, the 80 percent income limitation for NOL deductions for years 2018, 2019 and 2020 are suspended indefinitely. Furthermore, losses arising in 2019 and 2020 may be carried back and used to offset prior year income for the preceding five years. (Unfortunately, the window for taxpayers to recognize an NOL during 2018 and file for a carryback adjustment claim expired in June of 2020, though the window remains open for 2019.)

The modifications under the CARES Act with respect to NOLs could boast potential significant refund opportunities. For instance, if you did not incur any business losses before the pandemic and now sustain losses in 2020, you may carryback your 2020 NOL to previous profitable years in order to secure a refund of previously paid income taxes.

Businesses that are being affected by COVID-19 and expect losses into 2021 and beyond will not be able to carry back losses under the CARES Act. Therefore, taxpayers should consider other tactics such as accelerating expenses in the current year to the extent of income over the past five years. An example would be the purchasing of depreciable assets and electing bonus depreciation in 2020 with the intent to decrease current-year income while increasing the NOL carryback.

It is important to keep in mind that carrying back a loss could have adverse effects on other items of a tax return. Please analyze the scenarios and discuss with a trusted tax adviser before making any decisions.

8. Lease modifications may generate unintended tax consequences. IRC Section 467 was originally enacted as an anti-abuse provision to prevent tax shelters that took advantage of certain timing differences. Section 467 can result in the inclusion of income if lease terms are substantially modified by:

  • Increasing/decreasing the lease payments;
  • Shortening/extending the lease term; and/or
  • Deferring/accelerating lease payments due.

Moving forward, lease modifications will remain a very complicated issue. Comprehensive contract analysis and Section 467 testing will be required on a case by case basis as lessors and lessees continue to navigate the COVID-19 crisis.

9. Be mindful of PPP forgiveness concerns. Congress created the Paycheck Protection Program, better known as “PPP,” back in March 2020 as the COVID-19 pandemic continued to ravage the U.S. economy, forcing thousands of businesses to abruptly shutter (We previously wrote about PPP forgiveness in this Alert). The PPP was included in the $2 trillion CARES Act in order to authorize the funding of forgivable loans of up to $10 million per borrower, which qualifying businesses could spend to cover payroll, mortgage interest, rent and utilities expenses.

Loans were made available to small businesses with 500 or fewer employees for an array of business industries including: not-for-profits, self-employed individuals, sole proprietorships, veterans’ organizations and independent contractors. In addition, businesses with more than 500 employees in certain industries were also able to apply for loans. Congress intended to give support to organizations facing economic instability due to the ongoing COVID-19 pandemic, most notably to provide assistance so employees could continue to earn their salaries. As such, PPP loan forgiveness is largely based on maintaining prepandemic employees and salaries.

Since being enacted in March, the PPP program was substantially modified by the PPP Flexibility Act in June (which we wrote about in this Alert), and various additional guidance from the Small Business Administration. As the pandemic worsens again and new lockdowns loom, taxpayers around the country await additional aid, modifications and relaxation of the PPP rules.

While acceptance of some loan forgiveness applications began in August, most borrowers should hold off on submitting their loan forgiveness application. Like many other topics under the CARES Act, with guidance continuing to evolve, taxpayers should consult with trusted tax advisers before making any decisions.

10. Invest in Qualified Opportunity Zones to save on capital gains. Gains can be deferred on the sale of appreciated stock that is reinvested within 180 days into a Qualified Opportunity Fund (QOF). For 2020, special rules are in place allowing taxpayer to invest eligible gain into a QOF by December 31, 2020, if their 180-day period would have ended between April 1 and December 31, 2020. So if you have some gains from earlier in the year and look to be in a gain position for the year, you now have an extension to get that gain into a QOF, as long as you act before the end of the year.

If the investment is held for over 10 years, the gain after acquisition can be entirely eliminated. The investment can be in the form of an investment interest in either a partnership or corporation that invests 90 percent of its assets in a Qualified Opportunity Zone. All states have qualified communities that now qualify. Besides investing in a fund, one can also take advantage of this opportunity by establishing a business in the Qualified Opportunity Zone or by investing in Qualified Opportunity Zone property.

11. Claim a refund of the Corporate Alternative Minimum Tax (AMT) Credit. For 2018, the corporate AMT was repealed by the TCJA. However, corporations that paid AMT in 2017 and earlier were allowed to carry forward AMT paid as a credit against regular tax. With the passage of the CARES Act in March, now corporate taxpayers can claim 100 percent of any remaining credit, regardless of tax liability, beginning in 2019. Alternatively, taxpayers could also elect to claim the refundable credit in 2018 (on an amended return) for an immediate cash infusion. If your business still has AMT credits remaining, please contact us so we can prepare the necessary filings to get your business cash now.

12. Enjoy increased charitable contribution limits for C corporations. Normally, corporations are limited to charitable contributions of 10 percent of taxable income. However, with the passage of the CARES Act, this limit is increased to 25 percent of taxable income for the 2020 year only. Also, while the deduction for contribution of food inventory is usually limited to 15 percent of net income, this has been raised to 25 percent for 2020 only. This limit will allow more grocery and package stores to donate to local food banks and shelters to combat the food insecurity plaguing parts of the country.

13. File protective claims to ensure eligibility for tax refunds related to the Affordable Care Act (ACA). As was heavily publicized relating to the confirmation of Supreme Court Justice Amy Coney Barrett, the U.S. Supreme Court recently heard a case on the ACA, in which it may decide the constitutionality of the law as whole, including certain taxes paid under the act, such as the 3.8 percent Net Investment Income Tax (NIIT), the 0.9 percent Additional Medicare Tax and the individual mandate penalty (repealed for tax years beginning after December 31, 2018). Should the entire law be declared unconstitutional, taxpayers may be eligible for refunds of these taxes, subject to the statute of limitations on claims for refund.

Certain taxpayers prepared “protective claims” with the IRS that, should the law change, would preserve their right to claim a refund for 2016 before the statute of limitations expired on July 15, 2020 (Which we previously wrote about in this Alert). The statute of limitations for the 2017 tax year remains open, but for most taxpayers will expire on April 15, 2021. Contact us if you would to “crunch the numbers” and determine whether a protective claim may benefit you.

14. Complete a solar installation prior to year-end for maximum benefit. Currently, the Solar Investment Tax Credit (ITC) allow for a credit of 26 percent of eligible expenses for projects commenced in 2020. For projects commenced in 2021, this credit will drop to 22 percent of eligible expenses, though legislation is currently being considered which may extend the 26 percent credit (or prior 30 percent credit).

Planning Tip—Due to the special NOL rules mentioned at item 7, 2020 is a particularly great year for a business to invest in solar. As solar property can also take accelerated or bonus depreciation in addition to the credit, the taxpayer can usually deduct the entire cost of the project in 2020. Should this create an NOL for 2020, the taxpayer can now carry back that NOL up to five years, creating an opportunity for an immediate refund.

15. Take advantage of casualty and disaster losses from COVID. Due to the ongoing COVID-19 pandemic, President Trump declared an “emergency” under the Stafford Act in March 2020, subsequently approving all major disaster requests for all 50 states, D.C. and other various U.S. territories. This “disaster declaration,” as it is commonly known, was unprecedented in scope. As a direct result, under IRS regulations (specifically IRC Sec. 165(i)), any loss occurring in a federally deemed disaster zone may, at the election of the taxpayer, be considered for the taxable year immediately preceding the taxable year in which the disaster occurred.

Thus, any losses that were considered attributable to COVID-19 after March 13, 2020, could be pushed back into 2019, such as the closure of stores, losses on mark-to-market securities and permanent retirement of fixed assets. However, lost revenues and the decline in fair market value of property as a direct result of COVID-19 economic hardships would not constitute a loss under IRC. Sec 165(i).

While we are beyond the point where taxpayers could include the loss on their 2019 tax return (the due date was October 15, 2020), it is still possible for taxpayers to go back and amend 2019 filings, especially if 2019 profits could be offset with 2020 disaster losses. The subject of COVID-19 disaster losses remains a very complicated matter, and there are many rules and stipulations that would prevent taxpayers from taking advantage of the election. There are also certain reasons why taxpayers would not want to make the election. For those reasons, we recommend that you consult with us before delving into the amending process.

16. Review the increased standard deduction. For 2020, the standard deduction has increased slightly to $24,800 for a joint return and $12,400 for a single return. Taxpayers age 65 or older and those with certain disabilities may claim increased standard deductions.

Standard Deduction (Based on Filing Status)



Married Filing Jointly



Head of Household



Single (Including Married Filing Separately)



Planning Tip—With the standard deduction continuing to increase, many taxpayers who previously itemized may find their total itemized deductions close to or below the standard deduction amount. In such cases, taxpayers should consider employing a “bunching” strategy to postpone or accelerate payments, which would increase itemized deductions. Use of this bunching technique may allow taxpayers to claim the itemized deduction in alternating years, thus maximizing deductions and minimizing taxes over a two-year period. For a more in-depth discussion of “bunching,” see item 46.

17. Pay any medical bills in 2020. The medical expense deduction floor remains at 7.5 percent of AGI for 2020. In addition, the deduction is no longer an AMT preference item, meaning that even taxpayers subject to the AMT would benefit from deductible medical expenses. However, this deduction is currently scheduled to revert to a 10 percent floor and being an AMT preference item in 2021, barring congressional action. While this is a politically popular deduction on both sides of the aisle and Congress may elect to extend the lower deduction floor to 2021, it has not yet been extended.

Planning Tip—Pay all medical costs for you, your spouse and any qualified dependents in 2020 if, with payment, your medical expenses are projected to exceed 7.5 percent of your 2020 AGI as this will lower your tax liability for 2020. You also may wish to accelerate qualified elective medical procedures into 2020 if appropriate and deductible.

18. Defer your state and local tax payments into 2021. One of the most notable changes enacted by the TCJA in 2017 was the limitation of the state and local tax deduction. In 2020, the deduction limit for state and local income or sales and property taxes of $10,000 per return ($5,000 in the case of a married individual filing separately) remains unchanged.

Planning Tip—If you live in a state with either high income, sales or real estate taxes and you are not subject to AMT, this could significantly change your tax calculation. Many taxpayers in these states will be over the $10,000 limitation well before the end of the tax year. Thus, for many taxpayers, prepaying state and local taxes will be of no benefit in 2020. With the Democrats now in control of the House of Representatives, the presidency and even potentially the Senate, this is one of the areas that may be on the bargaining table in the near future. If your state and local taxes paid are excess of $10,000 for 2020, it may be best to defer any additional payments into 2021, as the state and local tax deduction has a chance of increasing for 2021.
Observation—While last year the IRS rendered ineffective most workarounds to the SALT cap passed by the states, earlier this month the IRS announced its plan to issue proposed regulations clarifying that state and local income taxes paid by partnerships and S corporations are not subject to the $10,000 cap at the partner/shareholder level, but rather deducted from pass-through income.
The proposed regulations would apply to a new type of pass-through entity (PTE) tax that several states have enacted since passage of the TCJA in 2017. By imposing an income tax directly on the PTE, a state’s tax on PTE income now becomes a deduction for the PTE for federal income tax purposes.
Currently, seven states assess such a tax: Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island and Wisconsin, though additional states will likely enact similar taxes to work around to the federal SALT deduction limitation, especially in light of these new proposed regulations. Please contact us to “crunch the numbers” on this tax in your state and evaluate the potential benefits of a workaround strategy.

19. Prepay your January mortgage payment if you will be under the mortgage interest limitation. For acquisition indebtedness incurred after December 15, 2017, the mortgage interest deduction is limited to interest incurred on up to $750,000 of debt ($375,000 in the case of a married individual filing a separate return). The mortgage interest from both a taxpayer’s primary and secondary residences remains deductible, up to this balance limit on newer debt. Home equity indebtedness not used to substantially improve a qualified home is no longer deductible. Debt existing prior to December 15, 2017, remains limited to the prior law amount of $1 million for original mortgage debt.

Planning Tip—It is important to consider how the proceeds of any home equity loans were used in determining whether or not the interest is deductible. While proceeds from home equity loans used to pay general household bills do not result in deductible interest, if you used the proceeds to improve your primary home, such home equity interest may be deductible. Thus, if you have a home equity loan that you originally used for other purposes and are considering home renovations, you may wish to pay off the loan and use it for the new renovations to create deductible interest. In addition, if you are planning to refinance and your total mortgage balance will exceed $750,000, please contact us to ensure you retain maximum deductibility and do not run afoul of certain rules related to refinancing mortgage indebtedness.

20. Take advantage of the child tax credit. The child tax credit will remain at $2,000 for 2020 for each qualifying dependent child age 16 or younger at the end of the tax year. The child tax credit is phased out beginning at $400,000 of modified adjusted gross income for joint filers ($200,000 for all other filers). In addition, the child tax credit is refundable to lower income taxpayers without an income tax liability, up to $1,400. Finally, nonqualifying child dependents (such as dependents over the age of 16, or those that do not meet the relationship test of a qualifying child) also qualify taxpayers for a $500 nonrefundable child tax credit per dependent.

Tax-Efficient Investment Strategies

For 2020, the long-term capital gains and qualifying dividend income tax rates, ranging from zero to 20 percent, have increased incrementally, as indicated in the table below.

Long-Term Capital Gains Rate


Married Filing Jointly

Head of Household

Married Filing Separately


Up to $40,000

Up to $80,000

Up to $53,600

Up to $40,000


$40,001 -$441,450

$80,001 -$496,600

$53,601 -$469,050

$40,001 -$248,300


Over $441,450

Over $496,600

Over $469,050

Over $248,300

In addition, a 3.8 percent tax on net investment income applies to taxpayers with modified adjusted gross income (MAGI) that exceeds $250,000 for joint returns ($200,000 for singles). Here are some ways to capitalize on the lower rates as well as other tax planning strategies for investors.

Planning Tip—The capital gains rates are largely untouched in 2020 with only small changes to the income thresholds to which the zero percent, 15 percent and 20 percent rates are applied. Additionally, the capital gains rate of zero percent for taxpayers in the lowest two tax brackets (10 or 12 percent) is preserved. Therefore, taxpayers should consider: (1) deferring income into 2021 in order to reduce 2020 income, and thus qualify for the zero percent capital gain rate in 2020, and/or (2) delaying the sale of long-term capital assets until 2021 if you will be within the 15 percent ordinary income tax bracket in 2021, which again will qualify use of the zero percent capital gain rate in 2021.

21. Maximize preferential capital gains tax rates. In order to qualify for the lower 20, 15 or zero percent capital gain rate, a capital asset must be held for at least one year. That is why it is important when disposing of your appreciated stocks, bonds, investment real estate and other capital assets to pay close attention to the holding period. If it is less than one year, consider deferring the sale so you can meet the longer-than-one-year period (unless you have short-term losses to offset the potential gain). While it is generally not wise to let tax implications be your only consideration in making investment decisions, you should not ignore them either. Keep in mind that realized capital gains may increase AGI, which in turn may reduce your AMT exemption and therefore increase your AMT exposure, although to a much lesser extent than in years past, given the increased AMT exemptions.

Planning Tip—To take maximum advantage of the spread between capital gain and individual income tax rates, you may wish to consider receiving qualified employer stock options in lieu of salary to convert ordinary compensation income to capital gain income.

22. Reduce the recognized gain or increase the recognized loss. When selling stock or mutual fund shares, the general rule is that the shares you acquired first are the ones deemed sold first. However, if you choose, you can specifically identify the shares you are selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it is long-term or short-term. One downfall of the specific identification method is that you may not use a different method (e.g., average cost method or first in, first out method) to identify shares of that particular security in the future. Rather, you will have to specifically identify shares of that particular security throughout the life of the investment, unless you obtain permission from the IRS.

Planning Tip—In order to use the specific identification method, you must ask the broker or fund manager to sell the shares you identify and maintain records that include both dated copies of letters ordering your fund or broker to sell specific shares and written confirmations that your orders were carried out.

23. Harvest your capital losses. It always makes sense to periodically review your investment portfolio to see if there are any “losers” you should sell. This year, with the ongoing volatility in the stock market, there are likely capital losses lurking somewhere in your portfolio. As year-end approaches, so does your last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital losses. However, one must be mindful not to run afoul of the wash-sale rule, discussed at item 26.

Planning Tip—For some, bracket management through harvesting of capital gains may be a good strategy. If you expect to be in a higher tax bracket in the future, perhaps sell assets in the current year, pay tax at a lower tax rate, and get a step up in tax basis. The effect is that you shift recognition of capital gain from a higher future rate to a current lower rate. If you like the investment position, repurchase the same or similar assets to maintain the upside potential and you will not be affected by the wash-sale rules as noted in item 26 below.

24. Take advantage of Section 1202 small business stock gain exclusion. For taxpayers other than corporations, Section 1202 allows for the potential exclusion of up to 100 percent of the gain recognized on the sale of qualified small business stock (QSBS) that is held more than five years, depending upon when the QSBS was acquired. The gain eligible for exclusion cannot exceed the greater of $10 million, or 10 times the aggregate adjusted basis of QSBS stock disposed of during the year. As an alternative, if the stock is held for more than six months and sold for a gain, you can elect to roll over and defer the gain to the extent that new QSBS stock is acquired during a 60-day period beginning on the date of the sale.

Planning Tip—Be aware that if you are harvesting losses to offset gains, the Section 1202 taxable gain will be less than what may have been anticipated. Accordingly, you need to keep the Section 1202 gain exclusion in mind so you do not sell too many losses, resulting in the inability to claim all the losses harvested in 2020. Any excess loss would be carried forward to 2021 and succeeding tax years.

25. Be mindful of change in “kiddie tax” rules. Under the TCJA, for 2018 and 2019 the investment income of a child was taxed independently of the parents’ rates, utilizing the compressed tax brackets applicable to trusts and estates. The passage of the SECURE Act last year reset these rules back to 2019 law and reverted to the old set of rules for 2020. For 2020 and later tax years, the unearned income of children subject to the kiddie tax in excess of $2,200 are generally taxed at the parent’s tax rate.

For kiddie tax purposes, a child is defined as someone that has not yet reached the age of 18 by the end of the year, or an 18 year old or a full-time student aged 19-23 who does not support him or herself.

Planning Tip—A child's earned income (as opposed to unearned investment income) is taxed at the child's regular tax rates, regardless of amount. Therefore, to save taxes if you have your own business, consider hiring the child and paying a reasonable compensation.
Observation—The net investment income tax (NIIT) is assessed on a taxpayer-by-taxpayer basis and is not subject to the kiddie tax rules unless the child themselves exceeds the single-filer threshold for triggering NIIT. Therefore, there may still be possible savings in transferring assets to children subject to the kiddie tax if the parent is paying NIIT on the investment income. Of course, any time you are transferring assets, be certain to keep the gift tax in mind.
Planning TipVarious measures can be taken to avoid or minimize the kiddie tax. Among those measures, consider investing a child’s funds in one or more of the following.
  • Owners of Series EE and Series I bonds may defer reporting any interest (i.e., the bond’s increase in value) until the year of final maturity, redemption or other disposition. (If held in the parent’s name and used for qualified higher education expenses, and assuming certain AGI requirements are met, the income is not taxed at all.)
  • Municipal bonds produce tax-free income (although the interest on some specialized types of bonds may be subject to the AMT).
  • Growth stocks that pay little dividends and focus more on capital appreciation should be considered. The child could sell them after turning 23 and possibly benefit from being in a low tax bracket. Selling them before then could convert a potential zero percent income tax on the gain into a 20 percent income tax.
  • Funds can be invested in mutual funds that concentrate on growth stocks and municipal bonds that limit current income and taxes. They may also limit risk through investment diversification.
  • Unimproved real estate that will appreciate over time and does not produce current income will limit the impact of the kiddie tax.
  • 529 plans offer investors the opportunity to experience tax-free growth, so long as distributions are used to fund qualified education expenses, discussed later at item 34. In addition, contributions to a 529 plan may qualify the donor for a deduction on his or her state income tax return.

26. Keep the wash-sale rules in mind. Often overlooked, the wash-sale rule provides that no deduction is allowed for a loss if you acquire substantially identical securities within a 61‑day period beginning 30 days before the sale and ending 30 days after the sale. Instead, the disallowed loss is added to the cost basis of the new stock. However, there are ways to avoid this rule. For example, you could sell securities at a loss and use the proceeds to acquire similar, but not substantially identical, investments. If you wish to preserve an investment position and realize a tax loss, consider the following options:

  • Sell the loss securities and then purchase the same securities no sooner than 31 days later. The risk inherent in this strategy is that any appreciation in the stock that occurs during the waiting period will not benefit you.
  • Sell the loss securities and reinvest the proceeds in shares of a mutual fund that invests in securities similar to the one you sold or reinvest the proceeds in the stock of another company in the same industry. This approach considers an industry as a whole, rather than a particular stock. After 30 days, you may wish to repurchase the original holding. This method may reduce the risk of missing out on any anticipated appreciation during the waiting period.
  • Buy more of the same security (double up), wait 31 days and then sell the original lot, thereby recognizing the loss. This strategy allows you to maintain your position but also increases your downside risk. Keep in mind that the wash-sale rule typically will not apply to sales of debt securities (such as bonds) since such securities usually are not considered substantially identical due to different issue dates, rates of interest paid and other terms.
Observation—The wash-sale rules apply to the investor, not each individual brokerage account. Selling shares in one account with one broker and then buying them back with another broker is not a workaround solution. If trades are made in different accounts, you are ultimately responsible for wash-sale tracking.

27. Lower your tax burden with qualified dividends. The favorable capital gain tax rates (20, 15 or zero percent) make dividend-paying stocks as attractive as ever, since their preferential lower rates will likely be preserved if the Senate remains in Republican control. This may cause you to reconsider the makeup of your investment portfolio. Keep in mind that to qualify for the lower tax rate on dividends the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stock, this period is expanded to 90 days during a 181-day period.

Observation—While dividends paid by domestic corporations generally qualify for the lower rate, not all foreign corporation dividends qualify. Only dividends paid by so-called qualified foreign corporations, which include foreign corporations traded on an established U.S. securities market (including American Depositary Receipts or ADRs), corporations organized in U.S. possessions and other foreign corporations eligible for certain income tax treaty benefits are eligible for the lower rates. Finally, beware of certain investments marketed as preferred stocks that are really debt instruments (e.g., trust preferred securities). Dividends received on these securities are not qualified dividends, and therefore do not qualify for the preferential capital gain tax rates.
Planning Tip—To achieve even greater tax savings, consider holding bonds and other interest-yielding securities inside qualified plans and IRAs, while having stocks that produce capital gains and qualified dividend income in taxable accounts. In addition, when a taxpayer is fast approaching retirement years, it may be more beneficial to invest in equities outside of the retirement accounts so they may take advantage of the more favorable capital gains rates when they decide to cash-in their investments to satisfy retirement-related expenses.

28. Consider tax-exempt opportunities from municipal bonds, municipal bond mutual funds or municipal ETFs. Tax‑exempt interest is not included in adjusted gross income, so deduction items based on AGI are not adversely affected. As long as your investment portfolio is appropriately diversified, greater weight in municipal bonds may be advantageous. However, be mindful of the AMT impact on income from private activity bonds, which is still a preference item for AMT purposes. In general, a private activity bond is a municipal bond issued after August 7, 1986, whose proceeds are used for a private (i.e., nonpublic) purpose. Accordingly, review the prospectus of the municipal bond fund to determine if it invests in private activity bonds. Anyone subject to the AMT, including those with incentive stock options, should avoid these funds.

Planning Tip—Tax-exempt interest is not included when calculating the net investment income tax, which, if you are already over the NIIT threshold, should be considered when determining your investment allocations as municipal funds will generate an even larger bang for your buck.
Observation—Depending on what type of tax-exempt securities you invest in and where you live, you could generate interest that is double- or triple-tax exempt if the bond is issued by the state or municipality in which you live. Double tax-exempt investment income is income that is not taxed at the federal or state level. If you live in a locality that also has a tax on investment income (like the Philadelphia School Income Tax), you may also achieve triple tax-exempt income, which is when your tax-exempt interest is not taxed at the federal, state or local level.

29. Time your mutual fund investments. Before you invest in a mutual fund prior to February 2021, you should contact the fund manager to determine if dividend payouts attributable to 2020 are expected. If such payouts take place, you may be taxed in 2020 on part of your investment. You need to avoid such payouts, especially if they include large capital gain distributions. In addition, certain dividends from mutual funds are not “qualified” dividend income and therefore are subject to tax at the taxpayer’s marginal income tax rate, rather than at the preferential 20, 15 percent (or zero percent) rate.

Planning Tip—Since mutual funds are valued based on the net asset value of the fund, if you receive a distribution of $25,000, the value of your original shares declines by $25,000―the amount of the dividend payment. Furthermore, if you are in the automatic dividend reinvestment plan, so that the $25,000 dividend purchases new shares, the value of your fund would now be about the same as your original investment. However, the $25,000 dividend payout is subject to the preferential tax rates. If it is not a “qualified” dividend, it is subject to tax of up to 37 percent. If you had invested after the dividend date, you would own about the same amount of shares but would have paid no tax!

30. Determine worthless stock in your portfolio. Your basis in stock that becomes worthless is deductible (generally as a capital loss) in the year it becomes worthless, but you may need a professional appraiser’s report or other evidence to prove the stock has no value. Instead, consider selling the stock to an unrelated person for at least $1, or writing a letter to the officers of the company, abandoning the stock. You have now eliminated the need for an appraiser’s report and are almost guaranteed a loss deduction.

Observation—You may not discover that a stock you own has become worthless until after you have filed your tax return for the year of worthlessness. In that case, your return for that year must be amended to claim a credit or refund due to the loss. For worthless stock, you can amend your return for up to seven years from the date your original return for that year had to be filed or two years from the date you paid the tax, whichever is later. This seven-year lookback is an exception to the normal time frame for amended returns as the IRS is aware of the difficulty in determining when a security became truly worthless.

31. Consider the greatest tax exclusion hidden in your home. Federal law (and many, but not all, states) provides that an individual may exclude, every two years, up to $250,000 ($500,000 for married couples filing jointly) of gain realized from the sale of a principal residence. The exclusion ordinarily does not apply to a vacation home. However, with careful planning, you may be able to apply the exclusion to both of your homes.

Illustration—After selling your principal residence and claiming the allowable exclusion, convert your former vacation home into your new principal residence for at least two years. Establishing residency and use is critical to the success of this technique. Proper conversions result in an additional $250,000/$500,000 of tax‑free gain. However, you may still have taxable gain to the extent of depreciation claimed. The same strategy applies when two individuals are planning to get married and each owns his or her own principal residence. If they do not sell one of the residences before marrying, it may not qualify as a principal residence on a subsequent sale if the residency and use requirements are not met. The result could be a fully taxable sale. You may also qualify for partial gain exclusion in certain circumstances.
Observation—Gain on the sale of a principal residence cannot be excluded if the home was acquired in a like-kind exchange within five years from the date of sale. Therefore, an individual who owns a principal residence, which was originally acquired in a like-kind exchange, must wait five years before selling the property in order to exclude gain up to $250,000 ($500,000 for married couples filing jointly).
Planning Tip—For many individuals, their greatest asset is the appreciated equity in their home. As you advance towards retirement, it is important to consider your home as an investment. If you plan to downsize in later years (after the kids have left the nest), this exclusion can help you realize up to $250,000 ($500,000 for married couples) of the appreciated equity in your home tax-free. It is commonly regarded as the greatest tax exclusion for most Americans.

32. Consider like-kind exchanges. A like-kind exchange provides a wonderful alternative to selling property outright. The traditional sale of property may cause you to recognize and pay taxes on any gain on the sale. A like-kind exchange, on the other hand, allows you to avoid gain recognition through the exchange of qualifying like-kind properties. The gain on the exchange of like-kind property is effectively deferred until you sell or otherwise dispose of the property you receive in the exchange. Beginning in 2018, like-kind exchanges are only available for real property sales. Also, while Democratic control of the Senate is unclear at this time, it should be noted that President-elect Biden did propose doing away with like-kind exchange gain.

Observation—Although a like-kind exchange is a powerful tax-planning tool, it includes certain risks. Simply put, it postpones the tax otherwise due on the property exchanged, but it does not eliminate it. The gain will eventually be recognized when the acquired property is sold. In addition, do not exchange property that is worth less than your tax basis in it, since the loss would also be deferred under the like-kind exchange rules. Instead, sell it and take the loss now.
Planning Tip—Like-kind exchanges provide a valuable tax planning opportunity if:
  • You wish to avoid recognizing taxable gain on the sale of property that you will replace with like-kind property;
  • You wish to diversify your real estate portfolio without tax consequence by acquiring different types of properties with the exchange proceeds;
  • You wish to participate in a very useful estate planning technique (continued like-kind exchanges allow you to permanently avoid recognition of gain); or
  • You would generate an alternative minimum tax liability upon recognition of a large capital gain in a situation where the gain would not otherwise be taxed. (The like-kind exchange shelters other income from the alternative minimum tax.)

However, President-elect Biden has proposed eliminating the preferential rate for long-term capital gains and qualified dividends on income over $1 milllion, resulting in a potential capital gain tax rate increase from 20 percent to 39.6 percent. So, a like-kind exchange may not make sense if you expect to ultimately sell the replacement property while in the 39.6 percent tax rate.

33. Understand the tax implication of any cryptocurrency transactions. While most cryptocurrency exchanges are not required to issue formal tax documentation to traders, the IRS has already been requesting records from major exchanges and is cracking down on this industry as a whole. Gains and losses from the sale of cryptocurrencies, just like the sale of stock, are required to be reported on your tax return. As taxpayers are generally not provided with tax documents detailing sale prices and cost basis, taxpayers must track these items themselves to accurately report their income. Proper recording of basis in cryptocurrency can significantly decrease the capital gains, which may be assessed in the future should the IRS start requesting sales information from more exchanges.

Observation—In 2019, all taxpayers filing Schedule 1 had to represent whether or not they traded in virtual currency. However, in 2020, this certification will be moved to the main Form 1040, demonstrating the increased focus on cryptocurrency compliance by the IRS in an area of potentially high abuse.
Planning Tip—Not only do you have to recognize a gain or loss when you exchange virtual currency for other types of currencies, you also have to recognize the gain or loss upon exchange of the virtual currency for other property and/or services. So if you buy something online with virtual currency, that is a reportable transaction; if you purchase a subscription with virtual currency, that is a reportable transaction. Because virtual currency is defined as property and not currency, any exchange for any type of value is a reportable tax event. Any movement of any virtual currency is supposed to be tracked and reported. In short, please do not use virtual currency like currency. Speculate on it like a normal investment. Your tax accountant may thank you with a smaller bill for your tax return!

Planning for Higher Education Costs

Many tax savings opportunities exist for education-related expenses. If you or members of your family are incurring these types of expenses now or will be in the near future, it is worth examining them in some detail. Here, in abbreviated form, are some strategies to consider as year-end approaches.

34. Plan ahead for tax-free growth with 529 qualified tuition plans. One of the best features of 529 plans is that the ownership and control of the plan lies with the donor (typically the parent or grandparent of the beneficiary student) and not with the beneficiary, so the plan is not considered an asset of the student for financial aid purposes, generally resulting in higher financial aid. For federal income tax purposes, plan contributions are on an after-tax basis, although many states allow a deduction. Contributions and earnings on contributions that are subsequently distributed for qualified higher education expenses (including tuition, room and board, and other expenses) at accredited schools anywhere in the United States are free of federal income tax and may be free of state income tax. Since 2018, 529 plan owners can use tax-free distributions for up to $10,000 of eligible expenses at elementary and secondary schools, in addition to colleges and universities. Since the SECURE Act was passed last December, tax-free distributions can be used to pay for eligible expenses related to an apprenticeship program, in addition to higher education expenses. The SECURE ACT also allows up to $10,000 of distributions to pay principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary.

To the extent that distributions are not for qualified higher education expenses, regular income tax plus a 10 percent penalty may apply to the earnings portion of the distribution. As contrasted with the other education strategies discussed below, contributions may be made regardless of the donor’s AGI.

An election can also be made to treat a contribution to a Section 529 plan as having been made over a five-year period; consequently, for 2020 a married couple can make a $150,000 contribution to a Section 529 plan without incurring any gift tax liability or utilizing any of their unified credit, since the annual gift exclusion for 2020 is $15,000 per donor and the contribution can be split with the donor’s spouse. It is important to note that additional gifts made in the five-year period to the same donees have a high chance of triggering a gift tax filing obligation.

Planning Tip—If your resident state allows a deduction, make a contribution to a 529 plan and immediately take a qualified distribution to pay for college tuition. In effect, this will provide you with a discount on college costs at your marginal state income tax rate.
Observation—Currently, more than 30 states and Washington, D.C., allow a deduction for Section 529 plan contributions. Please make sure you have the appropriate 529 plan, as many states are particular about what type of plan can lead to a state deduction. For example, New York only allows deductions for 529 plans set up under New York law. If you have changed residency since setting up a 529 plan, review your options before contributing.
Finally, in general, to the extent that contributions to a Section 529 plan are not distributed for the benefit of the beneficiary, the account may be transferred to a member of the beneficiary’s family, penalty-free. As long as the amounts transferred are used for qualified education expenses, they will still be free from federal income tax, as noted above.

35. Take advantage of education credit options. If you pay college or vocational school tuition and fees for yourself, your spouse or your children, you may be eligible for either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit. These credits reduce taxes dollar-for-dollar, but begin to phase out when 2020 AGI exceeds certain levels. The chart below provides a summary of the phaseouts.

2020 Education Expense and Credit Summary

Tax Benefit

Single filers (not including Married Filing Separately)

Joint filers

Maximum credit/ deduction/contribution

American Opportunity Tax Credit

$80,000 - $90,000

$160,000 - $180,000

$2,500 (credit)

Lifetime Learning Credit

$59,000 - $69,000

$118,000 - $138,000

$2,000 (credit)

Student loan interest deduction

$70,000 - $85,000

$140,000 - $170,000

$2,500 (deduction)

Coverdell Education Savings Account

$95,000 - $110,000

$190,000 - $220,000

$2,000 (contribution)

Planning Tip—The credits are allowed for tuition paid during the year for education received that year or during the first three months of the next year. Consequently, consider paying part of 2021 tuition at the end of 2020 if you have not maximized the credit or reached the above income thresholds.
Planning Tip—Parents can shift an education credit from their return to the student’s return by electing to forgo the child tax credit for the student. This strategy is a “no brainer” for high-income parents whose income prevents them from claiming the credit or from receiving any benefit from the child tax credit. To benefit from this strategy, however, the student must have sufficient income, and therefore tax liability, to take advantage of the credit. It might be necessary to shift income to the student as well, perhaps through gifts of appreciated property (that the student then sells at a gain) or employment in a family business, as discussed in item 77. However, be careful about the impact on a student’s financial aid―shifting income to a student can have a detrimental impact on a student receiving or being eligible for financial aid.

36. Remit additional student loan payments. The CARES Act gave temporary payment relief to borrowers of certain qualifying federal student loans. If your federal loans qualified, the U.S. Department of Education has automatically placed your loans in “administrative forbearance” through December 31, 2020. During this time, you are not required to make any payments and your applicable interest rate was adjusted to zero percent. You should consider making a payment by December 31, 2020, which will go directly towards your principal and may help you reduce your balance owed faster.

If your loan did not qualify for administrative forbearance or if you paid interest with respect to the period of January 2020 through March 2020 on a qualifying federal student loan, an “above the line” deduction of up to $2,500 is allowed for interest due and paid in 2020. Note the deduction is disallowed for taxpayers electing the filing status of married filing separate. The deduction is phased out when AGI exceeds certain levels. See chart above.

Planning Tip—The student loan interest deduction is set to expire at the end of 2020 if no further legislative action is taken. If you meet the income limits and have not maxed out your interest paid, it may be prudent to pay off enough interest to achieve the maximum deduction available to you before the deduction expires.

37. Contribute to a Coverdell Education Savings Account. These accounts must be established in a tax-exempt trust or custodial account organized exclusively in the United States. At the time the trust or account is established, the designated beneficiary must be under 18 (or a special needs beneficiary), and all contributions must be made in cash and are not deductible. The maximum annual contribution is limited to $2,000 per year, and the contribution is phased out when AGI exceeds certain levels. Distributions from Coverdell Education Savings Accounts are excludable from gross income to the extent that the distributions do not exceed the qualified education expenses incurred by the designated beneficiary, which include kindergarten through grade 12 and higher education expenses. If distributions exceed qualified expenses, a portion of the distributions is taxable income to the designated beneficiary. Furthermore, to the extent that distributions are not used for educational expenses, a 10 percent penalty applies.

Planning Tip— Since Coverdell Education Savings Accounts provide the same tax benefit as a 529 plan, you may wish to consider converting the Coverdell to a 529 and take a state tax deduction if your state allows a deduction for 529 contributions.

Strategies to Implement Throughout the Year

Virtually any cash-basis taxpayer can benefit from and exercise a fair amount of control over strategies that accelerate deductions or defer income based on the premise that it is generally better to pay taxes later rather than sooner (especially when income tax rates are not scheduled to increase). For example, a check you deliver or mail during 2020 generally qualifies as a payment in 2020, even if the check is not cashed or charged against your account until 2021. Similarly, payments of deductible expenses by credit cards are not deductible when you pay the credit card bill (for instance, in 2021), but when the charge is made (for instance, in 2020).

With respect to income deferral, cash-basis businesses, for example, can delay year-end billings so that they fall in the following year or accelerate business expenditures to the current year. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury bills and short-term certificates of deposit is not recognized until maturity, so purchases of such investments at this time will push taxability of such income into 2021. For a wage earner (excluding an employee-shareholder of an S corporation with a 50 percent or greater ownership interest) who is fortunate enough to be expecting a bonus, he or she may be able to arrange with his or her employer to defer the bonus (and his or her tax liability for it) until 2021. However, if any of this income becomes available to the wage earner, whether or not cash is actually received, the bonus will be taxable in 2020. This is known as the constructive receipt doctrine.

38. Help a disabled loved one maintain a healthy, independent and quality lifestyle with an ABLE account. An ABLE account is a tax-advantaged savings vehicle which can be established for a designated beneficiary who is disabled or blind. Only one account is allowed per beneficiary, though any person may contribute to an ABLE account. Contributions to an ABLE account are not deductible, but the earnings in the account grow on a tax-deferred basis and may be distributed tax free if used for qualified disability expenses, including basic living expenses such as housing, transportation and education, as well as medical necessities. If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax plus a 10 percent penalty tax.

Total annual contributions by all persons to the ABLE account cannot exceed the gift tax exclusion amount ($15,000 for 2019 and 2020), though additional annual contributions may be possible if the beneficiary is employed or self-employed. States have also set limits for allowable ABLE account savings. If you are considering an ABLE account, contact us for further information.

Observation—We understand that people sometimes fear giving because they do not want a disabled individual to lose something they are currently entitled to receive. ABLE accounts have no impact on an individual's Medicaid eligibility. However, ABLE account balances in excess of $100,000 are counted toward the SSI program's $2,000 individual resource limit. Thus, an individual's SSI benefits are suspended, but not terminated, when his or her ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account used to pay housing expenses count toward the SSI income limit. It is important to keep these potential nontax ramifications in mind before making a contribution.

39. Participate in and maximize payments to 401(k) plans, 403(b) plans, SEP (self‑employed) plans, IRAs, etc. These plans enable you to convert a portion of taxable salary or self‑employed earnings into tax deductible contributions to the plan. In addition to being deductible themselves, these items increase the value of other deductions since they reduce AGI. Deductible contributions to IRAs are generally limited to $6,000 in 2020, while substantially higher amounts can be contributed to 401(k) plans, 403(b) plans and simplified employee pensions (SEPs). For 2020, the deduction for IRA contributions starts being phased out if you are covered by a retirement plan at work and your AGI exceeds $65,000 for single filers and $104,000 for married joint filers. In 2020, $19,500 may be contributed to a 401(k) plan as part of the regular limit of $57,000 that may be contributed to a defined contribution (e.g., money purchase, profit‑sharing) plan. These limits have both increased in 2020 and are reflected in the table below. Don’t forget that additional catch-up contributions are allowed for those taxpayers ages 50 and above, as noted in the chart below.

In addition, SEPs can be established and contributed to as late as the due date of your return, including extensions, or as late as October 15, 2021, for tax year 2020.

Planning Tip—Often, teenagers have summer jobs or part-time jobs to earn extra spending money, while teaching responsibility and valuable life skills. Retirement is usually the last thing on these teens’ minds. Since these jobs generate compensation, these teenagers are eligible to make either Roth or traditional IRA contributions up to the lesser of $6,000 or 100 percent of their compensation in 2020. A particularly generous parent, grandparent or other family member may wish to contribute to the child’s IRA by gifting the child the contribution, keeping in mind the gift tax. Six thousand dollars gifted now, contributed to a Roth IRA, will be worth significantly more, tax-free, when the child retires in 50 years or so.
Observation—Roth 401(k) accounts can be established to take after-tax contributions, if the traditional 401(k) plan permits such treatment. Some or all of the traditional 401(k) contributions can be designated by the participant as Roth 401(k) contributions, subject to the maximum contributions that already apply to traditional 401(k) plans (including the catch-up contributions), as reflected in the table below. The Roth 401(k) contributions are not deductible, but distributions from the Roth 401(k) portion of the plan after the participant reaches age 59½ are tax-free.

Annual Retirement Plan Contribution Limits

Type of Plan



Traditional and Roth IRAs

Catch-up contributions (ages 50+) for traditional and Roth IRAs





Roth and traditional 401(k), 403(b) and 457 plans

Catch-up contributions (ages 50+) for 401(k), 403(b) and 457 plans



$ 6,000




Simple Plans

Catch-up contributions (ages 50+) for Simple Plans





SEPs and defined contribution plans*



* Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2020, the limit as adjusted for inflation is $285,000.

Planning Tip—As long as one spouse has $12,000 of earned income in 2020, each spouse can contribute $6,000 to their IRAs. The deductibility of the contributions depends on the AGI reflected on the tax return and on whether the working spouse is a participant in an employer-sponsored retirement plan. Keep in mind that an individual is not considered an active participant in an employer-sponsored plan merely because his or her spouse is an active participant for any part of the plan year―so it is possible that contributions to the working spouse’s IRA are nondeductible while contributions to the nonworking spouse’s IRA are deductible. In addition, catch‑up IRA contributions, described above, are also permitted.

40. Participate in health and dependent care flexible spending accounts (IRC Section 125 accounts). These plans enable employees to set aside funds on a pretax basis for (1) medical expenses that are not covered by insurance up to $2,750 per year, (2) dependent‑care costs up to $5,000 per year ($2,500 for married persons filing separately) and (3) adoption assistance of up to $14,300 per year. Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes (at maximum rates as high as 11 percent), resulting in a tax savings of as much as 55.65 percent. Paying for these expenses with after‑tax dollars, even if they meet various AGI requirements, is more costly under the current tax rate structure. Since many restrictions apply, such as the “use it or lose it” rule, review this arrangement before making the election to participate.

Illustration—The tax savings resulting from participation in FSAs are often significant. Assume a married couple contributes $5,000 for uncovered medical costs and $5,000 for qualified daycare expenses. Assuming a 37 percent tax rate, the family creates a tax savings of about $4,465 ($3,700 in income taxes and $765 in Social Security/Medicare taxes, not counting any potential reductions in state income taxes).
Planning Tip—Section 125 plans often adopt a two-and-a-half month grace period (to March 15, 2021) during which employees who participate in the Section 125 plan can incur expenses that can be treated as 2020 qualified expenses. Accordingly, this can potentially reduce employee contributions that would otherwise be subject to forfeiture. Please note COVID provisions related to 2020 makes this provision different for every employer. You should check with your employer’s respective benefits department to determine if they have adopted any extension provisions provided as the employer was not required to adopt.
Planning Tip—Married couples who both have access to flexible spending accounts (FSAs) will also need to decide whose FSA to use. If one spouse’s salary is likely to be higher than the FICA wage limit ($137,700 for 2020) and the other spouse’s salary will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. This is because FSA contributions by the spouse whose income is higher than the FICA wage limit will not reduce the 6.2 percent Social Security tax portion of the FICA tax, but FSA contributions by the other spouse will reduce it. This planning tip also applies to HSAs mentioned below.

For example, if John’s salary is $150,000 and Mary’s salary is $50,000, FSA contributions of $5,000 by John will not reduce his Social Security tax (since, even reflecting the FSA contributions, his Social Security wages exceed $137,700), while FSA contributions of $5,000 by Mary will save her approximately $300 in Social Security tax.

41. Participate in Health Savings Accounts (IRC Section 223 accounts). Health Savings Accounts (HSAs) are another pretax medical savings vehicle that are currently highly favored in the marketplace by Congress. HSAs offer a tax-favorable way to set aside funds to meet future medical needs. The four key elements to an HSA include: (1) contributions you make to an HSA are deductible, within limits; (2) contributions your employer makes are not taxed to you; (3) earnings on the funds within the HSA are not taxed; and (4) distributions from the HSA to cover qualified medical expenses are not taxed.

To be eligible for an HSA, you must be covered by a “high deductible health plan.” You must also not be covered by a plan that (1) is not a high deductible health plan and (2) provides coverage for any benefit covered by your high deductible plan. For self-only coverage, the 2020 limit on deductible contributions is $3,550. For family coverage, the 2020 limit on deductible contributions is $7,100.

Planning Tip—The HSA is not a “use it or lose it” account like an FSA, which means wiser choices can be made in long-term healthcare spending. Funds remaining in an HSA at year-end are not forfeited, but remain in the account tax-free until distributed for medical purposes. Like IRAs, an individual owns their HSA. It stays with the individual even after a job change making the HSA a very portable savings device.

42. Carefully plan Roth conversions. Converting a traditional retirement account such as a 401(k) or individual retirement account (IRA) into a Roth 401(k) or IRA will create taxable income upon conversion and allow tax-free distributions in retirement. There are many good reasons (and a few bad ones) for converting a 401(k) or traditional IRA to a Roth IRA. Good reasons include:

  • You have special and favorable tax attributes that need to be consumed such as charitable deduction carry-forwards, investment tax credits and NOLs, among others;
  • You expect the converted amount to grow significantly and tax-free growth is desired;
  • Your current marginal income tax rate is likely lower than at the time of distribution (retirement);
  • You have sufficient cash outside the 401(k) or traditional IRA to pay the income tax due as a result of the conversion;
  • The funds converted are not required for living expenses, or otherwise, for a long period;
  • You expect your spouse to outlive you and will require the funds for living expenses; and
  • You expect to owe estate tax.

If you decide to rollover or convert from a 401(k) or traditional IRA to a Roth 401(k) or IRA and you also expect your AGI and tax bracket to remain more or less constant, you should consider staggering the total amount you plan to shift over a period of years. For example, a taxpayer who plans to convert a total of $185,000 from a regular IRA to a Roth IRA should consider converting $37,000 per year for five years. This strategy may prevent the conversion from pushing a taxpayer into a higher tax bracket, since the conversion is fully taxable on the amount converted.

Planning Tip—Before assets are transferred to a Roth 401(k) or IRA, a careful analysis should be performed to project which retirement investment vehicle will be more financially beneficial, as well as the impact of the rollover or conversion on a taxpayer’s effective tax rate. This year, many taxpayers have unrealized losses in brokerage accounts which they can harvest to lower their taxable income, and thus take some of the “sting” out of the usual tax “hit” associated with a Roth conversion. We would be happy to assist you in determining the appropriate amount of losses to harvest and corresponding amounts to convert to a Roth.
Observation—Due to the changes in the RMD rules enacted by the CARES Act (See item 4 above), 2020 may be a great time to convert traditional IRAs to a Roth. Ordinarily, if you are age 72 or over, you would have to take an RMD before you could convert to a Roth, thus adding the RMD and the conversion to your taxable income and potentially increasing your tax bracket. Now, since RMDs are not required for 2020, you could make your Roth conversion with the first dollar distributed from the traditional IRA, potentially lowering your tax bracket.
Planning Tip—Many taxpayers are prevented from making a Roth IRA contribution due to their AGI. For 2020, Roth contributions are prohibited for couples filing jointly whose AGI exceeds $206,000 and for singles and head of household filers whose AGI exceeds $139,000. However, this limitation can be worked around by making a so-called “backdoor Roth” contribution. A taxpayer can make nondeductible contributions to a traditional IRA and can subsequently convert these contributions into a Roth IRA without being subject to the AGI limitation. Any income earned on the account between the time the account was a nondeductible IRA and the time of conversion to a Roth would be required to be picked up as income, though many taxpayers contribute to the traditional IRA and convert to the Roth within a short period to avoid this issue.

43. Avoid deduction limits for noncash charitable contributions. Gifts of appreciated stock allow a taxpayer to mitigate taxes on capital gains, though the deduction for capital gain property is limited to 30 percent of AGI.

For personal property, the charitable deduction for airplanes, boats and vehicles may not exceed the gross proceeds from their resale. Form 1098-C must be attached to tax returns claiming these types of noncash charitable contribution. Furthermore, donations of used clothing and household items, including furniture, electronics, linens, appliances and similar items, must be in “good” or better condition to be deductible. You should maintain a list of such contributions together with photos to establish the item’s condition. To the extent they are not in “good condition,” you will need to secure a written appraisal to deduct individual items valued at more than $500.

Observation—Substantiation of charitable contributions has grown in importance in the eyes of the courts and the IRS. If you are thinking of making a large noncash charitable contribution that is not in the form of publically traded stock, make sure you acquire and maintain the correct information and forms needed to substantiate your deduction. Charitable contributions in excess of $250 must have a written acknowledgment from the organization, while most contributions over $5,000 will require an appraisal. The chart below is a useful guide for determining what you need to have in order to deduct your noncash charitable contribution.

Noncash Contribution Substantiation Guide

Type of Donation

Amount Donated

Less than $250

$250 to $500

$501 to $5,000

Over $5,000

Publicly traded stock

•Written records
•Written records
•Written records
•Written records
Nonpublicly traded stock •Receipt
•Written records
•Written records
•Written records

•Written records
•Qualified appraisal
•Form 8283 Section B

Artwork •Receipt
•Written records
•Written records
•Written records
•Written Records
•Qualified Appraisal
•Form 8283 Section B
Vehicles, boats and airplanes •Receipt
•Written records
•1098-C or
•1098-C and
•Written records
•Written records
•Qualified appraisal
•Form 8283 Section B
All other noncash donations •Receipt
•Written records
•Written records
•Written records
•Written records
•Qualified appraisal
•Form 8283 Section B
Volunteer out-of-pocket
•Written records
•Written records
•Written records
•Written records

Planning Tip—Another noncash contribution you may wish to consider is a conservation easement. A conservation easement allows for the permanent use of real property by a government or charity —such as preservation of open space, wildlife habitats or for outdoor recreations. The easements affords the donor a charitable contribution for the difference in the fair market value of the property prior to the grant of the easement less the value of the property after the easement.

44. Make charitable contributions directly from 2020 IRA distributions. Current law provides an exclusion from gross income for certain distributions of up to $100,000 per year from a traditional IRA where the distribution is contributed directly to a qualified tax-exempt organization to which deductible contributions can be made. This special treatment applies only to distributions made on or after the date the IRA owner attains age 70½ and must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under this provision are not allowed as a deduction. Qualified charitable distributions (QCDs), as these are called, may be especially beneficial for those taxpayers who claim the standard deduction or whose taxable Social Security benefits are affected by AGI thresholds.

Planning Tip—Excluding the IRA distributions from AGI also results in a lower AGI, which may make income or deductions affected by AGI (such as medical deductions) more valuable and may also reduce the amount of Social Security benefits that are subject to tax.
Planning Tip—Qualifying charitable distributions can be used to satisfy required minimum distribution (RMD) requirements, thus allowing taxpayers to exclude income they would otherwise be required to include. It is also important to note that while the SECURE Act changed the age for the initial RMD to 72, the minimum age to make a QCD remains 70½.

Though the CARES Act suspended the RMD requirement for 2020, QCDs may be particularly valuable for those attaining age 72 in 2020 and deferring their initial RMD until April of 2021, when they will also be required to take a 2021 RMD during the calendar year. As a practical matter, however, such charitable distributions may not be made to a private foundation or donor advised fund.

45. Make intelligent gifts to charities. Although there has been much volatility in the stock market this year, gifts of appreciated stock remain a great way to maximize charitable gifting while also avoiding capital gains taxes. Do not give away loser stocks (those that are worth less today than what you paid for them). Instead, sell the shares and take advantage of the resulting capital loss to shelter your capital gains or income from other sources, as explained above. Then give cash to the charity. Since you just sold the stock, you will have the cash on hand. As for winner stocks, give them away to charity instead of donating cash. Under either situation, you recognize multiple tax benefits. When gifting appreciated stock to charity, you not only avoid paying capital gains taxes, gift and estate taxes, but you may also be able to deduct the value of the stock for income tax and AMT purposes. As always, be aware that gifts to political campaigns or organizations are not deductible.

Planning Tip—Another strategy to consider is a charitable remainder trust, where income-producing assets are transferred to an irrevocable trust. The donor or other noncharitable beneficiaries receive trust income for life or for a period of years. The donor receives an up-front charitable contribution equal to the present value of the remainder interest. The charity receives the remaining trust assets when the income interests end. For the estate tax implication of a charitable remainder trust, see item 97. Also, consider the use of donor advised funds, where you can contribute cash, securities or other assets. You can take a deduction and invest the funds for tax-free growth while recommending grants to any qualified public charity.
Observation—It is important to confirm that the donation you are considering is contributed to an organization that is eligible to receive tax-deductible donations (known as a “qualified charity”). The IRS website contains a search tool that assists in determining if the charity you are contemplating a gift to is a qualified charity.

46. Consider paying state and local taxes, mortgage interest, medical expenses, charitable gifts, etc. (subject to limits noted within this guide) in the same year as opposed to spreading the payments over two years. By bunching deductions and deferring taxable income along with using AGI‑reducing techniques, you increase the value of all deductions and reduce your overall tax liability.

In considering the strategies noted below, however, keep in mind that if you pay a deductible expense in December 2020 instead of in January 2021, you reduce your 2020 tax instead of your 2021 tax, but you also lose the use of your money for one month. Generally, this will be to your advantage, unless you have an alternative use for the funds that will produce a rate of return in that one month that will exceed the tax savings. In other words, you must decide whether the cash used to pay the expense early should be for something more urgent or more valuable than the increased tax benefit.

Planning Tip—Waiting to pay state and local taxes (SALT) until 2021 if you have already paid SALT of $10,000 could be worthwhile not only because of potential rate increases but also if the $10,000 SALT cap is modified or repealed.
Planning Tip—You may wish to consider refinancing your mortgage to take advantage of the current lower rates. Any points you paid on a previous refinancing that have not been fully amortized would be deductible in full in 2020 as long as the previous mortgage is paid off by the end of the year. In addition, even though the interest paid on a lower rate mortgage would be less and would result in a smaller tax deduction, it also would improve your monthly cash flow. In other words, as noted above, use sound economic planning in your decisionmaking process rather than viewing every transaction in terms of its tax effect.

The following chart illustrates the tax treatment of selected types of interest.

Interest Expense Deduction Summary*

Type of debt

Not deductible

Itemized deduction

Business or above-the-line deduction

Consumer or personal




Taxable investment (1)




Qualified residence (2)




Tax-exempt investment




Trading and business activities




Passive activities (3)




* Deductibility may be subject to other rules and restrictions.

1 Generally limited to net investment income.

2 For 2020, including debt of up to $750,000 ($1 million for debt incurred prior to December 16, 2017) associated with primary and one secondary residence. Home equity loan interest deduction is suspended, unless the loan proceeds are used to buy, build or substantially improve the taxpayer’s home securing the loan.

3 Subject to passive activity rules.

Charitable contributions. As discussed in item 5 above, consider paying 2021 pledges in 2020 to maximize the “bunching” effect.

Investment interest. This is interest on loans used to purchase or carry property held for investment purposes (e.g., interest on margin accounts, interest on debt used to purchase taxable bonds, stock, etc.). Investment interest is fully deductible to the extent of net investment income, unless incurred to purchase securities that produce tax-exempt income. Net investment income is equal to investment income less deductible investment expenses. Sources of investment income include income from interest, nonqualified dividends, rents and royalties. Investment expenses include depreciation, depletion, attorney fees, accounting fees and management fees. If you bunch your investment expenses in one year so that little or no investment interest is deductible, the nondeductible investment interest can be carried forward to a succeeding tax year.

You may be able to convert nondeductible interest to deductible investment interest by rearranging your borrowing. In addition, you may be able to increase your otherwise nondeductible investment interest by disposing of property that will generate a short‑term capital gain. The extra investment interest deduction may even offset the entire tax on the gain. Disposing of property that will generate long‑term capital gain will not increase your investment income unless you elect to pay regular income tax rates on the gain. Accordingly, you should review your debt and investment positions before disposing of such property.

Planning Tip—An election can be made to treat qualified dividend income as nonqualified. This would increase the amount of net investment income and consequently the amount of deductible investment interest. Although the election would result in qualified dividend income being taxed at the taxpayer’s top marginal income tax rate rather than, in general, at a 20 percent rate, tax savings could result. The only way to determine if this makes sense is to crunch the numbers and see if the overall tax liability decreases. Since investment interest is deductible for AMT purposes, making this election could reduce the AMT.

Medical and dental expenses. As discussed in item 17 above, a medical deduction is allowed in 2020 only to the extent that your unreimbursed medical outlays exceed 7.5 percent of your AGI. To exceed this threshold, you may have to bunch expenses into a single year by accelerating or deferring payment as appropriate.

Planning Tip—Keep in mind that premiums paid on a qualified long-term care insurance policy are deductible as medical expenses. The maximum amount of the deduction is based on the taxpayer’s age. For example, the deduction for such premiums paid for an individual age 40 or less is limited to $430, while the deduction for an individual age 71 or older is limited to $5,430. These limitations are per person, not per tax return, so a married couple where both husband and wife are 71 or older would be entitled to a maximum deduction of $10,860, subject to the 7.5 percent of AGI floor noted above.
Observation—A divorced parent generally can deduct medical payments incurred for his or her child even though the other parent claims the dependency exemption. Also, a child may be entitled to a deduction for the medical expenses paid on behalf of a parent, even though he or she cannot claim the parent as a dependent because the parent has gross income of at least $4,300 in 2020.

47. Determine your level of participation in activities to either avoid or qualify for passive activity loss treatment. In general, losses from a passive activity are subject to more limitations, (and therefore are less beneficial) than active losses. Usually, if an individual spends more than 500 hours participating in an activity during the year, the activity will not be considered passive. There are also other exceptions, such as participation during five of the preceding 10 tax years or 100 hours spent on the activity, which equals or exceeds the involvement of any other participant.

As for real estate professionals, eligible taxpayers may deduct losses and credits from rental real estate activities in which they materially participate, since they will not be treated as passive and may be used to reduce nonpassive income. An eligible taxpayer for these purposes spends more than 750 hours of services during the tax year in real property trades or businesses. In addition, a taxpayer’s personal use, or rental to others, of a vacation home during the last few days of the year may have a substantial tax impact.

48. Do not overlook the advantages of selling passive activities to free up suspended losses. Passive losses can be used to offset nonpassive income in the year you dispose of or abandon your entire interest in the activity in a taxable transaction, whether the transaction results in a gain or a loss.

Planning Tip—Dual tax benefit. If you have sufficient capital gains, you can sell a passive activity for a capital loss, offset the capital loss against the capital gains and also deduct prior year suspended losses from that passive activity. Should the sale result in a gain, this may still be a sound strategy since the gain will be taxed at a rate lower than the ordinary tax rate permitted for the passive loss. Once again, crunch the numbers to determine the tax impact.

49. Increase your basis in partnerships or S corporations to take advantage of any losses generated by the pass‑through entities. In order to claim losses from a flow-through, you need to have basis in the entity. In order to increase your basis and potentially free up losses, you may wish to increase basis in the entity by either contributing cash to the entity, either in the form or equity or debt. Keep in mind that loans made by a third-party lender to an S corporation and guaranteed by an S corporation shareholder do not increase the shareholder’s basis. The loan must be made directly from the S corporation shareholder to the S corporation in order to increase his or her basis.

50. Consider tax payments by credit card. IRS accepts tax payments by credit and debit cards. Consequently, taxpayers may wish to pay tax payments with a credit card to earn frequent flyer miles, cash‑back bonuses, reward points and other perks. The IRS now allows a taxpayer to select their preferred payment processor from either payUSAtax, Pay1040 or OfficialPayments, whose rates ranged from 1.87 percent to 1.99 percent for tax year 2019. However, the fees charged to you by the payment processor may exceed the benefits received. For example, a $2,500 balance due payment will incur a fee between $46 and $50, which is considered a nondeductible personal expense.

51. Consider accelerating life insurance benefits. For certain cash-strapped taxpayers, liquidating or selling a life insurance policy may be an option. Subject to certain requirements, an individual who is chronically or terminally ill may exclude payments received under a life insurance policy from income. Similarly, payments received from selling a life insurance policy to a viatical settlement provider, who regularly engages in the business of purchasing or taking assignments of such policies, may also be excluded.

52. Manage your nanny tax. If you employ household workers, try to keep payments to each household worker under $2,200. If you pay $2,200 or more to a worker, you are required to withhold Social Security and Medicare taxes from them and remit those withholdings, along with matching employer payroll taxes, on your individual income tax return on Schedule H, Household Employment Taxes. Additionally, you may be required to file your resident State Department of Labor quarterly filings with respect to unemployment compensation reporting related to your employee.

53. Consider deferring loan modifications and debt cancellations until 2021. Whenever debt is forgiven or canceled, the debtor generally recognizes taxable income in the amount of the forgiveness, absent certain exceptions. This cancellation of debt is usually not included in income of the taxpayer if insolvent or in bankruptcy. However, even when cancellation of debt is excluded from income, other attributes, such as basis, must generally be reduced, so the exclusion is more of a deferral of the income rather than an absolute exclusion. Further, it can often be difficult and expensive to determine whether a taxpayer is insolvent, involving appraisals of assets to determine the fair market value of assets and liabilities on a certain date.

Observation—There is also a gross income exclusion for canceled mortgage debt on a principal residence, which does not require an insolvency calculation. However, this exclusion is currently scheduled to expire on December 31, 2020. For certain individuals in foreclosure who have lost their jobs or are suffering from the economic impact of COVID-19, they may want to make the tough decision to ask their mortgage lender to cancel part of their mortgage debt in 2020 in case this benefit isn't extended into 2021. However, this exclusion is not politically controversial and would likely be extended as part of any bipartisan “tax extenders” package, should even a modicum of legislation pass in 2021.

54. Beware of alternative minimum tax (AMT). AMT is significantly less threatening than it had been in the past. The TCJA reduced the number of AMT adjustments that put taxpayers at risk for AMT. The AMT predominantly applies to high-income individuals, disallowing certain deductions, while also including certain exempt income in taxable income. In 2020, the exemption amount for single individuals will be $72,900 and $113,400 for joint filers. For tax year 2020, the AMT tax rate of 28 percent applies to excess alternative minimum taxable income of $197,900 for all taxpayers ($98,950 for married couples filing separately).

Planning Tip—Many of the adjustments or preferential items that have been part of the alternative minimum taxable income calculation were eliminated with the passing of the TCJA in 2017. Even though the AMT exemption was dramatically increased in 2018, it is still important to plan for the AMT. It may be beneficial to accelerate income, including short-term capital gains, into a year you are subject to AMT, as it could reduce the maximum marginal rate to which you are subject. The opposite could hold true as well—it may be beneficial to defer income as you could be subject to a lower AMT in a following year. You also may want to consider exercising at least a portion of incentive stock options (ISO) since the favorable regular tax treatment for ISOs has not changed for 2020. However, careful tax planning may be needed with respect to large ISO lots, as exercising ISOs could still produce an AMT. If you would not be subject to the AMT in 2020, the guiding philosophy of postponing income until 2021 and accelerating deductions (especially charitable contributions) into 2020 rings true.

Special Considerations for Corporate Executives: Planning Tips

55. Consider delaying the exercise of incentive stock options (ISOs), aka statutory options. Special tax treatment is afforded to taxpayers for regular tax purposes when an ISO is exercised. This includes: no taxation at the time the ISO is exercised; deferral of tax on the benefit associated with the ISO until disposition of the stock; and taxation of the entire profit on the sale of stock acquired through ISO exercise. The ISO is also taxed at the lower long-term capital gain rates as long as you hold the option for more than two years from date of grant and one year from date of exercise. Employment taxes do not apply on the exercise of an ISO. Be aware that the exercise of an ISO may produce AMT tax, as discussed below.

Observation—This special treatment, however, is not allowed for AMT purposes. Under the AMT rules, you must include in your AMT income, in the year the ISO stock becomes freely transferable or is not subject to a substantial risk of forfeiture, the bargain purchase price, which is the difference between the ISO stock’s value and the lower price you paid for it. For most taxpayers, this occurs in the year the ISO is exercised. Consequently, even though you are not taxed for regular tax purposes, you may still have to pay AMT on the bargain purchase price when you exercise the ISO, even though you did not sell the stock and even if the stock price declines significantly after you exercise the ISO. Under these circumstances, the tax benefits of your ISO will clearly be diminished. With the passage of the TCJA, the impact of the AMT has been diminished, though careful analysis of the tax environment and AMT exposure through the exercise of ISOs is necessary for maximum tax savings.
Planning Tip—Retirees generally have 90 days after retirement to exercise the options that qualify as ISO. If you have recently retired or are approaching retirement, evaluate whether the exercise of remaining ISOs will be beneficial.

Also, if 2020 is a down year in terms of income and/or you are worried about tax increases and wish to lessen the risk of increases in both ordinary income tax rates and capital gains tax rates, consider exercising stock options this year. You will recognize income on many types of options, including nonqualified stock options and incentive options, at the time exercised. Exercising the options before year-end would trigger the income for 2020. Keep in mind, however, that such exercise will also accelerate the deduction for the employer when employers themselves may be seeking to defer deductions in anticipation of a rate increase.

56. Take advantage of deferred compensation contributions to maximize the benefits of deferring income. Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2020, the limit as adjusted for inflation, is $288,000. This means that for an executive earning $300,000 a year, deductible contributions to, for instance, a 15 percent profit-sharing plan are limited to 15 percent of $285,000 or $42,750. Nevertheless, there is a way to avoid this limitation that you might want to consider.

Benefits that are not subject to the qualified plan limitations can be provided through nonqualified deferred compensation (NQDC) agreements. These deferred compensation agreements are contracts between an employer and an employee for the payment of compensation in the future—at retirement, on the occurrence of a specific event (such as a corporate takeover), or after a specified number of years, in consideration of continued employment by the employee.

Unlike a qualified plan, these NQDC plans are funded at the discretion of the employer and are subject to the claims of creditors. There are no guarantees that the benefits will be available to the employee in the future. Essentially, the trust is under the employer’s control and, structured properly, will result in a deferral of income taxes for the employee on the amount of compensation deferred above the traditional limitations.

57. Consider filing an IRC Section 83(b) election with regard to year-end restricted stock grants to preserve potential capital gain treatment. If you make the election within 30 days of the grant, you will pay tax at ordinary income rates on the spread between the market price (the value of the stock) and the grant price (the amount you paid for the stock). The benefit, however, is that you defer taxation on the future appreciation in the value of the restricted stock until the stock is sold and the postelection increase in the stock’s value is taxed at the lower capital gain rates rather than the higher ordinary income rates. The risk with making the election, however, is that the stock price might decline by the vesting date and you will have then prepaid income tax on an unrealized gain. The rules governing restricted stock awards are technically complex and call for some careful tax planning strategies.

58. Consider filing an IRC Section 83(i) election with regard to qualified equity grants. A qualified employee of a privately held company may elect to defer the income attributable to qualified stock transferred to the employee by the employer for up to five years. This election is an alternative to being taxed in the year in which the property vests under Code Sec. 83(a) or in the year in which it is received under Code Sec. 83(b). The election to defer income inclusion for qualified stock must be made no later than 30 days after the first date the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.

If a qualified employee elects to defer income inclusion, the employee must include the income at the earliest of the following dates:

  • The first date the qualified stock becomes transferable, including transferable back to the employer;
  • The date the employee first becomes an excluded employee;
  • The first date on which any stock of the employer becomes readily tradable on an established securities market;
  • The date five years after the earlier of the first date the employee’s right to the stock is transferable or is not subject to a substantial risk of forfeiture; or
  • The date on which the employee revokes his or her inclusion deferral election.

59. Opt for a lump-sum distribution of employer stock from a retirement plan. Employer stock distributed as part of a lump-sum distribution from a qualified plan is taxed based on the plan’s basis in the stock rather than on its value, unless a taxpayer elects otherwise. Consequently, assuming the value of the stock exceeds its cost, the tax on the unrealized appreciation is deferred until a later date when the stock is sold. This could be many years after receipt of the employer stock. As an added benefit, when the stock is sold at a later date, the gain is subject to tax at the more favorable long-term capital gains rate. Cash or other nonemployer stock distributed as part of the lump-sum distribution will be taxed at ordinary income tax rates.

60. Implement strategies associated with international tax planning. For executives on assignment in foreign countries, consider implementing strategies that will reduce your individual tax costs, such as maximizing the foreign earned income and housing exclusion provisions. The preparation of tax equalization calculations may be beneficial in determining the breakdown of compensation to maximize tax benefits associated with international assignments.

61. Consider engaging a new tax service provider. Corporate executives should review if additional tax assistance is required. This third-party guidance may decrease conflict of interest risks presented by the dual activities of the employer company’s auditors performing tax services for company personnel. TAG administers a flexible Executive Tax Assistance Program (ETAP) designed for corporate executives, providing comprehensive, confidential and highly personalized individual and business tax preparation, planning and consulting services at group-discounted rates.

62. Decrease your tax liability on pass-through income. Business income from pass-through entities is currently taxed at the ordinary individual tax rates of the owners or shareholders. In 2020, taxpayers who receive qualified business income from a trade or business through a partnership, limited liability company, S corporation and/or sole proprietorship will be allowed a 20 percent deduction, subject to taxable income phaseouts and complex calculations, in arriving at taxable income. The deduction will also be afforded to taxpayers who receive qualified REIT dividends, qualified cooperative dividends and qualified publicly traded partnership income. For owners with taxable incomes over $326,600 (joint filers) or $163,300 (all other filers), this deduction is subject to reduction or elimination, based on the owner’s pro rata share of W-2 wages paid by the business and/or the business’ basis in qualified property.

In addition, if the business is a specified service business and a taxpayer’s taxable income exceeds $426,600 for married individuals filing jointly and $213,300 for all other filers, owners of such businesses would no longer qualify for the deduction.

A qualified trade or business is defined as any trade or business other than a specified service trade or business and other than the trade or business of being an employee. Specified services are defined as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services (investing and investment management, trading, dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees). Notably absent from this list, and specifically excluded from the definition of specified services, are engineering and architectural services, as well as real estate agents and bankers.

Planning Tips—There are certain planning strategies taxpayers can use in order to take advantage of these deductions. The service businesses listed above should consider methods to increase tax-deferred income or decrease taxable income at the entity level, so that owners close to the $163,300/$326,600 threshold can take full advantage of the pass-through deduction. Some methods of reducing taxable income to fall within these thresholds include:
  • Consider the current status of contractors/employees. If the taxpayer is within the phaseout range and subject to wage limitations, it may be beneficial to deem current contractors as employees subject to W-2 wages. This both increases the W-2 wage base and will provide entity level deductions for additional payroll taxes and benefits to reduce pass-through income to the shareholder/partner.
  • Take full advantage of retirement vehicles, which serve to reduce taxable income at the shareholder/partner level.
  • Partners and shareholders should plan to maximize above-the-line (such as retirement plan contributions, health insurance, among others) and itemized deductions for purposes of reducing taxable income.
  • Combine qualified businesses and treat them as one aggregated business for the purpose of the Section 199A computation. The combination could result in a higher deduction than treating the businesses separately. Combining businesses can also help taxpayers meet the wage limitations that are part of the deduction computation.
  • Qualified business income, for purposes of computing the 20 percent qualified business income deduction, does not include guaranteed payments to partners in a partnership. Reducing guaranteed payments and allocating profits to ordinary income could increase the deduction for certain partners. In order to do so, a careful review of the partnership agreement is advised and may also require amending the partnership agreement to properly document the change.
  • Investments in real estate investment trusts (REITs) and/or publicly traded partnerships (PTPs) are eligible for a straight 20 percent qualified business income deduction. REITs and PTPs are not subject to the W-2 compensation or basis limitations, or limitations of specified trade or businesses.
  • Perform an analysis to determine if it would be advantageous for married taxpayers to file separately to avoid the threshold limitations.
Observation—In June of 2020, the Internal Revenue Service issued final regulations providing guidance on the new 20 percent deduction. The final regulations further define the meaning of specified service trade or business (SSTB) and also address various strategies being considered to avoid the deduction limitations associated with SSTBs. The limitations and analysis are complex. We would be pleased to consult with you for assistance in properly navigating these rules to ensure preservation of applicable deductions.

63. Take advantage of lower corporate income tax rates. Since 2018, corporations are subject to a flat 21 percent tax rate. The 21 percent rate also applies to personal service corporations such as accounting firms and law firms.

Observation—While the corporate tax rate of 21 percent may seem more advantageous than the personal income tax of up to 37 percent paid on pass through income, the corporate tax structure may not be advantageous for closely held business owners currently established as S corporations, limited liability companies or partnerships. While corporations may currently enjoy a lower tax rate on their profits, shareholders will encounter a second tax on dividends distributed to them. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not receive a tax deduction when it distributes dividends to shareholders and shareholders cannot deduct any losses of the corporation. Alternatively, income earned by pass-through entities is taxed only once at the owner level.
Another benefit to the pass-through structure of limited liability companies and partnerships is their flexibility for allocating income/loss and distributing cash/assets. The owners must agree on the allocations, and the allocations must have substantial economic effect. In addition, limited liability companies and partnerships are generally easier to form, manage and operate. They are less regulated in terms of laws governing the formation because the owners control the way the business operates.
Businesses, particularly those in service industries that are excluded from the proposed pass-through deduction, should consider if electing C corporation status would be a more favorable structure. Companies that generate significant income, reinvest in their business and do not distribute cash to investors could see a benefit of a lower corporate tax rate. Further, transitioning to a C corporation may be advantageous if you anticipate long-term ownership. However, owners considering a transition to a C corporation should also be mindful of the accumulated earning tax (20 percent tax on companies maintaining too much cash) and the personal holding company tax (25 percent penalty on undistributed passive income earned in a closely held C corporation).

64. Evaluate your sales tax exposure. In light of the South Dakota v. Wayfair, Inc. Supreme Court decision, businesses should periodically review their operations to determine if they have additional sales and use tax exposure. Businesses that have large retail or ecommerce sales may be subject to sales or use taxes, even if they do not have a physical presence in the state or local jurisdiction. Accordingly, now is the time to perform an assessment of your business activities and make plans to become compliant (if warranted) in early 2021. We have extensive experience conducting these assessments.

65. Prepare for new partnership capital account rules. Beginning in 2020, partnerships will have to report tax basis capital for all partners.

Tax basis capital represents a partner’s equity as calculated using tax principles. Computing a partner’s tax basis capital may sound like a simple task. However, the length of the partnership and admittance/exit of multiple partners over the years can add layers of complexity to properly computing a partner’s tax basis.

The IRS is mandating capital accounts now be kept on a tax basis to better monitor when a partner takes excess cash distributions, which, absent sufficient tax basis, would be considered a taxable distribution, and also to monitor whether or not a partner has sufficient tax basis to deduct losses.

Prior to the tax basis capital account mandate, most taxpayers defaulted to keeping their capital accounts based on “books and records,” which may differ significantly from tax basis.

Planning Tip—In addition to disclosure now being required by the IRS, maintaining proper tax capital account records is also important when determining any gain/loss on the sale of a partnership interest, the ability of a partner to receive a distribution of cash on a tax-free basis, and the ability of a partner to deduct losses generated by the partnership.
If you are unsure how to compute your tax basis capital, be sure to consult with a qualified tax professional sooner rather than later in order to prevent delays in 2020 partnership tax filings.

66. Review your plans to entertain clients. Part of the TCJA’s revenue raising provisions prohibited businesses from writing off expenses associated with entertaining clients for business purposes. However, business meals paid concurrently with the entertainment expenses are still deductible, provided these expenses are separately paid for or separately stated on the invoice.

Planning Tip—Entertainment activities with clients should be reviewed before year-end to determine their deductibility for 2020. The deduction for meals is preserved, so to the extent possible be sure to break out on the invoice the food portion of any entertainment expense incurred and, as always, maintain contemporaneous logs or other evidence of the business purpose of all meals and entertainment expenditures. This may require enhanced general ledger reporting to minimize effort in segregating deductible and nondeductible meals and entertainment expenses.
It is important to remember that a company-wide activity such as a holiday party or team building event is still deductible in full. Also 100 percent deductible are the costs of food or drinks provided to the public free of charge. Meals brought in for employees working late or for department meetings remain subject to the 50 percent limitation.

67. Strategically time purchases of business property. For 2020, businesses can expense, under IRC section 179, up to $1 million of qualified business property purchased during the year. This $1 million deduction is phased-out, dollar for dollar, by the amount that the qualified property purchased exceeds $2.5 million.

Generally, qualified business property for purposes of section 179 includes tangible personal property used in a trade or business, as well as non-residential qualified improvement property, including, but not limited to: roofs, HVAC systems, fire protection and alarm systems and security systems. The qualified improvement property must also be placed in service after the date of the real property in order to qualify for accelerated depreciation under section 179.

Additionally, bonus depreciation can be claimed on 100 percent of qualified new or used property placed in service during the year, and the first year bonus depreciation on passenger automobiles (vehicles with gross vehicle weight less than or equal to 6,000 pounds) is currently $8,000. Bonus depreciation of 100 percent under the new law is available for property placed in service after September 27, 2017, and before January 1, 2023. The definition of qualified property for purposes of bonus depreciation has been expanded to include the purchase of used property, so long as the taxpayer has not previously used the property (such as in a sale-leaseback transaction).

Qualified business property for purposes of bonus depreciation includes, but is not limited to, equipment and tangible personal property used in business, business vehicles, computers and office furniture and land improvements to a business, as long as the recovery period of the property is less than or equal to 20 years.

Observation—For a vehicle to be eligible for these tax breaks, it must be used more than 50 percent for business purposes, and the taxpayer cannot elect out of the deductions for the class of property that includes passenger automobiles (five-year property).
Planning Tip—If you are making multiple purchases of qualified property, pick assets with longer depreciable lives to expense. By doing this, you will depreciate your other assets over shorter recovery periods, thus accelerating and maximizing your depreciation deduction.
The CARES Act retroactively treats qualified improvement property as 15-year property, rather than 39-year property as it was classified under the TCJA, which made qualified improvement property temporarily ineligible for bonus depreciation. Since this reclassification, taxpayers can now potentially revisit and amend 2018 and 2019 income tax returns to take advantage of bonus depreciation available for qualified improvement property under the CARES Act and to secure a tax refund and enhance 2020 depreciation.

68. Select the appropriate business automobile. For business passenger cars first placed in service in 2020, the ceiling for depreciation deductions is $10,100. Higher deductible amounts apply for certain trucks and vans (passenger autos built on a truck chassis, including SUVs and vans). Vehicles such as SUVs and vans with gross vehicle weight ratings of between 6,000 pounds and 14,000 pounds are restricted to a first year deduction of $10,100, in addition to the $25,000 that is permitted to be expensed under IRC Section 179. Automobiles that are used 50 percent or more for business are also eligible for bonus depreciation of up to $8,000. For vehicles placed in service in 2020, the depreciation limitation for passenger automobiles is $10,100 for the year the automobile is placed in service, $16,100 for the second year, $9,700 for the third year and $5,760 for the fourth year and later years in the recovery period.

New Vehicle Depreciation in 2020




Passenger Automobiles

SUVs, Vans, Trucks

Maximum Section 179 Allowed



Maximum Bonus Depreciation Allowed



Year 1*



Year 2*



Year 3*



Year 4* and later



* Maximum amount of depreciation if electing out of or not qualifying for bonus depreciation and/or Section 179.

Illustration—If you purchase an SUV that costs $75,000 before the end of 2020, assuming the SUV would qualify for the expensing election, you would be allowed a $25,000 deduction on this year’s tax return. In addition, the remaining adjusted basis of $50,000 ($75,000 cost less $25,000 expensed under Section 179) would be eligible for a bonus depreciation deduction of $50,000 under the general depreciation rules, resulting in a total first year write-off of $75,000. This illustration also assumes 100 percent business use of the SUV.
Observation—Although the accelerated depreciation for passenger automobiles and SUVs is appealing, be careful to note that if your business use drops below 50 percent in a later year, the accelerated depreciation must be recaptured as ordinary income in the year business use drops below 50 percent.
Additionally, taxpayers are strongly urged to keep track of business miles through manual logs or digital apps in order to support business use of listed property.

69. Defer taxes with cost segregation. Property that is placed in service after September 27, 2017, and has a class life of up to 20 years will generally qualify for 100 percent bonus depreciation. Real estate that is nonresidential property is generally regarded as 39-year property and is not eligible for bonus depreciation. A cost segregation analysis allows for the appropriate allocation of costs amongst various class lives and may permit the owners to take advantage of greater depreciation deductions (including 100 percent bonus depreciation). Further, by frontloading allowable depreciation deductions to the early years of the property’s life, reclassification can result in significantly shorter tax lives and greater tax deferrals.

70. Consider simplifying accounting methods. Prior tax law posed reporting complications for businesses with average gross receipts exceeding a certain threshold. In 2017, if average gross receipts exceed $5 million, taxpayers were not permitted to use the simpler cash method of accounting. Similarly, under prior tax law, businesses with average gross receipts of over $10 million were not able to account for inventories of materials and supplies, and taxpayers were forced to use uniform capitalization rules. Under the TCJA, the thresholds for both accounting methods were indexed for inflation and currently stand at $26 million for 2020.

Planning Tip—If your business’ income previously exceeded the thresholds, but falls beneath the higher thresholds for 2020, determine whether the increased thresholds would make a tax accounting change a useful strategy.

71. Determine the merits of switching from the accrual method to the cash method of accounting. Businesses that sell merchandise generally use the accrual (rather than the cash) method of accounting to account for revenue and inventory related to the merchandise. While this may provide a more complete picture of the financial status of a business, from a tax perspective it provides much less flexibility in terms of planning options and is more difficult to use than the cash method of accounting. The good news is that for the years 2019 and 2020, businesses with average gross receipts over the last three years of $26 million or less that would otherwise be required to use the accrual method of accounting can elect to use the cash method. While there are some caveats to obtaining this relief, it is a tax-saving strategy worth considering if your business can meet the average gross receipts test and is currently using the accrual method of accounting.

72. Select the most tax-efficient inventory method. If your business tracks inventory, you may be able to realize meaningful income tax savings based on your selected inventory method. For example, in a period of falling prices, the first in, first out (FIFO) method will provide larger tax savings since it assumes that higher priced inventory units purchased first are the first ones sold. Conversely, in a period of rising prices, the use of the last in, first out (LIFO) method can produce income tax savings since it assumes that the higher priced inventory units purchased last were the first ones sold. IRS approval, along with professional assistance, may be needed.

73. Establish a tax-efficient business structure. The structure of your business can impact your personal liabilities as well as your tax liabilities. Businesses may operate under various structures, including general partnership, limited liability company, limited liability partnership, S corporation, C corporation and sole proprietorship. Owner liability and income taxation are the primary factors that distinguish one from another, but it is prudent to consider other characteristics as well. This is usually one of the first decisions made in setting up a business, and the decision should be carefully evaluated by you and your team of legal and tax advisers.

74. Consider the benefits of establishing a home office. Due to the COVID-19 pandemic, many people were forced to leave their offices and set up workstations at home in 2020. Taxpayers may wonder if they now qualify for the home office deduction. Those taxpayers who own small businesses or are self-employed and work out of their home may very well have the ability to take advantage of the home office deduction if they heed the rules below. Currently, W-2 employees do not qualify to take the home office deduction.

Expenses related to your home office are deductible as long as the portion of your home that qualifies as a home office is used exclusively and on a regular basis as a principal place of business. This can be broken down into a few factors:

  1. You must use part of the home or apartment on a continuous, ongoing or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick. But occasional, “once-in-a-while” business use won't do.
  2. To qualify under the exclusive use test, you must use a specific area of your home or apartment only for your trade or business. The area used for business can be a room or, preferably, a separately identifiable space. It cannot be the kitchen table, family room, den or playroom where clearly other nonbusiness activities occur.
  3. The area must be a place where you meet or deal with clients in the normal course of your trade or business, and the use of your home is substantial and integral to the conduct of your business. Incidental or occasional business use is not regular use, but this test may be met even if you also carry on business at another location.

A simplified home office deduction ($5 per square foot, up to 1,500 square feet) is also available to taxpayers, which minimizes expense tracking while providing a flat rate deduction per square foot of office space. In addition to claiming a deduction for home office expenses, the ability to qualify as a home office may enable you to deduct the cost of traveling between your home and other locations where you conduct business.

Observation—Take advantage of the home office deduction if you meet the requirements. Using your home or apartment for occasional meetings and telephone/videoconferencing calls will likely not qualify you to deduct expenses for business use, even if you are working there full time during the course of the pandemic. There is no new guidance given the unique circumstances of the COVID-19 pandemic, when many are working remotely. The exclusive use test discussed above may be satisfied while we are working remotely (if you’re not working from the kitchen table). However, the regular test as a continuous, ongoing or recurring basis may not be met when we return to the office. At this point, we simply do not know under current guidance if regular use for a short period of time, but not thereafter, will pass scrutiny.
Also, there is a potential downside for claiming home office deductions. For example, on the sale of your home, home office depreciation previously claimed does not qualify for the exclusion of gain on the sale of a principal residence. Additionally, be sure you meet all the requirements for claiming a home office deduction, as this can be a red flag prompting IRS inquiry. It will be important to be proactive in your tax planning and maintain accurate record keeping.

75. Examine and properly classify your independent contractors and employees. The question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one. It is intensely factual, and the consequences of misclassifying a worker can be serious. In general, the person (or entity) who controls how a job is performed is the employer. There are many factors requiring assessment to properly determine degree of control, as discussed below. Therefore, if the worker has control, the worker is self-employed and an independent contractor and is subject to self-employment taxes. On the other hand, if a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer’s share of Federal Insurance Contributions Act (FICA) taxes on the wages plus Federal Unemployment Tax Act (FUTA) tax, and often provide the worker with fringe benefits that are made available to other employees. There may be state tax obligations as well. Since these employer obligations do not apply for a worker who is an independent contractor, the savings can be substantial.

Observation—The IRS continues to intensely scrutinize employee/independent contractor status. If the IRS examines this situation and reclassifies the worker as an employee, not only are employment taxes due, but steep penalties will be assessed. The IRS’ three-category approach (i.e., behavioral control, financial control, type of relationship) essentially distills the 20-factor test the IRS had used to determine whether a worker was an employee or an independent contractor. The gig economy is also changing the landscape, as it is challenging the use of traditional criteria to assess a worker’s classification. Consider seeking professional guidance to review of your worker classifications.

76. Establish an accountable expense reimbursement plan. An accountable plan reimburses employees for work related expenses by utilizing specific reporting, substantiation of business expenses and return of any excess cash advances. Employers are allowed to deduct and employees are allowed to exclude from gross income employer expense reimbursements if paid under an accountable plan. Since both the employer and employee benefit from establishing an accountable plan, the need to specifically track expenses is usually worth the minimal extra effort over a nonaccountable plan.

Planning Tip—An accountable plan is a process of reimbursing an employee for business related expenses, and therefore not included in compensation and ultimately not considered taxable income. The costs must be business related, therefore, it is imperative to maintain segregated and accurate accounting of expenses. The key is to develop a reimbursement process that is consistent and well documented within the organization.

77. Consider the advantages of employing your child (or grandchild). Employing your children (or grandchildren) shifts income from you to them, which typically subjects the income to the child’s lower tax bracket and may actually avoid tax entirely (due to the child’s standard deduction). There are also payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both Social Security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. (See item 39).

Observation—When employing your child or grandchild, keep in mind that any wages paid must be reasonable given the child’s age and work skills. Also, if the child is in college or entering soon, excessive earned income may have a detrimental impact on the student’s eligibility for financial aid.

78. Don’t overlook your business tax credits. Credits are dollar-for-dollar reductions in tax and are much more valuable than deductions. Employers can claim the Work Opportunity Tax Credit, which is equal to a percentage of wages paid to employees of certain targeted groups during the tax year. Other credits, such as the retirement plan tax credit, may also be available but certain actions must take place before year-end to qualify. Employers can also receive tax credits for other employee provided services such as child care facilities/services, making improvements so businesses are accessible to persons with disabilities and providing health insurance coverage to employees.

79. Conduct a research and development (R&D) study to maximize your R&D tax credit. More industries and more activities now qualify for the R&D tax credit than ever before. For businesses of all sizes, accelerate research and development expenses, including qualified software development costs, prior to year-end.

80. Generate payroll tax credits with the research and development (R&D) tax credit. While it is generally known that the R&D tax credit can be applied to income taxes and the AMT (as long as certain requirements are met), qualified small businesses can also use the R&D tax credit against their Social Security payroll taxes. To qualify for this credit, a small business must: (a) have gross receipts of under $5 million for the current tax year; (b) have had gross receipts for five years or less, including the current year; (c) have qualifying research activities and expenditures; and (d) incur payroll tax liabilities. Businesses can generate up to $250,000 in payroll tax credits per year for five years, and any unused portion can be carried forward to future years. Contact us for assistance in determining activities eligible for these incentives and the assessment of the appropriate documentation required to support your claim.

81. Perform a compensation study. Businesses can maintain deductibility, yet avoid payroll taxes, on compensation moved from salary to fringe benefits. Employees will enjoy the tax savings resulting from lower taxable compensation. Benefits typically shifted include medical insurance and employee discounts. This may be a positive way to attract and retain employees. It is important to note, however, that transportation fringe benefits are not deductible by the employer unless included in the employee’s W-2 wages.

Planning Tip—Consider paying dividends in lieu of owner salaries in a family-owned C corporation. If you personally expect to be in the 32 percent or higher tax bracket for 2020 and you own a C corporation, you could net more cash after taxes by paying yourself some dividends in lieu of additional salary. This is because dividend income is subject to a maximum 20 percent tax rate, while your salary is subject to your 32 percent or higher tax rate, plus you and your corporation must pay payroll taxes on your salary.
Observation—Any dividends paid to you must be paid to other owners as well. This is ideal in the context of a family-owned C corporation, since a family recipient who is in the 10 percent or 12 percent tax brackets (which many children are) will not pay taxes on this dividend income. On the other hand, however, if there are multiple nonfamily member shareholders, paying dividends could alter the bottom-line cash flow available to the various shareholders, which may make this strategy unworkable in some situations.

82. Establish health savings accounts (HSA) and other cafeteria plans (i.e., Section 125 plans or flexible spending accounts). These plans provide an IRS-approved way to lower taxes for both employers and employees, since they enable employees to set aside, on a pre-tax basis, funds from their paychecks for adoption expenses, certain employer-sponsored insurance premium contributions, dependent care costs and unreimbursed medical expenses. Furthermore, Section 125 plans are permitted to offer salary-reduction HSA contributions for eligible employees as part of the menu of plan choices. Thus, employers can sponsor the HSAs and employer contributions are not subject to income or employment taxes.

Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes, with the exception of California and New Jersey (at maximum rates as high as 11 percent), resulting in a tax savings of as much as 55.65 percent. The employer pays less in Social Security matching tax. Like an accountable expense reimbursement plan, it can assist an organization in achieving its strategic goals by enhancing its ability to attract and retain talented, experienced people. Since many restrictions apply, you should carefully review this arrangement before instituting a plan.

Planning Tip—Consider naming your spouse as beneficiary of your HSA, as the surviving spouse is not subject to income tax on distributions as long as they are used for medical expenses. Anyone other than your spouse will be taxed on the balance remaining in the HSA upon the owner’s death.

83. Draft a succession plan. It is important for business owners to create a strategy to transfer the business in the event of death, disability or retirement. Failure to properly transition the business can not only create a greater tax burden, but turn a successful business into a failed business. You will need to identify candidates for leadership as well as ownership roles, while also considering estate and gift tax consequences. Together with your lawyer, CPA and financial advisers, you can transfer control as desired, develop a buy-sell agreement, create an employee stock ownership plan and carry out the succession of your business in an orderly fashion.

84. Deduct your business bad debts. Since business bad debts are treated as ordinary losses and can be deducted when either partially or wholly worthless, it is prudent to examine your receivables before year-end. Not being paid for services or merchandise that you have sold is bad enough; do not pour salt into the wound by paying income tax on income you will never realize.

85. Do not become trapped by the hobby loss rules. If your business will realize a loss this year, you need to consider the so‑called “hobby loss” rules to ensure that the business is treated like a business, not a hobby, and that the loss will be deductible.

86. Sell your company’s stock, rather than its assets. If you are considering selling your business, try to structure the transaction as a sale of the company’s stock, rather than as a sale of the company’s assets. A sale of your company’s stock will be treated as the sale of a capital asset and the preferential long-term capital gain rates will apply. A sale of the company’s assets, on the other hand, will typically result in at least some of the gain being taxed at the much higher ordinary income tax rates. However, since the buyer will generally want to structure the transaction as a purchase of the company’s assets in order to increase his or her depreciation deductions, some negotiating by both parties should be expected.

87. Consider installment sale treatment for sales of property at a gain. When property is sold, gain is generally included in income when the asset is sold. The installment method is required in cases where there is a sale of property and the seller receives at least one payment after the year in which the sale occurs. Under the installment method, gain is recognized ratably over multiple years on the sale to the extent payments are made on the installment note, subject to a gross profit computation. This method allows you to recognize gain only to the extent of payments actually received and is a valuable method to defer income. An election is available to “elect out” of installment sale treatment. In addition, not all states recognize this type of gain treatment, so the state tax effects also need to be considered.

Observation—The IRS also imposes an additional interest charge on installment sale obligations if the total amount of the taxpayer’s installment obligations at the end of the tax year exceed $5 million. The interest charge is assessed in exchange for the taxpayer’s right to pay the tax on the installment sale income over a period of time.

88. Set up a captive insurance company to realize insurance cost savings. For certain groups, setting up a small “captive” insurance company, which is owned and controlled by the insureds, may result in insurance savings, particularly when there is a high loss ratio anticipated from claims. In addition, small captives qualifying under the Internal Revenue Code 831(b) pay income tax only on investment income, not underwriting income. Generally, these captives are set up among related companies, companies within the same industry or companies affiliated with some association.

89. Utilize a private foundation to accomplish charitable goals. While donor-advised funds (DAFs) are increasingly popular among philanthropic individuals, private foundations may offer certain advantages to families looking to create a multi-generational plan for charitable giving. Private foundations can exist in perpetuity, so they are an excellent vehicle to carry on a founder’s family name. Generally, DAFs are not legally separate than the 501(c)(3) sponsoring organization, and may have time limits. Further, while DAFs usually follows a donor’s direction in gift giving, they are not legally required to. Private foundations may provide donors with greater flexibility in gift giving.

Private foundations are not without their limitations, however. Excise taxes are assessed annually on investment income, and foundations must distribute 5 percent of their assets each year. Beginning in 2020, the excise tax rate for private foundations is now 1.39 percent of net investment income, rather than the previous 2 percent, reduced to 1 percent in certain cases.

We have assisted numerous clients with evaluating whether a private foundation is a good option.

90. Beware of recapture of tax benefit on property not used for an exempt purpose. When a donor makes a charitable contribution of tangible personal property that is not used for exempt purposes, and the donor originally claimed a deduction for the fair market value of the property, the donor’s tax benefit may need to be adjusted.

Under the provision, if a donee organization disposes of applicable property within three years of the contribution of the property, the donor claimed a deduction of more than $5,000 and the organization does not certify that the property was substantially used for the organization’s exempt purpose or the intended use became impossible, the donor is subject to a tax benefit adjustment.

A penalty of $10,000 applies to a person that identifies applicable property as having a use that is related to a purpose or function of the organization constituting the basis for the donee’s exemption knowing that it is not intended for such use.

91. Ensure that your private foundation meets the minimum distribution requirements. A foundation is required to distribute approximately 5 percent of the average fair market value of its assets each year. Qualifying distributions meeting this requirement include grants and certain operating expenses. Penalties are imposed in the form of an excise tax on the foundation if it fails to make qualifying distributions within 12 months after the close of the tax year.

92. Review your estate plan documents. Despite the TCJA doubling the estate, gift and GST tax exemptions, wealth transfer strategies are still important. If you have not examined your estate plan within the last two years, you should consider doing so immediately. This year, it may be especially important as presidential administrations change. While we do not expect an immediate change in the federal estate, gift and generation skipping taxes, there is always the possibility of an increase in the effective tax, a reduction in exemption amounts, or both, as Democrats gain power, and deficits rise.

While addressing your will, also consider the benefits of a living will, medical power of attorney, healthcare directives, durable power of attorney and the appropriateness of your beneficiary designations on your retirement accounts and life insurance policies.

Planning Tip—One easy step to take in reducing your estate subject to the estate tax is to make annual gifts before the end of the year. A donor may make a gift of $15,000 to any one donee or $30,000 to any one donee provided the donor is married and the gift is split with his or her spouse, without using any of their unified credit or incurring a gift tax. Thus, a gift of $60,000 may be made by a husband and wife to another married couple, free of gift tax and with no impact on the unified credit. Medical and education expenses paid directly to the providing institution are not subject to gift tax. In addition, as indicated in the education planning section of this guide, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment. A substantial tax reduction can be achieved by making gifts to your child(ren) or grandchild(ren).

93. Take advantage of current exclusions. As discussed above, the annual gift tax exclusion is currently $15,000 for 2020. The estate and gift tax unified credit has increased slightly in 2020 from $11,400,000 to $11,580,000. For both simple and complex trusts, grantors should consider funding in 2020 to take advantage of this credit, as it may face political pressure moving forward, and is scheduled to sunset on January 1, 2026.

U.S. Estate Tax Exemption, 1990-2030

Illustration—Gifts are generally only subject to the gift tax in very limited circumstances. For example, say Sarah funds an irrevocable trust for the benefit of her grandchild. Sarah was never married. In 2020, she contributes $7 million to the trust. The first $15,000 of any present interest gift in 2020 can pass freely to the recipient, without any gift tax reporting obligation. When the gift exceeds the annual exclusion amount, a gift tax return must be filed for the year, but no gift tax is paid unless the gift exceeds Sarah’s remaining lifetime unified credit. Since Sarah has made no gifts exceeding the annual exclusion amount during her lifetime and has never filed a gift tax return to reduce her unified credit, she would reduce her $11.58 million credit by $6,985,000, resulting in no taxable gift, no tax liability, and the removal of appreciated assets from her estate. (The entire amount of the $7 million gift was offset by the unified credit.)




Less: Annual Exclusion


Less: Unified Credit


Taxable Gift


Gift Tax Due


Credit before gift


Credit used toward gift

$6,985,000 (a)

Credit remaining


(a) $7,000,000 gift less annual exclusion of $15,000 = $6,985,000 credit used

Observation—The TCJA effectively doubled the basic exclusion amount from an inflation-adjusted $5 million to an inflation-adjusted $10 million, but only until January 1, 2026. Thus, it is possible for certain taxpayers to gift more property during their lifetimes in excess of their exclusion entitlement upon death. After passage of the act, there was a certain fear that taxpayers passing away after 2025 who had gifted more than the inflation adjusted $10 million exclusion would face a “clawback” of the gift tax exclusion upon death. Fortunately, the IRS has released final regulations stating that, to the extent a higher basic exclusion amount was allowable as a credit in computing gift tax during the decedent’s life, the sum of these credits used during life may be used as a credit in computing the decedent’s estate tax. In the example above, suppose Sarah made no further gifts during her lifetime and passed away in 2026. Under the regulation, though the basic exclusion amount is set to revert to $5 million in 2026, Sarah’s estate would be entitled to an estate tax exclusion of $6.985 million due to the completed gifts she made during her lifetime, thus eliminating any “clawback” of the exclusion.
This regulation has gained added importance following the presumed election of Joe Biden to the presidency. President-elect Biden’s tax plan has proposed immediately reducing the estate, gift, and GST credit back to the pre-TCJA amount, effectively cutting it in half, from an inflation indexed $10 million to an inflation indexed $5 million. However, due to this regulation, if a taxpayer utilized the entire $11.58 million credit available in 2020 gifts, should the credit be reduced to say $5 million in 2021, the entire gift of $11.58 million would be excluded at the taxpayer’s death in 2021 or beyond. Thus, it may make sense to fully utilize the current credit, especially if you anticipate a change to the estate tax.
Planning Tip—All of the strategies and observations noted in this guide are aimed at minimizing your income and gift tax costs. In other words, it is important that you ensure that your current and future wealth are not unduly diminished by those taxes. We strongly recommend that you consult with estate planning professionals to discuss such topics as gift, estate and generation-skipping transfer (GST) tax exemptions, the unlimited marital deduction, each spouse’s exemption and related items.

94. Utilize a spousal lifetime access trust (SLAT) to take advantage of current high unified credits. As we mentioned previously, it is likely that the unified credit is near its historical peak. It is highly likely that even if the estate tax is not modified in next five years, the current credit will sunset in 2026 and revert to an inflation adjusted $5 million. In order to take advantage of the current credit, married persons can each gift the amount of the credit to a SLAT, utilizing the credit on the gift and paying no gift tax. In a SLAT, after the donor spouse gifts to the trust, the donee spouse has the right to receive distributions from the trust, thus preserving access for the couple to the trust assets if necessary. However, if principal is removed from the trust, the SLAT assets will be brought back into the estate, defeating the original intent of forming the SLAT, so exercise caution when taking distributions. When the donor spouse dies, the assets in the trust (and subsequent appreciation) are not subject to the estate tax.

Planning Tip—If you are trying to provide for a nonresident spouse, a qualified domestic trust (QDOT) may be appropriate. Under the estate tax, a noncitizen surviving spouse is generally not entitled to the same marital deduction afforded to citizen spouses. To get around this, the U.S. spouse can transfer assets to a QDOT during his or her lifetime, and upon death, the assets in the QDOT will not be subject to estate tax. Rather, the estate tax bill is deferred. The surviving spouse may receive income from the trust but any distributions of principal may be subject to estate tax, except in certain hardship situations. Upon death of the surviving spouse, the assets of the QDOT will finally be subject to the estate tax.

95. Consider use of a grantor retained annuity trust (GRAT) for inter vivos wealth transfer. In a GRAT, a grantor contributes assets to a trust while retaining annuity payments for a defined period of time, with the remainder payable to beneficiaries. Depending on the structure of the GRAT, one can achieve maximum wealth transfer with little to no gift tax effect or use of the lifetime exclusion. However, should the grantor pass away prior to the completion of the annuity payments under the GRAT, at least a portion and possibly all of the GRAT assets are includible in the grantor’s estate. Thus, by terminating the annuity and trust before December 31, 2025, when the new higher federal estate tax threshold is set to expire, one can reap all of the benefits of a GRAT with minimal risk, while retaining the use of the grantor’s applicable exclusion amount.

Planning Tip—Another way to retain access to an asset while passing it down to the next generation is by utilizing a qualified personal residence trust (QPRT). By transferring a house to a QPRT, the grantor can continue to live in the home for a specified period, after which the home passes to the beneficiaries. At this point, the grantors may, depending on the terms of the trust, pay rent to remain in the home. The gift of the future interest in the home to a QPRT allows the grantor to gift the home to the trust for a discounted value, using less of the exclusion, and shields future appreciation of the home from the estate tax.

96. Gift or sell assets to an intentionally defective grantor trust (IDGT). Traditionally, donors would gift assets to an IDGT, which would result in a completed gift during their life, using some of their gift tax exemption, but shielding appreciation in the assets from the estate and gift taxes.

Given the current low rate environment, donors should consider selling appreciated assets to an IDGT and taking back a promissory note which pays interest at the low current applicable federal rate (AFR). As the grantor is still treated as owning the assets in an IDGT for income tax purposes, there is no income tax on the “sale” to the trust, and the grantor will continue to pay tax on the income from the trust. Thus, beneficiaries of a grantor trust will receive assets undiminished by the payment of the income taxes (as the grantor, not the trust, pays the tax), and the payment of the tax by the grantor does not constitute an additional gift for purposes of the gift tax.

97. Utilize a charitable remainder trust (CRT) or a charitable lead trust (CLT) to transfer wealth and benefit charity. As you would expect, both trusts involve the donation of a portion of the assets transferred into the trust to charity, but the timing and functions of both are very different. Both a CLT and CRT permit the donor to remove the asset from their estate. The differences arise in the areas of recipients of the annuity payments, and the distribution of the remaining funds.

A CRT is created to ensure the donor’s financial future. Under a CRT, the donor will receive annual annuity payments, and the remainder is distributed to a charity (or charities) of his or her choosing.

A CLT is predominantly focused on the tax-efficient distribution of the donor’s wealth to beneficiaries. First, the donor makes a taxable gift equal to the present value of the amount that will be distributed to remainder beneficiaries. In a CLT, the charities “lead,” and they receive the annual annuity payments. The amount remaining at the completion of the term is then distributed to the beneficiaries.

Planning Tip—With the potential chatter to eliminate the lower and more favorable tax rate for long-term capital gains and qualified dividends on income over $1 million from 20 percent to 39.6 percent, funding a substantial sale to a CRT in 2020 may create more risk than desired. Careful planning is needed here.

98. Review trust residency qualifications often. The most difficult aspect of trust residency is that each state has different rules and qualifications for determining whether a trust is a resident or nonresident. For example, most trusts created by a will of a decedent or which was funded while the donor was considered a resident of Pennsylvania are considered resident trusts. However, a state like Kansas only considers a trust a resident if it is administered in the state. Each state and situation differs for trust taxation. We recommend contacting your tax advisor in any questions regarding trust residency.

99. Intra-family loans can prove to be beneficial for both the borrower/donee and the lender/donor. In this situation, the lender would be required to charge the minimum Applicable Federal Rate (AFR). As of October 2020, that rate was 0.4 percent, near historical lows due to the pandemic. A donor could choose to loan a beneficiary money, receiving the currently low AFR rate in return, while the beneficiary invests the proceeds. As long as the investment earns more than the interest paid, the donor has been able to transfer the appreciation on the assets to the beneficiary while avoiding gift taxes or use of the unified credit.

Alternatively, a donor could loan a beneficiary money to buy a home. With average mortgage rates estimated anywhere between 2.5 and 4 percent, there is significant room to make an arrangement beneficial for both parties. For the donee, if the loan is secured and properly recorded, it could be deductible on their tax return, while likely paying significantly less than what would be charged by a typical lending institution. For the donor, the mortgage could very well generate a better rate of return than a standard investment could, all while secured by real property.

100. Consider the benefits on a revocable living trust. In most cases, wills are written up to determine how assets are distributed upon death. However, revocable trusts can provide numerous advantages that may make them more beneficial than wills. One significant advantage is the avoidance of probate. Probate is the process of the legal administration of a person’s estate in accordance with their will or state law in the event there is no will in place. Having a revocable trust eliminates any uncertainty in connection with the probate process. Other benefits of revocable trusts are confidentiality and protection against incapacity.

101. Utilize life insurance properly. Whether it’s to pay estate taxes, protect the family of a deceased “breadwinner” or fund ongoing business structures, there are many reasons why taxpayers should obtain life insurance. Typically there are two different types of life insurance policies taxpayers may select: term life insurance, which provides coverage over a specific period of time (the most popular option being “premium level”), or permanent life insurance, which provides coverage until the taxpayer dies, or cancels the policy. A few examples of permanent life insurance include whole, universal and variable.

While life insurance may not be for everyone, it is worth looking into to see if your situation would benefit from it. For instance, business owners may want to guarantee they will be able to continue functioning after the loss of an important employee, or ensure survivor income for the deceased’s family. In addition, the business may want to provide inheritance for family members who are not directly involved with the business. In terms of estate taxes, high net worth individuals may still be plagued with a financial burden after the death of a taxpayer. Those electing to use insurance proceeds in order to provide cash for the estate tax payment may soften the blow of having to resort to using other tactics, such as liquidating assets.

When deciding who should fund the life insurance premiums, keep in mind if a business owner is funding the premiums, there could be various related income tax issues. In addition, gift tax issues could arise if a life insurance trust is already set in place. For those reasons, it is imperative that taxpayers consult with a trusted tax advisor in order to determine what structure would work best for their specific situation.

102. Minimize the income taxes applicable to estates and trusts. The tax rates that apply to estates and trusts continue to be significantly compressed. Estate and trust taxable income (exclusive of long‑term capital gain and qualified dividend income) of more than $12,950 for 2020 is taxed at a marginal tax rate of 37 percent. Consequently, it may be beneficial to distribute income from the estate or trust to the beneficiary for the purpose of shifting the income to a lower tax rate. Additionally, trusts and estates can minimize income taxes by employing many of the tax planning strategies that are applicable to individuals, including the “bunching” of deductions and deferral of income strategies noted above.

2020 Tax Rates Applicable to Estates and Trusts

Taxable Income

Tax Rate

$0 - $2,600


$2,601 - $9,450


$9,451 - $12,950


Over $12,950


103. Consider an election under the 65-day rule. Considering the compressed brackets with exceptionally high tax rates on income held within the estate or trust, it is feasible in many scenarios to lessen the total income tax hit for the trust by distributing income to be taxed at the beneficiary level, in lieu of the entity level.

With an election under Section 663(b), complex trust and estate distributions made within the first 65 days of 2021 may be treated as paid and deductible by the trust or estate in 2020. The election of the 65-day rule is an invaluable tactic, giving the trustee the opportunity to distribute income after the end of the year, once the total taxable income of the trust can be more accurately determined.

104. Be aware of many finalized regulations in 2020 for international tax. The Treasury Department and IRS have spent 2020 consistently issuing new final regulations on many international provisions enacted under the TCJA. In July 2020, new final regulations were released on Section 250 related to foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), which relaxed certain FDII documentation requirements, and expanded the pool of taxpayers eligible for FDII deductions. In addition, new final and proposed regulations were released with respect to the high-tax exception under GILTI and Subpart F, as well as the base erosion and anti-abuse tax (BEAT). In this ever-changing international environment, it is important to consult with knowledgeable and skilled advisers to help you navigate the landscape.

105. Take advantage of COVID-19 relief for U.S. nationals living abroad and foreign citizens in the U.S. The IRS has provided relief to individuals and businesses whose tax residence may be affected by cross-border travel disruptions due to the COVID-19 crisis, such as travel bans, canceled flights, border closings or shelter-in-place orders.

The IRS is providing relief to U.S. nationals living abroad by forgiving days spent away from the foreign country due to the COVID-19 emergency for purposes of qualifying for exclusions from gross income under the foreign earned income exclusion. This relief benefits individuals who reasonably expected to become a “qualified individual” for purposes of the exclusion but departed the foreign jurisdiction during the applicable period described in the revenue procedure. The period includes an individual who left China on or after December 1, 2019, or another foreign country on or after February 1, 2020, but on or before July 15, 2020.

The IRS is also providing relief to affected foreign citizens living in the United States. The IRS will presume that up to 60 consecutive calendar days of their U.S. presence arises from COVID-19 travel disruptions and will not count this time span for purposes of determining U.S. tax residency under the substantial presence test or whether the person qualifies for certain tax treaty benefits with respect to income from dependent personal services performed in the United States. Without this relief, some foreign citizens in the United States who are prevented from returning home by COVID-19 might be deemed resident aliens under the substantial presence test. Others might lose out on a tax treaty benefit with respect to income from dependent personal services performed in the United States because of their extended U.S. stay.

With this relief, these individuals can avoid having 60 days counted against them. The date when the 60-day period begins can be chosen by each person, but it must start between February 1 and April 1, 2020.

106. Avoid unintentional foreign trusts. Generally, trusts are considered domestic trusts for tax purposes if a U.S. court has primary jurisdiction over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. Thus, one needs to carefully consider, not only where the trust is formed, but also who will control the trust. A nonresident alien successor trustee could cause a U.S. trust to become a foreign trust when the original trustee dies or relinquishes their appointment. Along with such reclassification would come substantial changes to U.S. and foreign reporting requirements.

107. Re-evaluate transfer pricing policies in light of COVID-19. As a result of the global pandemic, many multinationals have faced severe disruptions to their global supply chains in 2020, resulting in new suppliers, temporary options, alternative means of performance and the restructuring of supply contracts. Taxpayers may wish to restructure or re-price interest rates in order to maximize available cash flow or defer certain inter-company payments, as well as increase their competitive position when operating in international jurisdictions.

The holiday season is upon us, once again, albeit very different this year, with many unknowns as we navigate daily life. One item of consistency, as we navigate this rapidly changing world and calibrate to a new normal, is that many of the 2020 tax savings opportunities will disappear after December 31, 2020. There’s a very short window in which to act in order to execute strategies that can both improve your 2020 tax situation and establish future tax savings. Without investing a little time in tax planning before year-end, you may only discover tax saving opportunities when your tax return is being prepared—at which time it may be too late. Plus, with new federal taxes looming, whether incremental or sweeping, we believe federal taxes (and perhaps state and local income taxes) will increase. A new work-from-home tax may also be on the horizon. If you would like to discuss the strategies and concepts indicated herein or have other concerns or needs, please do not hesitate to contact John Frederick, Michael Gillen or Steven Packer, or the practitioner with whom you are in regular contact. For information on other pertinent topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.