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As you file your 2019 tax return, consider these tips for 2020

W.G. Spoor

January 31, 2020

Tax season has begun, and as you work with your tax preparer on your 2019 return, it’s a great time to think about ways to reduce your tax liability in the year ahead.

Here are three tips that we’ve found can help individuals, and three tips that can be helpful for companies:

For individuals

  • Bunch itemized deductions into alternate years. If your charitable contributions or real estate taxes are significant when compared to your Adjusted Gross Income, consider staggering your itemized deductions, by using them in some years while claiming the standard deduction in other years, in order to minimize your taxable income.

  • Consider maximizing contributions to a 529 plan if you have children. Before the Tax Cuts and Jobs Act of 2017, 529 education savings plans could only be used to pay for post-secondary school expenses.

    Under the 2017 law, such plans can also be used to pay for up to $10,000 of tuition per beneficiary annually for kindergarten through grade 12. Plans known as 529 education savings plans are tax-advantaged because there is no income limit, nor contribution limit, with no contribution or distribution deadlines. Also, withdrawals from these plans are tax-free as long as the funds are spent on qualified higher education expenses.

  • Consider investing in opportunity zones if you incurred (or expect to incur) large capital gains. If you sold assets this year incurring large capital gains, investing such gains in opportunity zones would give you a temporary deferral until 2026, meaning you can wait to recognize such gains until December 31, 2026. (Note that the gains generally need to be re-invested within 180 days.)

    Moreover, you can enjoy a 10% step-up in the basis for assets you’ve sold if the corresponding capital gains are reinvested in opportunity zones and such investments are held for five years, meaning that the taxable gain would actually be less at the time you recognize the gains.

    Also, if you hold your investment in opportunity zone for 10 years, any capital gains arising from the sale of such investment are tax-free!

For businesses

  • Consider donating unused inventory. If you have unsold or unused inventory, consider donating it and getting tax deductions instead of incurring the cost to store it.  

    Generally, non-cash charitable contributions are deductible at thrift shop value. In the case of inventory donations, you can deduct either its fair market value on the day you contribute it or its cost. Keep in mind that the deduction is limited to 50% of an individual’s taxable income or 10% of a corporation’s taxable income.

  • Consider establishing a new retirement plan for your employees if you have no more than 100 employees. Under the SECURE Act, as of tax year 2020, the tax credit available for businesses that establish new retirement plans increases from last year’s limit of $500 to $5,000 in certain circumstances, based on the number of non-highly compensated employees. Keep in mind that this tax credit cannot exceed 50% of the total plan costs for the year.

  • Take advantage of extra depreciation and acquire new assets. The Tax Cuts and Jobs Act of 2017 allowed extra depreciation for qualifying assets put in place between September 28, 2017, and December 31, 2022. Qualifying property includes qualified building improvements, machinery, and equipment with a tax life of 20 years or less.

    This is a great opportunity for decreasing your taxable income. Now is the time to take advantage of this tax break, since bonus depreciation will begin to phase out in 2023, dropping 20% each year for four years until its expiration at the end of 2026.

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