skip to Main Content
tracking finances

Year-End Tax Tips for 2020

As we wrap up 2020, we are all looking forward to brighter and more COVID-free days ahead. Year-end tax planning has never been more crucial. This year brought new challenges that can impact your personal and financial situations – COVID-19, economic relief measures, and new tax laws.

Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs, goals, and take any last-minute steps that could save you money. We are honored that you continue to place your trust and loyalty in us as we provide you with one advisor, but twice the advice, through a comprehensive review of your tax plan with financial planning and investment optimization strategies.

Key Tax Considerations Related to COVID-19

Many tax provisions were implemented under the Coronavirus Aid, Relief and Economic Security (CARES) Act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption.

Economic Impact Payment (EIP)

Eligible individuals received a payment of $1,200 ($2,400 for joint filers) plus

$500 for each qualifying child, with payments phased out based on adjusted gross income. The payments are treated as advance refunds of a 2020 tax credit. If you received an EIP, you should have received IRS Notice 1444, Your Economic Impact Payment. Keep this for record-keeping purposes and please provide us with a copy.

Charitable Deductions

Unique to 2020, individuals who do not itemize their deductions can take an above-the-line charitable deduction of up to $300. Such contributions must be made in cash and made to qualified organizations. Please be sure to include your donation receipt even if you do not itemize.

Retirement Accounts

You can take up to $100,000 in coronavirus-related distributions from retirement plans through the end of the year without being subject to the 10% additional tax for early distributions. Additionally, required minimum distributions (RMDs) are temporarily suspended for 2020. If your retirement assets have taken a hit, not having to take an RMD may allow those assets to recover some value before you liquidate them. We expect RMDs to be restored in 2021.

Deductions

As the COVID-19 outbreak continues, many employers are encouraging or requiring their employees to work from home (i.e., telework). Such remote working arrangements could potentially have tax implications that should be considered.

Employee work-related business expenses are no longer deductible on the Federal return, but we may still need the information for your state return, and if you incur a lot of these types of expenses, you need to discuss the use of an accountable plan with your employer. With many working from home this year a simple tool to help is to see if your employer has an accountable plan to reimburse you, tax-free, for the business use of your home. We can help draft an accountable plan for your employer.

State Income Tax Considerations

COVID-19 has upended the traditional home and work environment. Here are some considerations:

  • Residency and tax home – if you have homes in more than one state and spent a significant amount of time in the second state you may have trigged statutory residency in that state and may be required to file a tax return in the second
  • Working from home in a state that is not where your office is located – if you worked in a state that is not your usual state for filing income taxes you may have a state income tax filing

If you think either scenario pertains to you, please call our office and we can walk through your individual scenario. If we think there may be a filing and income tax requirement, there is still time to make an estimated state income tax payment so you can mitigate any penalty and interest.

Employer Benefits

Check into your employer’s handbook to see what employer-provided fringe benefits are available. Taxpayers are often surprised at the available benefits or what some benefits mean. We offer special “tax planning” sessions to go through the handbooks and your paycheck to see what is available and what your options may be, via appointment. Something as simple as making your short-term disability premiums post-tax can have a tremendous impact on future taxable income.

Importance of Retirement Planning

We recommend you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans. It’s also advisable to take advantage of health savings accounts that can help you reduce your taxes and save for your future. We can help you determine whether you’re on target to reach your retirement goals.

The single greatest tax advantage available, which few average people use to its limit is the ability to defer nearly $20,000 into a 401k if your employer has one. If your employer has a 401k, you should consider contributing the maximum.

Key Numbers for 2020 and 2021

Tax and retirement reference numbers are as follows:

401k/403b Contribution Limits

2020 2021
$19,500 (Age 50+ Catch Up $6,500) $19,500 (Age 50+ Catch Up $6,500)

 

Traditional and Roth IRA Contribution Limits

2020 2021
$6,000 (Age 50+ Catch Up $1,000) $6,000 (Age 50+ Catch Up $1,000)

 

Roth IRA Income Limits

2020 2021
Single & HOH $124,000 $125,000
Married $196,000 $198,000

 

Health Savings Accounts

2020 2021
Single/Family $3,550/$7,100 $3,600/$7,200
Age 55+ Catch Up $1,000 $1,000

 

Standard Mileage Rate

2020 2021
$0.575 TBD

 

 Annual Gift Tax Limit

2020 2021
$15,000 $15,000

 

Fraudulent Activity Remains a Significant Threat

Our firm takes security seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:

  • Receive a notice or letter from the Internal Revenue Service (IRS) regarding a tax return, tax bill or income that doesn’t apply to you. Do not contact them and send the complete notice to
  • Get an unsolicited email or another form of communication asking for your bank account number or other financial details or personal
  • Receive a robocall insisting you must call back and settle your tax

Cyber Security Tips

It is strongly encouraged that you follow these cyber security best practices:

  • Update all your passwords at least once a year to at least 12
  • Use an encrypted password vault like LastPass; you will never need to remember a password
  • Turn on two-factor authentication (2FA) for all financial
  • Keep up with updates on your phone and
  • Never store your credit card or bank account information on a website you
  • Never click on unsolicited email
  • Never include personal information like date of birth, social security numbers, or bank account information in an email. Please call our

Make sure you are taking steps to keep your personal financial information safe. The IRS will never call or email you without first sending you a certified letter. Let us know if you have questions or concerns about how to go about any of this.

The Affordable Care Act (ACA) and Your Taxes

The U.S. Supreme Court is expected to rule on the constitutionality of the ACA in 2021. Though many questions remain, the penalty that the ACA imposes on individuals who do not have health insurance was repealed. However, other aspects of the ACA are still in place. Contact us if you have questions about how this affects you.

Virtual Currency/Cryptocurrency

Virtual currency transactions are becoming more common. There are many diverse types of virtual currencies, such as Bitcoin, Ethereum, and Ripple. The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services or holding such currencies as an investment has tax consequences and must be reported on your tax return. We can help you understand those consequences. If you received a notice from the IRS regarding Cryptocurrency transactions, we can help resolve the matter.

Estate Tax

It looks like an estate tax will become an issue again for many Americans. If the value of your home, life insurance, retirement, and savings or investments is over $1,000,000 it may be time again to do some planning either before the end of the year preferably or after-tax season.

Year-End Planning Equals Fewer Surprises

There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral of income, prepayment of expenses, etc., that can help you save taxes. We are here to help.

 

Insights delivered right to your inbox | Sign up

 

WE’RE HERE TO HELP

Questions on how to prepare for the upcoming tax season? Please email us at [email protected]

Chesapeake Financial Advisors is a fee-only financial planning, investment advisory and tax planning firm with offices in Towson, Columbia, and Frederick, Maryland.

For disclaimer, please follow our link below:

https://www.peakeadvisors.com/site/wp-content/uploads/2019/05/Compliance-Social-Media-Disclaimer.pdf 

Tim CPA

Tim has over 20 years of experience in investment portfolio management. Before he started Chesapeake Financial Advisors, Tim spent several years in the financial services industry, including positions as research analyst, equity trader and statistician with T. Rowe Price and Croft-Leominster, both investment advisory firms located in Baltimore, Maryland.

Back To Top