Tim Grant

Multiple tax changes in store for 2020 filers

Many people created workspaces — at their own cost — in their homes last year if they were no longer going to an office to work, and some may be wondering if they’ll get a tax break on setting up their home office. “Unfortunately, no,” said Alex Kindler, a partner at H2R CPA in Green Tree, Pa. “If you’re an employee who telecommutes, there are strict rules that govern whether you can deduct home office expense,” he said. In other words, you won’t be deducting the cost of those chairs, computer desks and printers you bought for your workspace last year, unless you were a business owner or a self-employed contractor. As the 2020 tax season gets underway, tax preparers say their clients want to know how their taxes will affected by the COVID-19 crisis. Those fortunate enough to have kept working and getting paid during the pandemic will not see a whole lot of difference in their individual tax returns this year compared to last year. But the pandemic forced millions of people to find different ways of making ends meet, which included taking on temporary jobs, joining the gig economy and even being creative enough to do something like make and sell masks to bring in extra cash. The good news is stimulus money from Uncle Sam isn’t taxable, but all other sources of incomes should be reported to the IRS and they could affect an individual’s tax bill. That’s why taxpayers working as independent contractors should keep records of income and all expenses related to the work, such as the miles they drove. Because of the pandemic, this year the Internal Revenue Service is allowing taxpayers to write off an additional $300 in deductions for charitable gifting over and above the standard deduction. The majority of taxpayers take the standard deduction. The 2020 standard deduction for single tax filers is $12,400. For married couple it’s $24,800. The federal government also has offered a lifeline for low-income workers who suffered financial setbacks due to the coronavirus. People who earned less money in 2020 than than they did in 2019 will be allowed to use their 2019 income — if it’s more advantageous — in order to receive a larger earned income tax credit or child tax credit. The credits mostly benefit low-income workers. The tax credits could range from $538 to $6,660 depending on the taxpayer’s filing status and the number of children in the household. A single head of household earning $50,954 with three or more children could receive the maximum tax credit. “The earned income tax credit is based on earned income. Unemployment income doesn’t count. This rule change helps people who had earned income in 2019, but lost a job last year,” said Howard Davis, president of the Davis, Davis &Associates accounting firm in the Strip District. “They can use the 2019 income and get a tax credit, which likely could result in a refund,” Davis said. “It’s a refundable credit. Even if they owe no tax, they can get money back.” He said the Internal Revenue Service also gave seniors and retirees a tax break last year by allowing them to skip making required annual withdrawals from their taxable retirement accounts, such as 401ks and traditional IRAs. The waiver also applies to anyone who inherited an IRA and those who turned age 70½ in 2019 and would have needed to take their first taxable withdrawal in 2020. “We recommended all of our clients to not take the distribution if they didn’t need it to live on,” Davis said. “Then, they don’t have to pay taxes on what they take out and 100 percent of that distribution is still working for them, and it’s still tax deferred.” Under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, taxpayers could take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the 10 percent additional tax for early distributions if the account owner is younger than 59½. To qualify, the taxpayer, a spouse or dependent must have been diagnosed with COVID-19 or experienced an adverse financial consequence from reduced income or inability to work due to lack of child care. The CARES Act also lets taxpayers who need a retirement account withdrawal to spread the tax payments over three years or pay the whole tax bill the first year. This helps reduce the tax burden for the current year and shift it to the following years, if necessary.

Watch out for tax bite after great year in markets

The stock market had yet another record-breaking year in 2020. While that means many portfolios likely ended up in the black, it could also mean substantial tax bills for investors who sold stocks last year — especially those that weren’t tucked inside an individual retirement account, a 401(k) or some other tax-advantaged retirement account. Investors who sold individual company stocks while the market was up could be liable for capital gains taxes. “Gains are good. Taxes are bad,” said Robert Fragasso, CEO of Fragasso Financial Advisors in Pittsburgh. Capital gains only occur when a shareholder sells stock and takes a profit. But it’s not always up to the individual investor when to pull the trigger and realize a capital gain. “If you own a mutual fund, the capital gains are realized for you,” Fragasso said. “Then you get a 1099 form at the end of the year telling you those gains have been registered for you inside the funds.” After dropping nearly 20 percent in March as the pandemic first gripped the U.S., the stock market indexes made a powerful comeback and ended the year at all-time record high levels. The Dow Jones Industrial Average gained 7 percent in 2020 and crossed the 30,000 milestone; the S&P 500 gained 16 percent; and the Nasdaq had its best year since 2009, with a 44 percent gain. Someone who bought Tesla stock in March at its lowest price of $71 and then sold those shares in December at its highest price of $718 would have a capital gain of $647 per share. While a relatively small segment of American families — 14 percent — are directly invested in individual stocks, more than half of U.S. households — 52 percent — have some investment in the stock market. Most of this stock ownership comes in the form of retirement accounts, such as IRAs and 401(k) plans, according to the Pew Research Center in Washington, D.C. Generally, any profit that an investor makes on the sale of stock is taxable at either 0 percent, 15 percent or 20 percent, depending on that person’s taxable income and filing status if the shares were owned for more than a year. Stocks held for less than a year are taxed at the shareholder’s ordinary income tax rate. Also, any dividends received from stocks are usually taxable. Exactly how much depends on how much you make. Single tax filers with income below $40,000 can benefit from the 0 percent long-term capital gains rate. However, most single people owning stock fall into the 15 percent capital gains rate, which applies to incomes that fall between $40,001 and $441,000. Single filers earning more than $441,500 face a 20 percent long-term capital gains rate. Married couples with incomes of $80,000 or less qualify for the 0 percent tax rate. However, couples who earn between $80,001 and $496,600 have a capital gains tax rate of $15 percent, and those with incomes higher than $496,600 will be hit with a long-term capital gains rate of 20 percent. Higher-income taxpayers with married joint incomes in excess of $250,000 also should be aware that their stock sales could be subject to a 3.8 percent net investment income tax in addition to the capital gains tax. “We had clients who sold investments in 2020 in anticipation of a possible bump in taxes on capital gains in 2021,” said Alex Kindler, a partner at H2R CPA in Green Tree, Pa. Those concerns were caused by the upcoming change in presidential administrations, Kindler said. But only time will tell if and when a tax increase is on the way. “It is unclear, given the status of the pandemic and its toll on the economy and the American people, whether Congress will have the appetite to increase capital gains taxes in 2021,” Kindler said. Tax strategies Financial advisors spend much of the year thinking about things like capital gains taxes, even if the average person is not on that program, said Benjamin Greenfeld, chief investment officer for Waldron Private Wealth in Bridgeville, Pa. “People should be doing tax planning throughout the year instead of waiting until the end of the year,” he said. “Tax planning is a process, not an event. You don’t wake up on Dec. 5 and decide to do tax planning for the year.” As a wealth manager, Greenfeld periodically rebalances client portfolios throughout the year by selling stocks that had over-appreciated and by buying stocks that appear ready to break out. The coronavirus crash in March caused stock values to drop like a rock. But it was also a tax-loss harvesting opportunity, he said. A hypothetical example of the strategy he used during that catastrophic event was if a client owned stock in Coca-Cola Co. that fell from $100 to $75, he sold the stock for a loss of $25, then bought shares of PepsiCo Inc. — the idea being that two companies in a related industry might have similar returns as the market rebounds. When an investor sells stocks in a down market and losses exceed that initial investment, the IRS allows the investor to deduct the loss on their tax return, up to $3,000 per year. “The market had a strong run out of the gate,” Greenfeld said. “If you bought Pepsi and Pepsi went up, you’d have the same investment performance as well as a tax asset from the loss. “If you weren’t being proactive during the volatility, you missed your opportunity to minimize taxes without harming the overall portfolio.” Matthew Helfrich, president of Waldron Private Wealth, said one tax planning strategy he used to reduce the impact of capital gains was to recommend his clients use equities to fund their charitable requests at year’s end. “That allowed us to reduce the position while saving on the tax and fulfilling client charitable goals,” Helfrich said. “Additionally, in some instances it made sense to delay taking gains until 2021, as it would give an extra year of deferral on the tax until it is paid — which works if capital gains rates continue to stay at their current levels,” he said. Tough choices Many people don’t pay a lot of attention to capital gains taxes because their investments are in retirement funds. If shares are held inside of a traditional or Roth IRA or a 401(k), the taxes on stock dividends and capital gains are deferred. As long as the money is held inside one of those qualified retirement investment vehicles and remains in the account, the account owner pays no taxes on the investment growth, interest, dividends or investment gains. But for non-retirement investment, tax issues can complicate things. Selling shares can be a tough decision, especially when the stock is hot and the stock owner doesn’t have a financial need. “For stocks to be sold, the trade-off is: Do you think the stock will continue to go up?” Fragasso said. “Well then, why take the gain? Do you think markets are going to fall precipitously? Nobody can predict that. So, that’s fool’s gold. “But if you feel you have experienced all the gain that you can and the stock is vulnerable because it’s run its full price course, then you take the gain — and pay the taxes.”
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