2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

2020 Year-End Tax Planning Strategies for Individuals

FLEXIBLE SPENDING ACCOUNTS (FSA) Amounts contributed to a healthcare Flexible Spending Account (FSA) are not subject to federal income, Social Security or Medicare taxes. For 2020, the maximum contribution is limited to $2,750 (increased from $2,700 in 2019). Historically, the “use it or lose it” provision applied to amounts contributed to a flexible spending account. However, there is a carryover provision which allows participating employees to carryover up to $500 of unused funds to the following year if your employer offers this option. This carryover does not count toward the annual contribution limit. Some employers may offer a grace period to incur eligible medical expenses, generally two-and-a-half months after year-end. Check with your employer for the rules on the established FSA plan. HEALTH SAVINGS ACCOUNTS (HSA) If you are covered by a qualified high-deductible health plan, you can either contribute pre-tax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions to an HSA you set up yourself. For 2020, the maximum contributions are $3,550 for single taxpayers (increased from $3,500 in 2019) and $7,100 for family coverage (increased from $7,000 in 2019). Taxpayers aged 55 or older as of the end of the tax year can contribute an additional $1,000. (This means HSA holders can contribute and reduce income by $9,100 if both spouses are over 55.) There is no “use it or lose it” provision with HSAs, as you can carry over unused balances from year to year. QUALIFIED CHARITABLE DISTRIBUTIONS (QCD) Taxpayers who have reached age 70 ½ can donate up to $100,000 of traditional and Roth IRA distributions directly to qualified charities. The donation satisfies the minimum distribution requirement and is excluded from taxable income. A charitable deduction cannot be claimed for the contribution. It is worth noting that the CARES Act suspended required minimum distributions (RMDs) for 2020.

SECTION 199A DEDUCTION FOR SOLE PROPRIETORSHIPS AND OWNERS OF PASS-THROUGH ENTITIES The TCJA introduced Section 199A (Qualified Business Income Deduction, or QBI), which provides a deduction for sole proprietorships and owners of pass-through entities (partnerships, S Corporations, trusts and estates, etc.). It is intended to provide tax relief to businesses not benefiting from the reduced top corporate rate, lowered from 35% to 21%. The 199A deduction is generally equal to 20% of QBI when taxable income is lower than the applicable threshold. The taxable income thresholds for 2019 are $326,600 for married filing joint and $163,300 for all others. The deduction is complex and subject to various rules and limitations based on (1) your taxable income, (2) the type of business(es) you operate (i.e., Specified Service Trade or Business), and (3) your business’ W-2 wages paid and basis at acquisition of qualified property. Consider making deductible retirement and HSA contributions, deferring income, or accelerating expenses to reduce taxable income. X Review your company personnel to consider if independent contractors should be converted to employees to increase your company’s total W-2 wages. X Consider acquiring qualified business property before year-end. If you have multiple qualified businesses, consider aggregating certain qualified businesses to maximize your 199A deduction. Analyze your various business revenue streams and consult with your tax advisor to determine which aggregated activities are more beneficial. X Planning Opportunities: X