Year-End COVID Tax Check UpSubmitted by Mission Financial Planning on November 20th, 2020
We’re doing a lot of year-end tax checks with clients; it’s a regular November/December activity, but a tax check is even more important this year. It’s been an unusual year - some clients have more taxable income than usual (unemployment, PPP, HHS/Cares Grants) and others have lower-than-usual income (missed paychecks, skipped Required Minimum Distributions). We’ll detail a few strategies for practice owners, employees and retirees below, some looking at what to do with higher income, some taking advantage of a lower-tax-bracket year. Find a scenario that applies to you and look for ideas that may apply, but be sure to check with us or your CPA before implementing anything.
Many dental practice owners are finding themselves in a potentially higher tax year than usual. Despite lost production during the shut-down, due to the tax implications of PPP and the HHS Cares Provider Act funds, some dental practice owners will find themselves with higher than usual taxable income.
- It may be a year to increase funding of pre-tax retirement plans (401(k), Simple IRA, SEP, Cash Balanced/Defined Benefit plans) to shelter some of that income from current taxes.
- Check your pay stub to be sure you hit your 401(k) funding and tax withholding goals before year end. If you missed paychecks you may need to catch up.
- If equipment is needed soon, it might be better to make the purchase this year rather than next year so the depreciation can offset this year's extra income.
- For practice owners with extra cash, be careful of the tax implications of paying down extra debt before year end.
- If you paid COVID-related Sick Pay or Family Leave (required), remember to claim your Tax Credit on the quarterly Form 941.
Even with a “bad” year business-wise, the tax implications of PPP and HHS funding could make it an expensive year, tax-wise.
People over 72 (in some cases 70.5) are usually responsible for making Required Minimum Distributions (RMDs) from their IRAs on an annual basis. This creates taxable income. However this year, The CARES Act let people skip their RMDs. For those who had other money to live on, the reprieve from forced IRA distributions may have put them in a lower tax bracket than planned.
- Being in a lower tax bracket than you anticipate in the future gives you the opportunity to take IRA distributions, pay taxes in the lower bracket, and convert the funds to a Roth IRA. RMDs aren’t allowed to be converted, but non-RMD distributions can be converted to a Roth where they can grow Tax Free. Evaluate your current and anticipated future tax brackets to see if a Roth conversion makes sense this year. We hate to miss taking advantage of a low-tax-bracket year.
Employees may have missed paychecks, may have taken unemployment, and may have had extra expenses setting up a Work From Home environment.
- If you took unemployment during the shut-down, you may be behind on tax withholding and 401k deferrals, be sure you’re caught up by the calendar year-end.
- If you took unemployment, did you have taxes withheld? Unemployment benefits are taxable, be prepared for related taxes.
- W-2 employees cannot write off expenses spent on a home office, equipment or supplies, however employers can reimburse employees for COVID-related expenses as a deductible expense, so check with your employer.
These are just a few things to check. Be aware that even with a “bad” year business-wise, the tax implications of PPP and HHS funding could make it an expensive year, tax-wise. Conversely, if your income was significantly decreased, the “opportunity” presented by a low tax bracket should be considered. Figure out what your 2020 scenario is, and give us - or your CPA - a call to discuss strategies before the end of the year.