Happy Holidays from E.R. Taxes!
Without question 2020 has been an unusual tax year.
Here at ER Taxes we appreciate your business and look forward to working with you to calculate and file your taxes. It is not too soon to be taking steps to gather the vital tax information we will need to ensure you file both a complete and accurate tax return and to pay the lowest legal amount of tax.
Covid-19
We hope everyone is doing well and staying healthy as we all try to get through this pandemic together. E.R. Taxes is still requiring masks to enter our building in the hope that it will help keep everyone safe.
Steps to take
You should gather Forms W-2’s, Forms 1099-MISC and Forms 1099 NEC, a new form to report Non-Employee Compensation rather than the 1099 MISC. Most income is taxable, including unemployment compensation and refund interest. If you received non-wage income such as self-employment income, investment income, taxable Social Security benefits and in some instances, pension and annuity income, you may have made estimated tax payments. We will need the date and amount of each estimated payment, remembering the one made in January 2021 is for the 2020 tax year.
You should also gather your 1098 Mortgage interest statement, real estate taxes paid in 2020, Charitable Contributions, and any other tax related documents you receive.
Refunds – Although the IRS issues most refunds in less than 21 days, the IRS cautions taxpayers not to rely on receiving a 2020 federal tax refund by a certain date, especially when making major purchases or paying bills. Some returns may require additional review and may take longer. Refunds that include the Earned Income Tax Credit or Additional Child Tax Credit should be available by the first week of March. By law, the IRS cannot issue refunds for people claiming the EITC or ACTC before mid-February. The law requires the IRS to hold the entire refund − even the portion not associated with EITC or ACTC. The IRS expects most EITC/ACTC related refunds to be available in taxpayer bank accounts or on debit cards by the first week of March, if they chose direct deposit and there are no other issues with their tax return.
For 2020, the SECURE Act as well as the CARES Act made several changes to your tax calculation. They include Waiver of the 10% Early Withdrawal Penalty on up to $100,000 withdrawal from IRAs and Defined Contribution Plans, such as 401(k)s made between 1/1/20 and 12/31/20 by a person who or whose family, is infected with the Coronavirus or they are economically harmed.
Required Minimum Distributions, RMDs, otherwise required for 2020 from 401(k) plans and IRAs are waived, meaning you do not have to take them in 2020. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.
For 2020:
Brackets and Rates: For tax year 2020, the top tax rate remains 37% for individual taxpayers filing as single and with income greater than $518,400, which is a modest bump up from $510,300 for 2019.9 The income threshold for this rate will be $622,050 for married couples filing jointly (MFJ) and $311,0215 for married individuals filing separately (MFS).
Income ranges of other rates up to the next-highest threshold are as follows:
- 35% for single and MFS income exceeding $207,350 ($414,700 for MFJ)
- 32% for single and MFS income exceeding $163,300 ($326,600 for MFJ)
- 24% for single and MFS income exceeding $85,525 ($171,050 for MFJ)
- 22% for single and MFS income exceeding $40,125 ($80,250 for MFJ)
- 12% for single and MFS income exceeding $9,875 ($19,750 for MFJ)
The lowest rate is 10% for single individuals and married couples filing separately, whose income is $9,875 or less. For married individuals filing jointly, the combined income may not exceed $19,750.
For those filing as head of household (HOH), the income thresholds are the same as rates for singles in the 37%, 35%, and 32% brackets.
In Head of Household brackets, the income thresholds are now $85,501 to $163,300 in the 24% bracket; $53,701 to $85,500 in the 22% bracket; $14,101 to $53,700 in the 12% bracket; and up to $14,100 in the 10% bracket.
Standard Deduction – The Standard deduction for married filing jointly rises to $24,800, for single taxpayers and married individuals filing separately $12,400 and for head of household status $18,750.
Itemizing Deductions – The exclusion for Medical Expenses in 2020 is 7.5% of the Adjusted Gross Income. If your income is $100,000, the first $7,500 in Medical is not deductible.
Charitable Contributions are virtually unlimited in 2020, however contributions must be made in cash/check to a public charity. The unlimited amount is not applicable to private foundations nor to gifts of appreciated stock or Donor-Advised Funds.
Retirement Plans
The contribution limit for employee Retirement Plans who participate in employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan (TSP) has been increased to $19,500, up from $19,000 in 2019. The catch-up contribution limit for employees age 50 and older has increased to $6,500, up from $6,000 in 2019. The contribution limit for SIMPLE retirement accounts for 2020 has been raised to $13,500, up from $13,000 for 2019.
Credits
2020’s maximum earned income credit (EIC) is $6,660 for qualifying taxpayers who have 3 or more qualifying children, up from a total of $6,557 for 2019. For tax year 2020, the modified adjusted gross income (MAGI) amount used by married joint filers to determine the reduction in the lifetime learning credit is $118,000 and phases out at $138,000, up from $116,000–$136,000 for tax year 2019. For single filers and heads of households, the MAGI range is $59,000 – $69,000 for 2020, up from $58,000–$68,000 in 2019. You can’t claim the credit if you are a married individual filing separately.
Estates and Gifts
Estates of decedents who die during 2020 have a basic exclusion amount of $11.58 million, up from $11.4 million for estates of decedents who died in 2019. The annual exclusion for gifts is $15,000 for calendar 2020, the same as it was for calendar 2019.
PPP Loans
Please let us know if you have received any funds from the ongoing business stimulus legislation such as the PPP loan or EIDL loans and grants. This way we can plan ahead on the effects of these instruments on your expenses within your business. If you have received these, we highly encourage you to schedule a tax planning appointment with your tax advisor before the end of the year 2020.
Some best practices with handling these loans (the following are just SOME of the many details):
1. Placing the loan in a separate bank account
2. Use as much of it as allowed on payroll
3. Keep track of employee hours and those who were laid off, fired or quit during the measurement and covered periods
4. Be aware of the maximum forgiveness amount per employee, annualized at $100,000 per employee
- This means 100,000 x 8/52 = 15,385 for the 8 week period and 100,000 x 24/52 = $46,154 for the 24 week period (this is PER employee)
- Owners have a max of $20,833 for the 24 week period
5. If any employees were laid off, then you will need to get your employment levels back to where they were during the first quarter of 2020 by the time you apply for forgiveness in order to get the full amount forgiven
6. Use the rest of it on other allowed expenses such as:
- Rent
- Utilities
- Transportation
If you use the loan on rent, make sure you have a lease agreement because you will need a copy to be provided in the forgiveness application. This is especially important if the business leases a building or space from you personally or from another one of your businesses. Debbi (928-445-0104 ext 5) offers this service in our office but you must have already been making rent payments before February 15, 2020. We are also offering our services to prepare the PPP forgiveness application as it can be incredibly complicated. Contact Nichole if you are interested in that service (928-445-0104 ext 1).
Client Spotlight: Cedar Tree Montessori
“Cedar Tree Montessori is a family-owned business serving the Prescott area since 2007. We have a toddler program for ages 18 months to 3 years, a preschool for ages 3 to 5 years and a kindergarten for ages 5 to 6 years. The toddler program focuses on social and emotional development. Our preschool and kindergarten are academic and unique in the fact that every child receives an individual study plan designed specifically for your child. Our kindergartners enjoy walking field trips to the library, Prescott Fine Arts and Yavapai College plays, picnics at the square, and downtown excursions and tours. We are a tuition-based, private school and truly appreciate any private school tax credits for our kindergarten. There are many kids who need an entire year of small class ratios and one-on-one attention.”
To make an Arizona Tax Credit eligible donation, please visit https://aztaxcreditfunds.com/private-school-tax-credit/
-Deb McMillan, President
https://cedartreemontessori.com/
928-771-8785
Last…
We hope all is well with everyone and as always, let us know if there is any way we can help you. It’s also not too late to make an end of year tax planning appointment with your tax professional.
Happy Holidays,
E.R. Taxes
Tony Ebarb 928-445-0104 x-2
Liisa Raikkonen 928-445-0104 x-8
Marion Lefkowitz 928-445-0104 x-7
David Snyder 928-445-0104 x-9
Nichole Scott 928-445-0104 x-1
Benjamin Klarer 928-445-0104 x-4
Phillip Ebarb 928-445-0104 x-6
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