Article Highlights:

  • Time to Gather Your Information
  • New for 2020
  • Choosing Your Alternatives
  • Tips for Pulling Your Information Together

Tax time is just around the corner, and if you are like most taxpayers, you are probably facing the ominous chore of compiling records in preparation for your tax appointment—whether in person, by videoconference or telephone. The difficulty of this task depends upon how well you maintained your tax records throughout the year. No matter how good your record keeping was, being fully prepared for your tax return preparation will give us more time to:

  • Consider every possible legal deduction;
  • Evaluate which income reporting methods and deductions are best suited to your situation;
  • Explore current law changes affecting your tax status; and
  • Talk about tax-planning alternatives that could reduce your future tax liability.

New for 2020 – There are a number of new complications this year, including:

  • Required Minimum Distributions (RMDs) – As one of the COVID-19 relief measures enacted by Congress in 2020, individuals were allowed to skip RMDs from their retirement plans and IRAs, but only for 2020. For 2021, RMDs will be required, but due to another law change, the age at which RMDs must begin is now 72, up from 70½.
  • Coronavirus-Related 2020 Distributions – A taxpayer (or their spouse) who was diagnosed with COVID-19; experienced adverse financial consequences as a result of being quarantined, furloughed or laid off; had work hours reduced due to COVID-19; was unable to work due to lack of child care; or had to close or reduce the hours of the business they owned or operated were eligible to take a distribution from their IRA or retirement plan of up to $100,000 in 2020 without an early withdrawal penalty. The tax on the qualified distribution does not have to be paid in full with the 2020 return but can be spread throughout 2020, 2021 and 2022 at one-third per year.
  • Coronavirus Distributions Redeposits – Any amount of a qualified coronavirus distribution can be redeposited to an IRA or qualified plan in one or more recontributions over the 3-year period, beginning the day after the date of the qualified distribution. This provides a way to replenish the retirement account, and the tax already paid on the redeposited amount will be refundable via an amended return for the year in which the tax was paid.
  • IRA Contribution Age Limit – Congress eliminated the age limit of 70½ for making IRA contributions as long as the individual has earned income in the amount of the contribution. However, contributions made by taxpayers age 50 and over are limited to the lesser of $7,000 or the individual’s income from working.
  • Sec 529 Education Savings Account – Changes made by the SECURE Act allow Sec 529 plan funds to be used for Registered Apprentice programs. In addition, up to $10,000 of the 529 plan funds can be used for payment of education loans.
  • Charitable Contributions – For 2020, non-itemizers can deduct up to $300 of cash contributions; for itemizers, the deduction limit for cash contributions has been increased from 60% to 100% of the AGI.

Choosing Your Best Alternatives – The tax law allows a variety of methods of handling income and deductions on your return. The choices you make when preparing your return often affect not only the current year but also future returns. Related topics include:

  • Sales of Property – If you sold property in 2020 for which you’re receiving payments on a sales contract over a period of years, you can sometimes choose between reporting the whole gain in the year of the sale or over a period of time as you receive payments from the buyer.
  • Depreciation – You can deduct the cost of your investments in certain business properties. You can either depreciate the cost over a number of years or, in certain cases, deduct them all in one year.

Where to Begin – Start preparing for your tax return in January, whether you are going have a face-to-face appointment, meet by videoconference or mail in your information and then have a follow-up telephone discussion. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard or safe. As you receive pertinent records, file them right away, before you forget or lose them. Make this a habit, and you’ll find your job a lot easier on your appointment date or when sending in your material. If you will be receiving source documents electronically, you’ll need to print out a copy of the forms or statements, unless advised otherwise by this office. Other general suggestions include:

  • Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations and follow the instructions carefully. By design, organizers remind you of transactions you may otherwise miss.)
  • Call attention to any foreign bank account, foreign financial account or foreign trust in which you have an ownership interest, signature authority or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you will have any special reporting requirements. The penalties for not making and submitting required reports can be severe.
  • Beware! The IRS has kept cryptocurrency on its radar and is ramping up enforcement programs. Cryptocurrency (virtual currency) is treated as property, and every time it is sold or used, the gain or loss from the transaction must be computed and reported in the same manner as a stock transaction.
  • If you acquired your health insurance through a government marketplace, you will receive Form 1095-A, issued by the marketplace, which will include information needed to complete your return and determine the amount of your premium tax credit. Include the 1095-A with the other material you bring to your appointment or mail in. If your insurance coverage was through an employer and the employer issued a Form 1095-B, Form 1095-C or substitute form detailing your coverage, include that as well.
  • Keep your annual income statements separate from your other documents (e.g., W-2s from employers; 1099s from banks, stockbrokers, etc.; and K-1s, including instructions and attachments, from partnerships). Be sure to take these documents to your appointment or provide them with the other items you are sending in!
  • Write down your questions as you assemble the material so you don’t forget to ask them at the appointment or include them with the documents being mailed in. Review last year’s return. Compare your income on that return to your income for the current year. A dividend from ABC stock on your prior year’s return may remind you that you sold ABC this year and need to report the sale or that you haven’t yet received the current year’s 1099-DIV form.
  • Make sure you have Social Security numbers for all of your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them.
  • Compare deductions from last year with your records for this year. Did you forget anything?
  • Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment or include them with the rest of your tax material that you are mailing in so you can ask about them.

Accuracy in Details – Make sure you review personal data to ensure the greatest accuracy possible in all details on your return. Check names, addresses, Social Security numbers and occupations on last year’s return. Note any changes for this year. Although your telephone number and e-mail address aren’t required on your return, they are always helpful should questions occur during return preparation.

Marital Status Change – If your marital status changed during the year, you lived apart from your spouse or your spouse died during the year, list the dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment or include copies when sending your material to this office. If your spouse passed away during the year, you should have a copy of their trust agreement or will available for review.

Dependents – If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3, you will not need to supply them again):

  1. First and last name
  2. Social Security number
  3. Birth date
  4. Number of months living in your home
  5. Income amounts (both taxable and nontaxable).

If your dependent is a child over age 18, note how long the child was a full-time student during the year. For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think one or more other individuals qualify as your dependents (but you aren’t sure), tally the amounts you provided toward their support vs. the amounts they provided. This will simplify the final decision.

Some Transactions Deserve Special Treatment – Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort if you have had the following types of transactions:

  • Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other property need to be reported on your return, even if you had no profit or loss. List each sale, and have purchase and sale documents available for each transaction. The purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained in the documents you bring to your appointment.
  • Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the original owner’s death date and the property’s value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor.
  • Reinvested Dividends: You may have sold stock or a mutual fund for which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.
  • Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you file a married joint return and meet certain ownership, occupancy and holding period requirements. The maximum exclusion is $250,000 for others. Since the cost of improvements made on your home can also be used to reduce gains, it is good practice to keep a record of them. The exclusion of gains applies only to a primary residence, so keeping a record of improvements to other property, such as your second home, is important. Be sure to provide us with a copy of the sale documents (usually the final closing escrow statement).
  • Purchase of a Home: We’ll need to see a copy of the final closing escrow statement if you purchased a home in 2020.
  • Vehicle Purchase: If you purchased a new plug-in electric car (or cars) in 2020, you may qualify for a special credit. Please bring the purchase statement to the appointment with you or include a copy if you are mailing in your documents.
  • Home Energy: Related Expenditures: If you installed a solar, geothermal or wind power-generation system in your home or second home, you’ll need to provide the details of the purchase and manufacturer’s credit qualification certification. You may qualify for a substantial energy-related tax credit.
  • Energy-Efficient Home Modifications: If you made qualifying energy-saving improvements to your home, you may qualify for a tax credit of up to $500. The credit-qualifying improvements include energy-efficient air conditioning, heaters, storm windows and doors, certain energy-efficient roofing, qualifying windows and skylights.
  • Identity Theft: Identity theft is rampant and can impact your tax filing. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen.
  • Car Expenses for Business: If you used one or more automobiles for business, list the expenses of each business vehicle separately. When claiming vehicle-related business expenses, the government requires your total mileage, business miles, and commuting miles for each business vehicle to be reported on your return, so be prepared to have those numbers available. Job-related vehicle expenses are not deductible by employees in most states on their federal returns for years 2018 through 2025. However, some states, including California, still allow them. So, if you have unreimbursed employee business expenses, continue to provide the information noted above in case the deduction is allowed for state taxes. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether it was included in your W-2.
  • Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date and amount. Unreceipted cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, donated items must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, the date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped off at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements.