2020 Tax Strategies for Healthcare Providers
As a result of the COVID-19 pandemic, there have been numerous pieces of legislation, IRS guidance, and new rules released for 2020. Healthcare providers can take advantage of many of these with action in the applicable time frame.
If you have been laid off or furloughed, you may have been receiving unemployment compensation. Through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), an additional $600 may be paid on top of weekly unemployment benefits through the week ending on or before July 31, 2020; however, benefits vary by state. For example, in Missouri, unemployment payments may be made retroactively for claims filed on or after March 29, 2020, so you still may be able to receive unemployment if you haven’t already. For tax purposes, remember that unemployment compensation is taxable income on your federal 1040 and in many states, including Missouri. Taxpayers should consider additional tax that may be due if they didn’t request withholding on their unemployment compensation.
Relief for Student Loan Recipients
For qualifying federal student loans, the CARES Act included a provision that placed borrowers in forbearance. This means payments on those loans aren’t required until after September 30, 2020. Borrowers enrolled in the Public Service Loan Forgiveness (PSLF) program should consider halting payments, even if they have the cash flow to make the payments. Making monthly payments while loans are in forbearance can put the borrower in a “paid ahead” status, which may adversely affect their qualifying loan payments for the PSLF program. If your payments are usually automatically drafted from your bank account, you should review your loan and bank accounts to ensure they stopped.
Another benefit related to student loan payments may be available through discussions with your employer. Through December 31, 2020, employers may provide their employees with a tax-free student loan repayment benefit of up to $5,250. This limitation extends to both new student loan repayment benefits and other educational assistance provided by an employer, combined. Reach out to your employer to see if they’re willing and able to provide this tax-free benefit.
Recent legislation has made several temporary changes to retirement plan rules. The CARES Act waives the 10 percent penalty on early distributions from qualified retirement plans for up to $100,000 of COVID-19-related distributions in 2020. Taxpayers may repay these amounts within three years of withdrawal without regard to that year’s cap. Although these distributions are otherwise taxable for federal income tax purposes, the taxpayer may elect to include the distribution in taxable income ratably over a three-year period. This relief is available to an individual who’s diagnosed with SARS-CoV-2 or COVID-19 or who has a spouse or dependent diagnosed with such virus or disease. The relief also is available to those who experience adverse financial consequences as a result of COVID-19, including being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, and other factors.
The CARES Act also provides a temporary waiver of the required minimum distribution (RMD) rules for certain retirement plans and accounts. Under this provision, funds related to RMDs normally required to be made by plan participants during 2020 can instead remain in those participants’ accounts. On June 23, 2020, the IRS provided additional guidance on the waiver of 2020 RMDs and extended the 60-day rollover period until August 31, 2020, for any RMDs already taken.
Another retirement benefit planning opportunity relates to Roth IRA conversions. Roth IRAs are an investment vehicle that can have significant advantages over other types of retirement accounts, including tax-free distributions, which allows for tax-free growth and no RMDs, among other benefits. Converting traditional IRAs to Roth IRAs is a taxable event if deductible contributions have been made in the past. This rule has prevented many taxpayers from converting in prior years. In addition, income limits make Roth contributions difficult for many healthcare providers, outside of “back-door” Roth conversions subject to annual limits ($6,000 for 2020 or $7,000 if age 50 or older). The combination of lower individual tax rates as a result of tax reform and stock market fluctuations, depending on timing and nature of investments, could mean a lower traditional IRA balance, or if your income is lower in 2020 due to a layoff, furlough, or reduction in pay or hours, this may be an opportunity to make a Roth conversion and incur that additional taxable income with less of an effect on your adjusted gross income (AGI) or overall tax bracket compared to previous years.
Charitable contribution planning may be another way to affect your 2020 taxes. For tax year 2020, the CARES Act allows an above-the-line deduction of up to $300 for taxpayers who don’t otherwise elect to itemize. This $300 deduction is for charitable contributions made in cash (not stock) to any qualifying Section 501(c)(3) public charity, excluding donor-advised funds. In addition, for individuals who itemize, the CARES Act temporarily modifies the limitation on deductions for charitable contributions made in 2020. For individuals, the 60 percent of AGI limitation is suspended for 2020 for cash contributions to qualifying organizations, excluding donor-advised funds. This means that you can give up to 100 percent of your AGI for the year, fully offsetting income with charitable deductions.
All healthcare providers should consider these tax effects, as they may be applicable to their specific situation. Contact your BKD Trusted Advisor™ or Wealth Advisor today for more information, or submit the Contact Us form below.