TAX+BUSINESS ALERT
News for your business and your life. | Hawkins Ash CPAs
In this Edition
December 22, 2020

A New Form for 2020: 1099-NEC

What’s Your Taxpayer Filing Status?

PODCAST: 2020 Year-End Tax Planning Tips for Individuals and Businesses

Handle Mutual Funds Carefully at Year-End
A New Form for 2020: 1099-NEC
Beginning with the tax year 2020, a 1099-NEC must be used to report nonemployee compensation. Prior to 2020, this information had been reported in box 7 on a 1099-Misc.

Payments should be reported as nonemployee compensation if:
  1. Payments were at least $600 in the year
  2. Payment was made to someone who is not your employee
  3. Payment was for services provided during the course of your trade or business
  4. Payment was made to an individual, partnership, or estate

Some examples of vendors who may receive a 1099-NEC would be snow removal, lawn care, repair and maintenance, and professional services such as attorneys and accountants.

1099-NEC’s need to be provided to the payee and filed with the Internal Revenue Service (IRS) by January 31 or, if this lands on a weekend, the following Monday. 

If you have questions or need assistance with filing your 1099s, please contact us.
What’s Your Taxpayer Filing Status?
For many, December 31 means a New Year’s Eve celebration. From a tax perspective, however, it should mean thinking about the filing status you’ll use when filing your tax return for the year. The one you use depends partly on whether you’re married on that date.

The Five Statuses
When you file your federal tax return, you do so with one of five filing statuses. First, there’s “single” status, which is generally used if you’re unmarried, divorced or legally separated. A second status, “married filing jointly,” is for married couples to file a tax return together. If your spouse passes away, you can usually still file a joint return for that year. A third status, “married filing separately,” is for married couples who choose to file separate returns. In some cases, doing so may result in less tax owed.

“Head of household” is a fourth status. Certain unmarried taxpayers qualify to use it and potentially pay less tax. Finally, there’s a fifth status: “qualifying widow(er) with a dependent child.” It may be used if your spouse died during one of the previous two years and you have a dependent child. (Other conditions apply.)

Head of Household
Let’s focus on head of household status because it’s often misunderstood and can be more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as a dependent.

A “qualifying child” is defined as someone who lives in your home for more than half the year and is your child, stepchild, foster child, sibling, or stepsibling, or a descendant of any of these. A qualifying child must also be under 19 years old (or a student under age 24) and cannot provide over half of his or her own support for the year.

Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.
For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep and food consumed in the home. Medical care, clothing, education, life insurance and transportation aren’t included.

Under a special rule, you can qualify as head of household if you maintain a home for a parent even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.

Not Always Obvious
Filing status may seem obvious, but there can be situations in which it warrants careful consideration. If you have questions about yours, contact us.


Contact: Leslie Smith, CPA, CMA
Phone: 715.384.1977 
Email: lsmith@hawkinsashcpas.com
PODCAST
2020 Year-End Tax Planning Tips for Individuals
As we get to the end of what seems like the longest year, 2020, there are things that you can do before December 31 to save taxes on your individual tax return.
PODCAST
2020 Year-End Tax Planning Tips for Businesses
There are a lot of ways to save taxes this year, but those same ideas may save you more in the future. Considering the Biden tax plan increases, the goal of tax planning is not always to pay the lowest amount of tax this year; it’s about paying the least amount of tax in the long run.
Handle Mutual Funds Carefully at Year-End
As we approach the end of 2020, now is a good time to review any mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid Surprises
Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, determine how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer Beware
Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution, so you’ll owe taxes on the gain without actually achieving an economic benefit.

Seller Beware, Too
If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year-end so you can defer the gain until 2021 — unless you think you’ll be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods (known as the specific identification method), thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think Beyond Taxes
Investment decisions shouldn’t be driven by tax considerations alone. You also need to know your risk tolerance and keep an eye on your overall financial goals. Nonetheless, taxes are still an important factor. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.
More Resources from CPA-HQ
2021 Key Tax Fact Sheet

Social Security, Medicare and Federal Unemployment rates and more for 2021 in this handy chart.
Nonprofit Connection Newsletter: November 2020

View and sign up for our latest QuickBooks Newsletter. Learn how to set up vendors for 1099 reporting in QuickBooks Desktop, how to reconcile W-2, W-3, and 941 Returns and more.
Podcast: The Latest on PPP Loan Expenses

IRS re-affirmed that PPP expenses are not deductible and they issued guidance on how to treat the PPP expenses if the expense is incurred in a different year than the forgiveness of the actual PPP loan.
Part of your business. Part of your life. | www.HawkinsAshCPAs.com