Tax Planning

6 tax planning steps that should be completed now

6 years of tax savings to take before New Year’s Eve.

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Impressive! 2020 was a crazy year. Many people have seen their incomes go down while others have been more fortunate. 2020 was a record year for some. Either way, the end of the year is a good time to do some tax planning to lower your 2020 income taxes, due this coming April.

If your income changes, what counts as an allowable tax deduction may change in addition to the tax brackets. Proactive tax planning is essential for the self-employed and small business owners. Most applicants are required to pay at least a certain percentage of tax before the end of the year to avoid IRS penalties.

Yes, there are some ways to minimize your taxes after New Years Eve, but most of your tax planning tools will be limited by the time we hit 2021.

What are the deadlines for your contributions to the 2020 retirement savings account?

When and how much you can contribute to your retirement depends on the type of plans and the types of contributions. The good news for those using a Roth IRA or traditional IRA is that these retirement accounts can be opened and funded until April 15, 2021 for the 2020 tax year. The bad news is that you can only contribute $ 6,000 per year. That probably won’t be enough to fund a secure retirement for someone earning an average income or more. As a rule of thumb, you should put at least 10% of your income into retirement accounts, more if you want to start late or retire early.

Self-employed (or small business) incomes should read the SEP-IRA or Solo 401 (k) plan. These valuable pension accounts are associated with later contribution periods and higher contribution limits. The top earners can benefit from opening a cash on hand plan that allows them to defer taxes on hundreds of thousands of dollars of income each year.

For SEP IRAsYou may be able to contribute up to $ 57,000 by 2020. Even better, you have until October 15, 2021 to fully top up the account. This assumes that you are filing your taxes on a renewal. Also, SEP-IRA accounts can be opened immediately prior to filing your taxes.

I usually prefer a Solo 401 (k) plan over a SEP IRA. It’s just easier to make bigger contributions, which translates into more tax savings. Individual K plans must be created by December 31, 2020. The employee contribution should be paid by the end of the year. However, you have until October 15, 2021 to fully fund the employer’s contributions to the plan. For 2020, you can put up to $ 57,000 in a Solo 401 (k), but that number jumps to an additional $ 6,500 if you’re 50 or older.

Did you withhold enough taxes from your paycheck?

There’s nothing worse than a big surprise tax bill. So see if you have enough taxes withheld from your paycheck. This is more important for couples and people who have switched jobs or have multiple jobs. If you are self-employed, make sure you have paid enough quarterly taxes throughout the year. Remember, unemployment benefits are taxable, which will matter to the millions of Americans who were unemployed during the COVID-19 recession.

According to the IRS, tax refunds for people earning $ 100,000 or more had decreased. If you’re expecting a hefty tax refund to pay off debts or finance other purchases, be sure to check your withholding tax before the end of the year as well.

To aid this process, a tax withholding calculator is available free of charge on the IRS website. This calculator is best for employees and retirees. The process is a little more complex for the self-employed. When you are, reach out to your certified financial planner or tax advisor.

Do you take the standard deduction or list your tax deductions?

Under the Tax Cut and Employment Act (TCJA), a large majority of taxpayers simply choose the standard deduction when filing their personal income taxes. Previously, around 30% of taxpayers submitted Appendix A to list tax deductions. However, under the Trump tax plan, that number has dropped to just 10% of applicants.

Much of the line item decrease is due to the $ 10,000 state and local tax (SALT) cap from the Trump tax plan. That costs people who live in high-quality real estate areas and / or high-tax countries a lot. As a Los Angeles based financial planner, I can tell you that it costs me and many of my clients a ton of extra taxes. The $ 10,000 cap is the same whether you’re single or married. I am confident that President-elect Biden will lift the state and local cap. Until then, it may be easier for more singles to list their tax deductions.

For the 2020 tax year, the base standard deduction for single applicants is $ 12,400. The standard deduction doubles to $ 24,800 for married couples filing together.

The standard deduction is one of the easiest ways to file your taxes. No need to save receipts to validate your tax write-offs. Even so, if it saves you money, it’s still worth it to break down your taxes!

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Harvesting tax losses at the end of the year

Take a look at your investments in your non-retirement accounts. Depending on your overall tax situation for the year, it might make sense to sell some winners or losers. You can realize short-term losses of up to $ 3,000 to offset up to $ 3,000 in regular income each year. Unused short term losses can be carried forward for future use.

Tax loss harvesting may be one of the biggest tax gains for people in 2020. Those who have proactive financial advisor can potentially capture significant short-term losses during the COVID-19 bear market that occurred at the beginning of 2020, while it has been with us ever since seen a strong market recovery. All of this plus the jump in value of many stocks since the election was called for for President-elect Joe Biden.

Be generous with donations

While most people only donate to charities to give something back, a good tax deduction can help you give more money if you choose to. As more people take advantage of the standard deduction, fewer people will receive tax breaks on their charitable donations. A prevalent strategy to get around this is to bundle prints together. Essentially, this means that in a single year you will need to donate several years’ worth of gifts to cross the threshold so that you can benefit from the breakdown of your deductions.

When considering this strategy, consider a donor-recommended fund. You can contribute now and get the tax deduction, but later distribute funds to charities. In the meantime, the money can be invested and potentially grow tax-free.

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Review your qualified deductions for business interests

If you have a small business or self-employed income, you may be eligible for the Qualified Business Interest (QBI) deduction. This is also known as the 199A pass-through business vent. The bottom line is a 20% discount on the net income of many companies that operate as pass-through businesses. QBI tax withholding is capped for individuals with income greater than $ 163,300 (single) or $ 326,600 (joint registration of marriage) in 2020.

Tax planning can become even more valuable for earners near these income thresholds. They may be able to keep their income low enough to qualify for a larger 199A tax withholding. Things like contributing to a Solo 401 (k) or Cash Balance plan are the obvious choices. Tax-deductible donations to charity are another.

It doesn’t matter how much you make, but how you keep it. A little tax planning at the end of the year can also help simplify the tax return process a little. Follow these six year tax saving measures and you should be able to avoid a major tax time surprise. 2020 was a terrible year in many ways, but it doesn’t have to be a terrible year for tax purposes. Make sure you do proactive tax planning now to keep more of your hard-earned cash in your proverbial pocket.

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