Tax Strategies for Next YearSubmitted by Mission Financial Planning on July 17th, 2020
With the tax-filing deadline behind us, many people are suffering tax-related sticker shock. What would it take to have a better tax-season next year? Here is a quick checklist of ideas; not all will apply, and of course there are caveats and limitations to almost every one of them. We’ll get detailed and down in the weeds when strategizing with your personal situation in mind, but these quick tips will give you some things to think about.
Check your withholding. It’s been an unusual year, and the number you started the year with may not be appropriate at this point. Some people had to skip/miss paychecks in the first half due to COVID and are on track for lower income in 2020 – you may be OK since missed paychecks means missed withholding, but those who use their W2 withholding to take care of taxes on other income as well may need a readjustment.
Speaking of skipping/missing paychecks, you may need to readjust your 401k withholding to reach this year’s maximum contribution. (2020’s limit is $19,500, plus another $6500 if you’re over 50)
Tax-deferred contributions into IRAs or 401ks reduce your current taxes and allow for tax-deferred growth. (2020’s limit is $6000, plus another $1000 if you’re over 50)
If you missed paychecks and collected unemployment, remember that unemployment benefits are taxable. Set aside money for taxes, they’ll be due next April.
If you received a Stimulus Check, it is not taxable.
Check to see if your health insurance makes you eligible to contribute to a Healthcare Savings Account (HSA). The contribution is tax deductible, and money can come out tax free to be spent on eligible medical expenses. Keep a file of your medical expenses to justify a tax-free withdrawal in the future.
You may be eligible for education-related credits or deductions if you pay college tuition or interest on student loans. There are income restrictions and limits on how many times some of the credits can be claimed.
Contributions to 529 plans are often State tax deductible or provide tax credits, check your state’s treatment.
It is a time of great need, remember that charitable deductions are deductible…but if you aren’t itemizing because the standard deduction is higher than your deductible expenses and donations, they won’t help your tax bill. Consider charitable “bunching” – lumping several years’ deductions into one year if that helps you exceed the standard deduction so that you see an impact on your tax return.
A bunching strategy could also be applied to medical expenses related to elective or non-emergency procedures.
Be proactive managing your capital gains/losses. There are many tax strategies for capital gains. Tax-loss harvesting when the market is down, offsetting gains with losses, donating appreciated assets, like-kind exchanges (real estate), installment sale (business), estate and gifting strategies and transferring gains into alternative investments (i.e. distressed communities).
Expenses paid for with PPP money will not be deductible. The AICPA and ADA are lobbying to change this, but this could lead to a tax surprise for practice/business owners. Plan and be proactive, setting money aside for the potential tax hit.
Business owners should watch income thresholds related to Qualified Business Income, a very attractive 20% deduction on passthrough income.
There are many business-related tax items to be aware of (home and vehicle usage, equipment purchases, cost segregation, 139 reimbursements). Each practice owner’s situation will be unique, please call us to discuss.