End of Year Tax Planning Guide
As we approach the end of 2020, the thing on the forefront of many an individual and business owner’s mind is taxes. Filing your tax return correctly and punctually is critical, and there are many steps you can take to make sure you aren’t paying more than you should be.
Check your Withholding
Checking your tax withheld for the year is important, especially this year. Due to COVID 19, millions of individuals have been collecting unemployment, far more than is typical. These unemployment payments ARE taxable and those who collected it without opting to set money aside to help pay for that in advance will see significant increases in how much they owe in taxes. To check your tax withheld, use the IRS Tax Withholding Estimator.
Filing Status and Major Life Events
It’s important to correctly enter your filing status, as not doing so can result in missing out on tax return deductions. So, whether you are single, married filing jointly, married filing separately, head of household, or a qualifying widow(er) with a dependent child, make sure you choose correctly. If, like many others, you’ve experienced major life changes this year, these could also be relevant to your tax refunds. Significant life events that are tax-relevant include marriages, divorces, childbirth, new disabilities, loss of a family member, or living through a disaster situation. More information about what to do in these situations can be found here.
Check if you should Itemize your Deductions and Redeem any Credits
Make sure to check if you should just be applying for your standard deduction or whether outstanding circumstances have made itemizing your deductions behoof you. In addition to deductions, make sure to also check if you are eligible to subtract any tax credits as well. Tax Credits are earned through various means, including raising children, falling within certain income ranges, etc. A full list of these credits can be found here.
Also, the stimulus checks distributed by the government this year count as credits AGAINST your taxable income for the year. If you have it still, be sure to hold on to Notice 1444 so you’re aware of how much you received EXACTLY, as incorrectly guessing or simply estimating this number could result in longer processing times for one’s returns.
The Premium Tax Credit can get tax payers in trouble if they earn more than expected. The premium tax credit – also known as PTC – is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. To get this credit, you must meet certain requirements and file a tax return with Form 8962, Premium Tax Credit. To be eligible for the premium tax credit, your household income must be at least 100 – but no more than 400 – percent of the federal poverty line for your family size, although there are two exceptions for individuals with household income below 100 percent of the applicable federal poverty line. For example the federal poverty line for a married couple with 3 kids is $30,170. Thus if you made more than $120k you likely have to pay back the advance credit.
Charitable Contributions
Charitable Donations made to qualifying organizations, as described in Schedule 170 of the Internal Revenue Code, throughout the tax year can be counted when itemizing deductions in Schedule A. In most years, the amount that can be written off here capped at 60% of an individual’s adjusted gross income. However, it has been recently amended to now be 100% of an individual’s income, with any excess able to roll over into next year, retaining the same value.
Also, for the first time in 2020, and in order to support charitable organizations and encourage them to still receive donations, the CARES Act included a section that enables those who are eligible and don’t itemize deductions to deduct $300 of qualified donations as direct Adjusted Gross Income deductions, lowering what is owed to the government in one’s tax returns. The only qualifying factor is not itemizing deductions for 2020. The $300 in donations must also be cash, not goods or services, in order to qualify for the “above-the-line” deduction. It would be prudent to seek IRS guidance regarding whether or not one should claim this deduction if the taxpayer’s AGI is less than the standard deduction, or a married individual filing a separate return with a spouse who has itemized deductions. These charitable contributions must have been given in the year 2020 in order to qualify.
Retirement Plans
Also, remember that some retirement plans can reduce your adjusted gross income while also securing your future. Contributions to your companies 401k plan are the most common, but there are other options especially for self-employed individuals. Here some highlights of the most common retirement plan options:
Simplified Employee Pension (SEP): Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000 for 2021 ($57,000 for 2020 and $56,000 for 2019).
401(k) plan: Make annual salary deferrals up to $19,500 in in 2021 and in 2020 ($19,000 in 2019), plus an additional $6,500 in 2021 and in 2020 ($6,000 in 2015 - 2019) if you're 50 or older either on a pre-tax basis or as designated Roth contributions.
Savings Incentive Match Plan for Employees (SIMPLE IRA Plan): You can put all your net earnings from self-employment in the plan: up to $13,500 in 2021 and in 2020 ($13,000 in 2019), plus an additional $3,000 if you're 50 or older (in 2015 - 2021), plus either a 2% fixed contribution or a 3% matching contribution.
Section 179 Deduction
This deduction was created as an incentive by the federal government for business to make investments in machinery and equipment. It was created to encourage business owners and decision makers to invest in company infrastructure, enhance business to business commerce, and as a result in the investment, more efficiencies in business processes.
The Section 179 Deduction allows small business to write off qualifying equipment purchased by a business as long as it serves business purposes more than 50% of the time. The equipment must also be put in service in the tax year that the 179 deduction is taken. Full post about 179 can be found here.
Remember that RTC is her to help and reach out with any questions. Merry Christmas and Happy New Year!