6 Tax Planning Moves To Make Now

Wow! 2020 has been a crazy year. Many people have seen their incomes plummet, while others have been more fortunate. 2020 has been a record-setting year for the incomes of some. Either way, yearend is a great time to do some tax planning to help reduce your 2020 income taxes that will be due this coming April.

When your income changes, what qualifies as an allowable tax deduction may also change, along with the tax brackets, this income falls into. Proactive tax planning is imperative for self-employed and small business owners. Most filers will need to pay at least a certain percentage of the taxes before yearend to avoid IRS penalties.

Yes, there are a few ways to minimize your taxes after New Year’s Eve, but most of your tax planning tools will be limited once we reach 2021. 

What Are the Deadlines for Your 2020 Retirement Account Contributions?

When and how much you can contribute to your retirement will vary between types of plans and types of contributions. The good news for those using a Roth IRA, or traditional IRA, is these retirement accounts can be opened and funded all the way until April 15, 2021, for the tax year 2020. The bad news is you can only contribute $6,000, per year. That will likely not be enough to fund a secure retirement for anyone earning an average income or more. Rule of thumb, you should be contributing at least 10% of your income into retirement accounts, more if you are starting late or want to retire early.

Those with self-employment income (or income from a small business) should check out the SEP-IRA or Solo 401(k) plan. These valuable retirement accounts come with later contribution deadlines and higher contribution limits. The highest earners may benefit by opening a Cash Balance Plan, which may allow you to defer taxes on hundreds of thousands of dollars of income per year.


For SEP-IRAs, you may be able to contribute up to $57,000 for 2020. Even better, you have until October 15, 2021, to fully fund the account. That assumes you file your taxes on an extension. Also, SEP-IRA accounts can be opened just before you file your taxes. 

Typically, I prefer to use a Solo 401(k) plan versus a SEP-IRA. It is just easier to make larger contributions, which translates to more tax savings. Individual K plans must be set up by December 31, 2020. The employee contribution should be made by year’s end, but you have until October 15, 2021, to fully fund the employer contributions to the plan. For 2020, you can contribute up to $57,000 into a Solo 401(k), but that figure jumps an additional $6,500 if you are 50 years old or older.

Have You Withheld Enough Taxes from Your Paycheck?

There is nothing worse than a big surprise tax bill, so see if you have had enough taxes withheld from your paycheck. That is more important for couples and people who have switched jobs or have multiple jobs. If you are self-employed, check to make sure you have paid enough quarterly taxes throughout the year. Keep in mind, unemployment benefits are taxable, which will matter to the millions of Americans who found themselves out of work during the COVID-19 recession.

Tax refunds were down for people who make $100,000, or more, according to the IRS. If you are counting on a big tax refund to pay down debt or fund other purchases, you should also check your withholding before the year’s end. 

To help with this process, there is a tax withholding calculator available for free on the IRS site. This calculator is best for employees and retirees. The process is a bit more complex for the self-employed. If this is you, get help from your certified financial planner or tax preparer.

Will You Take the Standard Deduction or Itemize Your Tax Deductions?

Under the Tax Cuts and Jobs Act (TCJA), a vast majority of taxpayers will simply choose the standard deduction when filing their personal income taxes. Previously, around 30% of taxpayers filed a Schedule A to itemize tax deductions. However, under the Trump tax plan, that number has dropped to just 10% of filers. 

Much of the drop in itemizing is due to the $10,000 State and Local Tax (SALT) Cap from the Trump tax plan. That costs people living in high-value real estate areas and/or high tax states dearly. As a Los Angeles-based financial planner, I can tell you that it costs myself and many of my clients a ton in extra taxes. The $10,000 cap is the same, whether you are single or married. I am hopeful President-Elect Biden will eliminate the state and local cap. Until then, it may be easier for more singles to itemize their tax deductions.

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

Taking the standard deduction is one of the easiest ways to file your taxes. You will not need to save receipts to validate your tax write-offs. All the same, it is worth the hassle to itemize your taxes if it saves you money!

MORE FROM FORBESTax Mistakes In 2020 That Could Ruin Your Retirement

Yearend Tax Loss Harvesting

Look at your investments in your non-retirement accounts. It may make sense to sell some winners or losers, depending on your overall tax situation for the year. You can realize up to $3,000 in short-term losses to offset up to $3,000 of regular income each year. Unused short-term losses can carry forward for future use.

Tax Loss Harvesting may be one of the biggest wins for people tax-wise in 2020. Those with proactive financial advisors may find they are able to capture substantial short-term losses during the COVID-19 bear market that occurred earlier in 2020 while enjoying the strong market recovery we have seen since then. All of that plus the jump in the values of many stocks since the election was called for President-Elect Joe Biden.

Be Generous with Charitable Donations

While most people donate to charity simply to give back, a nice tax deduction can help you give more money if you so choose. With more and more people utilizing the standard deduction, fewer people are getting a tax break for their charitable giving. One prevalent strategy to get around this is bunching deductions. That essentially means donating several years’ worth of gifts in a single year, pushing you above the threshold, so you will benefit from itemizing your deductions.

If you are considering that strategy, you may want to look at using a donor-advised fund. You can make the contribution and get the tax deduction now but distribute funds to charities later. In the meantime, the money can be invested and potentially grow tax-free.

MORE FROM FORBES4 Ways To Stay On Track For A Secure Retirement

Review Your Qualified Business Interest Deductions

If you have a small business or self-employment income, you may be eligible for the Qualified Business Interest (QBI) deduction. This is also known as the 199A pass-through business deduction. The bottom line, it works out to a 20% deduction for the net income of many businesses that operate as pass-through entities. The QBI tax deduction is limited for those with a 2020 income of more than $163,300 (single) or $326,600 (married filing jointly).

For earners near those income thresholds, tax planning may become even more valuable. They may be able to get their income low enough to qualify for a larger 199A tax deduction. Things like contributing to a Solo 401(k) or Cash Balance Plan are the obvious ways. Tax-deductible donations to charity are another.

It is not how much you make but how you keep it that matters. Doing a little yearend tax planning can also help make the tax filing process just a little bit easier. Follow these six yearend tax-saving moves, and you should be able to avoid a big tax time surprise. 2020 has been a terrible year in many ways, but it does not have to be a terrible year tax-wise. Make sure to do some proactive tax planning now to keep more of your hard-earned money in your proverbial pocket.

Products You May Like

Articles You May Like

Ask Larry: Will My Social Security Retirement Benefits Be Reduced If My Ex Files On My Account?
SLS: Nasa’s ‘megarocket’ set to fire up engines in crucial test
The Best Places To Retire Abroad? During Covid-19?
More and more travelers are spending the entire winter away from home
Opponents to $2,000 stimulus checks say they are not targeted. How that could be fixed

Leave a Reply

Your email address will not be published. Required fields are marked *