No matter your specific tax situation, it’s a good idea to review key areas before the end of December to ensure you’re making the most of your tax filing circumstances for 2020.
1. Defer your income
Income is taxed in the year it is received, so if you can defer the income owed to you until after the first of the year, you can also defer those taxes owed from 2020 to 2021.
As an employee, you may be able to defer a year-end bonus into next year.
If you are self-employed or do freelance or consulting work, delaying billings until late December may push payments received to the next year.
Before making the decision to defer your income consider whether or not your marginal tax rate will be higher in 2021 compared to 2020. When in doubt, you should consult your tax professional.
2. Take some last-minute tax deductions
Like deferring income, you can also lower your tax bill by accelerating deductions this year. Contributing to charity is a great way to get a deduction.
- You can supersize the tax benefits of your charitable donation by donating appreciated stock or property rather than cash.
- If you’ve owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.
You must have a receipt to back up any contribution, regardless of the amount.
Other expenses you can accelerate include an estimated state income tax bill due January 15, a property tax bill due early next year, and medical bills.
3. Contribute the maximum to retirement accounts
There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time, tax-free.
This benefit is maximized with company-sponsored 401(k) plans where employers match contributions.
Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($19,500 for 2020, $26,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
Also consider contributing to an IRA.
- You usually have until the April 15 filing deadline to make IRA contributions, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred.
- Making deductible contributions also reduces your taxable income for the year.
- You can contribute a maximum of $6,000 to an IRA for 2020, plus an extra $1,000 if you are 50 or older.
- If you are self-employed, establish a retirement plan by December 31. Contributions may still be made until the tax filing deadline (including extensions) for your 2020 return.
For more information on these and other year-end tax planning strategies, the Laciak>cpa team is here to help. Visit Laciak.com to learn more.
Jane Szymczak
Director of Client Services
219-309-4423 | [email protected]
