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Tax Planning Tips and Tricks to Close Out 2020

As we bid adieu to 2020 (sigh of relief), we must begin to plan for the inevitable: Taxes. This year has been full of changes and no doubt, many are yet to come with the inauguration of a new President. Whether you are concerned about paying too much or too little in taxes, there are some things you can do to prepare for April 15 (no word yet on another filing extension). Here are some quick hits to get you started:

You are concerned that you will have to pay (like a lot):

1. Accelerate Tax Losses

If you have a brokerage or taxable account (receive a 1099 each year), you may want to consider selling some “loser” investments and taking the tax loss this year.

2. Increase Your Retirement Contributions

If you have not yet maxed out your 401k or other employer retirement account ($19,500 or $24,500 if age 50 or over), consider deferring more of your income these last few weeks of the year.

3. Business Expense Acceleration and/or Income Deferral

If you own a business and if available to you, consider accelerating expenses in 2020 and deferring some income until next year.

4. Give, Give, Give!

Have a favorite charity? The IRS allows a $300 above the line deduction (without itemizing) on your taxes. Those who are able to itemize might want to consider accelerating or increasing their donations (cash or goods).

5. Prepare for Next Year

Why did you owe so much tax this year? Was it an anomaly or did you forget to update your withholdings? The IRS has a great W-4 tax calculator: Remember, neither paying too much tax or too little tax are good things. You may also want to begin saving for and pre-paying or paying quarterly taxes if you are self-employed, your income is inconsistent, or if you receive an unexpected windfall.

You are anticipating a large refund:

1. Roth Conversions

If you have a traditional IRA or old 401k sitting around somewhere, now may be the year to pay the taxes and convert some or all of that money to a tax-free Roth IRA. Please consult a tax professional first, as there are other things to consider before attempting a conversion.

2. Business Expense Deferral and/or Income Acceleration

The opposite of what I mentioned earlier if you are expecting a big check. If you own a business and if available to you, consider accelerating income in 2020 and deferring some expenses until next year.

3. Prepare for Next Year

Why are you getting a large refund this year? Again, start with your withholdings. A major life event could affect not only this year, but upcoming tax years as well.

Other things to consider:

1. Student Loan Interest Deduction May Not Be What It Once Was

If you have a student loan and are anticipating being able to deduct the maximum amount of interest, be aware. This year, federal student loan holders saw 0% interest for much of the year. The $2,500 deduction could be reduced depending on the amount of your loan and your interest rate.

2. Refinancing to a Lower Mortgage Rate

If you refinanced into a lower mortgage payment this year, you may find you paid much less in interest potentially resulting in your itemized deduction either being reduced or no longer available to you.

3. Working Remotely In Another State

No doubt COVID-19 has changed how we work. Many of us are staying home or even leaving our home state to work closer to family or from a second home. Flexibility is great, but there could be tax consequences in the new state. Check with your employer if this might apply to you.

If you are unsure of the best strategy for you, please talk to a tax professional or other financial expert who knows your situation before making any changes. You may also consider hiring a CPA or tax accountant to ensure you stay ahead of the game, plan appropriately, and stay consistent. Remember, tax law changes will continue to happen and it’s important to be informed and aware of these changes.


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