5 Steps to Kickstart Your 2020 Tax Strategy
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Whether you’ll be among those who make it over the April 15 finish line to file your 2019 tax return on time, or you filed for an extension, your post-tax routine should include preparation for 2020 taxes. Having a strategy and executing it will help you avoid missing opportunities and relieve tax prep stress later on.
Here are five steps you can take before April 15, 2021 to simplify your tax filing preparations and maximize tax reduction opportunities.
Step One: Project your 2020 income.
Keeping an ongoing tally of your income will help you determine your tax liability and develop a strategy to reduce it before the time comes. If you are employed, your payroll stubs are a wealth of information regarding salary and deductions.
If you are self-employed, you can use your 2019 income to gauge 2020: do you expect any large orders or projects? Have you lost any clients? Do you have prospects that might bring in additional revenue?
Step Two: Track deductible expenses throughout the year.
Start by taking a quick inventory of the expenses you used as tax deductions in 2019, then create a method for tracking and retaining your 2020 expense records. For example, you might sort receipts by the type of deductible expense: medical, property taxes, charitable contributions, car odometer readings for business travel.
Other variables such as anticipated life changes (marriage, birth or adoption of a child), life enhancements (purchasing of an electric vehicle or home solar panels), and health insurance changes could have a dramatic effect on your tax strategy.
Step Three: Set aside money for your 2020 tax liability.
Meet with your tax advisor to estimate your likely tax liability in 2020.
Be aware of the amounts being withheld from your paychecks. Self-employed individuals: determine how much you should set aside for taxes. With the changes in tax law and deductions, taxpayers need to evaluate whether the amounts being withheld from paychecks or amount being set aside are sufficient to meet their tax liability.
You can read about tax law changes in IRS Publication 5307 and use the IRS withholding calculator to figure out your projected tax liability for the coming year.
The sooner you estimate your tax liability, the better chance you have of covering it through withholding or quarterly estimates. However, if you realize later in the year that you haven’t been withholding enough, you can send electronic payments directly to the IRS to help reduce/eliminate any interest or penalties you may owe.
Step Four: Participate in programs that could reduce your tax liability.
Some taxpayers overlook tax-advantaged programs offered by employers. For example, enrolling in a High Deductible Health Plan (HDHP) qualifies you to make contributions to a Health Savings Account, or HSA.
The money you put into an HSA is a straight-line deduction on your personal tax return. Some employers also match HSA contributions through their cafeteria plans. You may want to consider contributing to an HSA and using it to pay your medical bills rather than paying your medical expenses directly.
Step Five: Contribute to tax-advantaged retirement savings accounts.
To the extent that you are able, increase your contributions to your employer’s retirement plan such as a 401(k), 403(b), or governmental 457(b) plan. Making contributions to these plans will reduce your federal and state taxable income. They do not however, reduce your Social Security liability, FICA, and FUTA deductions.
As an individual, you can also contribute to an IRA. Contributions to a Traditional IRA could reduce your taxable income, and possibly reduce your tax liability through the Saver’s Tax Credit.
If you have a small business or are self-employed, consider establishing and contributing to an employer-sponsored plan such as a Simplified Employee Pension Plan (SEP), Savings Incentive Match Plan (SIMPLE) or an Individual 401(k) plan. Contributions to these plans are tax deductible.
The Department of Labor encourages small businesses to establish employer-sponsored plans. Read about the plans in the IRS publication 560 or talk with your tax advisor about the best plan for your situation.
Avoid tax season stress by getting an early start on planning this year. While you’re at it, you can open an Entrust Self-Directed IRA online in under 10 minutes and start taking advantage of the tax benefits today.