Between grappling with the effects of the coronavirus pandemic, wrapping up the fourth quarter, and preparing for the holiday season, end-of-year tax planning is probably the last thing on the minds of individuals and business owners as the country looks forward to the end of what could charitably be called a hectic 2020.
Not many of us are working feverishly on end-of-year tax planning, pondering how to work out the best ways to stay on top of payments, assessing our investments and maxing out our contributions to our IRAs.
I get it.
But spending the time now to begin working on your end-of-year tax planning can be incredibly beneficial to your bottom line and may help spare you stress and frustration at the start of the new year.
To that end, there are a few simple tax planning measures individuals and business owners can take right now to help ensure that they get off on the right foot in 2021.
First, of course, it is crucial for individuals and business owners to know where they stand with their 2020 tax payments. Individuals and businesses using the quarterly estimated tax payment system need to be aware of the January 15, 2021 deadline for their Q4 payment.
Additionally, if you’re self-employed and you realize that you may have missed a quarterly estimated tax payment in 2020, pay what you can as soon as possible. There may be some additional fees or penalties associated with late payments.
If you’ve had a hard time staying on top of quarterly estimated payments this year, make a plan for 2021 to ensure your quarterly payments are submitted on time.
Now is also a great time for taxpayers planning to take itemized deductions to begin assessing their planned deductions for 2020; if you’re not itemizing, you can take the $12,000 standard deduction ($24,000 for married couples filing jointly) instead.
Second, now is a great time for individuals and business owners to assess their investment portfolios. Individuals and business owners should explore whether they can offset any gains with allowable deductions for capital losses.
Third, individuals should do a “paycheck checkup” by double-checking their withholdings. Checking withholdings can help taxpayers protect against having too little tax withheld and consequently facing an unexpected tax bill or penalty next year.
Alternatively, taxpayers may wish to have less tax withheld upfront, so that they receive more from their paychecks but receive a smaller refund later. Whatever the case, taxpayers can complete a new W-4 form and submit it to their employer to adjust both federal and state withholding.
Fourth, itemizing taxpayers may want to consider prepaying certain expenses on or before December 31, 2020, so that they can claim the deduction on their 2020 return. For example, itemizing taxpayers may want to consider prepaying their mortgage payment by a few days, or making any planned charitable contributions (both cash and noncash). These prepayments can help itemizing taxpayers get the most out of their itemized deductions.
Finally, taxpayers should max out those IRA contributions. IRA contributions can be made into 2021 and then deducted on the taxpayer’s 2020 return, provided certain requirements are met. Taxpayers can also make contributions to a qualified Section 529 plan.
Of course, perhaps the best move a taxpayer can make is to consult with a professional tax accountant or a financial adviser. They can help guide taxpayers through possible strategies to take to get the most out of their 2020 taxes.
If you’re already feeling stressed and anxious about your end-of-year tax planning, hiring a professional may be the best tax move you make all year.
Mike Savage is the founder, owner, and CEO of 1-800Accountant, a virtual accounting firm that is redefining small business services through technology. Mike is a 2018 recipient of the Glassdoor Top CEOs award.