The 2020 year is coming to a close and for most people their focus is the holidays. Taxes season is also upon us. There are a few things people can do to minimize their tax burden before the year is completely Over.
- Give to a Charity
Donating to a charity is a great way to reduce taxes if you itemize. You can support a great cause and help yourself all at the same time. To take this deduction your charity donations need to be paid to a 501(c)(3) organization. Your ability to deduct cash donations is limited to 60% of adjusted gross income. For property donations, the deduction is limited to either 30% of your adjusted gross income when using fair market value of the property or 50% of your adjusted gross income if you’re using a cost basis to determine the amount of the deduction. The CARES Act created a new $300 dollar cash donation deduction for individuals that take the standard deduction in 2020.
IATC Inc currently partners with a local nonprofit organization www.hyncharity.org. We donate a portion of our profits to help this 501(c)(3). Helping Your Neighbor Charity promotes long-term self-sufficiency and empower at risk community members through safe green housing, financial literacy, and career development.
- Maximize IRA, SEP, and Roth Contributions
One easy way to reduce your taxable income before the year is over is to max out allowable 401(k) contributions. “Of course, this will provide a boost for your retirement, but as a bonus, qualified contributions will lower your taxable income for the year,” For 401(k), 403(b), and many 457 plans, as well as the federal government’s Thrift Savings Plan, the annual contribution limit is $19,500, up from $19,000.
For self employed people your business can contribute to an SEP
The amount of contributions made to each employee’s SEP-IRA each year cannot exceed the lesser of:
- 25% of compensation, or
- $57,000 for 2020 ($56,000 for 2019 and subject to annual cost-of-living adjustments for later years).
These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Compensation up to $285,000 in 2020.
Bonus Tip. Once you contribute the maximum allowable amount to your SEP-IRA of $57,000 from the business. You are allowed to also make regular, annual IRA contributions to your Roth IRA and Regular IRA but your total contributions still cannot exceed $6,000 for 2020.
- Make Estimated Tax Payments
Our tax system is a pay as you go system so taxes are supposed to be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. This is a common issue with self-employed individuals.
If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty for underpayment of estimated taxes. You may also be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return. To avoid this penalty you need to owe less than $1,000 in tax after subtracting your withholdings and credits. You need to have paid at least 90% of the tax due for the current year, or 100% of the taxes owed on the prior year return, whichever amount is smaller.
- Update Information with Past Employers and Banks
It’s normal for people to move and get new jobs throughout the year. Before the year end you should check with your prior employers and confirm they have your correct mailing and email addresses. I would do this as early as November. Employers must file Form W-2 and other wage statements by January 31, 2021, to avoid penalties and help the IRS prevent fraud. In actual practice most employers are sending the W-2s, and 1099’s out via mail and electronically the first two weeks in January.To make sure your forms make it to you on time, and not someone else. I recommend people confirm with each employer, bank, contractor, or other payers to ensure they have your current mailing address or email address.
- Defer Additional Bonuses
End of the year bonuses are normally accounted for when I do tax planning with my clients. Sometimes you just have a great year and the bonus amounts push you into an even higher tax bracket. Companies that pay bonuses are familiar with employees requesting that their bonuses not be paid out until January of the new year. This will help you defer the taxes on that income until the next tax year. A useful strategy for individuals who might see their income decline in the upcoming year.