5 Year-End Tax Tips
As the end of a crazy year comes to a close, I wanted to give you 5 tax tips that may help you save money on your 2020 tax return. Keep in mind that year-end planning should not take the place of daily tax planning, but it is still very important. I hope these tips save you money and I wish you a very happy holidays!
1. Get Up-To-Date on Your Bookkeeping
Having solid and up-to-date books is the foundation of saving taxes. Without maximizing your deductions and understanding where your money is going, it is impossible to get your taxes down to the legal minimum. I recommend doing both business and personal bookkeeping to ensure you are not missing any write-offs.
2. Review Estimated Tax Payments
Make sure you are not going to be hit with any underpayment penalties from the IRS or state taxing authorities. This is a big area that I see people have to pay on their tax returns. If you think you might owe money on your 2020 tax return, determine if you should make any estimated payments by January 15, 2021 to minimize any potential late payment penalties.
3. Review Your Entity Structuring
Having the proper entities in place is absolutely crucial with tax planning. For example, if you are a sole proprietor filing a Schedule C with net income in excess of $40,000 per year, you can save significantly on taxes by forming an S-Corporation. Additionally, with the 21% flat C-Corporation rate, there are now situations where owning a C-Corporation is advantageous. Conversely, if the situation is wrong, having corporations in place can cost you thousands of dollars per year. It is all about reviewing your situation, and figuring out what is best for you.
4. Contribute to a Retirement Account
Whether it's an IRA, SEP IRA, 401-k, or an HSA, this is a fantastic way to defer taxes to a later year and build that bucket of wealth towards retirement. Many of these plans require that they be opened before year-end in order to get a tax deduction for 2020.
5. Accelerate Your Business Deductions
I have mentioned before how this is my least favorite way to save taxes but it still has its place. I never recommend buying something just for a tax deduction, but if you know you will have to pay for an expense anyway, you might want to consider prepaying it. Think of every business expense you will absolutely have to pay for in 2021 and then think about which of those you can prepay at the end of 2020. This will provide a write-off in 2020 for all of those expenses. Some examples of possible prepay's include supplies, electronics, cars, insurance, continuing education. etc.
