Tax credits and deductions can put more money in your pocket at tax time, but it takes preparation. There are also some deductions included in the CARES Act passed earlier this year that are only available for a short period of time.
Preparing your tax return can be complicated, and the rules are changing all the time. While these tips will help you plan, you should consult our tax preparation professionals.
Normally, you can’t deduct charitable contributions unless you itemize deductions. But this year’s CARES Act gives a deduction of up to $300 for cash donations even if you don’t itemize. Non-itemizers can claim an above-the-line deduction of up to $300 for charitable cash contributions. This extra write-off is per return, meaning couples who file jointly can deduct only $300, not $600.
Another strategy for charitable contributions involves bunching contributions that you would normally deduct over multiple years into one year. The goal is for your charitable contributions, along with any other itemized deductions you plan to take on Schedule A, to exceed the standard deduction for your filing status. If you anticipate being just below the standard deduction threshold it may make sense to accelerate your planned 2021 contributions into 2020 to realize the tax benefit of those contributions. You may want to contact your usual charities to inform them of this strategy so they can be update their internal budgets.
If you want to donate valuable property, contribute appreciated investments, such as stocks or mutual fund shares. For itemizers, generally you can write off the full value of the donated property. Be sure the donated investments have been held for more than one year. Also, avoid donating property that has declined in value since you acquired it.
Accelerate Deductible Expenses
Charges on your credit cards for recurring expenses that you would otherwise pay in early 2021 can be accelerated and deductible in 2020. You can claim these deductions even though the credit card bills won’t be paid until next year. Accelerated expenses paid with checks require that the check is mailed prior to year-end. Do not simply write the check and then mail it after the end of the year.
Tax law allows business owners using the cash basis method of accounting to take this even further by allowing the business to deduct most prepayments of expenses so long as any right or benefit attributable to the expense does not extend beyond the earlier of:
- One year from the time the benefit is first realized; or
- The end of the taxable year following the taxable year in which the payment is made.
The general rule for cash-basis taxpayers is that you are not required to report income until the year you receive cash or checks in hand or through the mail. To take advantage of this opportunity, you might want to consider intentionally delaying sending out your invoices. Theoretically, with the delayed invoices, payments will be deferred to early next year.
Buy Capital Assets
If you’re planning to purchase larger equipment, a vehicle, office furniture, etc., it may make sense to make those planning purchases prior to year-end if you’re anticipating taxable income from your business, rental property, farm, etc. Many of these items are eligible for accelerated depreciation or can be immediately deducted in full in the year they are purchased. These purchases can dramatically decrease your tax liability if proper planning occurs.
Increase Your Withholding or Make Estimated Tax Payments If You Haven’t Paid Enough Taxes
No one likes a big surprise at tax time, so make sure your withholding and/or estimated tax payments will cover your tax liability and limit or eliminate underpayment penalties.
Taxpayers can avoid a penalty for underpayment of estimated tax if they owe less than $1,000 in tax after subtracting withholding and refundable credits. Taxpayers can also avoid an underpayment penalty if the total withholding and estimated tax paid is at least equal to the “required annual payment” – 100% of the tax shown on the taxpayer’s return for the preceding year (110% if AGI is over $150,000; $75,000 for married filing separate returns) or 90% of their tax for the current year, whichever is smaller.
Reach out to us prior to year-end so we can project your 2020 income to determine if additional withholding or a fourth quarter estimate (or an increased fourth quarter estimate) payment is necessary to avoid these penalties.
Careful handling of capital gains and losses can save taxes.
As is the case with most planning involving capital gains and losses, investment factors need to be considered but here are a few year-end strategies related to capital gains/losses that can produce significant tax savings:
- Taxpayers whose 2020 taxable income from long-term capital gains and other sources is below the zero-rate amount should try to avoid recognizing long-term capital losses before year end as they may receive no benefit from the loss.
- Taxpayers whose 2020 taxable income will be below the zero-rate amount should consider recognizing enough long-term capital gains before year-end to take advantage of the 0% rate.
- Taxpayers who have no capital gains should consider recognizing capital losses up to $3,000, which can be used to offset ordinary income.
- Taxpayers should consider selling capital assets showing a long-term gain this year rather than next if their taxable income will be higher next year and their gains would be subject to a higher tax rate next year. Conversely, taxpayers should put off recognizing long-term capital gains if next year’s taxable income is likely to be lower and result in a lower tax on capital gains.
- Time long-term capital losses for maximum effect. A taxpayer should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they are used to offset short-term capital gains. To do this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken. However, this is not just a tax issue.
Add to Your Retirement Savings
One way to lower your taxable income for the year is to contribute to a retirement plan, such as:
- Deductible IRA
- SIMPLE IRA
You have until Dec. 31 to make contributions to 401(k)s and 403(b)s for 2019 and until April 16 to make contributions to IRAs and some other plans. SEP contributions are due by the due date of your tax return, including extensions.
The end of the year isn’t far away. Make sure you’re prepared. Contact us today for even more tips on how to minimize your 2020 tax liability. We can also get a head-start on 2021 and beyond.