The Ultimate Tax Planning Tips and Tax Strategies

Income is taxed in the year it is received—but why pay tax today if you can pay it tomorrow instead?
It’s tough for employees to postpone wage and salary income, but you may be able to defer a year-end bonus into next year—as long as it is standard practice in your company to pay year-end bonuses the following year.

If you are self-employed or do freelance or consulting work, you have more leeway. Delaying billings until late December, for example, can ensure that you won’t receive payment until the next year.

Whether you are employed or self-employed, you can also defer income by taking capital gains in 2021 instead of in 2020.

Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don’t want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. If that’s likely, you may want to accelerate income into 2020 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later.

Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductions this year.
For example, contributing to charity is a great way to get a deduction. And you control the timing.

• You can supercharge the tax benefits of your generosity by donating appreciated stock or property rather than cash.
• Better yet, as long as you’ve owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.

You must have a receipt to back up any contribution, regardless of the amount. (The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.) Other expenses you can accelerate include:

• an estimated state income tax bill due January 15
• a property tax bill due early next year
• or a doctor’s or hospital bill.

Sometimes accelerating tax deductions can cost you money… if you’re already in the alternative minimum tax (AMT) or if you inadvertently trigger it.

Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class.

The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher.

This is a year-end issue because certain expenses that are deductible under the regular rules—and therefore candidates for accelerated payments—are not deductible under the AMT.

• State and local income taxes and property taxes, for example, are not deductible under the AMT. So, if you expect to be subject to the AMT in 2020, don’t pay the installments that are due in January 2021 in December 2020.

A key year-end strategy is called “loss harvesting”—selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.

And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.

If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2020 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.

There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes.

Company-sponsored 401(k) plans may be the best deal because employers often match contributions.

Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($19,500 for 2020, $26,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.

Also consider contributing to an IRA.

• You usually have until the April 15 filing deadline to make IRA contributions, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred.
• Making deductible contributions also reduces your taxable income for the year.
• You can contribute a maximum of $6,000 to an IRA for 2020, plus an extra $1,000 if you are 50 or older. Use our IRA Calculator to see how much you can contribute.

If you are self-employed, a good the retirement plan might be a Keogh plan. These plans must be established by December 31 but contributions may still be made until the tax filing deadline (including extensions) for your 2020 return. The amount you can contribute depends on the type of Keogh plan you choose.

Congress created the “kiddie tax" rules to prevent families from shifting the tax bill on investment income from Mom and Dad’s high tax bracket to junior’s low bracket.

• For 2020, the kiddie tax taxes a child’s investment income above $2,200 at the same rates as trusts and estates which are typically higher than rates for individuals.
• If the child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns age 24.

So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is too large and the child’s unearned income exceeds $2,200, you could end up paying taxes at the same rates as trusts and estates.

You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 72 (70 1/2 if you reached 70 1/2 prior to January 1, 2020). However, minimum distribution requirements have been suspended for 2020. Failing to take out enough triggers one of the most draconian of all IRS penalties:

• A 50% excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year.
• After that, annual withdrawals must be made by December 31 to avoid the penalty.

When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.

Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees steer part of their pay into a special account which can then be tapped to pay child care or medical bills.

The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious “use it or lose it" rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don’t use it all by the end of the year, you forfeit the excess.

With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2020 set-aside money as late as March 15, 2021. If not, you can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.

Contact Initor Global for our tax preparation outsourcing services today!