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Final Minute 2020 Tax Planning Taxpayers Can Nonetheless Take Benefit Of



2020 is already a distant reminiscence for a lot of Individuals. Virtually midway by way of January, it’d really feel that there isn’t any planning that may be executed in your 2020 taxes. In actual fact taxpayers do nonetheless have some tax planning alternatives.

“Most tax planning ought to be executed earlier than the tip of the 12 months,” says Nicole Davis, CPA at Butler-Davis Tax & Accounting in Conyers, Georgia. “Nonetheless, there’s on alternative that taxpayers can nonetheless benefit from to avoid wasting tax {dollars}.”

Efficient tax planning is proactive planning. Whereas not all planning alternatives are nonetheless out there for the 2020 tax 12 months, the remaining few can actually make a distinction to the taxpayer’s backside line.

Being Paid In

One of many fundamental parts of tax planning is for taxpayers to verify that they’ve paid in sufficient withholding. Whereas this might sound apparent, many taxpayers are stunned after they file in April and uncover they owe further taxes. However taxpayers have till January 15, 2021 to make a 4th quarter estimated tax fee for the 2020 tax 12 months.

“Failure to pay not less than 90% of the present 12 months’s tax legal responsibility or 100% of the prior 12 months’s tax legal responsibility can result in substantial penalties for underpayment of taxes,” Says Colin Horsford, CPA and Managing Accomplice of Horsford Accounting & Advisory. “It is best for taxpayers to make these funds forward of time so they are not hit with a big tax invoice with added penalties for underpayment.”

This may increasingly even be an excellent train for the brand new 12 months.

“Taxpayers ought to examine their withholdings for 2020 to find out if any modifications must be made for 2021,” explains Davis. “To keep away from having to owe annually, withholdings must be reviewed and adjusted not less than yearly.”

Retirement Planning Can Nonetheless Assist

One of many greatest alternatives for taxpayers on their 2020 tax planning comes from retirement accounts. By selecting the best account, taxpayers can decrease their tax invoice and meet their retirement objectives.   

“Taxpayers can nonetheless contribute to eligible retirement accounts. Relying on the retirement automobile, the contributions can rely as a deduction,” says Davis.

IRAs are sometimes the automobile of selection as funding them could be very easy. People can contribute $6,000 for 2020 with an extra $1,000 for these over age 50.

However a standard IRA won’t be the most effective reply for individuals who have their very own companies.

“Enterprise homeowners can even benefit from retirement deductions by way of SEP IRA plans,” says Davis. “Simplified Worker Pension (SEP) IRAs are particularly helpful in worker/shareholder solely or husband/spouse entities. SEPs are totally funded by the employer. The worker doesn’t need to contribute a dime.”

The SEP IRA is an ideal software for 2020 tax planning in January particularly since this contribution doesn’t must be made till the taxpayer information. For the 2020 tax 12 months, the utmost is the lesser of 25% of compensation or $57,000. This quantity is far greater than the normal IRA and may present actual tax financial savings.

Don’t Overlook The HSA

There may be one other alternative that taxpayers can benefit from:  funding a Well being Financial savings Account or HSA by April 15 for the 2020 tax 12 months. To benefit from this, the taxpayer will need to have had a HAS-compatible Excessive Deductible Well being Care Plan for 2020, wherein case they’ll fund $3,550 for particular person plans and $7,100 for household plans. Plus, if the taxpayer is over 55, they’ll additionally make the $1,000 catch up.

“The contributions develop tax-free and by no means expire and could be withdrawn tax-free so long as they’re used for certified medical bills,” explains Hosford.

However taxpayers must be strategic with these accounts as nicely. In the event that they solely have a restricted quantity of liquidity to fund a retirement account or HSA, there’s a clear reply on which account to prioritize.

“HSA contributions could be invested very like an IRA and can be utilized for non-medical bills after the age of 65, although taxpayers must pay taxes on these withdrawals,” says Hosford. 

Thus, the account can double as each a financial savings account for medical prices and a retirement automobile.

Proactive Planning Is the Finest Planning

In the end there’s nonetheless some tax planning that may be executed for 2020. But when taxpayers wish to actually take management of their tax returns, 2021 remains to be a clean canvas to do actual planning.

Davis agrees. “There are a selection of methods at your disposal all year long. This additionally ensures that the taxpayer optimizes their tax financial savings.”

However the secret is to do the planning year-round. Typically one of the best ways to do that is to work with a tax skilled.

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