By Tom Wheelwright
Many Americans hate taxes and avoid thinking of them until Tax Day is right around the corner. What people don’t realize is that the tax law is written as a roadmap to create savings, and when you plan accordingly, you’ll be rewarded. The end of the year is an important time in a tax strategy, because once it’s ended, some tax opportunities are lost forever. Consider these tips to make sure you get the best results from your year-end tax planning.
Update your bookkeeping
Bookkeeping impacts nearly every part of tax planning. That’s why it is so important to make sure your bookkeeping is current before the end of the year is here—“current means” it is done through the end of last month or last quarter. In addition, be sure to have all documentation on hand and organized, as it will help you successfully get through an audit. It’s also a great way to increase tax deductions, because proper documentation leaves less room for deductions to get missed. This includes documentation for travel, meals and entertainment, home office and vehicle.
Determine if you’re itemizing
With the current standard deduction at $12,400 for single filers and $24,800 for married couples, it may seem pointless to itemize your deductions instead. However, if you take the time to review your options, you may find that itemizing will create more tax savings. There are hundreds of available deductions identified by the IRS, including medical expenses, property taxes, charitable contributions, mortgage interest and more. If you decide to go this route, you must have records of all items you plan to deduct, so be sure to gather your receipts and additional documents now.
Get reimbursed for your business expenses
If you have paid for any business expenses personally, including for your own business, and have not been reimbursed, it’s time to submit that expense report and get paid. These expenses are easy to forget, and that means the tax deduction could get missed. If your business doesn’t have a policy in place to reimburse you for these expenses, it’s time to get that in place.
Contribute to retirement accounts
If you haven’t contributed the maximum amount to your 401(k) this year—$19,500 for employees under 50 and $26,000 for employees 50 and older—consider increasing your withholding. This is a win-win, as it allows you to defer paying income tax on the money contributed and puts more money into your savings. In addition, you can deposit up to $6,000, or $7,000 if you’re over 50, in an individual retirement account, better known as an IRA, and defer income tax until the money is withdrawn from the account later.
Consider tax-loss harvesting
Chances are that due to the pandemic, you may own stocks that have lost money. The good news is that you can sell them a deduct up to $3,000 on your taxes with a strategy know as tax-loss harvesting. An important rule to be aware of is the wash-sale rule, which states that you can’t buy the same or similar stock within 30 days before or after the sale.
Start a business
The coronavirus pandemic disrupted nearly every industry and left many unemployed. Have you been considering using this time as an opportunity to become your own boss? Now is a great time to start your own business. The government wants you to start a business to fuel the economy, so the tax law provides a plethora of tax breaks only available to business owners. The biggest key is to set up a legal entity that will increase your tax savings. Work closely with your CPA to determine which entity would be best for your company.
Taxes can make you rich or they can make you poor. It all depends on your approach. Tax planning is a critical component to save on taxes and create wealth. Take the time this year to create a strategic plan and you can legally reduce your taxes and reap the rewards.
Tom Wheelwright is a CPA, CEO of WealthAbility, best-selling author of “Tax-Free Wealth (Rich Dad Advisors Series),” speaker, entrepreneur and host of two popular podcasts: “The WealthAbility Show with Tom Wheelwright CPA” and “The WealthAbility for CPAs Show.”