The year 2020 brought about significant changes in the basic economy of our country, as well as globally. Let’s take a look at how to map out the rest of your year before December 31 to put yourself and your small business in the strongest possible tax position.
These tips are primarily for the owners of small businesses, but much of what follows can apply to tax-filing individuals across the spectrum.
- Financial statement review - Year after year, people are surprised by the state of their finances when they file their taxes in April. The best time to check your 2020 financial statement is before the end of the year so you have time to make any needed adjustments.
- Lower your income – Perhaps you got hit hard with less income after the pandemic hit, which helps with your tax rate. Individuals who went on unemployment and businesses deemed essential, but having never closed, might have made more money. Exploit whatever losses you might’ve had to offset income boosts. Businesses can cut their clients a break regarding paying any late invoices. Document missed payments. Consider writing those payments off as losses. At least, push them until 2021.
- Deductions – Add up those deductions. Don’t wait to make payments to debtors and government entities. Anyone who will take your money before the end of the year can save you money in the long run.
- Charitable contributions – Donating to a charitable organization before the new year can also help adjust your annual income rate. Check with your CPA to discuss the limits of Adjusted Gross Income (AGI) for direct cash or property.
- Refinance your home – Rates are low now for refinancing for under $1 million of debt, but check with your CPA for optimal timing. New mortgages can sometimes also help with your tax rate, but again, seek guidance.
- Withholding amounts – Don’t be ambushed in April 2021 by an incorrect tax withholding. With changes to working at home, being laid off and some work becoming subcontracted, you could be in for a nasty surprise. Ask your CPA about state income tax if you worked across state lines due to COVID-19.
- Retirement plan or savings – Add as much as possible to your retirement savings. Even better, consider conversion to a Roth IRA, which doesn’t require paying taxes for withdrawals done during retirement. Start a plan for employees for the tax boost.
- Flexible spending accounts – Whether for healthcare or other expenses, you must use or lose the money in a flex account by year’s end.
- Spend money – Make all deductible purchases before the end of the year. This will add to your 2020 deductions, thereby lowering your taxable income. Make other deferred payments to creditors and government early, if allowed, so they count in 2020.
- PPP loans – If you received an SBA loan from this government program, see your CPA regarding eligibility to apply for loan forgiveness.
Here's to a strong finish for your year,
Charles Myrick and Team
The professionals at Myrick CPA are here to answer all of your tax and audit questions and navigate simple solutions. You don’t have to go it alone with the IRS. We can help sort this strange tax year out to your best advantage. Get in touch with us today!