Year-End is Almost Here: 3 Things You Can Do Now to Maximize Your Tax Savings
By: Susan Powers
With just a few weeks left in 2020 to maximize your tax savings we are sharing potential actions you can take now to make a difference in your tax bill.
1.) Max Out Your Retirement Plan Contributions
If you participate in your employer’s retirement plan, adjust your contributions now to defer more income before year end. Year-end bonuses or commissions work especially well for reducing your taxes in conjunction with that additional income. Large one-time payments can often leave you under withheld on federal income taxes. Contributing more now can save surprises later when you file your return.
Self-employed? A solo 401k may be the best option for you by potentially allowing you to contribute a larger percentage of your income than you would be able to do with a SEP IRA. With a 401k, the portion that is considered your personal deferral should be made by year end. You will still have the ability to make a profit-sharing contribution once you know your total 2020 taxable income. These are not required to be funded until the due of your tax return in 2021.
For 2020, you can contribute up to $19,500 to your Solo 401k or your employer’s 401(k) ($26,000 if you are age 50 or older). Profit sharing and SEP contributions are both calculated once your taxable income is known allowing for more flexibility and additional time to fund.
2.) Bonus Depreciation for Small Business Owners
If you need new equipment, consider purchasing it before the end of the year. The Tax Cut and Jobs Act increased the amount of first year bonus depreciation you can deduct from 50% to 100% of the purchase price. With Section 179 and the bonus depreciation rules, you may be able to deduct the entire purchase price this year, instead of depreciating it over the next several years.
As an added benefit, bonus depreciation now includes used property. This can mean large, immediate deductions when acquiring the assets of another business.
Bonus depreciation is optional—you don’t have to take it if you don’t want to. But if you want to get the largest depreciation deduction you can, you will want to take advantage of this option whenever possible.
3.) Fund 529 Plans
Over 30 States now provide a state income tax credit or deduction for contributions to a 529 plan. While recent federal legislative changes permit the use of 529 plan funds to include K-12 private education, college and graduate school and vocational and trade schools, not all state plans comply with the federal law.
For example, an individual could participate in their state plan and get their deduction, but they may not be able to use the funds for K-12 if that plan does not comply with the Federal Tax Law. Check the following link to see the specifics for your state.
My partner Kate Hennessy recently recorded a video on this subject. Listen in to learn more about the specifics you need to know regarding your 529 options.
As you approach the end of this year and make plans for the holidays, take time out of your schedule to do a little year-end tax and financial planning. You will enjoy the long-term rewards for years to come.
Consult with your tax professional to understand how these options may apply to your situation. As always, contact us with any questions you may have about how to plan and best invest for your future.