You may be thinking you have plenty of time before you need to start worrying about tax time. However, no matter your current financial situation, you may want to take advantage of some critical end-of-year tax strategies. Implementing these tips before December 31, 2020 could potentially minimize your tax burden.
- Make sure you’re withholding enough from your paycheck
Many taxpayers don’t withhold enough to pay what they owe at tax time. To avoid this kind of surprise in your filing, use the IRS Withholding Estimator to determine if you’ve been withholding the right amount. If you need to make adjustments, file a new Form W-4 at your workplace.
- Max out your retirement account contributions.
Tax-advantaged retirement accounts, such as a traditional IRA or 401(k) plan, compound over time and are funded with pre-tax dollars. That makes them an excellent investment. They’re also helpful at tax time, since any contributions you make to these plans lower your taxable income. If you cannot make the maximum contribution to your 401(k), try to contribute the least amount your employer is willing to match.
- Spend any leftover funds in your Flexible Spending Account (FSA).
FSAs are bank accounts for out-of-pocket healthcare costs. An FSA earmarks your pre-tax dollars for medical expenses, lowering your taxable income.
Make sure to schedule any last-minute checkups and eye exams by December 31, 2020. Fill prescriptions for you and your family. If you still have money leftover, stock up on items approved for FSA spending (e.g., contact lenses, eyeglasses, bandages, sunscreen, heating pads).
- Make charitable donations.
Donate clothing and household goods to charities before January 1, 2021. Don’t forget to ask for a receipt from the organization you’re donating to. The deduction is limited to the item’s current Fair Market Value (FMV)—what you could sell it for at a garage sale.
- For small business owners, decide whether to make business purchases now or wait for next year.
Making business purchases before the end of the year could lower your taxable income this year, but that’s not necessarily always the best move. Putting the expense on next year’s books could reduce income taxed at a higher rate, which results in saving you more money overall. Weigh the pros and cons before making that large purchase.
Remember that a Healthcare Sharing Organization is not considered health insurance and is not deductible as a medical expense.
With just a bit of planning before the year ends, you can be better prepared for the upcoming tax season. Focusing on your taxes at the end of the year, and when you file a return is a good start, but you could benefit from considering tax planning year-round.
Meet with a CPA now and consider different scenarios with your income, investments and portfolio, to figure out a way to reduce your tax liability.
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