This blog was prepared
with the assistance of Peter A. Weitsen, CPA, partner at
Here are some tax tips for
steps that can be taken early in the New Year. Tax planning is a year-round
activity, and the earlier you start, the better position you’ll be in.
and estimated tax payments. Get your 2019 tax info
organized, and your return done as early as possible. You should use the
completed return as a roadmap for the 2020 tax year. If you will get a large
refund or have a large balance due, consider adjusting your Form W-4
withholdings and/or your estimated tax payments.
Note: As of January 1, 2020, there is a revised W-4 Form to be used by new employees and employees who are seeking to adjust the amount of tax withheld. It is the first major redesign of the form since 1987, and it is simpler than the old form. The form no longer provides for “withholding allowances” and has a five-step process designed to account for all sources of income and deductions. To help fill out the form, workers are allowed to use an online tax-withholding estimator tool from the IRS, which will be updated after the first of the New Year, or a printed worksheet. The calculations using the tool or worksheet also can help in determining estimated tax payments if they are required.
If you expect any changes
from 2019, including such changes as marriage or having a new baby, factor this
in when adjusting your withholdings and/or estimated tax. Do it now by using a
projection of your 2020 income and expenses. Most every article on tax planning
suggests you prepare a projection. That is good advice, and it really should be
When you have a
projection prepared, review the individual items to determine whether any
changes can be made that would either minimize your taxes or improve your
financial situation. For instance, if you are in a high tax bracket and have significant
taxable interest income, perhaps you should consider tax-free bonds or other
forms of investing. Use your planning “session” to consider your alternatives.
an extension. Delaying
your filing hurts current-year planning. What happened last year is done—but you
have it somewhat in your power to affect 2020. If, however, you need to file an
extension, then get it done early rather than waiting until a few days before
April 15. When you file an extension make sure you pay the tax you expect to
owe and do not forget to also file your state extension so you will avoid
penalties and interest.
retirement plans. If you have any self-employed income, consider
a solo 401(k) plan. That way you might be able to put in up to $57,000, and an
additional $6,000 catch-up if you are over age 50, in either tax-deducted money
or into a Roth 401(k), which sets up a tax-free earnings fund for you and your
family. If you do not have self-employed income, and you qualify, you should make
a contribution to either a traditional or Roth IRA.
Whether you use a
deductible retirement plan or a Roth plan will be determined by your financial
and tax situation. Further, the earlier you contribute, the sooner the tax-deferred
or tax-free compounding starts.
interest. Mortgage interest that you pay is another cost to
consider from a tax- and wealth-management standpoint. If you get no itemized deduction
for the interest because you take the standard deduction, or if you itemize and
get a deduction but you are in a low tax bracket, you might not be getting a
significant tax benefit from the interest payments. Furthermore, interest on a mortgage
usually is greater than income most people earn on their investments (unless
they are comfortable taking higher investment risks). If that is your
situation, consider reducing your mortgage by accelerating payments. One way is
to add an extra amount to each monthly payment. Whatever you add will reduce
your interest costs by the amount of your mortgage interest rate multiplied by
the extra payment. For example, a $100 extra payment with a 4% interest rate
will save you $4 per year. If you make the $100 extra payments monthly, you
will save $48 per year after the first year and this will compound annually
after that. As a result, the mortgage will be liquidated earlier than
contributions. If you make charitable contributions and
use the standard deduction, you no longer will get a deduction for this. If you
are past age 70½ and are taking required minimum distributions (RMDs) from your
traditional IRA, you can make the contributions from the IRA—called qualified
charitable distributions (QCDs). You cannot do this with a 401(k) account.
However, if you roll over the 401(k) to an IRA, you can then do this.
If you so itemize and
take a charitable deduction, consider contributing appreciated securities if
possible, where you will get a deduction for the full value of the shares
contributed and will not have to recognize the gains for tax purposes. If you
make significant contributions, consider donating appreciated securities that
would cover multiple future years to a donor-advised fund and then making the
transfer to your charity on your normal donation schedule. In the later years,
you could use the standard deduction and get the higher charity deduction now.
Required minimum distributions. If you reached age 70½ by December 31, 2019, and need to take RMDs from IRAs, 401(k)s and/or other retirement plans in addition to the QCD, consider how you time the distributions. (Under a new federal law affecting retirement plan rules, if you did not reach age 70½ by December 31, 2019, you don’t have to start RMDs until you reach age 72.) Any RMD amounts for 2020 are determined by the retirement account balances on December 31, 2019. The distribution can be taken anytime during 2020 and, in some cases, you can elect to have no withholding tax or extra withholding tax. If you are required to make estimated tax payments during 2020 and do not have sufficient balances in your IRAs, you can have the entire year’s estimated taxes paid in December 2020 from the IRA, thereby earning tax-deferred income for as long as possible. When the withholding is paid in this manner, it is considered as being paid ratably on each payment date, thus avoiding any underpayment penalties.
You also can try timing
your other distributions to take advantage of the deferrals in the IRA.
If you are contributing
to your traditional IRA or 401(k) and are subject to RMDs, then consider making
a contribution for 2020 at the beginning of January 2021. Contributions can be
made for the 2020 tax year up to the due date of your 2020 tax return—or later
for a 401(k)—and can be applied to get the 2020 deduction. If you make the 2020
contribution in 2020, it will increase the year-end 2020 balance, which will
increase your RMD in 2021.
If you write checks to make your QCDs and the checks do not clear by December
31, 2020 and you use the outstanding checks as part of your RMD, you will have
an underpayment and be subject to a 50% penalty. Therefore, write such checks
early enough so they will certainly clear, and then check your account to
verify that they did clear.
RMDs for all of your IRAs
can be aggregated and taken from any of the accounts you desire, but you cannot
combine the RMD from non-IRAs such as your 401(k) or employer plans.
and local income taxes. If you pay high state and local income
taxes and have the option of moving to another state, then consider the possible
tax savings as one of the factors in making this decision. FYI—Alaska, Florida,
Nevada, South Dakota, Texas, Washington and Wyoming do not have any state
income taxes. Again, the earlier you start the planning and implementation, the
better chance you have to get it all done by the end of 2020, so you could
start 2021 in a low or no tax state.
Tax. If your children are subject to the Kiddie Tax,
consider shifting their investments into lower-dividend or lower-interest
alternatives. Example: Transfer some of their funds into tax-free bonds
or stocks that do pay dividends.
Corporation conversions to S. If you operate a business
as a C corporation, consider making an S election starting for 2020. This must
be made by March 15, 2020, to be effective for 2020. Such income could be
eligible for the up-to-20% qualified business interest (QBI) deduction, but to
be sure you get this deduction, you should start your planning early and
consult with a knowledgeable tax adviser.
corporation earnings. Earnings from an S corporation can be
eligible for the up-to-20% QBI deduction. If the earnings are reduced by
salaries to owners that work in the business, the QBI deduction will be reduced
as well as those wages being subject to payroll taxes. However, the salary paid
must be reasonable, meaning that it cannot be too low in relation to the
operations and what others in the company are earning. One tip is that many
people that put a spouse on the payroll for nominal amounts or for a salary
that is actually greater than their responsibilities should reconsider this. Removing
the spouse from the payroll, unless the spouse is actually earning what he is
are paid, would save payroll taxes and boost the income that would be eligible
for the QBI deduction. Comment: This is a complicated area, especially
with the QBI deduction being limited based on salaries paid, as well as other
issues affecting the QBI deduction. This is something that would best be
analyzed with a tax professional. While this article is limited to individual
taxes, this is included since the salaries paid to the S corporation owners
would affect those individuals.
use tax. States that have sales taxes also have a use tax that
requires the tax to be paid on purchases where sales tax should have been paid
but wasn’t. This applies particularly to purchases made out-of-state or out-of-the-country
and the tangible property is shipped or delivered into your state of residence.
This is a self-reporting tax that carries severe penalties for failure to
comply. If you make such purchases, it is easier in the long run to request the
vendor to charge the tax, and if not, then keep your invoices and speak to a
tax expert on the proper reporting and payment method.
The above are some
suggestions that can reduce your 2020 taxes or increase your cash flow or keep
you in better compliance with the tax laws. As with any tax generated moves, it
is advisable to consult with a knowledgeable tax adviser beforehand. Have a
great 2020, and thanks for reading my tax blogs.