Why Plan for Taxes?

Taxpayers are often surprised by their tax liability or refund when filing business and personal tax returns. Large tax liabilities could lead to underpayment penalties, while large refunds are due to overpayment of taxes with funds that could be used for other investments. One way to mitigate the surprise filing returns is through tax planning. Most taxpayers believe that tax planning occurs at the end of the year, when it really occurs throughout the year. Taxpayers should consult their accountant throughout the year as major tax matters occur.

The following points should be considered by each taxpayer:

Year-Round Tax Planning (January – December)

• Review payroll tax withholding to make sure not over or under withholding. Changes in marital status or number of children requires revision to payroll withholdings.
• Maximize charitable contributions, medical expenses, and property taxes if itemizing.
• Contribute to a college savings plan (529 Plan) for children or grandchildren.
• Track mileage used form work, business, medical and charitable events.
• Utilize pre-tax Health Savings Accounts (HSA), Flexible Spending Accounts (FSA) and Dependent Care Deduction through payroll.
• Consider paying children wages for business owners.
• Sell off underperforming stocks to create losses to offset capital gains.
• Setup quarterly estimates based on business income.

Year-End Tax Planning (October – December)

• Max out retirement plan contributions. Catch-up contributions if turning 50 during year.
• Look into converting Traditional IRA to Roth IRA for certain circumstances.
• Examine income level to take full advantage of tax brackets.
• Upgrade equipment in additional business expenses through special depreciation

CARES Act Planning

• Stimulus checks are advanced credit payments. If qualifying taxpayer did not receive payment in 2020, credits will be available during the 2020 tax filing.
• Charitable contributions available as a “Above-The-Line” deduction. Individuals that do not itemize can still deduct up to $300 of charitable giving if paid in 2020.
• Retirement provision that allows an exception to the early withdrawal tax up to $100,000 of distributions from a qualifying retirement plan.
• Net Operating Loss (NOL) arising from 2018, 2019, and 2020 can be carried back 5 years.
• Small Business that obtained Paycheck Protection Program Loans (PPP) will likely not be able to deduct the expenses they use to qualify for loan forgiveness. We expect further guidance will come.  However, planning for the alternative outcomes is recommended. 

Taxpayers must review their tax activity and consult with tax professionals for changes in tax law periodically to make sure they are taking full advantage of the tax code.

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