December is upon us, and, before we know it, we will be celebrating the new year. Many times, though, people wait until January to look at their income tax situation and begin gathering all of the documents coming in the mail and the ones collected and saved in some file or box.
If that’s how you’re planning to handle your financial obligations this year, you may be missing out on a number of ways to reduce your income tax liability.
And though you’re undoubtedly going to be engaged in the traditional cooking, cleaning, and traveling that all women past 55 do around the holidays, here are a few tax planning tips you should consider squeezing in between all the fun:
Start gathering your tax related information in one place. As year-end receipts come in, save them and sort them out as being related to income, deductible personal and/or business expenses, and charitable contributions.
If you expect your income may be lower next year, consider trying to defer income from this year to next. This may be simply deferring a bonus or not taking a distribution from an IRA in December.
If you are employed, have you maximized your contributions to your retirement plan – such as a 401(k), SEP IRA, traditional IRA, or Roth IRA? You can set up an IRA any time prior to filing the tax return.
If you are self-employed, you may be able to establish an individual 401(k) and make contributions up to the maximums allowed.
Voluntary contribution can go up to $24,000 if over 50 years old, in addition to an employer contribution of up to 25% of net income. The maximum combined amount could reach $61,000!
You need to set up the Individual 401(k) before year-end. If you wait until next year, you will be limited to only being able to set up a SEP IRA any time prior to actually filing your tax return.
This gives you a chance to see exactly what the tax impact will be by contributing to the retirement account. Of course, you can establish an IRA if the amount of the expected contribution is not going to be more than $6500.
Why do we get a ton of charitable solicitations in the last two months of the year? For many charitable organizations, more than half of their annual donations are received at end of the year!
Be sure to post mark checks before the end of the year or make contributions online via a secure web site. And don’t forget to clean out your closets! All that ‘stuff’ you are not using anymore can generate a nice tax deduction.
Do you participate in a “Flexible Spending Account” through your employer? If so, you may want to get those doctor appointments scheduled or buy the eyeglasses or see your dentist. You may only be allowed to carry over up to $500 if not spent by year-end.
Be sure to review your individual investment portfolio and consider selling some of the investments that are at a loss. These losses may offset some of the gains made earlier in the year. If you want to own the investment, you can always buy it back after 30 days.
Did you have a large capital gain from sale of investment property, or begin to receive Social Security Retirement benefits, or begin taking distributions from your IRA this year? If so, you may need to check if you have had taxes withheld or you might be in for a big surprise when time comes to file your return.
You can make an estimated tax payment to the IRS by January 15, 2021, and it will count as a tax payment toward your 2020 tax liability.
If you pay state income taxes, you are usually not required to make the 4th quarter tax payment until January 15, 2021, but in so doing, you will not be able to deduct the payment on your 2020 federal tax return.
You must make the tax payment to the state prior to December 31, 2020, in order to take the deduction on this year’s tax return.
Now you have read this, you can go back to shopping!
How much time do you put in each month or quarter into planning your financial obligations? Have you planned for this year’s taxes? What do you still need to do to get your stuff in order before January comes knocking? Please share any tips you make have in the comments below.
Tags Retirement Planning