Tax Planning For Individuals
Planning is the key to successfully and legally reducing your tax liability. We go beyond tax compliance and proactively recommend tax saving strategies to maximize your after-tax income. We make it a priority to enhance our mastery of the current tax law, complex tax code, and new tax regulations. Below are a few tips for Individuals to help you plan:
1) Check Your Withholding to Avoid a Tax Surprise
If you owed tax last year or received a large refund you may want to adjust your tax withholding. Owing tax at the end of the year could result in penalties being assessed. You can use the IRS Withholding Calculator for planning purposes: https://apps.irs.gov/app/tax-withholding-estimator
2) Tax Incentives for Higher Education
The tax code provides a variety of tax incentives for families who are paying higher education costs or are repaying student loans. You may be able to claim an American Opportunity Credit or Lifetime Learning Credit for the qualified tuition and related expenses of the students in your family who are enrolled in eligible educational institutions.
3) Plan on Filing Your Taxes Early
Earlier is better when it comes to working on your taxes. The IRS encourages everyone to get a head start on tax preparation. Not only do you avoid the last-minute rush, early filers also get a faster refund.
4) Amended Returns
Oops! You’ve discovered an error after your tax return has been filed. What should you do? You may need to amend your return.
5) Ayuda en Espanol
If you need federal tax information, the IRS provides free Spanish language products and services. Pages on the IRS.gov, tax topics, refund information, tax publications and toll-free telephone assistance are all available in the Spanish-language.
6) Filing an Extension
If you can’t meet the April 15 deadline to file your tax return, you can get an automatic six month extension of time to file from the IRS. The extension will give you extra time to get the paperwork in to the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amounts not paid by the April deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.
7) Car Donations
The IRS reminds taxpayers that specific rules apply for taking a tax deduction for donating cars to charities.
8) Charitable Contributions
When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations can add up to a nice tax deduction if you itemize on IRS Form 1040, Schedule A.
9) Plug-In Electric Vehicles (PEVs)
Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks.
10) Earned Income Tax Credit for Certain Workers
Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.
11) Refinancing Your Home
Taxpayers who refinanced their homes may be eligible to deduct some costs associated with their loans.
12) Credit for the Elderly or Disabled
You may be able to take the Credit for the Elderly or the Disabled if you were age 65 or older at the end of last year, or if you are retired on permanent and total disability, according to the IRS.
13) Selling Your Home
If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return.
14) Foreign Income
With more and more United States citizens earning money from foreign sources, the IRS reminds people that they must report all such income on their tax return, unless it is exempt under federal law. U.S. citizens are taxed on their worldwide income.
15) Deductible Taxes
Did you know that you may be able to deduct certain taxes on your federal income tax return? The IRS says you can if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation.
16) Gift Giving
If you gave any one person gifts valued at more than $14,000, it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift.
17) Marriage or Divorce
Newlyweds and the recently divorced should make sure that names on their tax returns match those registered with the Social Security Administration (SSA). A mismatch between a name on the tax return and a Social Security number (SSN) could unexpectedly increase a tax bill or reduce the size of any refund.
18) Filing Deadline and Payment Options
If you’re trying to beat the tax deadline, there are several options for last-minute help. If you need a form or publication, you can download copies from the IRS Forms page under Tax Tools on our website. If you find you need more time to finish your return, you can get a six month extension of time to file using Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. And if you have trouble paying your tax bill, the IRS has several payment options available.
19) Refund, Where’s My Refund?
Are you expecting a tax refund from the Internal Revenue Service this year? If you file a complete and accurate paper tax return, your refund should be issued in about six to eight weeks from the date IRS receives your return. If you file your return electronically, your refund should be issued in about half the time it would take if you filed a paper return even faster when you choose direct deposit.
20) The Tax Advocate Service, Provided by the IRS
Have you tried everything to resolve a tax problem with the IRS but are still experiencing delays? Are you facing what you consider to be an economic burden or hardship due to IRS collection or other actions? If so, you can seek the assistance of the Taxpayer Advocate Service.
21) Tip Income and Taxes
Do you work at a hair salon, barber shop, casino, golf course, hotel or restaurant or drive a taxicab? The tip income you receive as an employee from those services is taxable income. Keep track of all of your income and expenses.
Tax Planning For Small Business
SMALL BUSINESS OWNERS ARE OFTEN LOOKING FOR ways to minimize their companies' tax liability. This year’s conversation with your tax professional could be especially important, as accountants fully grasp the tax implications of the Coronavirus Aid, Relief and Economic Security (CARES) Act for small business owners. Plus, the Tax Cuts and Jobs Act continues to affect the way business income is calculated, the deductions you can take, and more.
As you work with your tax advisor, be aware of these changes—along with the possibility that additional changes may emerge in coming months—and consider whether the 9 strategies below could help you in the 2020 tax year and potentially farther into the future. Below are a few Tax Tips for Small Businesses to help you plan:
1. Determine whether your business may qualify for different tax treatment
Many small business owners can deduct 20% of qualified business income in calculating their federal taxes—“but it’s not automatic.". The deduction generally applies to income from “pass-throughs” (when owners pay taxes on business income themselves, rather than the business itself paying tax). However, the law limits the deduction for certain service businesses. For tax year 2020, owners of businesses such as legal, medical or accounting practices begin to see a reduced deduction if their taxable income surpasses $326,600 for joint filers ($163,300 for all other filers). Owners of service businesses with taxable income in excess of $426,600 for joint filers ($213,300 for all other filers) get no deduction.
Looking ahead to the 2021 tax year, you may want to consider changing your status from a pass-through business to a C-corporation in spite of the 20% deduction. While pass-throughs may still have advantages, the 2017 Tax Cuts and Jobs Act reduced income tax rates from 35% to a flat 21% for all C-corporations.
Whether the switch makes sense for you is something your tax specialist can help you understand.
2. Create a smart plan for paying taxes
The sooner you have an idea of your business’s general outlook for the tax year, the better prepared you are to prevent cash flow disruptions—either by putting money aside or arranging for a line of credit to pay the IRS. Ask your accountant whether you’d be better off paying quarterly estimated taxes next year, allowing you to distribute the tax burden throughout the year instead of having to find the cash for a large tax payment in April. (You may need to pay estimated taxes throughout the year to avoid interest and possibly penalties levied by the IRS.)
Small businesses may get a tax credit to help defray the cost of starting certain retirement plans.
3. Set up—or add to—a retirement savings plan
In addition to personal IRA contributions, small business owners have several options for employer-sponsored retirement savings plans, including SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. They differ in the amount the employer and employee can contribute, the investment options available, and the ease and expense of setting them up, among other factors.
With any plan, contributions you make for yourself and your employees may be tax-deductible. Small businesses may also get a tax credit to help defray the cost of starting certain retirement plans. For calendar year taxpayers, you generally have until the due date, including extensions, of the small business’s tax return in 2021 (for the 2020 tax year) to contribute funds to a retirement plan for the 2020 tax year. But some types of plans must be established before the end of this year, or earlier during this year, to get the tax deduction for 2020. Ask your tax advisor. (This provision may or may not apply beyond the 2020 tax year. To learn how much you can contribute to your retirement plan, refer to our Contribution Limits and Tax Reference Guide.)
4. Take advantage of larger deductions for equipment
If you buy new or used equipment for your company and place it in service before the end of the year, you could be entitled to a federal tax deduction of up to $1.04 million. Because the deductions are intended for small businesses, they start to phase out at spending amounts starting at $2,590,000, ending above $3,630,000. In addition, businesses can take a 100% bonus depreciation deduction on certain kinds of equipment bought and placed in service after Sept. 27, 2017 (up from 50%). That deduction applies to purchases of certain used as well as new equipment.
5. Defer expenses and accelerate income—or vice versa
If your company operates on a cash basis for tax purposes and your profits seem likely to be lower in 2020—and you expect your business to be more profitable in 2021—consider accelerating cash collection before Dec. 31 and delaying deductible expenses until after the new year. Income you realize in 2020 may be taxed at a lower rate, and deductions will be more valuable when your income recovers. To bring in more income, try to invoice customers early and encourage them to pay early. To delay deductions, you could pay staff bonuses in January instead of December.
Alternatively, if you expect your profits to be high in 2020, you may want to defer revenue during the last part of the year as a way of reducing your 2020 taxable income, and move up deductions by paying some 2021 costs in advance.
6. Contribute to charity
Giving can not only help you fulfill your goals as a socially responsible business and engage your employees in a meaningful activity—it can also provide your business with a tax deduction, usually equal to the fair market value of the property donated. However, if you own a pass-through business, be aware that your ability to deduct charitable gifts made by the business could be limited in 2020. The Tax Cuts and Jobs Act capped personal itemized deductions for state and local taxes. The standard deduction for 2020 is $24,800 for married couples filing jointly and $12,400 for individuals1. If you claim the standard deduction, you generally can’t write off charitable gifts, though in 2020 non-itemizers can deduct up to $300 in cash contributions to certain charities. Be sure to review your giving strategy with your tax specialist.
You may have heard that forgiven PPP loans are not taxable. That’s true, but the full tax picture is far more complicated.
7. Understand how PPP loans will be taxed
The CARES Act created the Paycheck Protection Program (PPP), which authorized small businesses loans to cover employee salaries and certain other expenses. Assuming certain conditions are met, businesses can apply to have those loans forgiven. You may have heard that forgiven PPP loans are not taxable. That’s true, but the full tax picture is far more complicated. That’s because the IRS has stated that otherwise deductible expenses, such as payroll costs, will not be tax-deductible if they are funded with PPP loan proceeds. “For tax planning purposes, you may have taxable income that you’re not expecting,”. Consult with your tax advisor about this and other important tax issues raised by PPP loans.
8. Consider when to pay back payroll taxes
The CARES Act allowed businesses to defer paying their 6.2% share of Social Security payroll taxes incurred between March 27, 2020 and the end of 2020. However, half of the deferred funds will have to be paid by December 31, 2021, and the other half of the deferred funds by December 31, 2022. So now’s the time to talk to your tax advisor about how to plan for this liability.
9. Make the most of this year’s losses
If 2020 was a tough year for your small business, you may be able to find a silver lining. Thanks to the CARES Act, certain small businesses can apply a net operating loss generated in 2018, 2019 or 2020 to income from the past five years for a potential immediate refund. This rule change could even be an incentive to take steps to increase your losses in 2020 by incurring more expenses. You’ll have the option to amend past returns or carry losses forward for future tax years, which is yet another reason to talk to your tax advisor about this issue. If you don’t tell the IRS what you’re doing on your 2020 return, the law specifies that these losses will first be carried back to previous years. If you want your refund quickly, the best way to do that may be to file a tentative refund claim.
10. Track your Mileage and Keep Your Auto Repair Receipts
If you’re going to deduct mileage from work trips on your taxes or you need to track mileage to get reimbursed for gas at work, mileage trackers can be very useful. You don’t have to worry about wasting time tracking your miles and writing down the details of trips with pen and paper.
Mileage trackers make it easy to stay organized and have all the information you need come tax time.
Independent contractors, entrepreneurs and small business owners can either keep record of all their actual expenses (like gas station receipts and parking stubs) or use the IRS standard mileage rate to determine the deduction amount for business travel. The rate for 2021 is 56 cents per mile.
If you drove 10,000 miles for business, for instance, you would be able to deduct $5,600 from your tax liability.
When deducting mileage on your tax returns, the IRS is looking for an accurate account of business miles driven. In addition to your mileage numbers, you should keep track of the dates of your trips, the places you travelled and the reason for the trip. Keeping auto repair receipts including oil change receipts (track mileage) is also highly recommended. Mileage tracker apps, like the ones listed above, will help you keep the required records. Stride is the only completely free app you can use. You can also use, QuickBooks Self Employed, Everlance, TripLog, Hurdlr and MileIQ all have a free version. We strongly recommend that you use one of these apps to track you mileage.