With tax season in full swing and the filing deadline looming in less than two months, there is no room for putting off your annual tax return filing ritual. Act today so that any tax balances due can be budgeted and paid for by April 15th. Those that are required to pay estimated taxes may have a second federal or state remittance due on April 15th so don’t get caught flat-footed. In 2018 there were many tax law changes which continue to apply in 2019. If last year’s changes threw you for a loop because of the Tax Cuts and Jobs Act (TCJA) taking effect, the SECURE Act passed on December 20th 2019 may challenge you next year at this time. But first things first.
The first step is to carefully track your deductions. By keeping track of your receipts, invoices, bills, and other records of expenses like medical bills and donations for individuals and travel expenses, mileage and other business expenses for business owners, you can ensure that you deduct everything possible and maximize the benefits you qualify for. More documentation is always better than less. If you are looking for more advise on how to keep your tax records, read our blog post on it here.
The next step to take is to brush up on changes to the tax laws. There have been some major changes for both individual and business filers. The TCJA is explained here as well as further details on how it effects those planning on getting a divorce. The 20% deduction for qualified business income granted by the TCJA and the new classification guidelines for employees and independent contractors are two other major changes to the tax law that filers should make themselves aware of. Lastly, planning around estate tax because of the increased exemption under the TCJA can help individuals take out larger exemptions without having to pay the 40% tax. By being aware and well informed, tax planning will become much easier and you can avoid making mistakes that will result in steep fines and penalties owed to the IRS. Specifically, for those filers in New Jersey, Mayor Murphy made changes to the tax law that they should keep in mind when planning for the upcoming tax season. The minimum wage increase, the new task force on employee misclassification, and the paid sick leave legislation are just a few of the major changes the state tax laws have seen.
Thirdly, contributing the maximum amount to your retirement funds is an important part of tax planning as well as future planning. For small business owners or independent contractors, setting up a SEP IRA (an alternative to a 401(k) with similar benefits) may be beneficial. This plan allows employers to contribute up to 25% of employee’s salary up to the annual maximum which was $56,000 this past year and has increased to $57,000 in 2020. By financially preparing to contribute the maximum amount, you can ensure that you are taking advantage of the benefits being offered. For independent contractors or those who are self-employed with a SEP IRA, it is a bit harder to pinpoint the exact limit, but on average the limit is around 20% after self-employment taxes. For individuals, reviewing your retirement account contributions whether it be a 401(k) or a similar retirement plan can result in tax benefits. Contributing to traditional retirement accounts is tax free and can make reaching your retirement goals much easier to reach. For more help on retirement planning, click here.
Finally, hiring a trusted accountant is the best way to ensure that you plan for the upcoming tax season. Businesses should consider reviewing their business structure, especially if they are not already incorporated. Asking an accountant to help you review your business structure can help you decide if becoming an LLC, an S, or a C corporation makes the most sense for you. Even independent contractors can benefit from this type of review and deciding to create an LLC or corporation. Different entities and classifications grant different benefits depending on the businesses needs so by picking the right structure, you can maximize your benefits for the tax year. Businesses should also plan their write-offs. The more big-ticket purchases that can be planned in advance, the more saving become available. By checking with your accountant before you make these large purchases can ensure that your expenses have a positive impact on your tax returns. Another tip for planning that you should discuss with an accountant is setting up estimated tax payments for 2020. Due to any number of situations or circumstances, your tax obligations can shift. In order to avoid a big tax bill at the end of any tax year, the IRS requires you to make payments four times a year. And not paying estimated taxes or underpaying can lead to penalties, something which must be avoided! Until you prepare your 2019 or at least an accurate draft tax return, it is not feasible to pinpoint your estimated taxes for 2020. You can make a reasonable estimate by first figuring out your adjusted gross income, taxable income, deductions, and credits and then split that number into four estimated payments to pay through the year. Using the numbers from the previous tax year can provide a solid base for these estimations but the more thorough you are with your documentation the more accurate your estimated payments will be and the less likely you are to owe more money at the end of the year.
One final tidbit of advice: if you know that you can’t meet the Wednesday April 15, 2020 filing deadline, prepare a Form 4868 extension and make a payment. Remember, the IRS and all states will allow extensions until October 15, 2020, but these jurisdictions will his you for interest and possibly late payment penalties for shortages not received by April 15!
We at Mazur & Associates, Certified Public Accountants and Business Advisors are here to assist you with your tax return preparation and make it a stress-free endeavor. We have the knowledge and experience to ensure that you maximize your deductions and credits while minimizing the amount you owe. Call us at (732) 936-1230 and make us your trusted CPAs and Business Advisors! Together let’s create a custom tax plan that you can feel good about.