The end of the year is almost here, and one of the things foremost in the minds of many people is taxes. If you’re a seasoned tax adviser and you’re considering setting up your own practise, now may well be an excellent time to find out how to open a tax office to help others handle their tax issues. Taxes are unavoidable, and as a good citizen, you must file your taxes. Taxation is an all-year-round process, and if you want to recognize and take advantage of potential breaks for tax-efficiency, you’ll need careful planning. If you plan on not leaving any money on the table, here are four ways to increase your tax efficiency:
Re-evaluate your withholding
A new version of Form W-4 has been released by the IRS for 2020. This new version includes the amendments that were made by the Tax Cuts and Jobs Act. The information that you provide on this form will determine the size of your income that is withheld from your pay-check. In the case where you choose to withhold more income, it means that you will receive less in your pay-checks. It also means that you will owe less income tax.
On the other hand, if you decide to withhold less income, the pay-check you will receive will be bigger, but your overall tax bill will be on the higher side. Withholding is mostly dependent on your sources of income and your personal situation. It is advisable to work with your tax advisor when filling out your W-4 form to ensure that it reflects what you want.
Utilize tax-deferred accounts
Increasing your contributions to special savings plan accounts – known as tax-deferred accounts is a great way to be tax efficient. This year you can make up to $6,000 in contributions to a traditional or Roth IRA, and if you are over 50 years, your contributions can go as high as $7,000. Your traditional IRA contributions may be tax-deductible depending on your income level and filing status. With increased limits of up to $19,500 for 401(k) contributions, people over 50 may contribute up to another $6,500 if they want. For 2020, if you are on a high-deductible plan (HDHP), you can make contributions of up to $3,550 for individual health plans or up to $7,100 for family health plans. The steady rise of expenses for health care makes this a great way to save money for medical costs when you retire, as the distributions from HSAs for medical expenses are tax-free.
Convert your traditional IRA to a Roth IRA
Traditional IRAs are meant to serve as funding for your retirement, but if you foresee not needing it for that purpose, it is tax-efficient to convert it into a Roth IRA. This way, you can avoid taxes from the minimum distributions. Also, converting from a traditional IRA to a Roth IRA will reduce the tax bill if you decide to pass on your IRA to your children. With the changed rules for inherited accounts by the SECURE Act of 2019, the deceased’s IRA assets should be fully distributed by the tenth year after their demise. Before this new act, a beneficiary could spread the tax deferred over the rest of their lives.
Put charity contributions in a single year
You can take advantage of tax deductions if you put your charitable contributions in a single year and they surpass the limit of the standard deduction. Spreading your charitable contributions over a couple of years will keep it below the limit of standard deductions; you will not be able to take advantage of tax deduction in that regard. You may consider using a Donor Advised Fund (DAF) if you want to bunch your charitable contributions for tax purposes, but not all in one year. Using a DAF makes you eligible to claim an immediate tax deduction when the contribution is made, even though the distribution will be done at a later date.