The best time to start thinking about your 2020 taxes is not April 15 of next year. By then it is too late to make many of the moves that can save you money. Here are a few tax-saving tips you can take advantage of before the year ends.
1) Make a Charitable Contribution
Normally, if you make a donation by cash (including credit card or check) you could deduct up to 60% of your adjusted gross income (AGI) when you itemize on your tax return. Thanks to the CARES Act you can deduct up to 100% of AGI.
What happens though if you don’t have much in the way of mortgage interest, property taxes, unreimbursed medical expenses or other payments that can be itemized? This year you can deduct up to $300 for cash donations even if you do not itemize.
If you make a donation be sure to receive written acknowledgement for your contribution.
2) Discard Inventory
Retailers know that sometimes not everything sells. Those clothes that were flying off the shelves last year might be out of style this year. Perhaps the computer equipment is behind the times and no longer sellable. If you have obsolete inventory you can discard or donate them for potential tax savings.
3) Set up a Retirement Plan
Setting up a 401k plan is a good way for individuals to defer taxes. In 2020 employees can contribute up to $19,500 and an additional $6,500 if age 50 or older. These contributions are salary deferrals that are run through payroll. As an added bonus a tax credit is available for up to 50% of the costs incurred in setting up or educating your employees about the retirement plan.
4) Write Off Receivables
It goes without saying that 2020 has been a rough year for many businesses. Some have been very slow to pay their vendors. Others might not pay their bills at all. If you own a business and have customers who won’t pay their invoices then you can write off those receivables that are not collectible.
5) Take Advantage of Losses
Prior to the CARES Act net operating losses (NOL) could only be carried forward. Now any NOL’s from January 1, 2018 to December 31, 2019 can be carried back 5 years. It’s also important to note that the deductibility of net operating losses were limited to 80% of taxable income. Now that limit has increased to 100%. The 2021 tax brackets will have an impact on whether it’s better to carry those net operating losses back or wait to next year.