Five on Fridays: 5 Year-End Tax Considerations for Individuals and Small Business Owners
For individuals and small business owners, it’s never too early to start thinking about ways to minimize your tax burden. Below are some year-end considerations for individuals and small business owners looking to save on their tax bills:
1) Max out your retirement account contributions? If you participate in your employer’s 401(k) program, you can contribute up to $19,500 ($26,000 if you are 50 or over) in 2020. Examine your contributions for the year to determine whether you are on pace to max out this tax deferral opportunity. If not, consider upping your contributions each paycheck (which could take time to process) or simply make a one-time contribution before year end to hit the max. If you do not have a 401(k), consider maxing out your contribution to a traditional IRA. For 2020, the maximum contribution to an IRA is $6,000 (plus an extra $1,000 if you are 50 or older). For small business owners, if you have not done so already, consider setting up a SEP or Simple IRA to provide tax-deferred retirement benefits to you and your employees.
2) Give charitably? Consider giving to your church and/or favorite charity/charities before the New Year. If you itemize your deductions on a Schedule A (you most likely do if you have a mortgage), then you can get a write off and feel good about yourself all at the same time. Make sure to track your contributions and retain any and all receipts.
3) Save for college? If you have children, consider setting up and/or contributing to a 529 college savings plan. The account grows tax free federally and you may be entitled to a deduction on your state taxes for 2020.
4) Stock up on supplies for your small business? Before December 31, consider making a trip to Sam’s or Costco to stock on supplies for 2021. Paying the expense in 2020 will reduce your tax burden and set you up with a fully-stocked office for 2021.
5) Buy a new ride for your business? If you purchase a new vehicle before the end of the year you can take advantage of the Section 179 deduction and bonus depreciation for certain SUVs and trucks used in your trade or business. For qualifying vehicles, the law allows you to take the full amount of bonus appreciation as long as it is placed in service before the end of 2020 (not a pro-rated amount). For more information about the rules, limitations, and vehicles that qualify, MileIQ provides a good overview: https://www.mileiq.com/blog/section-179-vehicles-deduction/.
Disclaimer: Each person’s tax situation is different and you should consult with your own CPA or tax attorney regarding your situation.