Why You Should Be Tax-Planning: Strategies for 2020 and Beyond
It seems safe to say none of us really expected 2020 to turn out the way it did. Regardless of whether the year was good to you or you’d have just as soon skipped it, we’re betting you’d still like to save some money on taxes.
The best time to start strategizing for this is now – before the year is over. This will allow you to max out advantageous deductions, restructure where necessary, and go into the new year with a plan.
If that sounds like what you’re looking for, consider a tax-planning session. Tax planning is the process of reviewing the fine points of the big picture that is your business, personal, and financial well-being. By looking at tax deductions and credits that may be missing, as well as opportunities to restructure entities, implement estate and gift planning, and maximize retirement and healthcare benefits, both individuals and businesses can often save big money.
Here’s a few of the strategies you might cover in a strategy session:
Optimize Business Structures
If you own a business (or a few) a big consideration is whether the entity structures are ideal for the size and function of the business. One move we often help growing businesses with is the transition from an LLC to an S-Corporation. When done at the right point, this limits personal income from heavy self-employment taxes.
Capitalize on Retirement
Most people know that various retirement accounts have a maximum yearly contribution that can be made to them. These caps are usually fairly low – for example, the annual IRA contribution in 2020 is $6,000. But an employer-funded profit sharing plan that contributes to retirement has a cap of $57,000 in 2020.
Other retirement contributions, like a 401K, and Money Purchase Pension Plan, can be combined with different retirement accounts for a total contribution cap of $285,000 in 2020.
Maximize Deductions & Credits
Okay, you probably guessed this one. But with the constant changes to tax law, such as the Tax Cuts and Jobs Act, as well recent business tax breaks granted in light in COVID-19, there might be a few you’re not taking advantage of.
One credit that we find a number of businesses qualify for, yet don’t take, is the Research & Development (R&D) tax credit, which rewards businesses that invest time and money in research that improves products, processes, or business components. The most common missed deduction is the home office deduction, especially during this pandemic.
Under certain types of entities, the business can reimburse its shareholders for health insurance premiums – and the business can deduct the expense. There are also a number of medical reimbursement strategies that can be used with HSA, QSEHRA, FSA, and HRA plans, but be sure to follow the rules to ensure your expenses will qualify.
While we’re on the subject of insurance, consider establishing a captive insurance company for your business, making the premiums tax-deductible and saving the profit margin that would normally go to a third party.
Use Your Family
That sounds bad, but they’ll understand (hopefully). Wages paid to a business owner’s children performing legitimate services for a company may be exempt from both income and payroll taxes up to a certain limit, depending on the entity type.
…and that’s just for starters.
More complex strategies in tax-planning may involve 1031 exchanges, charitable LLCs, and Offshore Asset Protection Trusts. The great thing about tax-planning is that it is completely customized to you – your business, your expenses, your needs.
If you feel like your tax burden has gotten a little too heavy, schedule a tax planning strategy session today.