After the rush of end-of-year planning and accounting activities, it seems logical that any strategies which could impact your 2019 tax bill would become irrelevant after the first day of 2020.
And yet, that’s not the case. The IRS provides numerous opportunities for you to make early-in-the-year decisions that can directly impact your tax filing for the prior year. While common strategies involving deferred income or accelerated deductions are no longer accessible, consider these options to have an impact if you act promptly:
1. The IRS Wants You to (Pre)-Pay Your Taxes.
Under the tax code, you can be charged a penalty fee not only for late taxes but also for under-funding your tax liabilities. That means that if you haven’t pre-paid enough to the IRS in 2019, you can be subject to additional fees and interest under the underpayment penalty rules.
The good news is that you have until January 15th to make an estimated payment that can help you avoid this fate. It only addresses estimated payments in the last quarter, but can still make a huge difference. In addition, you can file a Form 2210 to address any income ‘windfall’ that may have arrived after August 31st of last year.
2. The IRS Wants You to Retire.
One of the greatest underutilized options for reducing any year’s tax bill is to contribute more funds to your retirement account. You have until April 15th of the new year to make decisions that will apply to your 2019 taxes if you have a traditional IRA or a Roth IRA. Keep in mind that a contribution is both tax-deductible today and the investment compounds tax-deferred. That can literally save you $50,000 or more over 20 years.
3. The IRS Wants to Know About Your Kids.
Some taxpayers forget to include the Taxpayer Identification Number or Social Security Numbers of their children on their tax returns. What you may not realize is that the IRS will reject any dependent credits you might have due unless this information is included.
The last thing you want to do is miss the opportunity to deduct your children on your taxes, so make sure to plan accordingly when it comes to filing this year’s return. In fact, this is so important that the IRS specifies that it’s better to file for an extension and complete your return later, rather than filing a tax return that lacks this information.
4. The IRS Wants to Respect Your Home-Based Office.
While the Tax Cuts & Jobs Act of 2017 did a lot to curtail many common small business tax deductions, the IRS has actually loosened the eligibility rules for deducting home office uses. Even if you don’t have a permanent location where you do business, and even if you don’t see clients at your home-based office, the IRS will recognize the space you use for the administration and execution of work for your business or freelance activities.
Although it has been a deduction some have avoided for fear of being flagged for an audit, this is a critical deduction for those to whom it applies. Setting up a home office that is used exclusively for business activities allows you to legally utilize this deduction, based upon the square footage in use (whether the office is in its own room or shares space with other uses in the same room).
And this deduction can directly impact your tax liability significantly. For example, if you pay $2,000 each month for your two-bedroom home or apartment and one bedroom is used for your business, you could easily save $1,000 per year in taxes.
5. The IRS Wants You to File Online. Please.
Whether you file directly or your accountant or tax preparer files for you, the IRS really really wants you to become online friends and get past your paper-based ways. Electronic filing gives you many advantages.
The first is that the IRS uses a series of automated checks to ensure that an e-filed return is accurate and as a result, less than 1% of e-filed returns are rejected for inaccuracies whereas paper returns are flagged with errors about 20% of the time. In addition, the IRS notifies you that the return is confirmed as received, thus further ensuring that you won’t accidentally get billed for penalties and interest if a return runs late due to issues with postal delivery or processing on the IRS’ end.
If you are owed money by the IRS, e-filing will generate a refund check much faster and if you opt for electronic funds transfer and direct deposit, refund payments can come weeks and sometimes even a month or two faster than taking the paper-based route.
Alternatively, if you owe a payment, keep in mind that you can e-file today and wait until the federal filing deadline to send in payment with the appropriate Form 1040-V. You can also pay via direct debit in which case you can also delay the debiting of your bank account until the actual filing deadline as well.
These five strategies can collectively save you thousands of dollars on your taxes for the year just completed, and provide other benefits to boot (like lower tax liabilities in future year or more funds building wealth in your retirement account). Use this time wisely to maximize your tax planning success in cooperation with your accountant.
Image Credit: Thomas Bonte (Flickr @ Creative Commons)