OK, we’re past the main 2019 tax return deadlines for individuals and businesses, so you might be thinking there’s no need to think about taxes until next March or April. Actually, the next two months give you a great opportunity to think about 2020 taxes to avoid surprises next year. Taking some time to review where you are right now will give you time to make any adjustments before the year is over.
There are really two main purposes of doing some tax planning at this point in the year:
- Avoid surprises next year
- Reduce your taxable income for 2020
Avoid surprised next year
No one likes to be surprised by a big tax bill, especially if it’s more than they can easily pay when the taxes are due. The problem is that most people wait until the taxes are due to calculate the amount of their taxes. This leads to anxiety of how much you’ll owe and, for many people, a tendency to put off calculating their taxes because they’re afraid of what that number might be. If you used a tax professional, they should have programs that help you enter year to date amounts and calculate an estimated tax payment based on the current information that is available and using last year’s amount as an estimate of what the current information would be.
If you don’t have a tax professional, your tax software should have some ability to do this for you. If you don’t have this option, or didn’t use software, you can search online for some tools you can use. If you’re finding you owe money each year with your taxes and you don’t use a professional, it might be time to hire one. You might even find that paying a tax professional is cheaper overall than penalties and interest from underpaying taxes or making mistakes.
Once you get a good estimate of what your taxes will be for 2020, you can compare that amount to your withholding and any estimated tax payments you’ve made to determine how much will be due on the tax deadline. To avoid underpayment penalties on this balance, you could make additional estimated tax payments or bump up your withholding so the amount due is lower. Knowing this information might also prompt you to take some actions before the year is over to reduce the taxes due.
Reduce your taxable income for 2020
Now that you’ve gone through the steps above to calculate your estimated 2020 tax amount due, perhaps you’d like to do something to reduce the tax balance. What can you do? Some of the things you can do are contributing to a retirement plan, giving to charity, selling some stock, and many other moves. Rather than writing up a long list of various tax moves you can make, I’m planning on writing smaller blog entries that cover one or two specific tax moves you can make. This way you can take in the options in smaller bite sized pieces.
So, watch for the year-end tax planning posts. These will probably be coming out on Tuesdays to go along with my attempt to come up with little tips through out the year that I call Tax Tip Tuesday. You can find these on Twitter under the hashtag #TaxTipTuesday.