Published on 05/12/2020

The year is ending, and 2020 has been especially hard on taxpayers. Extra brunt has been faced by those laid off from their jobs and those working with massive pay cuts. And so, tax planning has to be done meticulously- in tandem with your tax planner/advisor.

There have been stimulus packages, loan moratoriums, and extensions- provisions that most people have made the best use of. With this year coming ending soon, there might be some extra benefits offered by the CARES Act that you can use to reduce the tax payout this year. After all, it’s been a challenging year amid the pandemic and we all could use the benefits. Remember- every penny saved is an extra penny earned.

We give you an inside track of a few strategies.

1. Defer 2020 gains Qualified Opportunity Zone Fund

If you’ve come into profit and made gains with your investments lately, you can choose to reinvest that Gain further- and get incentive on reinvesting it! Choose a Qualified Opportunity Zone Fund (QOF) to reinvest your money. QOFs will invest your money into economically distressed areas (termed Opportunity Zones) identified by the Government.

You can avail of the incentives by reinvesting your gains for 180 days. This is also the best way to make sure you don’t incur any losses on capital gains as well.

By reinvesting your gains, you stand to avail three incentives, as set by the Federal Government:

1. If you hold your investment in QOF for up to 5 years, you can avail permanent exclusion of up to 10% of your invested gains.
2. If you keep your investment in QOF for up to 10 years, you can benefit from the permanent exclusion of post-investment appreciation.
3. You can defer the gains and defer paying taxes on it upon investment in QOF.

2. Collect tax losses by writing off old receivables

It is advised and in your best interest that you go through all your receivables and write off any old collectibles. This will reduce the possibility of collection, further reducing tax on uncollectible receivables. Generating a tax loss is one of the best ways to reduce the payable tax to the Government.

3. Expedite deferred payroll tax payments

If you are an employer and a cash-basis taxpayer, it is advised that you pay your share of the Social Security Taxes before the year ends. Remember, the Government allowed deferred payments of social security taxes by employers until 2021 and for salaries paid between March 27, 2020, and December 31, 2020. However, you can pay the taxes before this year ends to claim a deduction in the 2021 payroll.

Taxpayers using the accrual method have time till September 2021 to pay their share of social security taxes to claim a deduction. Nevertheless, it is mandatory to pay deferred taxes well before the due date to deduct taxes on the return for the year 2020.

4. Expedite new purchases

The time before the year ends is the best to buy new equipment, furniture needed for your enterprise. Under the current tax norms, you can quickly write the new purchases off before the year ends. It is the best way to get new equipment for your business without burning a hole in your pocket. You can easily deduct the expenses of the new purchase on your 2020 income tax returns.

5. Donate more

Maximum tax deduction under the CARES Act is given to those individuals who donate more, i.e. those who shell out more money as charitable contributions. Individuals can claim up to 100% deduction of adjusted gross income when filing tax returns for charitable donations made in cash. Corporations can claim up to 25% for the same as deductions. 

Hence, you can create as many charitable contributions as you want by the year-end to avail of this deduction when doing your taxes.

6. Avoid limitations of the tax law.

There are many limitations in the tax law which can act as a disservice to the taxpayer. Certain restrictions can also reduce the deductions that you might be entitled to while other provisions can even eliminate the deduction for you as a taxpayer. It is in your interest and favour to identify these limitations with the help of your tax planner and avoid them altogether before the year ends.

7. Increase retirement plan contributions

One of the top ways suggested by tax advisors to increase deductions is to contribute more to your retirement account. You could plan and put more money in your IRA account or 401(k) account. This way, you put more money aside as a retirement fund and gain tax deductions as well. For most 401(k) accounts, contributions must be made before the year ends to claim deductions.

Most of the strategies for maximizing your tax deductions are complete no-brainers. Meanwhile, it is always advisable to get in touch with your tax planner or CPA to know what strategy is best suited for you. You can write to us at [email protected] for more information.