Whether you are a small business owner or an affluent business person, every penny of your earnings count in the income tax department. Therefore, as a business owner, you not only want to increase your revenue but also minimize tax liabilities. Unfortunately, due to lack of time, Affluent business owners are not well-experienced in the tricks and tools available to them and sometimes end up paying high taxes.
Reducing tax liabilities is vital as well as time-consuming. While 2020 was one of the most uncertain years in the human era, 2021 holds room for those who plan appropriately. Moreover, effective tax planning leads to savings, and affluent business owners paying low taxes. It is time to re-assess your tax saving plan and set yourself up for the best tax year ever.
7 Tax Saving Tips to Make Your Best Year Ever
Tax is the harsh reality of our society but it is our duty to pay tax and contribute to the economy. Thanks to tax saving tips, a business owner can prepare in advance. Here are some of the tips to make 2021, your best tax year ever-
1. Year-Round Tax Planning
2020 is officially over, now it’s time to plan for your 2021 Tax returns. Taxes are complicated and you could end up losing your money if you don’t plan accordingly. Tax planning throughout the year is critical for reducing taxes and increasing refunds. It is advised to hire professional Tax advisors to prepare tax-saving strategies within the law of the country. Your tax consultant prepares tax plan guidelines and Tax Strategy for the whole year. So, you can focus on your business seamlessly.
2. Identify Opportunities
With the sudden occurrence of the Coronavirus pandemic and political uncertainty, we can likely see another economic downturn in 2021. The coronavirus pandemic has taught us that there are always opportunities to succeed in tough times. As you now have year-round tax planning, you can plan to use your savings in the right investment at the right time to lower your taxes and earn extra money. During the great recession, we all see some winners and losers, those who planned are winners and those who didn’t are obvious losers. So, make sure to plan for opportunities that increase your wealth.
3. Analyze Income
Most of the qualified accountants suggest pushing income to the later year as it helps in saving taxes. But, in order to do so, there are few factors to keep in mind.
First, next year’s tax rates. There can be possibilities that income tax rates could increase in the next year. Therefore, the best plan would be to stimulate your income in the same year to avoid high tax rates.
Second, is your income too low to lose deductions? Some personal deductions do not carry over to the next year. Instead of taking deductions on personal expenses, you can accelerate your income to use all the deductions.
4. 2020 Tax Credits and Deductions
A taxpayer can file their 2020 returns in January 2021. Review all the credits and deductions, you can claim on your 2020 Tax returns. With the help of Tax Accounting Services you can prepare all the tax return files. But, there are some tax breaks that are officially expired in 2020. This means that under current law, none of these credits and deductions can be claimed on 2020 Tax returns. This is why Year-round Tax planning is crucial, in order to take leverage of tax credits and deductions at the end of the year.
5. Gifts with Tax Benefits
The Holiday season is the time of giving gifts. Whether to your family members, charity, or others. Interestingly, some of them provide income tax saving options such as-
- A Gift of College Tuition
U.S tax laws allow an individual to pay a student’s education fee directly to the college or university in the form of a gift. College and university fees qualify for the federal income tax credits and you can get a hefty return for your gift.
- Qualified Charitable Distribution (QCDs)
Individuals with the age of 70 or above are allowed to transfer up to $100,000 per year from their IRAs to charities without paying tax. Even a single penny dollar you contribute is not taxable.
- Donor-Advised Funds (DAFs)
A DFA is a separate account set up within a public charity in which the donor makes a contribution. You can take the deduction for the entire donation of the year. Deductions apply to both funds and assets. In addition, not distributed funds or assets are invested and grow over the years.
6. Get Insured
A health saving account is a way to save taxes, get insured, and save money. When you deposit your earnings in 401(K) or an IRA, you cannot withdraw before retirement, and if you do then the amount will be taxable. But, in the case of HSA, you can withdraw the money anytime from anywhere and it is not taxable until it is used for qualified medical expenses. Although, if the account holder withdraws the money for any other purpose, then the person will be fined with a 20% tax penalty.
7. Convert your SEP and Simple to a Roth IRA
Roth distributions are up to 100% tax-free. Simply because they don’t fall under investment income and are not considered as investment income. Therefore, they will not increase the Modified Adjusted Gross Income (MAGI) of a business. But, a taxpayer can only take advantage of this if he/she is above the age of 59 and has met the five-year rule.
Long term planning for your taxes creates long-term savings and a better future, but it is nearly impossible to create a tax-saving plan on your own without breaking the laws. U.S Tax laws are complicated and can be understood only by a professional tax advisor.
If there is one thing that this pandemic has taught us is that everyone needs to be prepared in advance. Planning in advance is beneficial for not only the business but also for the business owner. Tax planning for the year is tough and laws are complicated. But, a qualified tax advisor is experienced in planning and handling tough situations. If you are planning to consult with a tax advisor, look no further. Together CFO has got experienced professionals Tax Advisor in Los Angeles and glorified as the best tax advisory company based in the USA.