Traditionally, the end of the calendar year is a great time for people to start considering their tax strategies to prepare for the April tax deadline. Unsurprisingly, things are a little different this year as we wrap up the 2020 tax season.
Due to the unprecedented circumstances that defined 2020, business owners have a little more time than usual in which to make moves that benefit themselves when tax day rolls around. The IRS recently announced that this year’s deadline for tax filing has been extended from April 15 to May 17. With this extended timeline in place, now might be a good time to look over your expenses and ensure that you’re getting the most out of your 2020 tax return. Here are 5 tax strategies that every investor should know.
Tax Deadline Postponed t0 May 17
The IRS recently announced that Americans will have extra time to get their tax filings in order this year. “This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities,” said IRS Commissioner Chuck Rettig.
This extension only applies to federal taxes and returns, so the IRS recommends checking with your local government to see if an extension has been made for state-level taxes as well. Estimated quarterly payments are still due on April 15.
Filing a tax return may be more important this year than ever because it is the only way to recoup stimulus payments that you may be eligible for and didn’t receive. “Even with the new deadline, we urge taxpayers to consider filing as soon as possible, especially those who are owed refunds,” explained Rettig. “Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to.”
1. Review Accounting Records and Projected Total Income
You already know that keeping accurate, complete accounting records is critical to your business performance. With 2020 a few months behind us, now’s the perfect time to update records for each of your flip projects and rental properties. Once that’s done, you have the information you need to project your income and expenses accurately.
Why is that important? Because now is your last chance to make any needed adjustments or needed investments to balance your net income to your target level. Not only will this make your CPA’s life easier, but you can also go into tax season with less worry about unpleasant surprises.
2. Take Advantage of 401(k) Matching
Got an employer-sponsored 401(k) or 403(b)? Now might be the time to take a look at your retirement accounts.
If your employer matches your contributions, make sure that you’ve contributed the max. If not, it’s like throwing away free money. Plus, contributing up to the limit can help reduce your taxable income. For 2020, that’s $19,500, with an additional $6,500 if you’re over 50. Consult with your employer or financial advisor to make sure you reaching the best contribution levels for both your current budget and long-term goals.
3. Consider Alternative Retirement Account Options
You may also consider converting your traditional 401(k) or IRA to a Roth. While converting won’t reduce your taxable income now, you won’t pay any taxes when you take distributions in retirement. Consult with your tax advisor to see if a blend of traditional and Roth accounts can offer you the best of both worlds.
Finally, consult with your financial advisor about setting up a solo 401(k) or a self-directed IRA (SDIRA). This allows you to contribute up to $56,000 ($62,000 if you’re over 50) in business income. Just keep in mind that you can’t contribute passive income, i.e. rental income, to these types of accounts.
4. Hit the Deduction Threshold
Here’s yet another reason why it’s so important to take steps now to hit your desired income.
If you keep your taxable income below a certain threshold — for 2020, $163,300 for an individual and$326,600 for a married couple — you may claim a Qualified Business Income deduction. The QBI offers a 20 percent deduction. Unfortunately, if your taxable income rises above the threshold, not only will you lose this 20 percent QBI deduction, you may also risk a limited or eliminated business deduction based on an unadjusted basis of business property and W-2 income.
Just remember that taxable income is not the same as adjusted gross income or AGI.
5. Consider a Cost Segregation Study
Since you know your projected total income, you can make an informed decision about whether a cost segregation study will reduce your tax bill.
This tool can help accelerate your rental properties’ depreciation. It allocates purchase prices between five, seven, 15, or 27.5 years. This can help you select certain properties to depreciate over a shorter time, for increased depreciation expenses in the years following purchase. Cost segregation studies can help reduce your tax burden if you have lots of passive (rental) income. Keep in mind that studies generally cost $4,000 to $7,000, so be sure that the potential tax savings are worth the investment.
Once your taxes are in line, you can bring your focus back to growing your investment business. When you’re ready to invest in your next property, let New Western do the legwork. Our team will match you to off-market properties that fit your investment profile. Contact your local New Western office to see if you qualify for access to our exclusive inventory of investment properties.