As the federal business tax deadline for pass-throughs with extensions is approaching on September 15th, we summarized the following relevant tax saving tips and reminders.
1. UPDATE YOUR W-4 WITHHOLDING
Did you receive a large refund for 2019? If so, you’re part of the great majority of individuals who have too much withheld from their paychecks. This is evidenced by the hundreds of billions of dollars in tax refunds the IRS issues each year. While over-withholding might give you a nice chunk of change at tax time, it also means less money in your pocket the rest of the year.
If you ended up owing IRS instead, consider increasing your withholding by updating your W-4 with your employer or payroll provider. If you own an S Corp, make sure you pay yourself a “reasonable salary” and increase your withholding on your W-4. If you have an LLC or partnership, since you considered self-employed and cannot be on payroll through the LLC, we suggest making quarterly estimated tax payments (more on that below).
2. PAY YOUR 3RD-QUARTER ESTIMATED TAX PAYMENT
If you are self-employed and want to avoid the Estimated Tax Penalty, or have any side income that will significantly change your 2020 taxable income, we recommend that you make a Third-Quarter payment by the deadline of September 15th. You can make the payment on the IRS website. Click on Make a Payment. Under Reason for Payment, select Estimated Tax in the drop-down menu.
How much should you pay? The easiest way to calculate this is to calculate last year’s tax total tax, divided by four, minus any withholding you have contributed in that quarter via W-2.
3. DONATE TO CHARITY
If you want to give away money this year, you can effectively eliminate your entire tax liability entirely by giving to charity, up to the amount of your adjusted gross income. The CARES Act provides the following significant tax relief and charitable giving benefits:
- Makes a new charitable deduction available to individual taxpayers who typically cannot deduct any charity because they do not qualify to itemize deductions. This new benefit allows for a charitable deduction of up to $300 per individual.
- For 2020, the Act provides incentives for both individuals and corporations by suspending the AGI limits for cash contributions to charities. Now the deduction is increased to:
- 100% of their adjusted gross income for individual taxpayers who itemize their deductions. (Deduction for qualified charitable contributions made by itemizing individual donors is usually limited to 60% of their adjusted gross income.)
- 25% of taxable income for corporations. (Up from 10%).
In order to qualify for these enhanced tax benefits, both individual and corporate taxpayers must make a cash donation to a public charity (as always, with a few exceptions).
4. CONTRIBUTE TO RETIREMENT
If your employer offers a 401(K) with a company match, try to take advantage of this and get the maximum match.
If your employer does not offer the company match or you are self-employed, skip the 401(K) at first and start with an IRA. If you favor an immediate tax break, consider a Traditional IRA, which will reduce your taxable income by the amount of your contribution.
Alternatively, a Roth IRA does not give you an immediate tax deduction, but it gives you tax-free growth on your investments and tax-free withdrawals in retirement. Keep in mind there are income limits to your IRA contributions.