2020 Vision: Individual tax planning strategies for the upcoming year

whiteboard with Tax planning text layout with a calculator. Passbook tax form and coins on wooden table for planning Money Financial Accounting Concept

Tax planning isn’t a concern exclusive to businesses, although individual taxpayers often mistakenly believe that to be the case. While it is true that tax planning for individuals is less complicated than it is for businesses, it is no less important. Even W-2 employees can take steps to reduce risk, minimize the chance of getting an unexpected tax bill and ensure retirement savings deliver the maximum benefit from a tax perspective.

Check your withholdings periodically

When was the last time you reviewed your payroll tax withholding rate? This simple act is a vastly underutilized strategy to keep unwelcome tax surprises at bay. Whether it’s due to a revamped tax code or a personal event, shifts in personal tax liability have a way of creeping up unnoticed. Did you owe taxes last year? Have you added a side gig that generates 1099 income? Has your family profile changed? Maybe you inherited an IRA that leads to taxes on required minimum distributions from the account.

The possibilities are endless, so check in with the payroll or human resources department at work as well as your accountant to make sure your exemptions match life on the ground. Ideally, you’ll do this at the beginning of the year and again in June or July. The mid-year check allows you to verify that withholdings to date are enough to cover your income thus far. That way, if there is a problem you still have enough time to correct it before accruing a big tax debt for the year.

If in doubt, ask your CPA

Keeping communication lines open between you and your CPA is another key to tax efficiency. If you’re considering any type of major financial move it’s wise to run the idea by your accountant before you’ve committed. Things like buying or selling a house or rental property or investing in a business opportunity can trigger significant tax consequences.

Even if you end up doing nothing now you’ll have a clear understanding of the potential ramifications should you decide to do it later. If you do act on the idea now, your accountant will be able help you formulate a proactive strategy that minimizes the tax hit and gracefully incorporates the move into your overall financial plan. For any action that could hold tax implications, you’re definitely better off finding out early rather than after you’ve spent the proceeds. Otherwise, you could face big problems when it’s time to give Uncle Sam his cut.

Roth or traditional?

You know how important saving for retirement throughout your working years is, but do you know which type of IRA is best in your situation? Both choices are solid savings vehicles that can offer valuable tax benefits for those who qualify. The choice between Roth and traditional is a highly personal one that will vary with individual circumstances. It usually boils down to one question: Would you rather be taxed now or later?

If you’re already in one of the highest tax brackets, it may not make sense to utilize a Roth account since your tax rate in retirement will likely be the same or lower than what you’re paying now. For young workers who expect to see much higher income levels (and associated tax rates) later on, though, a Roth strategy can be quite valuable.

The choice between Roth and traditional can also be a function of where your income lies within a tax bracket. If taxable income nudges you just above the lower threshold for one rate, consider deferring enough through a traditional IRA to knock this year’s income into the bracket below – unless you’re confident you’ll be taxed at a higher rate once you reach your retirement years, that is.

Spending a few minutes to communicate with your CPA, review your withholding rates and determine the ideal retirement savings vehicle is well worth the potential benefits: tax savings in 2020. If you’d like to learn more ways to lower your tax liability in the coming year, contact the experienced tax professionals at HBP.