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Five steps to take to prep for your next tax year

On Behalf of | Nov 5, 2020 | Firm News

With only two months left of 2020, it’s time to start thinking ahead to 2021 and what the next tax season will look like. Most taxpayers will need additional time to gather financial documents and employment records due to the unpredictable circumstances of this year.

Most people imagine extensive work and time to get all their taxes ready, but there are simple ways to prepare for tax season now and save time and money later.

Steps to take before the end of 2020

It’s critical that you don’t wait until the last minute to implement these tips:

  1. Review your whole balance sheet – Many people make the mistakes of only reviewing their assets on their balance sheets, but you must review the whole picture in order to understand your interest rates, existing loans and how you could lower your interest in the future.
  2. Consider charitable giving – As the holiday season approaches, you will want to consider giving away some funds to charitable organizations. Not only is it a good deed, but you can use the giving as a potential deductible for your 2020 tax filings.
  3. Look at harvesting tax losses – This year was experienced highs and lows in the stock market, so you will want to look at any losses in your investment portfolio and sell assets at a loss if necessary. It could help in terms of deduction and part of rebalancing your portfolio.
  4. Maximize your contributions to retirement plans – Before taxes, individuals could contribute up to $19,500 in their employer-sponsored 401(k) plans. There is also an additional $6,500 for people over 50 to “play catch up” for retirement.
  5. Prepare for the worst (with liquidity plan) – There are always situations where cash flow may abruptly stop and you’ll need funds quickly. In those cases, you need to consider if you can sell a large asset without disrupting the rest of your finances. Evaluate what of your assets you could easily liquidate if necessary.

If you take the time to walk through these steps before December 31st, your tax season will be significantly smoother and better for your wallet.