This is the time of year where we get a handful of calls asking us for ideas on lowering tax payments for our business owner clients. While we wish we can waive a magic wand and make the taxes go away, the reality of it is that taxes are one of the two guarantees in life. We can, however, offer some creative ways to defer taxes and put more money away for retirement. It is also important to remember that paying taxes is a direct result of making money. It is a good problem to have. That mindset can take away some of the pain of writing a sizable tax check. In the meantime, we will offer two quick last-minute ideas to manage your tax payment.
This is about as Simple as it gets. You can still make a 2020 IRA contribution before you file your taxes. The maximum contribution for the 2020 tax year is $6,000 for people under 50 years old. People over 50 can make a “catch up” contribution of $1,000 for a total contribution of $7,000. The contribution to the IRA is a direct deduction to your income, which results in a lower tax payment. Income limits can apply to the deductibility of the payment if you participate in an employer retirement plan
One bonus idea for a Traditional IRA is a spousal IRA for a non-working spouse. The same contribution limits apply, and you may be able to contribute to an IRA for your spouse to create additional tax savings. It is important to consult with your tax advisor before taking action on any of the ideas we offer because they may not be applicable to your personal situation.
The SEP IRA could be a viable option for a person who is self-employed with no other employees. It is a little bit more complicated than the Traditional IRA, but also has much higher contribution limits. Depending on your situation, the tax savings can be very significant. We like to have a discussion with the tax advisor to make sure everyone is on the same page with the contribution amount and tax savings.
The maximum contribution to a SEP IRA for the 2020 tax year is 25% of compensation up to a $57,000 contribution. Like a Traditional IRA, you can still make a contribution to a SEP IRA up until you file your 2020 taxes. It is very important to note that if you have employees, you have to make contributions for them at the same rate that you contribute for yourself. Therefore, if you make a 25% SEP IRA contribution for yourself, you have to make a 25% contribution for your employees. This rule makes the SEP much less attractive to most business owners who have employees. It is, however, an excellent option for the self-employed with no employees that are in the fortunate situation of having made too much money last year.
While these aren’t the only two options available to you, they are the most popular last minute ideas during tax season. As mentioned above, we strongly encourage you to consult with a professional about your situation before taking action. The only thing worse than paying taxes is paying penalties on taxes you didn’t pay.