Of course many people start to think about taxes this time of year since last year’s 1099’s, W-2’s, and other tax documents begin arriving in the mail or inbox. But guess what? Now is actually the time to start thinking about reducing your tax bill for 2020.

Taxes are getting a lot of attention these days. President Donald Trump and his supporters are touting the virtues of the 2017 Tax Cuts and Jobs Act (TCJA) while the democratic candidates who wish to unseat him in 2020 are focused on repeal or other tax generating proposals. Last year was the first year for tax returns prepared under TCJA. AAII quotes a Gallup poll from April 2019, in which they determined that 49% of respondents disapproved of the TCJA. Slightly more than one out of five said that their taxes increased as a result of the act.

It could be that many individuals did not properly plan for the implementation and had too little withheld resulting in a larger tax due or a smaller refund than they had on their 2017 return. We wrote about the impact on paychecks in a blog post in early 2018.

A big reason for the difference in 2017 and 2018 returns was most likely the loss of itemized deductions. That happened for one or two reason: 1) some deductions (e.g. miscellaneous deductions) were eliminated entirely and others were reduced (e.g. state and local taxes) or limited (e.g. interest deduction) for certain filers; 2) the standard deduction was raised to a level that meant approximately 10 million taxpayers earning between $100,000 and $200,000 went from using itemized deductions to taking a standard deduction. We expect to see an even bigger use of the standard deduction this year.

The moral of this story is that effective tax planning does two things for you: 1) it eliminates surprises when you actually file and 2) it gives you a chance to find deductions or adjustments that you might have otherwise missed.

At our firm we utilize a very complete tax planning tool published by Bloomberg. We start the process for our clients by entering their most recently filed tax return. Right now, that would be the 2018 return for most people. Although rare, sometimes we are able to catch mistakes made in the preparation of that return and can advise the client to file an amended return. (It’s always a good idea to catch AND CORRECT your own mistakes before the IRS does.)

We don’t prepare returns, but when the 2019 data become known, we can setup the projection to show the impact for last year. We like to do that even before you turn your data over to your tax preparer. That will give you an estimate of what to expect. One client, after seeing our projection, went back home to hunt for more deductions. Of course, if we are managing the investment assets, we already have the interest, dividends, and capital gains and can plug in the actual numbers to make the projection more accurate.

After setting up the tool with the previous return, we have a good idea about what to expect for the current and next year. We project at least two years into the future (currently 2020 and 2021) in search of tax saving ideas.

We also model different cases to reflect the impact of each of those ideas. Some alternative cases can be combined for even more tax savings.

While we are on the subject of taxes, we have a resource for you to download if you like. It is a two-page listing of relevant tax data for 2020. I have also included the 2019 data for comparison and to assist you in preparation of your return. The download is free.

Click here to request the 2020 Key Financial Data resource kit.

If you would like to consider this kind of tax planning while you’re gathering your 2019 data, drop us a line or give us a call.

January 3, 2020