What You Can Do Right Now to Make 2021 Your Best Tax Year Ever Set yourself up to be in the best tax position possible.
By Tom Wheelwright Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Traditional tax planning is transactional and, honestly, not nearly as beneficial as one might think. You ask your taxes preparer questions and figure out what to do in the spur of the moment. Creating a long-term plan of action for your taxes is how to create real savings, but it takes months to create an effective plan. Now is the time for business owners and investors to be planning to reap the rewards for the rest of 2020 and into 2021.
Analyze income
Many accountants suggest pushing income to a later year. There are a few different factors to consider when deciding whether to do this. First, is your income so low you lose deductions? Many personal deductions don't carry over to the next year. Rather than taking deductions now, you may want to accelerate your income to make use of all your deductions. Another factor to consider is the next year's tax rates. There's a real chance that income tax rates could increase in 2021, so the best plan would be to accelerate your income into 2020 to avoid paying at a higher rate.
Related: 5 Tax Strategies to Help Your Business Survive the Coronavirus Slump
Identify opportunities
With both economic and political uncertainty, it's likely that we'll see another economic downturn in 2021. During those times there are always opportunities to succeed, but if you don't plan for them, you'll be left with remnants. Now that you have an income tax plan in place to reduce your taxes, you can plan to use those savings to invest when the market goes down and investments are cheaper. We all saw the winners and losers following The Great Recession, so make sure you're prepared to take advantage of opportunities that increase your wealth.
Become someone tax law favors
While preparing to make investments, consider if they're the ones the government wants you to make. Tax laws are a series of incentives for business owners and investors and it's easy to take advantage of the opportunities when you understand how the laws can work in your favor.
The government favors producers like business owners, real estate investors and commodity providers and has created huge tax incentives for these activities because they spur economic growth. While consumers typically owe 40% in taxes, producers can easily pay less than 20% in taxes based on the level of their activity. This reduction in taxes allows you to continue to reinvest and grow your wealth.
Related: Analyzing Joe Biden's Tax Plan
As you can see, reducing your taxes is a valuable and time-consuming process. While 2020 was a difficult year for many, 2021 holds opportunities for those who plan appropriately. Don't allow yourself to be stuck in a tax rut doing the same things you've always done. It's time to reevaluate your plan and set yourself up for your best tax year yet.
