With Labor Day here, what tax planning should I think about before the fourth quarter is in full swing? The biggest mistake a business can make is not knowing their true numbers. The biggest mistake individuals can make is thinking they aren’t affected financially just because they “made it” and are back to work. Business owners have it especially tough because they are stressed and exhausted from scrambling to adapt and survive with all the new restrictions in place. They look at the books and think “I just cant be proactive right now. Mentally, I’m wiped. We are finally stable again and I’m just happy to be here taking a breath. The problem is their tax returns are going to look very, very different than last year and they could have a severe shock coming when they see the final results. All business owners should get their books in perfect order by the end of September so they can do a pro-forma tax return and still have time to take actions to plan better tax outcomes.
Many employees kept working through the lock-downs, or even worked more, while others had a huge break and were on unemployment for several months. The $600 weekly unemployment bonus actually increased many incomes over the prior year, and it is possible that the stimulus payments may end up being taxable. This may cause some people to be in the 22% bracket, instead of 12%, and they may need to increase withholding now to avoid owing extra tax when they file next year, since their regular withholding will not take into account t all the extra money they made on unemployment.
People closed and reopened businesses, cashed in 401(k)s without being Covid positive, and on and no. All these events may generate positive or negative tax outcomes and in some cases both. Before you hire more people back, lay people off, take a staycation, spend money on a home office or start your Christmas shopping, prepare a pro-forma tax return to see what your tax situation will look like this year, as surprises are waiting everywhere. Tax planning has never been more important than this year!