Three Major Considerations for your 2020 Tax Return from a CPA
On January 6, 2021 Isaac Addae and I sat down with Dimeta Smith Knight, owner of Dimeta Smith, CPA, LLC, and Herman Hicks, Vice President and Private Relationship Manager at First Tennessee Bank to discuss taxes, financial planning and other wealth building strategies. This document is not tax advice. Contact a professional to discuss your personal situation.
1. What are some quick wins people can do today to reduce their 2020 tax bill if they haven’t filed already? For business owners and nonbusiness owners?
Be efficient about how you save and invest your money:
· Make tax-deferred contributions to a retirement plan up until you the date you file your taxes. It will reduce your taxable income and grows tax free! Contribute tax-deferred up to the max so that you can reap tax free growth over the years. See an example of tax-free savings in the paycheck tax savings here.
· Don’t forget about any potential contributions from your employer.
· Go through your records for 2020. Do you have any personal medical expenses?
· If you received unemployment benefits, meet with a CPA to go over any particulars for your situation.
2. Explain how tax deductions such as mortgage interest expense and nonprofit donations limits have changed based on the increased standard deductions.
· Standard deductions increased to almost double so it’s more difficult to itemize.
· Many deductions and adjustments typically used to try to improve taxes went away, but overall, you have would have benefited more with the standard deduction.
· Charity starts at home! Build your wealth by saving so you can help others.
Dimeta Smith Knight CPA is an expert in this field. Reach out to her with any questions.
If you typically file with Turbotax, don't forget they have live experts to make sure you get the highest refund.
3. For those on the path to financial freedom, can you explain how capital gains are taxed compared to rental income and to wages? Which is taxed highest?
· Long terms capital gains have been reduced and has helped wealthier individuals because they can sell their assets to live on and pay less taxes than if they worked for wages since ordinary income can be taxed up to 37% depending on income.
· The sale of an asset can create a loss or a gain. Long term capitals gains is generated from the sale of an asset that you have owned more than a year. A business, real estate, stocks or bonds generate a capital gain (or loss). The growth of an asses is taxed at no more than 25%. Capital gains is taxed on the growth of an asset once it is sold. For example, if you buy an asset at $1,000 and sell it for $2,000, then you will be taxed on the $1,000 of growth.
· Rental income is taxed as ordinary income rates that is your personal asset that builds equity. When it comes to rental property you own, rental income it’s still taxed at your ordinary income bracket. But you can claim qualified business income deduction (2017 tax cuts and jobs act). Talk to a tax professional to take advantage of these potential deductions.
Dr. Lakisha Simmons is a first generation college student, tenured professor of analytics, and financially independent AchieveHer(TM). She is the author of The Unlikely AchieveHer and creator of many tools and resources for self-development. She shares real-life goal achieving and simple wealth building information so that you can achieve your dreams and reach financial freedom. No charting, day trading, gimmicks, pyramids or confusing terminology. Start with Part 1 here. Express in our money club below.