Tax Tips – November 2020
Buttoning things down for 2020
Despite the bite of COVID-19 and its effects on our economy, our people and our truckers, there are success stories within our industry. Though social distancing and sanitization have made our lives more difficult, it’s still prudent to know what our taxes will look like going forward. We hope the following will be beneficial to you all.
Q. How can I tell if I have paid in enough tax for the year?
A. Revisit your tax withholding and estimated tax payments. If you haven’t had enough taxes withheld from your income, now is a good time to catch up. If you generally make estimated tax payments, be sure that you have paid in at least 100% of the prior year’s tax amount or at least 90% of the actual tax amount owed for the current year. If you’re a high earner, with $150,000 or more adjusted gross income, the prior year’s tax amount is increased to 110%.
Q. Are the required minimum distributions required for 2020?
A. The CARES Act enabled any taxpayer with a required minimum distribution due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those required minimum distributions this year. This includes anyone who turned age 70½ in 2019 and would have had to take the first required minimum distribution by April 1, 2020. This waiver does not apply to defined-benefit plans.
Q. When must I take required minimum distributions?
A. If you reach 70½ in 2020, you have to take your first required minimum distribution by April 1 of the year after you reach the age of 72.
For all subsequent years, including the year in which you were paid the first required minimum distribution by April 1, you must take the required minimum distribution by Dec. 31 of the year.
Q. I have some extra money set aside and have made my estimated tax payments. Should I wait until tax time to make my IRA contribution?
A. Make your IRA contributions now. Don’t delay making contributions. Deposit the full amounts now, and start earning tax-deferred income sooner.
The annual contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (same as 2019 limit). The annual contribution limit for 2015, 2016, 2017 and 2018 is $5,500, or $6,500 if you’re age 50 or older. Your Roth IRA contributions also may be limited based on your filing status and income.
If you have your own business and do not have a pension plan, and you would like to contribute more than the IRA allows, consider opening a 401(k) plan.
If you have no full-time employees with the exception of your spouse, you are eligible for an owner-only 401(k) regardless of whether you operate as a sole proprietor, a partnership, a corporation or a limited liability company. Multiple owners also qualify. The plan offers the advantage over traditional retirement programs for the self-employed by enabling you to put more money toward your retirement.
Q. I am driving for someone who does not want to withhold payroll taxes. What should I do about taxes?
A. You will be responsible for the full brunt of the self-employment tax. Your only options are either to convince your employer to withhold taxes, go find another company who will withhold taxes, or pay estimated taxes on what you will owe. The way it stands now, you are self-employed without the benefit of depreciation to write off. If this is not your intent and you want to be a company driver, then you need to look elsewhere.
If you stay in your current position, you will be responsible for paying estimated taxes.
Essentially, your net income will be your gross pay less any nonreimbursed business-related expenses you incur, such as per diem, cellphone and supplies. You will be subject to income tax, after the normal deductions, as well as the self-employment tax based on your net income. The major mistake drivers make in your situation is not paying enough estimated tax and therefore they cannot believe what they owe on their income taxes. LL
This article has been presented by PBS Tax & Bookkeeping Services, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153. See our website at pbstax.com.
Please remember everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.