It’s tax season once again, and if you’re like most people, you might feel a bit overwhelmed. Sorting through forms, gathering receipts, and meticulously researching tax deductions can be tedious, so it’s no wonder why it’s a source of stress for many.
With the right knowledge, however, you can breeze through tax season and make things easier for next year. Here are a few tax filing tips to help you tackle your 2020 taxes and save money in the process.
Save Money on Taxes by Getting Organized
Being organized may not reduce the amount you pay them, but it does make filing taxes easier. Rather than storing your income forms in a drawer next to a pile of old receipts, try to keep a folder or box of all tax-related documents.
While it may be too late for this year’s taxes, start organizing now to ensure that everything is ready for next year. You’ll be less likely to forget about tax-deductible expenses and will have easy access to everything you need when you file or visit your accountant.
Timing Is Everything
From a tax perspective, the date you make a purchase or incur an expense can directly affect the amount of tax you pay. Things like medical expenses, mortgage interest, and student loan interest can be tax deductible, so you may be able to reduce your taxable income by paying January bills in December.
On the other hand, if you’ve reached the deduction threshold for the year, you could push an upcoming expense back into the following year to make it count as a deductible.
Don’t Wait Until the Last Minute
Procrastination is a common way to deal with the anxiety of filing taxes, but it often leads to even more stress later on. Leaving it until the last moment could leave you scrambling to gather paperwork and you may miss important deductions, credits, and even calculations.
Instead, try to plan a specific date to gather all of your documents. That way, you’ll be able to sit down and file your taxes without feeling rushed.
Check Your Tax Deductions
Tax deductions essentially shield a portion of your income from tax, indirectly reducing the amount you owe the US government. When you file your taxes, you'll need to choose between itemized or standard deduction. There are pros and cons to each method, but they are both great ways to save on your taxes.
What Are Itemized Deductions?
Itemized deductions are various deductions for expenses incurred throughout the tax year. You’ll select a variety of deductions that apply to your situation in order to reduce your taxable income. There are hundreds of deductions available, and if you choose this option, you’ll be responsible for finding out which ones you’re eligible for.
|Potential to exceed standard deduction||Time consuming|
|Hundreds of options||Not guaranteed to exceed standard|
|Tailored to your situation||You’ll need to provide proof|
What Are Standard Deductions?
Standard deductions are flat reductions in your gross income, helping you save money on your taxes. Rather than picking and choosing individual deductions (like you would with itemized deductions), your income will be reduced by a fixed amount. By choosing this option, however, you give up the ability to select specific deductions.
|Much easier than itemizing||May end up with a smaller deduction|
|Could exceed itemized deduction||Potential filing limitations|
|Increases each year||Not tailored to your situation|
Lesser-Known Tax Deductions
For those who go the itemized route, there is a long list of potential deductions that can be used to reduce your taxable income. Besides the more common options, you might want to keep an eye out for lesser-known deductions that can help you save money on taxes:
Fostering a pet
Refinancing mortgage points
Parents as dependents
Casualty, disaster, and theft losses
Save Money on Taxes With Tax Credits
Unlike deductions – which reduce your taxable income – tax credits directly reduce the amount of tax you owe. Applied after deductions, they provide a dollar-for-dollar reduction of your tax liability. Here are a few common tax credits:
Student Loan Interest Credit
American Opportunity Tax Credit
Child and Dependent Care Credit
Child Tax Credit
Earned Income Tax Credit
Medical Expenses Tax Deduction
State and Local Deductions
Energy-Efficient Home Improvements
Optimize Your Retirement Contributions
Traditional retirement accounts are funded with before-tax income, which effectively reduces taxable income. By contributing more towards your retirement savings, you'll be able to reduce the amount you owe. There are three main ways you can go about this:
Contributions to a traditional IRA may be tax-deductible, but the deductible amount depends on you and your spouse’s income, as well as your employer-sponsored retirement plans. There are limits on the amount you can contribute per year: For 2019 and 2020, the limits were $6,000 per year. For those 50 and older, that limit was $7,000.
These employer-sponsored plans are another great way to reduce your taxable income and they have higher contribution limits than IRAs. You can contribute up to $19,500 for 2020.
Those 50 and older can contribute an additional $6,500 in 2020.
Contribute to Tax-Advantaged Accounts
Beyond your retirement savings accounts, there are a number of other tax-advantaged accounts that might help you save money on your 2020 taxes.
Health Savings Accounts are tax-exempt accounts used to pay medical expenses. Contributions to these accounts are tax-deductible, allowing you to reduce your taxable income.
If you have high-deductible personal health coverage, you can contribute up to $3,500 in 2019. For 2020, that number increases to $3,550. If you have high-deductible family coverage, you can contribute up to $7,000 in 2019 and $7,100 in 2020.
Note you can fund an HSA for the prior year up until the tax filing deadline of April 15th, 2020.
If your employer offers a Flexible Spending Account, you can decrease your tax bill by contributing up to the limit. In 2019, the limit is $2,700. In 2020, the limit is $2,750. NOTE: unlike the HSA, any funds contributed to the FSA are ‘use or lose’ though you do have until March 15th of the following year to make full use of the account.
529 College Savings
529 college savings accounts are used explicitly for the purpose of saving for college and are operated by a state or educational institution. Contributions aren’t deductible on your federal income tax return but they may be on your state tax return (if you live in a state with a state income tax and you are putting money in that state’s 529 plan).
Minimize Trading in Taxable Accounts
Any trades completed outside of tax-advantaged accounts must be reported to the IRS. So unless your trades are done in a Roth IRA, traditional IRA, or HSA-Linked trading account, a form 1099-B will be filled out on your behalf by the custodian for sales of stocks, bonds, commodities, or any other securities.
Sound simple? Not so fast.
For each sale, you'll need to fill out your cost basis, purchase date, sale price, and sale date. Sound tedious? It is. And that’s before you even consider things like capital gains tax, reconciling wash sales, tax loss harvesting, and more.
The good news: You can avoid all of this by keeping most of your trading in tax-advantaged accounts. Transactions in these accounts are not taxable, so there is no need to track or report cost basis or transactions in these accounts. Unlike taxable accounts, gains and losses do not need to be reported, so you won’t need to worry about recording every little detail about your transactions.
Give to Charity
Charitable contributions are tax-deductible and there are a number of ways you can give to causes you support. While cash donations are certainly generous, you can also write off clothes, food, furniture, and other donations (as long as you get a receipt). If you plan to take the standard deduction then you will not receive a deduction for these types of donations unfortunately.
It’s up to you to decide how much of your income you want your employer to withhold for taxes. An abnormally large refund indicates that you’re paying too much in taxes and essentially giving the government an interest-free loan.
On the other hand, owing a large sum could quickly ruin your monthly or yearly budget when you file your return. This may indicate that your employer is not withholding enough. Consider giving your employer a new W-4 form to instruct them on how much to withhold.
Review for Mistakes
As we mentioned earlier, you never want to rush through your taxes. Once you’re ready to submit it, take a few minutes to review your tax return. Double check your calculations, revise your deductions and credits, ensure all documents are accounted for, and verify that your personal information is correct.
Tax Changes For 2020
Every year, the government makes adjustments to the tax code to account for inflation, price changes and other economic factors. While there was a major overhaul last year, this year’s changes are more subtle. In order to save money on your 2020 tax return, you’ll want to stay up to date with the tax changes for 2020.
Taxpayers who turned 65 on or before Jan. 1, 2020, can use a new form called 1040-SR, which uses a bigger font and more contrasting colors.
There is no longer a penalty for not having health insurance
Formatting has been adjusted to make the form more clear
Moving expenses are no longer considered tax deductible
Taxpayers can no longer deduct expenses incurred while searching for a job
Medical Expense Threshold Increased to 10% from 7.5%
Alimony payments are no longer deductible for the payer and don’t count as income for the recipient
Standard deduction increased to $12,400 for individuals and $24,800 for married joint filers
Premiums for private mortgage insurance or insurance on FHA or VA mortgages are now tax-deductible
401K contribution limits have been increased to $19,500
IRA contribution limits have increased to $6,000
Taxpayers aged 50 or above can contribute an additional $1,000 to their IRA and $6,500 more to 401(k)s
2020 Income tax brackets
|10%||$0 to $9,875|
|12%||$9,876 to $40,125|
|22%||$40,126 to $85,525|
|24%||$85,526 to $163,300|
|32%||$163,301 to $207,350|
|35%||$207,351 to $518,400|
|37%||$518,401 or more|
Joint married couples
|10%||$0 to $19,750|
|12%||$19,751 to $80,250|
|22%||$19,751 to $80,250|
|24%||$171,051 to $326,600|
|32%||$326,601 to $414,700|
|35%||$414,701 to $622,050|
|37%||$622,051 or more|