It’s a new year, and that means hope for brighter days, an effort to achieve new goals, and – something most don’t look forward to – tax season. The good news? Getting ready for tax season doesn’t have to be so stressful and overwhelming. By taking a few steps to prepare and exploring your options for reducing your taxes and preparation costs, you’ll tackle this item on your to-do list confidently.
Avoid the April Scramble
Lessen the stress of tax time with a little preparation, starting now. What can you do to streamline your filing efforts?
- Start early. The deadline for filing your 2020 tax return is April 15, 2021, but you can get started on filing well before that. Feb. 1 is the deadline for employers to mail out W-2 forms and other wage statements.
- Decide how you’ll file. There are more options than ever for filing your taxes this year due to increased precautions surrounding COVID-19. You can:
- E-file or mail your completed tax return to the IRS and your state. Please note that the IRS says that, due to staffing issues, processing paper tax returns could take several weeks longer than usual. Taxpayers and tax professionals are encouraged to file electronically.
- File your federal and state taxes online through a tax preparer for free or a minimal fee, depending on your filing’s complexity.
- File your returns online with on-demand help from a tax preparation company (for a fee).
- Upload or drop off your documents and let a tax professional complete your filing.
- Work one-on-one with a tax professional in a socially distanced setting.
- Know about new tax rules and potential deductions first. Some things to know for this year include:
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows you to deduct up to 100% of your adjusted gross income on qualified charitable donations if you plan to itemize your deductions.
- You can deduct medical expenses above 7.5% of your adjusted gross income.
- If you’re self-employed, you can claim a home office deduction, but if you’re a regular employee who’s been working from home due to COVID-19, you cannot.
- Individuals who earned up to $56,844 during the 2020 tax year may be eligible for the earned income tax credit.
- Most families can claim up to $2,000 per qualified child with the child tax credit.
- Federal stimulus checks are not considered income, so you will not owe tax on these economic impact payments, which are technically a tax credit for 2020.
- If you received unemployment benefits in 2020, you will need to pay income taxes on that money.
- The IRS provides more information about what’s new for filing in 2021 here.
- Organize your records. For your 2021 filing, the IRS advises that you gather all relevant tax records as soon as possible to ensure that you have everything and that you don’t overlook potential deductions or credits. Here’s a list of forms that can help you get started:
- W-2 forms from employers
- 1099 forms
- Other income documents
- Records of virtual currency transactions
- Notice 1444, issued by the IRS if a stimulus payment was sent to you
- Keep your information secure. In addition to storing your own tax documents in a safe place, you should practice extra caution when handing them off and especially when sending them electronically. Ask your accountant or tax preparer where your personal data will be stored, who has access to it, and how your preparer will share forms and information with you. You should avoid sending sensitive financial documents via email and instead use an encrypted file-sharing system with multifactor authentication.
There’s Still Time to Save Money
It’s 2021, but you can still save money on your 2020 taxes. How?
1. Fund your retirement account. Though 401(k) contributions were due by the end of 2020, you have until April 15, 2021, to contribute to a traditional IRA or a Roth IRA. Making a deductible contribution helps you lower your tax bill by reducing your taxable income while contributing to a tax-deferred IRA account. To qualify for the full annual deduction on a traditional IRA, you (and your spouse, if filing jointly) must:
- Not be eligible to participate in a company retirement plan
- Be eligible but have an adjusted gross income of $65,000 individually or $104,000 or less as a married couple filing jointly
- Have a combined gross income of $196,000 or less with your spouse, if one of you participates in a company plan
For both traditional and Roth IRAs, the IRA contribution limits for 2020 are $6,000 if you are under 50 and $7,000 if you are 50 or older.
Contributing to a Roth IRA will not reduce your 2020 tax bill, as these contributions are made after tax (all qualified withdrawals from a Roth IRA can be tax-free when you retire, while withdrawals from a traditional IRA are fully taxable). To contribute the full $6,000 or $7,000 to a Roth IRA, you must earn $124,000 or less individually or $196,000 if you’re married filing jointly.
Your tax savings will depend on a variety of factors, including how much you contribute to the plan, your tax bracket, and how long and how much your invested money is able to grow.
2. Itemize your deductions. You may find savings if you itemize instead of taking the standard deduction of $12,400 for individuals or $24,800 for married couples filing jointly. Mortgage interest, charitable donations, and medical expenses making up more than 7.5% of your adjusted gross income are some examples of these itemized deductions.
3. File and pay on time. Avoid late filing penalties by filing your return by the tax deadline, April 15, or by filing Form 4868 to get an extension until Oct. 15. This form asks you to estimate your total tax liability, subtract how much you have already paid, and pay the balance. Otherwise, the failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes.
Want to find out whether a traditional IRA or Roth IRA is right for you? We can help. Whether you’re new to investing or you’d just like a second opinion on your current plan, we’ll help you find your path to financial security in retirement. We can also help you determine if IRA Term Certificates – a dependable, federally insured investment option – might fit within your overall retirement plan.
Consult a tax professional regarding your individual tax situation. This content is for informational purposes only and is not intended to be financial or investment advice. Consult a licensed professional for financial planning and investment advice.