It’s hard to believe that we’re in the last quarter of the year! With 2020 coming to an end, now is a great time to make some easy and smart tax moves to help lower your tax bill and increase your tax refund when you file.
Start compiling all of your receipts for any tax-deductible expenses and sources of income because these 10 quick and easy tax tips will help you get your finances organized and save money at tax-time before the year ends!
1. Defer bonuses: If your hard work paid off and you are expecting a year-end bonus, this extra money in your pocket may bump you up to another tax bracket and increase the amount of taxes you owe. If you can delay any extra income until the beginning of next year, do it! If your boss is able to pay you your bonus in January, you will still receive it close to year-end, but you won’t have to pay taxes on it when filing your 2020 taxes.
2. Accelerate deductions & defer income: There are a handful of tax deductions that are recognized the year in which you pay them. For example, if you own a home, get a mortgage interest deduction, and if you make an extra mortgage payment on December 31, you may be able to claim the additional interest paid as a tax deduction in the tax year paid.
This lets you take the tax deduction immediately rather than wait an additional 12 months when you do your taxes for next year. Before using this strategy, be aware that under tax reform, if you purchased a new home after December 15, 2017, you can deduct the mortgage interest you paid based on a home loan up to $750,000 instead of $1,000,000 for homeowners who purchased before that date.
3. Donate to charity: The holiday season is coming, which is a great time to clean out your closet and household goods for those in need. You can help someone in need and reap the benefits of a tax deduction for non-cash and monetary donations given to a qualified charitable organization if you can itemize your tax deductions.
If you volunteer at a qualified charitable organization, don’t forget that you can also deduct your mileage (14 cents of every mile) driven for charitable service. TurboTax ItsDeductible will accurately value and track your donations and mileage for volunteering year-round, and then you can export your donations to your TurboTax return. Make these donations count on your taxes by donating by December 31st. Even if you make a donation by credit card, you do not have to pay it off in 2020 to receive the tax deduction.
Typically if you make a charitable donation to a qualified charity, you can deduct the contribution if you itemize your deductions. However, under the CARES Act, there is the addition of a new charitable deduction up to $300 on your 2020 taxes for your cash donations made to a 501(c)(3) organization even if you don’t itemize and claim the standard deduction. This will be something to keep in mind since close to 90% of taxpayers now claim the standard deduction instead of itemizing and are no longer able to deduct charitable contributions under tax reform.
The CARES Act also temporarily eliminates the limit placed on the number of cash contributions you can deduct if you itemize your deductions. Usually, cash donations that you can deduct are limited to 60% of your adjusted gross income, but the CARES Act eliminates the limit for tax year 2020 returns(the ones you file in 2021).
4. Take a class: Taking a course to advance your career or improve skills is also a great way to lower your taxes and boost your tax refund. Paying for next quarter’s tuition by December 31 may give you a valuable tax credit up to $2,000 with the Lifetime Learning Credit.
5. Maximize your retirement: Another great way to reduce your taxable income while building your nest egg is to make a contribution to your retirement savings account. Whether you contribute to a 401(k) or a Traditional IRA, you can reduce your taxable income and also save for the future. If you are self-employed and contribute to a SEP IRA, you can contribute up to the lesser of 25% of your net self-employment income or $57,000 for 2020.
6. Spend your FSA: If you have a Flexible Spending Account and have money left, get caught up on your doctor visits. While the old “use it or lose it” rule may not still apply, you may only be able to carry over $500 worth of unused money left in your 2020 FSA account at the end of the year. Your plan may also limit the amount of time you’re able to use your funds to 2 1/2 months after the end of the plan year.
7. Buy Low, Sell Low: If you have a few investments in your portfolio that have gone down in value, did you know you can recognize your losses and use them to offset investment winners? To do this, you need to sell the losing investments and offset your losses against your gains recognized. If your losses exceed your gains, you can apply $3,000 of that against your regular income. Any extra will then be passed to the next tax year.
8. Make W-4 Withholding Allowance Adjustments: If you did not have the tax outcome you were expecting in 2019 due to tax law changes or experienced life changes like having a baby, getting a pay increase or decrease, unemployment, or a new job, now is a good time to adjust the amount of taxes withheld from your paycheck by adjusting your withholding on your W-4 and refiling the form with your employer. TurboTax W-4 withholding calculator can help you easily adjust your withholding, so there are no surprises at tax time.
9. Be Aware of the Other Dependent Credit (ODC): Do you support your parents or grandparents? How about another loved one? If that happens to be you and they qualify as a non-child dependent, then make sure to take advantage of the new “Other Dependent Credit” worth up to $500, which can reduce the taxes you owe dollar-for-dollar by $500.
10. Gather Receipts Related to Your Home Property Taxes or Large Purchases: Do you pay home property taxes, pay state taxes, or did you make a large purchase and pay a lot of sales tax? You can still deduct the amount of state and local property, income or sales taxes up to $10,000. In the past, these taxes have generally been fully tax-deductible.
Don’t worry about knowing these tax rules. TurboTax asks you simple questions and gives you the tax deductions and credits you’re eligible for based on your answers. If you have tax questions, you can connect live via one-way video with a TurboTax Live CPA or Enrolled Agent. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish, year round and can also review, sign, and file your tax return.