Last Minute Tax Tips for Individuals in 2020
With the holidays approaching and the end of the year in sight, individual taxpayers should take time to ensure they are reducing their tax obligations and preparing for next year. We anticipate that deadlines will return to their initial timetables, with April 15 as the deadline for individual tax returns, so taxpayers should have their information in order as soon as possible.
Here’s a quick list of things to consider:
Make a charitable contribution. Many people no longer itemize their taxes because of higher standard deductions. But the CARES Act now allows for an “above-the-line” deduction for charitable cash gifts of up to $300. That means that even if you do not itemize, you can still claim this new deduction.
Check your FSA balance. If you have a Flexible Spending Account (FSA) for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.
Max out tax-advantaged savings. Reduce your 2020 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts (HSAs) to the extent you’re eligible. Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2020 return if they’re made by April 15, 2021.
Consider a QCD. If you’re 70½ or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and apply the amount toward your RMD. This is a big advantage for those who wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).
Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.
Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction, depending on your state and plan.
Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes under-withheld due to changes under the Tax Cuts and Jobs Act. Use the IRS withholding calculator (available at irs.gov) to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.) The IRS gave taxpayers a break for under-withholding last year, but we are not expecting the same in 2020.
Get every dime of your stimulus. Didn’t get a stimulus payment in 2020? You may still be eligible. Stimulus payments sent to taxpayers this spring were based on 2019 income, but the final amount will be based on 2020 income and will be settled on your 2020 tax return. That means that those who did not initially qualify for the payment – if their adjusted gross income was $75,000 or more (single filer) in 2019 for example – may still qualify for it if their income dropped below that threshold this year. They would then receive the payment through a larger tax refund or a smaller tax payment in early 2021. Those who did qualify but made more money than that threshold this year can still keep the advance payment and do not need to pay it back.
Of course, that’s just for starters; there may well be other measures you can take depending on your specific financial situation. For assistance and answers about year-end tax issues, please contact your Weiss tax professional at your earliest convenience.
About Weiss & Company
Innovative and flexible like the best boutique firms, with the broad selection of services of larger firms, Weiss & Company delivers solutions precisely tailored to your needs.
For the latest financial news you can use, subscribe to our company newsletter, The Weiss AdvisorSignup Now