Reduce Your 2020 Tax Bill
Tax planning is one of those activities where you get out of it what you put into it.
Tax planning, not tax prep, can reduce your tax bill and minimize your tax expenses. Those that only have their tax return prepared are surprised when their tax outcome is mediocre.
How can you optimize tax minimization at tax return time?
It is important to remember that we’re still in the tax planning season. If you haven’t hit the ceiling for the accounts below, there’s time to contribute, which can lower your taxable income for 2020.
Until April 15
IRA – $6,000 contribution limit; $1,000 catch-up contribution if over 50
Health Savings Account (HSA) – $3,550 single, $7,100 married contribution limit; $1,000 catch-up contribution if over 55
Until October 15 (if you extend your return)
Solo 401(k) – $19,500 contribution limit; $6,500 catch-up contribution if over 50
SEP IRA – 25% of employee’s compensation or $57,000 contribution limit
Simple IRA – $13,500 contribution limit; $3,000 catch-up contribution
These are simple tax minimization moves.
Important Items for 2020
While there are some tax items with more flexible deadlines, most things don’t. Let’s look at what you want to make sure your CPA knows about when prep time comes.
Stimulus checks were based on tax returns from 2018 or 2019 and phased out benefits if you made $75,000 a year (or $150,000 for couples) or more. If your circumstances changed – a lost job, lost business, etc. – and your income changed dramatically in 2020, you can still receive stimulus checks you may have missed and receive them on the 2020 tax return.
There are also no payback provisions if your tax picture is changed. In other words, if your income exceeded the threshold for the stimulus in 2020, you don’t have to give back any stimulus money received.
Be sure to provide accurate stimulus monies received in both 2020 and 2021.
In past years, investors have been able to connect their RMDs (required minimum distribution) and QCDs (qualified charitable distribution) to give the money directly to the charity and avoid including the RMD on their return.
In 2020, RMDs were suspended, which disrupted the QCD. The 1099-R form reports distributions from your retirement plans, but this form doesn’t specify the QCD amount. You will need to inform your tax preparer to ensure that whatever portion of your distributions went to charity isn’t reported as taxable income.
Charitable Contributions if You Don’t Itemize
In 2020 you can deduct $300 even if you don’t itemize deductions. This limit is for each return, no matter your filing status. This deduction increases for 2021, so be sure to document these contributions this year.
Tax Planning, Not Just Preparation
It pays to have these late tax planning discussions, so your bill is reduced. You can also start putting practices in place for 2021 to plan.
Remember: These are only a few of the tips and details to keep in mind. Please make sure you’re in conversation with me to take advantage of the opportunities available. It’s about tax planning, not just tax preparation. Feel free to start the tax planning discussion today.