Tax season is stressful enough. Don’t be caught off guard when it comes time to file your return. Start planning now and breeze through the 2020 tax season.
1. Get organized and begin gathering missing records.
Get a manila envelope or folder and start filling it with the tax records your already have. Receipts for charitable donations, medical expenses, home improvements, property tax bills, gambling wins and losses, etc. should be collected throughout the year. When January rolls around you can add the other tax documents as they come and be ready for your tax return preparation appointment.
If you’ve moved or changed jobs during the year, confirm that each 2020 employer and financial institution has your current mailing address and email to avoid delayed or lost tax forms.
2. Check your withholding and make any adjustments asap.
There are just a few more paychecks this year, and the window to avoid an unpleasant surprise when you file your return is closing. If you didn’t recalculate your withholding earlier this year, were furloughed or unemployed at any point, owed an unexpectedly large amount last year, or received a smaller refund than anticipated, do it today. Most taxpayers can use the Tax Withholding Estimator provided by the IRS.
3. Ensure you are covered for taxes on any unemployment payments.
Record numbers of people received unemployment this year after being furloughed or laid off during the pandemic. Those payments are taxable income. If you were not having taxes withheld from them or making estimated payments, you have until the final estimated payment due date of January 15, 2021 to avoid penalties and interest. If you are unsure, don’t wait until filing season; consult a tax professional now.
4. If you’ve had a big life event this year, reassess your overall tax picture.
If you had a big life event or a change to your eligible filing status, or will by December 31st, your tax liability could be drastically different than previous years. If you’ve married, divorced, have a new child or an older child is no longer a dependent, bought or sold a home, had a significant raise or pay cut, or you or your spouse started a new job, you should review your withholding and tax deferred savings as soon as possible.
5. If you don’t already have one, start shopping for a tax preparer.
When you choose a professional firm like Bacon & Gendreau, your dedicated tax professional will have decades of experience and continuing education to help you make the best possible decisions to minimize your tax liability, during your tax return session and beyond. They will be there year-round to answer your questions and stand behind your return.
6. Use the money in your Flexible Spending Account.
If you have been putting money in a tax-free FSA account, use it so you don’t lose it. Check with your employer as some plans allow you to carry over $500 to the next year, and some give you until the middle of March to use last year’s funds. If your FSA plan requires you to use the money by December 31st, schedule that root canal you’ve been putting off or replace that expired first aid kit.
7. Talk to your employer about leftover Dependent Care FSA funds.
As daycares and summer camps closed up shop and employees switched to work from home or furlough, many ended up with funded accounts they could no longer use. The IRS is allowing employers some temporary flexibility with regards to these plans but does not require them to adopt any changes. If you may end up with leftover funds, consult your plan administrator to evaluate your options.
8. Reevaluate your tax-deferred accounts.
Have you made the maximum contribution to your Health Savings Account? Are you contributing the allowable maximum to your 401(k) or IRA? Consider saving more if your budget allows. All those contributions work towards a healthy savings and can have significant tax advantages.
The CARES Act changed the tax-favored treatment of many retirement accounts (see a summary here). If you made emergency withdrawals this year or made changes to your regular distributions, be sure to consult a tax professional this tax season.
9. Estimate your 2020 and 2021 income to decide if bunching deductible expenses will benefit you.
In order to deduct certain expenses, their sum will need to be greater than the standard deduction. For the 2020 tax year, the standard deduction is $24,800 for married taxpayers filing jointly. For medical expenses, only the portion over 7.5% of a taxpayer’s adjusted gross income counts towards that figure. Maybe you should have that medical or dental procedure you’ve been putting off before December 31st or make that big annual charitable donation in January instead of at Christmas. By consciously bunching deductible expenses into a certain tax year you can maximize your deduction and minimize your tax liability. Your tax professional can advise you for your individual tax situation.
10. Take advantage of the new above-the-line charitable deduction.
Previously, taxpayers needed to itemize their deductions in order to receive a tax benefit from charitable contributions. The CARES Act created an above-the-line deduction for up to $300 in cash contributions for those who don’t itemize.
11. Reevaluate your investments and the potential tax consequences.
If your investments were hit hard by the pandemic, you might decide to offload some losing assets. Up to $3K in investment losses can be used to reduce your ordinary income. Work with a financial advisor or tax professional so you understand the pros and cons before selling major assets.
12. Familiarize yourself with the major tax changes likely to affect you.
Stay informed. Watch our Facebook page and bgtaxct.com for news likely to affect your tax return. As always, if you are a client with questions please feel free to contact our office at 860-216-2195 or email your Bacon & Gendreau tax professional.