Many people procrastinate when it comes to filing their tax return, which is understandable. Nobody enjoys gathering a wide range of documents or trying to organize a year's worth of financial activity. That said, putting things off may mean making mistakes that could have been avoided. Even now, there is still plenty you can do to plan ahead and prepare before filing your taxes. Here are six steps designed to help tax filers save money and avoid surprises when filing this year.
Step #1: Consider CARES Act Changes
Several benefits offered to families and businesses through the CARES Act will warrant tax changes for the 2020 tax year. Many of these changes will depend on your personal and business circumstances. Therefore, you should consult a tax specialist before filing in 2020. However, one change is likely to affect some individuals. This change allows filers who choose to take a standard deduction to deduct an additional $300 for eligible charitable contributions made in 2020.1 Keep this change in mind when calculating the difference between a standard and itemized deduction.
Step #2:Get Organized
Even if you are going to work with a tax professional, using tax software can help you get all of your paperwork together and answer some basic questions. Your preparer may appreciate the organization, and you may be able to save time when meeting with them in-person or virtually. It also helps to make a list of financial institutions you use. Where do you have brokerage account(s)? Who services your mortgage? You can proactively pull tax documents from these accounts online.
Step #3: Go Digital
You may find it easier to work through tax documents when they are scanned and organized by topic or deduction type. This is something most people can do on their own. Create a digital folder on a flash drive and have everything ready to file your taxes. Most financial documents provided by a bank, credit card company or even stores can be downloaded, giving you easy access to important financial documents.
Step #4: Hunt Down All Your Charitable Donations
If you opt to take an itemized deduction, your qualifying charitable donations can count towards a tax deduction. But, you can only claim this deduction if you have proof, typically in the form of a donation receipt. Many people have them, but like other receipts, aren’t sure where they place them, often stuffing them in drawers or file-piles. Take some time now and do a thorough sweep for any relevant receipts or documents. In order to be organized going forward, create a folder in your email system. Virtually every charity emails a copy of donation receipts.
Keep in mind that non-cash charitable contributions above $500 require a Form 8283 to be filed with the return, and donations above $5,000 may require an independent appraisal.
Step #5: Catch Up on Retirement Savings
If you have an IRA, you can still make adjustments for the prior year up until you file your tax return. If you have not maxed out your contribution limits for 2020, you and your financial advisor may find it advantageous to post your retirement contributions to the 2020 tax year, even if it is the beginning of 2021. You have until April 15th to make IRA and Roth IRA contributions. Those under 50 years old may contribute up to $6,000 and $7,000 for those 50 and older to your IRA.3 This can help maximize your deposit ability for the next year, and may reduce your taxable income for 2020.
Step #6: Avoid the Estimated Tax Penalty
If you are a business owner or otherwise earn income that does not have taxes automatically withheld from an employer, estimated tax payments may be required or recommended. While it’s too late to make estimated tax payments for the 2020 tax year, now is a good time to determine if you should be making them for 2021.
Estimated taxes may be required or recommended for those who earn income through:4
- Self-employment income
- Capital gains
Make sure to take your time when filing your 2020 taxes. Double-check this list, and more importantly, contact a tax professional who can help maximize your return and stay on top of recent tax changes for yourself and your business.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.