Last-Minute Tax Tips from TaxAudit
Tax representation service TaxAudit has released its last-minute 2020 tax tips.
The tips will help taxpayers be proactive with their end-of-year tax and financial decisions that could potentially minimize their tax bill and reduce their chances of falling into tax debt, joining the over 14 million Americans who owe $131 billion in back taxes to the IRS.
A survey conducted earlier this year by TaxAudit revealed that taxpayers are concerned about how COVID-19 will increase the amount of taxes owed during the 2020 filing season with the majority (61%) deeply concerned that the financial impacts of the pandemic may force them into tax debt.
Despite the extended tax filing deadline for filing 2019 tax returns, more than a third of taxpayers (37%) did not have the resources to pay their 2019 taxes owed in 2020.
TaxAudit’s tips and strategies will help inform taxpayers about ways to potentially save money on their taxes and minimize the chances of going into tax debt.
TaxAudit’s 2020 Eleventh Hour Tax Tips include:
Adjust your paycheck withholding. Review your withholdings to see if you need to make any last-minute adjustments. Take advantage of the IRS’s free withholding calculator to make sure your withholdings are not too high or too low – and provide a new W-4 to your HR department if needed. The new W-4 is four pages and is not based on exemptions any longer, so be sure to read it carefully.
Make estimated payments to make up for any possible underwithholding. Taxpayers who lost jobs due to COVID-19 may be at risk for going into tax debt if they collected unemployment benefits, sold stocks, or took unplanned retirement account distributions to make ends meet during the crisis.
Now is the time to determine if your withholding from these transactions was sufficient. If you determine you will owe, you can make estimated tax payments by January 15, 2021, to minimize any underpayment penalties you might be liable for.
Relief for “Coronavirus-Related Distributions.” Taxpayers who withdrew funds from their retirement plan accounts in 2020 may qualify for tax relief on up to $100,000 in “coronavirus-related distributions” (CRD).
This special relief includes a waiver of the 10% early distribution penalty for those under the age of 59 ½, the ability to elect to report the taxable distributions ratably over a three-year period, and the option to treat the distribution as a loan to repay the funds back to their accounts.
The relief applies to employees and self-employed individuals who experienced adverse financial consequences due to COVID as a result of work or job loss, reduction of hours or pay, furlough, or the inability to work because of childcare issues.
These are qualifying events for CRD. In addition, taxpayers will qualify if they or a member of their immediate family was diagnosed with COVID by a CDC approved test.
Take advantage of bonus depreciation. The Tax Cuts and Jobs Act changed the bonus depreciation for assets placed in service after September 27, 2017, and prior to January 1, 2023, to a 100% deduction. There are a few income rules to review for each taxpayer’s individual situation. If you expect your business to show a decent profit this year, consider purchasing assets for the business before the end of the year to help reduce your total taxable income.
Consider deferring year-end income until 2021. For taxpayers who receive a year-end bonus or collection of rents, business debts, and payments for services for cash basis taxpayers, consider deferring these to 2021 to potentially pay less tax depending on your tax rate and taxable income. Not cashing the check in 2020 does not qualify as deferring income.
Pay off high medical bills. The threshold for the medical expense deduction is back to 7.5% for 2020. If you are planning to itemize your deductions on your 2020 tax return, consider paying for any unreimbursed medical expenses in December rather than waiting for next year.
Take advantage of educational tax benefits. If you paid for any college or school expenses, there may be credits available for you. Ensure you have all your receipts and records as well as a 1098-T form from the qualified educational institution(s). If you have a 529 plan, consider making contributions before the end of the year up to the allowable limit.
Remember alimony payments are no longer deductible. Alimony payments are no longer deductible for divorces and separations which took place after 2018. And that means the alimony received is not taxable either under these same guidelines. However, alimony established prior to 2019 is still taxable and payments are deductible.
Contribute to your favorite charities. Keep in mind, however, that if your standard deduction is higher than your itemized deductions you will not receive an additional benefit. You may want to consider making this year and next year’s charitable gifts before the end of 2020 if you do expect to itemize. There is a new deduction for those who do not itemize for charitable donations, but it is capped at $300.
Sell poorly performing stocks if you’ve sold winners. If you’ve sold stocks at a gain this year, it’s not too late to sell under-performers to offset those gains. This is a popular strategy for reducing taxes, commonly referred to as “harvesting losses.”
Consider maximizing your contributions to your current retirement accounts [e.g., IRAs and 401(k) plans]. There are multiple contribution limits for 2020 depending on your situation. For example, the limit is $19,500 for 401(k) base contributions plus $6,500 for “catch-up” for taxpayers 50 and older. The base contributions amount for IRAs is $6,000 with $1,000 as “catch-up.”
Make sure your records are meticulous. You’ll need meticulous documentation for all expenses you plan to write off. The sooner you can collect your receipts, the sooner you can file your tax return.
Remember to check the rules before making any of these moves to ensure you understand how they apply to your specific situation.
Please note: This is only a short list of some tax moves taxpayers should consider making before the end of the year. Please spend time learning about the rules at IRS.gov so you are knowledgeable about qualifying deductions, exemptions, and more that may help to reduce your tax burden.
Find out more at www.taxaudit.com.
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