Rushing to file your tax return before the deadline 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 eight steps designed to help tax filers save money and avoid surprises when filing this year.
Step 1: Figure Out Your Filing Status
Will you be filing single or jointly this tax year? That’s an easy question for many. But if things change due to marriage, divorce, separation or a passing, your status will change for the filing period. Identify what status you will be listing for this filing period early because it will greatly impact the rest of your tax return.
Step 2: 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. However, one change is bound 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 3: Organize Your Information
Whether you’re going to work with a tax professional or file on your own, using tax software can help you get all of your paperwork together and answer some basic questions.
Step 4: 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 your computer or 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 5: Locate All Of 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. Take some time now and do a thorough sweep for any relevant receipts or documents.
Step 6: Decide Between Standard and Itemized
Standard deductions for the 2020 tax year are:2
- $12,400 for individuals
- $24,800 for joint
- $18,650 for heads of household
When itemizing your deductions, it’s unwise to take a deduction on a tax return simply because you believe you’re eligible. There should be a supporting document that objectively validates the deduction. Whether that document is a receipt, proof of address, membership or any other category, you want your paperwork to be able to back up your claims.
Step 7: Catch Up on Retirement Savings
If you have an IRA or 401(k), 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 may contribute up to $6,000 for those under 50 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 8: 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 professional who can help maximize your return and stay on top of recent tax changes for yourself and/or your business.
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