Just a few tweaks could save you a bundle on your taxes. However, timing is crucial with taxes. Act before it’s too late and take advantage of all the tax breaks available with our tax tips for 2020.
The first thing to remember is the standard deduction increased in 2019 to $12,200 for single taxpayers and $24,400 for married filing jointly. Add $1,300 if you are over 65 or blind and filing by yourself. Add $1,300 for every individual who is over 65 or blind if filing jointly.
Here are ten effective tax tips to get you started:
1. Financial gifts tax exclusion
This year allows for individual personal gifts of up to $15,000 as a tax exclusion. If you are married, you can double this tax benefit by each gifting up to $15,000 to one or multiple recipients. The maximum gift tax exclusion is $30,000. This tax benefit includes donating directly to institutions on behalf of loved ones and friends. These yearly tax exemptions do not count toward your lifetime exemption limit.
Exclusion Vs. Deduction – What is a tax exclusion?
Tax exclusions and deductions are similar but they aren’t the same. A tax exclusion is a tax break that allows you to not pay tax on income that would otherwise be taxable, such as foreign earned income or combat zone income. A deduction, on the other hand, reduces your taxable income. Examples of tax deductions include business expenses and interest payments.
Top 10 tax tips for 2020:
2. Dump bad investments
If you have stocks or mutual funds that reach up to $3000 in losses, this is the time to sell them. You can use the loss to offset taxable gains dollar for dollar. There’s more good news here. If you have more than $3000 in losses, you can carry them over to the next tax year. Losses can be carried over every year for the length of your life.
3. Contribute to retirement accounts
This is one of the most important tax deductions available. Don’t miss out. Not only are you given the chance to keep your money, tax-free, but you can safely watch it grow as you prepare for your retirement. The best option here is a company-sponsored 401-(k) plan since many times these investments are matched by your employer. The maximum 401(k) contribution allowed for 2020 is $19,500 (or $26,000 if you are 50 or over).
Contributing to an IRA is another good option. For 2020 you can contribute a maximum of $6,000 to an IRA ($7,000 if you are 50 or older). If you aren’t able to contribute the entire amount by the end of the tax year, you can still make deductible contributions to an IRA right up until April 15.
If you have reached the age when the IRS requires you to take a required minimum distribution from your traditional IRA (70 ½), you still have options. You are allowed to use part of your RMD (required minimum distribution) as a qualified charitable distribution (QCD). This means that you are allowed to transfer up to $100,000 from your IRA to a qualified charity and it will not be considered taxable income.
4. Donate appreciated assets
If you are planning to itemize your deductions, it’s important to be smart about how you contribute to organizations that you care about. If you have appreciated assets that you’ve held for over a year, you can deduct the full fair market value if you donate them to a 501(c)(3) nonprofit organization. These charitable gifts can include common stocks and bonds, mutual funds and other long-term appreciated securities.
If you choose a private charity, you are allowed to donate up to 20% of your gross income to benefit from this tax deduction. If you choose to donate to a public charity, the amount increases to 30% of your adjusted gross income in appreciated assets.
5. Donate small items (tangible property)
There’s ALWAYS someone who can use personal property (in good condition) that you are finished with. If you haven’t already been through your closet, garage, basement, and attic to do some cleaning up, now’s the time to get motivated. Bringing your tangible property to a thrift or second-hand store results in recycling of your old items and, with a receipt, a tax break for you. (Not to mention the benefit of a less cluttered closet).
Remember that if you estimate the value of your donated goods to exceed $5000, then you will need a professional appraiser to validate that amount to claim the deductions on your taxes.
6. Consider a Roth IRA conversion
If your tax rate when you retire will be similar or higher than your current tax rate, then a Roth IRA is a sensible retirement account to consider. When you retire, a Roth IRA allows you to withdraw your funds tax-free. For this reason, some taxpayers make the decision to convert their traditional IRA to a Roth IRA.
This option generally only makes sense for taxpayers with a tax federal tax bracket that is lower than 24%. There are limits to your Roth IRA contributions depending on your situation, so weigh this option carefully. However, tax-exempt retirement withdrawals make a conversion to a Roth IRA worth considering.
7. Make a fourth-quarter estimated tax payment
If you didn’t pay sufficient taxes throughout the year, you’re going to owe taxes to the IRS when you file your tax return. You may have to pay a penalty also. This is because you either didn’t withhold enough taxes from your weekly paycheck or you’re self-employed and you didn’t pay enough in estimated tax payments. To avoid penalties, make an estimated tax payment by January 15th.
8. Make an extra payment toward your mortgage
Top apps to e-file your taxes:
Not all homeowners will still benefit from this tax break since the standard deduction increased this year. But if you owned a home as of December 15, 2017, this is still a great itemized option. If you make an additional payment by December 31, you can add that additional deduction to your 2020 taxes.
The maximum amount of interest you can write off in 2020 is $750,000 in loans.
9. Take advantage of the healthcare deduction
If you plan to itemize tax deductions and have healthcare expenses that exceeded 7.5% of your adjusted gross income (a.k.a. AGI) in 2020, then this deduction is worth considering. What qualifies? Sorry, no Flexible Spending Accounts. Add the costs of your health insurance for the year. Eligible expenses include Medicare premiums and nursing home expenses.
10. Wait for your year-end bonus
If your employer offers you a choice here, watch your income before accepting your “year-end” bonus before January 2020. If your bonus will move you forward into a new tax bracket, then it’s well worth it to ask your employer to hang on before handing over more taxable income.
Bonus tax tip:
If you’re not planning to hire an accountant to prepare your taxes this year, invest in a high-quality tax preparation program. You can save hours and a lot of money with a well-designed tax preparation software package.