The end of December is just a little over two weeks away, which doesn’t leave you with much time if you’re looking to lower your tax liability for this year. However, there are a few things you can do before 2020 comes to an end. If you act quickly, these tips from Yahoo Money can help you lower your tax bill and possibly leave you less stressed when it comes time to file your taxes.
Generally, if you want to lower your tax bill, you have two options: reducing your taxable income or qualifying for tax reductions. And since 2020 has been a particularly difficult year, the silver lining is that you may be able to take advantage of new ways to save on your taxes.
Donate To More Charity
It is the season for giving, and if you’re feeling particularly generous this year, you could consider donating to charity and writing it off on your taxes. Now is the time to do so because you only have a short time left before a key benefit included in the CARES Act ends.
Under the sweeping $2.2 trillion pandemic relief bill passed last Spring, taxpayers who make itemized deductions when they file their taxes can deduct as much as 100% of their adjusted gross income (AGI) when they make a charitable donation. After this year, the rule will revert, and donations will be restricted to a portion of your AGI.
Plus, if you file a standard deduction when you submit your taxes (that’s $12,400 for individuals and $24,800 for couples filing jointly), you can also qualify for the charitable giving benefit offered under the CARES Act. In this situation, you can enjoy an above-the-line deduction worth up to $300 in charitable cash donations.
Concert Your Traditional IRA To A Roth IRA
If the pandemic disrupted your income — either due to a job loss, pay cut, or reduction in hours — Yahoo Money suggests converting your traditional IRA to a Roth IRA. With the latter, your post-tax contributions earn interest tax-free so that when you’re ready to retire, you can withdraw your holdings without paying a dime in taxes.
Dave Cherrill, a certified public accountant, told Yahoo Money, “In the current environment, where asset values may still be low, and with the potential that tax rates may increase in the future, the Roth IRA conversion is even more attractive between now and the end of 2020.”
Write Off Your Business Expenses
At the beginning of the pandemic, millions of Americans transitioned to remote work or were forced to freelance to stay afloat. If you were among this group, you should take full advantage of business deductions.
Typically, you can write things like printer ink, paper, and other supplies on your taxes as “ordinary and necessary.” However, you can also get a deduction based on your home’s square footage used for work and even potentially your internet or phone bill. Make sure to save your receipts and stay on top of business expenses.
Prepay Your Residential Real Estate Taxes
If you can financially afford it, you might consider prepaying your 2021 real estate taxes to qualify for this year’s discount. In the past, prepaying real estate taxes would cause the alternative minimum tax (AMT) to go into effect, but since AMTs are exempt right now, and there is also a $10,000 limit on state and local withholdings, you don’t need to worry as much about AMT.
Update Your Tax Withholdings
It’s never a bad idea to get a jumpstart on next year’s tax return. And according to data from the American Institute of CPAs, 45% of taxpayers don’t even remember the last time they updated their withholdings.
If your withholdings aren’t up-to-date, you might receive a worryingly high tax liability or a disappointingly small refund. As Jeff Jones, the CEO of H&R Block, told Yahoo Money, “Taxes are a mystery to Main Street America, but they don’t always have to be and changing your withholding is a really important part of that equation.”
“We do tax check-ups for people mid-year and we’re constantly asking people, did you have a life change, did you move, did you have a job change, did you have a baby? All those things can be reasons to change your withholding,” he continued.
So if you expect a nice refund from the IRS next year, it just means you paid more than you should have in 2020. However, if you get hit with a costly tax bill, you likely underpaid on your taxes.
The IRS delayed the tax filing due date in 2020, but don’t expect that to happen next year. “At this point, the IRS feels very confident in starting the tax season and ending the season on time,” Jones explained.
- Christopherous, Alexis. “Taxes 2021: Tips for American Taxpayers between Now and the End of 2020.” Yahoo!, Yahoo!, 12 Dec. 2020, money.yahoo.com/taxes-2021-tips-for-american-taxpayers-between-now-and-the-end-of-2020-152830579.html.