There's no reason to wait until tax time to start making sure you've checked all the right boxes. Here are three tips for making the most of your money when it comes to filing your taxes in 2020.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
1. Estimate your 2020 taxes early
Making sure you're withholding the proper amount from your paycheck is something that can pay off big at tax time. Avoid guessing the amount of taxes you'll pay and hoping that you'll come out ahead. Instead, estimate the actual amount and see if you need to adjust your withholdings.
This is particularly important if you've had a change in how much you’re earning or if your filing status has changed. When you know how these differences are going to affect your taxes, you can not only adjust your withholdings accordingly, but you can also do better financial planning for yourself overall.
The Tax Cuts and Jobs Act that went into effect on January 1, 2018, changed taxes in many ways — and that could've changed how much you pay in taxes. Avoid surprises by estimating in advance how your paycheck withholdings will affect your taxes. Use our online W-4 calculator to see how you should adjust your withholding if you want to increase the amount of your tax refund. Or, if you’d rather get more money in each paycheck, you can find that out, too.
2. Take advantage of all possible deductions
It might seem easier to claim the standard deduction instead of itemizing. However, doing so means that you may miss out on some financial advantages that you might not even have realized were available. Among the most commonly overlooked tax deductions are:
- Reinvested dividends: This one is easy for a lot of taxpayers to miss because it's not technically a deduction, but a reduction. If you're automatically having dividends from your mutual funds reinvested in extra shares, you can include them in your cost basis. This means that, when you sell your shares, you might reduce your taxable capital gain.
- Out-of-pocket charitable contributions: You don’t have to make big donations to enjoy a write-off; you can also include small expenses, such as spending money on supplies to make signs for your child’s eligible school fundraiser. Keep track of small items and expenses, and you might be surprised at how they add up.
- State sales tax: You can write off either your state and local income taxes or your state and local sales taxes (but not both). The IRS provides a calculator to help you determine how much of a deduction for sales tax you can take.
- Student loan interest (even if someone else paid it): This recent change lets the payments qualify for the deduction even if your parents (or someone else) paid the bill. Under new guidelines, the IRS views it as if you were given the money and used it to pay the student loan.
- Child and Dependent Care Tax Credit: A tax credit is valuable because it can reduce your tax bill and reduces how much of your income can be taxed. The Child and Dependent Care Credit provides a credit for the money that you spend on qualifying individual.
- Earned Income Tax Credit (EITC): If you earn a low to moderate income, you could be missing out on thousands of dollars by not claiming this. It’s even available if you’re self-employed. If you meet the qualifications, this can net you a refund — even if you didn’t have to pay any taxes.
- State income tax paid on last year’s return: If you paid money on your state income tax return last year, this payment can be used as an itemized deduction.
- Points paid to finance your home: If you paid mortgage points, you may be able to deduct the amount on your return. To deduct all the points in the year you paid for them, you need to meet certain criteria. Otherwise, you may be able to deduct them over the life of the loan.
Even if you take the standard deduction, there are still some additional deductions that could be available to you. Generally, these are referred to as adjustments to income. They reduce your gross income and can lower your overall tax liability. Among the overlooked adjustments are:
- Educator expenses
- Student loan interest
- Early withdrawal penalties for savings accounts and CDs
- Health Savings Account contributions
- Deductible retirement account contributions
- Jury duty pay or reimbursements required to be turned over to your employer.
3. Play the "matchmaker game" with capital gains and losses
If you've sustained capital losses during the year, take heart. You can use them to offset capital gains triggered by a market up-turn. Take a hard look at your portfolio and consider how you can match one transaction against the other to reduce your tax burden.
Remember that you'll first need to match long-term against long-term and short-term against short-term. Net losses of either type can then be deducted against remaining gains. If you're facing a really big capital gain, you might consider selling some losers before year's end.
Additionally, you can use up to $3,000 (or $1,500 if you're married filing separately) in leftover to offset your regular taxable income each year. If your capital losses are greater than $3,000, the excess amount can be carried over in subsequent years. But don't wait until the last minute. The longer you wait, the less time you'll have to make the right matches.
Not sure what tax deductions to take?
With TurboTax, we’ll ask you simple questions and fill out the right forms for you based on your answers. We’ll find every tax deduction and credit you qualify for to get you the biggest tax refund, guaranteed.