There’s still time to save on 2020 taxes

There’s still time to save on 2020 taxes


February 04, 2021

There’s still time to save on 2020 taxes

There’s still time to save on 2020 taxes


February 04, 2021

Share

Last year was one of massive upheaval for millions of Americans. Many lost their jobs or saw their paychecks reduced; others worked remotely from makeshift offices. Some were forced to drain their retirement accounts to pay the bills; others bulked up their savings with stimulus checks.

All of these changes could affect your 2020 taxes — for better or for worse. With the following guidance, we’ll help you snag the biggest refund available to you, or at least reduce the amount you’ll owe. Because as the pandemic continues to wallop the economy, none of us can afford to leave any money on the table.

Tax tips for non-itemizers

The Tax Cuts and Jobs Act, enacted in December 2017, nearly doubled the standard deduction, which sig­nificantly reduced the percentage of taxpayers who itemize on their tax return. (The standard deduction for 2020 is $12,400 for singles and $24,800 for married couples filing jointly.) But the goal of simplifying tax preparation has proved elusive. The tax code is replete with credits and deductions for taxpayers who claim the standard deduction — and that list got a little longer in 2020.

The CARES Act, the economic stimulus bill enacted in early 2020, includes a provision that allows non-itemizers to deduct $300 in cash contributions to charity. Because the tax break is an above-the-line deduction, it will reduce your adjusted gross income and your taxable income.

The provision was designed to encourage taxpayers to help charities, many of which are struggling to fulfill their mission during the coronavirus pandemic. The deduction is based on your tax return, not per person, so the maximum a married couple who file jointly can deduct is $300.

To claim this deduction, you need to have made a cash contribution to a qualified charity by December 31. Non-cash contributions, such as donations of used clothes to Goodwill, as well as donations to donor-advised funds, aren’t eligible. This tax break isn’t available to itemizers: If you still itemize, you’ll claim your charitable contributions on Schedule A (see below).

Low-income credit

Finally, if your income took a dive last year, you may be eligible for the Earned Income Tax Credit, which is designed to help lower-income working people. For 2020 tax returns, the maximum EITC ranges from $538 to $6,660, depending on your income and how many children you have. When the federal EITC exceeds the amount of taxes owed, you’ll receive a check for the balance. The income limits on this program are fairly low: If you have no children, your 2020 earned income and adjusted gross income (AGI) must each be less than $15,820 if you’re single, or $21,710 if you’re married and file jointly. But couples with three or more children can qualify with AGI and earned income of up to $56,844. The pandemic relief bill enacted in December allows families to use income from either 2019 or 2020, whichever year provides the largest credit. The bill also prevents unemployment benefits from reducing the size of EITC credits.  

Tax tips for itemizers

Even with the larger standard deduction, about 10% of taxpayers will still get a lower tax bill by itemizing deductions on their tax returns. Tax software programs or a tax preparer can determine whether you should itemize or claim the standard deduction, but you’ll need good records to make sure you claim all of the deductible expenses available to you.

Deductions for homeowners

Home­owners with large mortgages are good candidates for itemizing. For home loans acquired after December 15, 2017, you can deduct interest on a mortgage—or mortgages—of up to $750,000. (For loans taken out before that date, you can deduct interest on mortgage debt of up to $1 million.)

Property taxes are also deductible—up to a point. The tax overhaul capped deductions for state and local taxes at $10,000. The cap primarily affects homeowners who live in high-tax states, such as New Jersey.

Charitable contributions

Charitable contributions are deductible, so if your mortgage and property taxes put you close to the itemizer threshold, make sure you claim credit for all of your philanthropy in 2020. And if you were extremely generous last year — perhaps in conjunction with estate planning — you will be able to take advantage of a provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act designed to encourage charitable giving. Ordinarily, the maximum you can deduct for cash contributions is 60% of your adjusted gross income; for 2020, you can deduct up to 100% of your AGI.

If you used the time spent sheltering at home last year to clean out your closets, be sure to claim a deduction for items donated to charity. You can deduct the fair market value of donations of clothes, books and other noncash items. Some tax software will provide guidance on valuing your donated items.

Medical expenses

If you had extraordinary medical expenses in 2020—perhaps related to COVID-19 or another catastrophic medical event—you may be able to deduct a portion of your out-of-pocket costs, particularly if your income took a hit. You can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. If your AGI was $50,000, for example, you would only be allowed to deduct the unreimbursed medical expenses that exceeded $3,750. The list of eligible expenses is long, ranging from long-term care to health insurance co-payments to prescription drugs. Costs for dental and vision care that aren’t covered by your insurance are also deductible.

If you were unemployed

If you claimed unemployment benefits for the first time last year, you may be in for an unpleasant surprise. Unemployment benefits are taxable at the federal level, and most states tax them, too. The extra $600 provided to jobless workers under the CARES Act through the end of 2020 is taxable as well. You should receive a Form 1099-G from your state that shows how much unemployment compensation was paid to you in 2020.

Taxpayers who received unemployment for a few months and then went back to work could be particularly hard hit by the combination of taxes on their wages and benefits. If you fall into that group, make sure you’ve taken advantage of strategies to lower your taxable income, such as contributing to an IRA. Depending on your income, you may be eligible to claim a saver’s credit for those contributions. For 2020, single taxpayers with $32,500 or less of adjusted gross income can claim a credit of up to $1,000; married couples who file jointly with AGI of less than $65,000 can claim a credit of up to $2,000. The credit is based on 10%, 20% or 50% of the first $2,000 ($4,000 for joint filers) you contribute to retirement accounts, including 401(k)s and IRAs.  A credit is a dollar-for-dollar reduction in your tax bill, which means it will go a long way toward offsetting taxes on your benefits.

If you’re still receiving unemployment benefits — including the additional $300 a week included in legislation signed into law in December — you can take steps to avoid another tax shock when you file your 2021 tax return. For federal taxes, you can have up to 10% of your benefits withheld by filing W-4V. Contact your state for the appropriate form if you want money withheld for state taxes.

If your stimulus payment was too low

Millions of Americans received economic stimulus checks last year for $1,200, plus $500 for each dependent child. A second round of checks for $600 per person went out in early January. Eligibility for the first round of checks was based on your 2018 or 2019 tax returns, whichever was filed more recently; the second round was based on your 2019 tax return.

While the stimulus put billions of dollars into the economy, some taxpayers got smaller checks than they were eligible to receive, and some didn’t receive a check at all. For example, a college student who was claimed as a dependent on her parents’ 2019 return but was working for herself in 2020 wouldn’t have received a stimulus check even though she was eligible for one, says Lisa Greene-Lewis, a CPA and tax expert for TurboTax. Those taxpayers will have an opportunity to claim the difference when they file their 2020 tax return.

If information from your 2020 tax return shows that you’re eligible for a stimulus payment, or a larger amount than you received, you’ll be able to claim it on a line labeled “Recovery Rebate Credit” (tax software will calculate this for you). Similarly, if you didn’t receive your $600 check in January — a possibility, because the IRS was required to send out those checks by January 15—you can claim the money on your 2020 tax return. And if it turns out you received more than you were entitled to, find something else to worry about, because the IRS won’t make you pay the money back.

If you took a hardship withdrawal

The CARES Act allowed taxpayers who suffered economic distress due to the pandemic to withdraw up to $100,000 from their 401(k)s or IRAs without paying the 10% early-withdrawal penalty if they’re younger than 59½. That money is still taxable, but the law allows taxpayers to spread the tax bill over three years or avoid taxes altogether if they repay the money.

If you took a pandemic withdrawal last year, you have two choices, says Greene-Lewis of TurboTax. You can pay the entire tax bill when you file your 2020 tax return or pay one-third of the balance in 2020, 2021 and 2022. If you re­contribute the amount of the withdrawal after paying taxes on it, you can file an amended return and get a refund, she says.

This article was from Kiplinger and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.

Stay Connected