Tax Season Tips
The day is coming, Tax Day! Preparing your taxes can be a real drag. It can feel like tax day looms over your spring! Well, fear not: the IRS has given you another month to file your taxes!
New Tax Date
The Treasury Department and Internal Revenue Service has announced that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended to May 17, 2021.
Per a recent press release from the IRS, individual taxpayers can postpone federal income tax payments for the 2020 tax year to May 17, 2021, without penalties and interest, regardless of the amount owed.
The IRS permits contributions to specific accounts for the 2020 tax year before filing, so you can utilize the extra time to take advantage of strategies that could save you on your taxes.
Even with the new deadline, consider filing as soon as possible. Filing electronically with direct deposit offers the quickest way to receive a refund if you’re entitled to one. Electronic filing with direct deposit can also help ensure you receive the most recent stimulus payment promptly.
Tips for Completing Your Taxes this Year
Contributions to a traditional IRA may be fully or partially deductible, depending on your filing status and income. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. You have until May 17, 2021, to contribute up to $6,000 for the 2020 tax year ($7,000 if you’re 50 years or older).
Health savings account (HSA).
You can claim a tax deduction for contributions you or someone other than your employer make to your HSA, even if you don’t itemize your deductions. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. The contributions remain in your account until you use them. The interest or other earnings on the assets in the account are tax free. Distributions may be tax free if you pay qualified medical expenses. An HSA is “portable,” meaning it stays with you if you change employers or leave the workforce. To be an eligible individual and qualify for an HSA, you must be covered by a high deductible health plan (HDHP). Your maximum contributions for the 2020 tax year are $3,550 for individuals and $7,100 for families, plus an extra $1,000 catch-up contribution for those aged 55 or older. Contributions for the 2020 tax year can be made up until May 17, 2021.Also, consider itemizing your tax deductions. Tax deductions lower your tax bill by lowering your taxable income. While the IRS doesn’t allow for retroactive deductions, it does allow you to choose between taking the standardized deduction amount or itemizing them. While itemizing takes extra time and can feel like a hassle, it may be worth it if your total deductions exceed the standardized deduction amount.
Here are two deductions that can impact your totals but are often overlooked:
Smaller, out-of-pocket charitable contributions.
While larger deductions made via checks or payroll are hard to miss, the cost of stamps to mail out a school fundraiser flier or the miles driven in service of a charitable organization tend to fall through the cracks. Small expenses add up quickly.
Medical expenses not covered by your insurance.
Medical expenses that exceed 7.5% of your adjusted gross income can be taken as a deduction. And there is a very broad list of qualifying expenses to consider, including Medicare Part B and Part D premiums. Find your receipts and tally the costs.
Preparing your taxes is a year-long event, not just a one-day conquest. Staying organized throughout the year will help ensure that none of your deductions or contributions are overlooked or forgotten this time next year.
Once you complete this year’s taxes, you may wonder what to do with that pile of records, 1099s, receipts, and bank statements. The IRS recommends holding on to any documents related to the income you’re reporting or any deduction or credit you’re claiming, including:
- Proof of income, including W-2s and 1099s, bank and brokerage statements, K-1 forms, and spousal-support payment records
- Bills and invoices, credit card statements, mileage logs, and canceled checks
- Financial records related to real property, including paperwork from the purchase or sale of a home and all documents associated with the costs of buying, selling, or managing rental properties
- Investment records related to stock transactions, IRAs, and other retirement accounts
If you’re unsure whether to keep a document or not, err on the side of caution and store it in your files. How long you should hang on to all those documents varies, depending on the action, expense, or event that the document records. The IRS has the right to review all tax returns filed during the Period of Limitations. This is the time when you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. That period is typically three years from the date you filed for any given year.
Consider keeping some documents past three years. For example, the IRS recommends keeping employment tax records for at least four years after related taxes become due or are paid, whichever is later. Keep your property tax records until the period of limitations expires for the year you dispose of the property. Retain your tax returns and related documentation for six years or more if you have reason to believe you may have under-reported your income by 25% or more.
It’s best to create digital copies of all your documents. That way, if the printed version is lost or destroyed, you’ll have a backup.
I am happy to work with you and your tax professional to help keep your financial records up-to-date and create a personal financial plan tailored to your habits and lifestyle. Don’t hesitate to reach out if you have questions or need help.