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Life Area: Financial | Topic: Tax Planning
6 Year End Tax Moves to Set You Up for Success in the New Year
It’s hard to believe that we’re in the last quarter of the year! With the year coming to an end, now is a great time to make some easy and smart tax moves to help lower your income tax bill when you file. These six quick and easy tax tips will help you get your finances organized and save money at tax-time before the year ends!
1. Defer compensation
If you can delay any compensation until the beginning of next year, do it, you won’t have to pay taxes on it when filing your 2020 taxes.
2. Accelerate deductions
There are a handful of tax deductions that are recognized the year in which you pay them. For example, if you own a home, get a mortgage interest deduction, and if you make an extra mortgage payment on Dec. 31, you may be able to claim the additional interest paid as a tax deduction in the tax year paid.
3. Donate to charity
This is a win-win. With the holiday season coming, it is a great time to clean out your closet and household goods a donate to those in need. You can help someone in need and reap the benefits of a tax deduction for non-cash and monetary donations given to a qualified charitable organization if you can itemize your tax deductions.
Typically if you make a charitable donation to a qualified charity, you can deduct the contribution if you itemize your deductions. However, under the CARES Act, there is the addition of a new charitable deduction up to $300 on your 2020 taxes for your cash donations made to a 501(c)(3) organization even if you don’t itemize and claim the standard deduction. This will be something to keep in mind since close to 90% of taxpayers now claim the standard deduction instead of itemizing and are no longer able to deduct charitable contributions under tax reform.
The CARES Act also temporarily eliminates the limit placed on the number of cash contributions you can deduct if you itemize your deductions. Usually, cash donations that you can deduct are limited to 60% of your adjusted gross income, but the CARES Act eliminates the limit for tax year 2020 returns (the ones you file in 2021).
If you can delay any compensation until the beginning of next year, do it, you won’t have to pay taxes on it when filing your 2020 taxes.
4. Take a class
Taking a course to advance your career or improve skills is also a great way to lower your taxes and boost your tax refund. Paying for next quarter’s tuition by Dec. 31 may give you a valuable tax credit up to $2,000 with the Lifetime Learning Credit.
5. Maximize your retirement
Another great way to reduce your taxable income while building your nest egg is to make a contribution to your retirement savings account. Whether you contribute to a 401(k) or a Traditional IRA, you can reduce your taxable income and also save for the future. If you are self-employed and contribute to a SEP IRA, you can contribute up to the lesser of 25% of your net self-employment income or $57,000 for 2020.
6. Spend your FSA
If you have a Flexible Spending Account and have money left, get caught up on your doctor visits. While the old “use it or lose it” rule may not still apply, you may only be able to carry over $500 worth of unused money left in your 2020 FSA account at the end of the year. Your plan may also limit the amount of time you’re able to use your funds to 2 1/2 months after the end of the plan year.
Two bonus tips:
Make W-4 Withholding Allowance Adjustments
2020 brought A LOT of changes for us all and some of those changes may be reflected in your 2020 earnings…either up or down, depending on your personal circumstances. So… going into a new year you may want to revise the amount of taxes withheld from your paycheck by adjusting your withholding on your W-4 and refiling the form with your employer.
Real and Personal Property Taxes
Do you pay home property taxes, pay state taxes, or did you make a large purchase and pay a lot of sales tax? You can still deduct the amount of state and local property, income or sales taxes up to $10,000. In the past, these taxes have generally been fully tax-deductible.
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