Before you know it, the deadline to file your 2020 income taxes will arrive. That makes now the perfect time to learn how taxes might be different this year and to look for ways to reduce what you owe and maximize your refund.
Here are a few essential tips about preparing your taxes for this year and links to a few Money Matters articles that may help.
How Can I Prepare for Tax Day 2021?
Filing your 2020 taxes will be strikingly similar to filing your 2019 taxes. The Tax Cuts and Jobs Act of 2017 remains in effect, so tax brackets and deductions haven’t changed.
What’s the Difference Between Tax Deductions and Tax Credits?
A tax deduction lowers the amount of your income that’s taxable. Say, for example, you earn $50,000 before any federal tax deductions, but you contribute $5,000 to your workplace 401(k). The $5,000 is deducted from your taxable income, so you owe taxes on $45,000, not $50,000.
A tax credit directly changes the amount of tax you owe and comes in two types: nonrefundable and refundable. Let’s say you owe $2,000 in taxes but have a $2,500 nonrefundable tax credit. Your tax bill would be reduced to zero. Because the credit is nonrefundable, it can only reduce how much you owe. If you owe $2,000 in taxes and have a $2,500 refundable credit, though, you would get a $500 refund.
Learn more: Personal Finance 201: Tax Credits vs. Tax Deductions
What Are Tax-Advantaged Savings Accounts?
Tax-advantaged savings accounts help you save for the future and on your yearly income taxes at the same time. Looking for a way to reduce your 2020 tax bill? Contribute to a traditional IRA before April 15, 2021, and you could deduct your contribution from your 2020 taxable income.
Learn more: Getting to Know Tax-Advantaged Savings Accounts
How Does Investing Money Affect My Taxes?
If 2020 was the year you began investing your money, then you made a very smart move—the markets saw impressive gains after a low point in March. Now, you can make an even smarter move by learning how investing affects your taxes. If you haven’t sold any of your investments yet, dividends are likely to be your first experience with investment-related taxes, and capital gains and capital losses will come later in your investing journey. If you did sell stocks this year, you will most likely owe taxes on any profits, or you may be able to write off any losses. But the amount you owe will depend on whether you owned the stocks for more or less than a year.
Learn more: How Investing Money Affects Your Taxes
What Tax Deductions Am I Missing?
The Tax Cuts and Jobs Act led many people who had previously itemized their tax deductions to opt for the increased standard deduction instead. But if you still itemize your taxes, or need to decide whether you should, the infographic at the link below is for you. Use the examples of charitable contributions and medical, moving or business expenses that others have successfully deducted to figure out which receipts and documentation to collect.
Learn more: Tax Deductions That May Surprise You
Can I Pay Less on My Property Taxes?
Most people pay close attention to saving money on their income taxes but don’t realize they could reduce their property tax bill. If you’re a military veteran or senior citizen, you may be eligible for property tax credits. Or your property may be overvalued, and if it is, you can appeal to your state or local government to have it reassessed and potentially save money. Learn more in the podcast below. (As a bonus, you can also find out whether it’s ever a good idea to lend money to a family member and how to maximize your Social Security benefits.)
Learn more: Podcast: Property Taxes, Lending Money to Family, Social Security
How Can I Avoid Owing Taxes?
A large, unexpected tax bill is never fun, but it can also be a learning experience. If you end up owing a lot on your 2020 taxes, and you expect the main factors that affect your taxes to remain the same in 2021, consider taking a few simple steps to avoid another stressful surprise. Adjust your withholding through your employer or increase contributions to a traditional 401(k) or traditional IRA. Look into which deductions and credits you qualify for, some of which we’ve described above.
Learn more: Owe Taxes This Year? Here’s How to Plan Better for Next Year
What Should I Do with My Tax Refund?
If you get a large refund, you may be tempted to splurge. Before you do, think about this: The government has been using your money interest free. Put your money to work for you instead by depositing your refund into a Roth IRA or paying down credit card debt, if you have any. After you do that, adjust your withholding so you stop lending Uncle Sam your hard-earned cash. Put the extra take-home pay into a high yield savings account or money market account. Or set up an automatic monthly contribution to your Roth IRA. One day, you’ll take a look at your savings balance and thank yourself for making excellent use of your money.
Learn more: Getting a Tax Refund? Pay Your Future Self a Bonus
How Could the 2017 Tax Code Changes Impact My Savings?
For many Americans, the Tax Cuts and Jobs Act increased their take-home pay. If you’re one of them, consider saving your extra money and maximizing its value by putting it into a high-interest savings account, money market account or certificate of deposit. Add to your retirement savings by depositing your extra take-home pay into a Roth IRA. Or, if you have school-age children, look into a 529 savings plan, which you can use to pay not only for college costs but also for elementary or secondary school tuition or expenses at all public, private and religious schools.
Learn more: Tax Code Changes That Affect Your Savings Strategy
What Tax Moves Should I Make Before Year-End?
Did you contribute to a flexible spending account (FSA) in 2020? If so, now is the time to do two things. First, check the deadline for spending your funds. Some employers require you to spend your money by December 31, but some give you a grace period, allowing you to spend 2020 FSA funds in the first few months of 2021. Other employers allow you to roll over a portion of unused FSA funds to the following year. Second, gather receipts. New expenses are now eligible for FSA reimbursement, including over-the-counter medications and menstrual care products. Don’t forget receipts for doctor copays and prescriptions, which remain FSA-eligible. The following article also includes useful tips you can use this year to plan ahead for your 2021 taxes.
Learn more: 5 Tax Moves to Make Before Year-End
How Are Taxes Different if I’m a Gig Worker?
If you’re self-employed or have a side hustle, you may be wondering which business expenses you can and can’t deduct. For example, do you have a home office? Have you bought a new laptop or software for your business? If so, how much of the cost can you deduct? The sooner you know the answers to these questions, the sooner you can organize your records and the easier filing your taxes will be.
● Learn more: Taxes: They’re Different With a Gig
What Tax Changes Might Come with the Biden Administration?
President Joe Biden’s tax plan would change many aspects of individual and business taxes. The majority of tax increases would fall on people earning more than $400,000 per year, or the top 1.5% of earners, according to an analysis by researchers at the University of Pennsylvania. To help low- and middle-income families, Biden’s tax plan includes a range of tax credits related to child care, healthcare expenses and retirement savings.
But a new Biden administration tax plan remains a proposal. For your taxes to change, the plan will have to become law, and that will require several steps. Not only that, but the proposal could look very different by the time it’s turned into law, if it’s passed at all.
Taxes Come Every Year
There is no way to avoid taxes, but luckily there are many ways to reduce your overall tax burden. Federal and state tax codes can be complicated, so a tax specialist or accountant may be able to provide you with money-saving tips or strategies beyond what we’ve discussed here. Many of them also offer free consultations—take them up on the offer!
Elizabeth Whalen is a freelance writer based in Seattle. She loves writing about business, financial services and sustainability.
READ MORE: Owe Taxes This Year? Here’s How to Plan Better for Next Year