Last-minute Tax Moves That Pay Off
A Dozen Ways to Boost Your Refund or Cut Your Bill
CPA and Turbotax tax expert Lisa Greene-lewis.
To claim it, you simply need to fill in the missing sum on line 30 of your tax form 1040 or 1040-SR. (Figure out how much to enter by completing the Recovery Rebate Credit worksheet on page 58 of the 1040 instruction booklet.) Even if you’re not normally required to file a tax return, you must complete this form to get that missing stimulus money.
If the IRS agrees that you’re owed stimulus money, it will not be mailed or direct deposited into your bank account as previous payments were. Instead, the IRS will either add the amount to your refund or reduce the tax you owe by that sum.
Contribute to a Traditional IRA
Unlike other types of retirement savings accounts, traditional IRAS allow you to make contributions for the previous year right up until the tax-filing deadline. This year, that means you have until May 17, 2021 to put money in this account to reduce your taxable income for 2020.
You can stash up to $6,000 in a traditional IRA, or $7,000 if you’re 50 or older. Your contributions will reduce your taxable income dollar for dollar as long as neither you nor your spouse is covered by a retirement plan at work or your income falls below certain thresholds: $65,000 for single filers and $104,000 for married couples. Above those income levels, the tax break phases out and disappears completely once income exceeds $75,000 for singles and $124,000 for married couples.
If you qualify, the savings can be substantial. For instance, a single filer earning $50,000 last year who contributes the full $6,000 to an IRA would boost their refund or cut their tax bill by $720, according to Turbotax.
When you contribute, just be sure you specify that the money is earmarked for 2020, says Greene-lewis. Don’t have a traditional IRA? Not to worry, you can open an account in 2021 and still make contributions that count for 2020.
A single filer earning $50,000 last year who contributes $6,000 to an IRA will boost their refund or cut their tax bill by $720.
Save for Your Spouse’s Retirement, Too
If your wife or husband didn’t earn any income last year—perhaps more likely than in years past as many left the workforce via layoffs or to care for children at home or older relatives hit harder by COVID-19—YOU can take advantage of an often overlooked tax move: funding a spousal IRA, says New York City financial planner and CPA Robert Westley.
These accounts are set up under the spouse’s own name and come with the same rules and contribution limits as a regular IRA. The only catch is that the total contributions made to each spouse’s IRAS cannot exceed the compensation earned by the working partner. As long as the partner with income makes more than $12,000 ($14,000 if 50 or older), this shouldn’t be an issue, and you’ll be able to sock away the $6,000 or $7,000 max in each account.
Put Money in a SEP, if You’re Self-employed
Small business owners and self-employed workers can save for retirement in a different kind of IRA, called a Simplified Employee Pension IRA or SEP, that offers higher contribution limits and more generous tax savings.
For the 2020 tax year, you can sock away up to $57,000 in a SEP, or up to 25 percent of your compensation—nearly 10 times more than the max for a traditional IRA. Because of those higher contribution limits, the tax savings can be huge. When Irvine, California, financial planner Henry
Hoang helped a client establish a SEP IRA for his side hustle, it ended up saving the man close to $10,000 in income taxes between his federal and state returns.
The other benefit to using a SEPIRA? You can delay 2020 contributions all the way until October 15 this year, rather than just until May 17 as with a traditional IRA. But you will need to complete a tax filing extension form in order to do so, says Westley. This can be a great tool, if you’re waiting to fund the account until you see how much income tax you’ll likely owe, he adds.
One caveat: If you employ other people in your business, the company must contribute the same amount to all workers’ SEP IRAS. You can’t elect, as the business owner, to reward yourself more.
Save More for Health Care Costs
It’s always wise to make sure you have a little extra money tucked away in case of an unexpected medical bill, but especially so during a pandemic. If you have insurance coverage through a high-deductible plan, you can save for future health expenses through a Health Savings Account (HSA) until May 17 of this year—and cut your tax bill at the same time.
Similar in structure to an IRA, contributions to an HSA reduce your taxable income dollar for dollar—you can stash up to $3,550 away for 2020, if you had individual coverage, or double that, $7,100, if you had family coverage, up until the filing deadline (taxpayers 55 and older can kick in an extra $1,000). Save the maximum and you’ll boost your refund or reduce the amount you owe by around $780 if you have an individual plan or about $1,560 if you have a family plan, assuming you’re in the 22 percent tax bracket.
Other benefits to HSAS: You won’t pay any taxes on money you withdraw to pay qualified medical expenses, and gains on any investments in the account grow tax-free as well.
To open and fund an HSA, your health insurance last year had to have a minimum annual deductible of $1,400 for individual coverage or $2,800 for family coverage and a maximum annual deductible of $6,900 for individual coverage and $13,800 for family coverage. While contributions are commonly made through pre-tax payroll deductions if you get health coverage through work, you can put additional funds into an HSA anytime; the same is true if you bought a high-deductible plan via an ACA marketplace.
Get Rewarded for Your Generosity
In a year when the need was greater than ever, more than half of all Americans, 55 percent, donated to a
charity in 2020, according to an Invisibly survey. If you’re among them, the CARES Act now allows you to deduct up to $300 in cash donations to a qualifying nonprofit on your 2020 return, even if you don’t itemize.
That’s big news because, since the passage of the Tax Cuts and Jobs Act in 2017, the only way to get a tax deduction for donating has been to forgo the standard deduction and itemize your return, something only 13 percent of Americans actually do.
Donations must have been made by cash, check or credit card to count. Contributions of physical goods won’t work.
Take an Extra Credit
If you’re planning to take advantage of the extended filing deadline to save in your IRA or were contributing to it or another retirement savings account throughout 2020, you may be eligible for the Saver’s Credit. A tax credit reduces the amount of tax you owe directly, increasing your refund or cutting your tax bill dollar for dollar; that makes them more valuable than deductions, which instead reduce your taxable income.
The IRS rewards lower-income earners (married couples earning up to $65,000; singles making up to $32,500) who are for saving for retirement by offering them a tax credit worth up to $1,000 for single filers and $2,000 for married joint filers. Depending on your income, the credit will be either 50 percent, 20 percent, 10 percent or zero percent of the amount you contributed to an IRA, Roth IRA, 401(k), 403(b) or other retirement plan.
Maximize a Low-income Year
If you suffered a layoff, furlough or drop in earnings last year due to the pandemic, you might be newly eligible for the Earned Income Tax Credit.
Only given to those with low incomes, this generous and refundable credit can knock up to $6,660 off your taxes, or, if you owe nothing, boast your refund by that much. But you must have received at least some compensation from an employer or self-employment work last year to qualify. Unemployment benefits, Social Security and child support, for instance, do not count, says Turbotax’s Greene-lewis.
Thanks to the Taxpayer Certainty and Disaster Tax Relief Act, you can use either your 2020 or 2019 income to calculate whether you qualify and get the biggest credit.
Get a Discount for Child Care Costs
If you paid for day care, after-school programs or summer day camp for your child last year so you could work or look for work, you may be able to get a tax credit for those expenses— up to $3,000 of your bills for one child, or $6,000 for two or more.
Anyone with child care expenses for kids under age 13 or offspring who are not mentally or physically able to look after themselves can claim the Child and Dependent Care credit, regardless of income. But the tax break is worth more to lower-income families: Those
making less than $15,000, for example, can take 35 percent of child care costs whereas someone making more than $43,000 can only take 20 percent off.
Claim Your Freelance Costs
Because of the pandemic, 12 percent of the U.S. workforce began freelancing for the first time last year, an Upwork survey found. If you were among them, know that starting your own business opens up a whole other world of possible tax breaks.
For instance, if you worked out of your home or use part of it for your freelance work, you can deduct a portion of the mortgage or rent, property taxes, utility costs and similar expenses.
But there are a couple catches to this. You typically must be self-employed to get it as the IRS doesn’t allow those who are employees to take it. And the deduction is limited to the home’s square footage that is used “exclusively and regularly” for business activities. So if your home office equals 10 percent of the home’s space, then a tenth of your housing expenses for the year may be deductible.
Alternatively, you can skip this and opt for the simplified version of the Home Office deduction. This option lets you deduct $5 per square foot of home used for the business, up to 300 square feet. You won’t have to do as many calculations or keep as many records this way, but you could end up with a lower deduction.
Self-employed workers can also get a deduction on health and dental insurance premiums if they purchased the coverage for themselves or their family. One snag though—married joint filers can’t have a spouse who is eligible to enroll in an employer’s plan.
Pick the Best Filing Status
If you’re not married, should you file as a single or head of household? Picking the wrong filing status is a common but costly mistake, says Woburn, Massachusetts, financial planner and CPA James Guarino, since the head of household designation offers more generous tax credits and deductions than filing as a single, plus higher income limits for claiming those breaks.
To be eligible for head of household status, you must have a child who is either under age 19 (or 24, if he or she is a full-time student) or disabled, or another dependent for whom you provided more than half of their support last year, typically a close relative such as a parent. Review the IRS’S definition here to see if you qualify.
Because of the pandemic, 12 percent of the U.S. workforce began freelancing for the first time last year.
Carry Over Past Tax Breaks
Finally, you’ll want to look over your most recent tax returns for any deductions or losses you couldn’t use fully before that can be carried forward onto your 2020 return, says Guarino.
A common example of this is if you sold an investment for less than the price you paid for it. The IRS only allows up to $3,000 of losses to be used to reduce taxable income on a single year’s return. So if you sold a stock in 2019 at a loss of, say, $5,000, you’d still have $2,000 worth of that loss to claim on your 2020 return.
“You can save just by refreshing yourself about prior years’ returns,” says Guarino. “Many people forget to look back, but there can be hidden jewels there.”