Tax season is upon us, finally closing the book on the 2020 fiscal year once and for all. Before you do, consider how to make the most of your filing. First, the IRS has announced you have more time to file your 2020 income tax return. The IRS and Treasury Department has postponed the April 15 tax-filing deadline to May 17, 2021.
Plus, the IRS says you can also delay payment of any money owed to them until May 17, 2021. If you need more time to submit your return, you can request an extension (but not taxes owed) until Oct. 15, 2021, by filing IRS Form 4868.
No one really likes filing their taxes. Unless you are a certified public accountant—and a notably zealous one at that—filling out paperwork and poring over records and receipts is no way to spend a spring Saturday.
Typically, filing your taxes would be another annual and arduous rite of passage. Still, on the heels of the most challenging year most of us have ever had, putting a bow on the fiscal year and possibly clawing back some of what you set aside over the year could feel even better than an early-April walk in the park.
Don't get too excited to file just yet. Before you get started, take a few extra steps to get the most out of filing. It may mean a little more paperwork, but that paperwork should pay off—if not this year, certainly down the road. Let's look at what to do before you file your taxes for 2020.
Make Your IRA Contributions
Tax-deferred contributions to your individual retirement account are some of the finest tax breaks around. Don't forget to take advantage. By investing in your future, you can reduce your taxable income for this year while putting that money to work in the stock market, bond market, and beyond. You can contribute up to $6,000 to your IRA this year and doing so before you file could mean significant savings on your tax bill.
Meanwhile, that contribution, well-invested, can accrue interest over the years, meaning that you will still come out ahead when it's time to pay taxes on withdrawals.
If you were 50 or older by the end of 2020, you are allowed to contribute an additional $1,000 to your IRA. The extra tax benefit is known as the 'catch-up contribution.' As you get closer to retirement, you can add more to your retirement plan to, perhaps, catch-up with contributions you could not do in the past. With this perk, you can add a total of $7000 for the 2020 tax year.
The deadline for a 2020 IRA contribution is April 15, 2021. The IRA regular contribution ($6,000) and 50-plus catch-up contribution ($1,000) limits remain the same for 2021.
If your employer offers a 401(k), you can contribute additional money to that program if you are over age 50. The contribution limit for 401(k) plans is $19,500 in 2021. Those 50 or older can chip in an additional $6,500 in 2021 for a total contribution of $26,000. Remember, when you contribute money in these accounts, you lower your taxable income by the same amount - reducing your taxable income.
Don't forget your Health Savings Account. You cannot impact 2020 now, but you can add additional money to an HSA. Like the 401(k), contributions will lower your taxable income for the year. You can use money in the HSA to pay for health-related expenses, including deductibles and Long-Term Care Insurance premiums.
Remember, the money in an IRA, 401(k), and HSA grows tax-deferred and is an excellent tool to secure a successful future retirement. Remember, you will have to pay taxes on this money at some point - but as income when you take money out of the account.
Gather All Your Receipts
When it comes to securing deductions, don't leave money on the table—or, more accurately, in all the places old receipts turn up. Medical expenses and charitable donations—whether those donations are cash or merchandise—are tax-deductible. Proper documentation of these expenses can ease your tax burden for 2020, a year that has asked for the easing of burdens like few others before it.
Explore the Property Tax Deduction
You may believe that the generous break of up to $10,000 is limited to homeowners. Not so—this deduction is available for other forms of taxable ownership as well. Vehicles, boats, and even apartments that belong to a co-op are eligible. Ascertaining that you can make this claim is a big part of what to do before filing your taxes this year. If you've kept immaculate records, you should be able to find the necessary paperwork to claim what could be a crucial deduction on your tax bill.
Bigger Standard Deduction for Those Age 65 and Older
As you get older, the standard deduction gets better. The standard deduction reduces your taxable income. For married couples under age 65, the standard deduction is $24,800 in 2020.
For single individuals under age 65 and those who are married filing separately, the standard deduction is $12,400. Heads of household get $18,650.
However, taxpayers who are 65 and older get a bump up in their 2020 standard deduction, lowering their taxes even more. For married couples who are filing jointly, they get to add $1,300 per person to their standard deduction, to a maximum of $2,600 if both are older than 65.
The extra bump in the standard deduction is $1,300 if only one of the spouses is 65-plus, but the other is younger than age 65. Those unmarried taxpayers, age 65 and older, get an additional $1,650, for a total of $14,050.
However, one of the drawbacks of the higher standard deductions is it sets a very high bar for itemizing deductions. For some taxpayers, the higher standard deduction will mean no itemized deductions.
Simplified Tax Form Available for Seniors
If you are aged 65 and over and don't have a complicated financial situation, you could use the new simplified Form 1040-SR for seniors. The form is just two pages and includes a larger type and bigger text boxes.
Seniors who are still employed can very easily report their wages, salaries, and tips on this form. It also includes a handy chart showing the bigger standard deductions available for anyone aged 65 and older.
LTC Insurance Tax Benefits
Don't forget the premium for your Long-Term Care Insurance policy has tax benefits and can be included as one of your medical deductions if you do itemize. However, you cannot take both an itemized deduction and use pre-tax money from a Health Savings Account to pay for the premium. If you have self-employment income, the premium can also be a business deduction. However, you use only one of those options.
The problem of long-term care is both a cash flow issue and a family issue. Preparing your family and finances for the financial costs and burdens associated with long-term health care is key to enjoying a successful future retirement.
There are many resources available on LTC NEWS that help educate you about the options available to you for safeguard savings and income and reduce the stress on your loved ones. As you prepare for your future retirement, better consider the physical, emotional, and financial burdens that get placed on you and your family.
Find all the resources on LTC NEWS by clicking here.
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