The clock is running out to trim your tax bill for 2020, but there are some strategic steps you can take now to save money later and make the tax filing season less stressful.
The good news is that while 2020 has been a challenging year, it’s also provided some unique tax opportunities.
If you’re in a generous mood, for example, there’s no better time than the present to give to a good cause. That’s because the CARES Act, the major relief bill that went into effect during the pandemic, gives donors an added incentive to be charitable.
For 2020 only, taxpayers who take itemized deductions on their tax return can deduct up to 100% of their adjusted gross income (AGI) for donations to charities. In any other year, charitable gifts are limited by a percentage of your AGI.
If you claim the standard deduction on your tax return —$12,400 for singles and $24,800 for married couples — the CARES Act also has a charitable giving provision. In this case, you can take an above-the-line deduction for up to $300 in cash donations to charity.
Consider converting to a Roth IRA
If you’ve lost income during the COVID-19 economic downturn, you may want to consider converting your traditional individual retirement account (IRA) into a Roth IRA. After-tax dollars you save in this account grow tax-free over time and could be tapped — free of taxes — in retirement, depending on which state you live in.
“In the current environment, where asset values may still be low, and with the potential that tax rates may increase in the future, the Roth IRA conversion is even more attractive between now and the end of 2020,” said Dave Cherrill, a certified public accountant.
Take advantage of business deductions
The pandemic forced millions of people to work from home or start a side-gig to make ends meet. That means there are plenty of business deductions to be had.
Most spending on materials and equipment for your home office are considered “ordinary and necessary” and therefore, can be deducted. Just be sure to keep all your receipts and track business expenses.
Prepay residential real estate tax
If you can swing it, you may want to prepay your 2021 real estate taxes to get a 2020 discount. It used to be that prepaying real estate taxes would trigger the alternative minimum tax (AMT), but with the current AMT exemption and a $10,000 cap on state and local taxes, AMT is not as much of a concern.
Update your tax withholdings
It’s never too early to start planning for next year’s taxes. According to a survey from the American Institute of CPAs, 45% of taxpayers don’t know when they last updated their withholding.
An inaccurate withholding on your W-4 form could lead to an alarmingly large tax bill or a smaller-than-expected refund.
“Taxes are a mystery to Main Street America, but they don’t always have to be and changing your withholding is a really important part of that equation,” said H&R Block CEO Jeff Jones.
“We do tax check-ups for people mid-year and we’re constantly asking people, did you have a life change, did you move, did you have a job change, did you have a baby? All those things can be reasons to change your withholding,” Jones said.
If you’re getting a big check from Uncle Sam in the spring, it means you overpaid the IRS the prior year. But, if you wind up with a hefty tax bill, you probably paid too little tax throughout the year.
Unlike this year, don’t expect the IRS to extend the tax filing deadline again.
“At this point, the IRS feels very confident in starting the tax season and ending the season on time,” Jones said.
Alexis Christoforous is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AlexisTVNews.