Tips for making your 2020 tax return preparation easy and accurate.
One of the most important things you can do to prepare your tax returns yourself or to turn them over to a professional is to ORGANIZE!
Pull out your prior year return to compare what you had last year to what you should have for the current year.
Things do change, but usually if you had reportable interest or dividends in one year, you are likely to the next year. Find a convenient place to keep important tax documents as they come in by mail. When you think you have almost everything, sit down and go through them comparing to the prior year.
You may think that you are not in a position to itemize deductions since the rules changed in 2018 HOWEVER, if you are close to the Federal limit, but slightly under, you should still prepare the return both with itemized deductions and without to properly compare.
Many states do not allow you to itemize unless you itemize on the Federal return and unlike the Federal, the state standard deductions tend to be very low.
It is possible that you elect to itemize and have a higher Federal tax to be able to save even more on the State taxes. You never know until you try! Also, new for 2020, even if you don’t itemize, you are able to deduct up to $300 in CASH contributions to a qualified charity. Note, donations of goods can’t be included in this.
If you are self-employed, make sure you have all of your business deductions. These may include automobile mileage for business use and office-in-home deductions. Most self-employed persons should consider making estimated tax payments. These are due throughout the year as quarterly tax payments, but the due dates are sometimes confusing: 1st payment for the following year is due by April 15, the 2nd payment is June 15, 3rd is September 15 and the 4th and final is due by January 15 of the following year.
Some tax savings measures can include making a contribution to an IRA account (if eligible) or a Self-Employed IRA (known as a SEP) if you are self-employed.
These give you an opportunity to lower your current taxable income by putting money into your retirement account where it can grow tax free. IRAs are usually due by April 15 while SEP payments can be made as late as October 15 if you have filed an extension for your return.
Speaking of extensions, a big misconception is that if you go on extension, you will not have to pay a balance due now. This is not correct! An extension gives you more time to file, but no additional time is given to pay a balance due. You should do your best to calculate what you expect to owe and pay as much as you can by April 15 with the extension form (Form 4868). This will reduce the amount that the IRS will charge you for penalties and interest on your late payment!
Last note for 2020, if you were struggling due to COVID and took a distribution from an IRA or company retirement plan, you can spread the distribution over 3 years (2020 – 2022) to minimize the tax impact.
Begin working on your taxes today, so you can get them completed, get your refund, make an IRA deduction and/or file and extension and pay by April 15th!
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