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Believe it or not, it’s already the season for filing your 2020 income tax return. So, it’s too late to cut your taxes because the year is over — or is it? Here are some timely strategies that could still make a difference for your tax bill.
Last-ditch efforts
Consider these potential last-minute tax-saving methods:
Contribute to an IRA. Generally, traditional IRA contributions are fully or partially deductible unless you (or your spouse, if married) actively participate in an employer-sponsored retirement plan and your modified adjusted gross income (MAGI) exceeds certain limits.
Best of all, you have until April 15, 2021 (perhaps longer if filing deadlines are extended again like they were in 2020), to make a contribution that is deductible for the 2020 tax year. The maximum contribution is $6,000 ($7,000 if you were age 50 or older on Dec. 31, 2020).
If you act quickly, you can even claim a deduction on your return and use your tax refund to help fund the contribution, as long as you deposit the money in the IRA by the April 15 deadline.
Contribute to an HSA. The deadline for contributing to a Health Savings Account (HSA) is April 15. Note that you’ll need to reduce the amount that you’d otherwise be eligible to contribute by the amount of any contributions made by or through your employer.
Pick the best higher-education tax break. Currently, parents who pay a child’s college expenses can generally choose between one of two higher education credits and a tuition-and-fees deduction, subject to certain limits. Crunch the numbers before you make your tax return choice.
The maximum American Opportunity Tax Credit (AOTC) is $2,500 per student, while the maximum Lifetime Learning Credit (LLC) is $2,000 per filer. Thus, the AOTC is generally preferable. But both credits are phased out based on MAGI. The LLC is phased out at lower MAGI levels, but it can be used for expenses beyond the first four years.
Finally, the tuition-and-fees deduction is either $4,000 or $2,000, depending on MAGI, and unavailable if MAGI exceeds certain limits. Remember that a credit is more valuable than a deduction of the same dollar amount.
Don’t forget capital loss carryforwards. In the usual scenario, gains and losses from sales of capital assets like securities offset each other. The maximum tax rate on long-term gains is generally 15% (20% for high-income investors). Notably, capital losses offset capital gains first and then up to $3,000 of high-taxed ordinary income. Any excess capital losses are carried forward to the next year.
Therefore, if you have losses carried forward from 2019, they may offset capital gains realized in 2020. This is especially beneficial if you’re recognizing short-term gains that would be taxed at ordinary income tax rates — up to 37% — in addition to, potentially, the net investment income tax of 3.8%. And that’s before considering any state income tax implications.
Work on a home office deduction. If you’re self-employed and run your business from your home, you may qualify for a home office deduction. This includes direct expenses and a portion of indirect expenses — such as utilities, repairs, insurance, mortgage interest, and property taxes — based on the business use percentage of the home.
For your convenience, the IRS has approved a simplified method for deducting home office expenses. The deduction is equal to $5 per square foot of the home office, up to a maximum of $1,500.
Normally, the traditional method for deducting expenses is more of a hassle but will produce a bigger deduction. It requires records for expenses based on the business use percentage of the home.
Scour records for medical expenses. It’s usually difficult to qualify for a medical expense deduction. Reason: You may deduct unreimbursed expenses only above an annual threshold based on your adjusted gross income (AGI). Prior to the Tax Cuts and Jobs Act (TCJA), the threshold was 10% of AGI.
But the TCJA temporarily lowered the threshold to 7.5% of AGI. Subsequent legislation extended the 7.5%-of-AGI threshold through 2020. So, this might be your last good shot at a deduction.
Don’t let anything slip through the cracks. Go over your records thoroughly. Look for deductible expenses that might have slipped through the cracks. Remember to include amounts you paid for dependent relatives.
Get professional advice
These are just a few ways you can still reduce your 2020 tax liability. Consult with your Belfint advisor for tweaks tailored to your specific situation.