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Tax Day 2021 will be here before we know it. While many Americans will wait until the final days leading up to April 15th to put their paperwork together and file, there are a number of reasons that you should consider starting on your 2020 return before the calendar year ends.
Here are six ways your taxes filed in 2021 will differ from your prior-year return...
In an effort to encourage Americans to contribute to charitable causes and non-profits during the Coronavirus pandemic, The IRS will allow taxpayers to reduce their adjusted gross income (AGI) by as much as $300. This tax change was part of the CARES Act.
These contributions must be in the form of cash, check or credit card payments, and you must have the proper documentation.
This adjustment is helpful because it also impacts other aspects of your financial life. Medicare Part B and Medicare Part D premiums and programs at the state level are tethered to AGI. This means having a lower adjusted gross income can reduce those premiums or make you eligible for additional state programs.
Normally, taxpayers are allowed to write up charitable donations on their federal tax return if they itemize deductions. On your 2020 return, you aren’t subject to the $300 limit for charitable contributions on itemized deductions, however they cannot go toward a reduction in income.
The CARES Act also waived required minimum distributions (RMDs) for 2020 tax returns. In a normal tax year, they are taxable income. This could mean that some retirees will have lower taxable incomes, thus owe less in federal income taxes in 2021.
Contribution limits for health savings accounts (HSAs) typically increase year by year due to inflation. This is no different for your 2020 tax return. In fact, the contribution limits for HSA-eligible workers with high-deductible health insurance policies are:
Self-only coverage: $3,550 — ($50 increase from the previous years’ return)
Family coverage: $7,100 — ($100 increase from the previous years’ return)
Line 30 on your 2020 return has been reserved for something that the government is calling a recovery rebate credit. This refers to the stimulus payments you received.
You can receive an additional credit if your 2020 tax return has a smaller AGI than the one that was used to calculate the initial stimulus check or if you have additional dependents.
Make sure you have the letter from the IRS telling you how much you received in your stimulus check. It is Notice 1444 that you want to have available when you are filing your tax returns.
There are numerous legal loopholes you can jump through to reduce what you owe, but they need to be taken advantage of now.
Contribute to a College Savings Plan for your children or grandchildren. When your children or grandchildren go to college, payouts from the accounts that are used for tuition, fees, and books will be income tax-free.
Track your mileage. You can deduct a certain amount of mileage expenses for using your vehicle for work or business, medical, or charitable purposes. Find out the latest deductible mileage rates.
Adjust your paycheck withholding with a Form W-4. Recent IRS statistics show that almost 100 million of all Americans get a tax refund check, and the average refund check is $2,400. So why not get some of this refund now as part of your regular paycheck? Every month most taxpayers pay an average of $200 too much in income taxes.
Look into tax-free income. Tax-free income is compensation you receive which cannot be taxed by the IRS. Find several examples of expenses that can be paid or reimbursed by your employer without burdening you here.
The Coronavirus relief bill allows for distributions from a retirement account, including an IRA, to be handled differently if the taxpayer was impacted by COVID-19. It does not require the individual to have contracted Coronavirus, simply to have had their economic life disrupted by it. That could involve being quarantined, furloughed, laid-off, seen a reduction in work hours, or have been unable to work because you could not find child care.
For those that this impacts, there will be no 10% penalty if you take a distribution while under the age of 59½, the distribution will be spread over three years, and the taxpayer may repay the amount taken out over three years and avoid taxation.
You are required to self-certify so be sure to have documentation, including any medical records, notices from your employers or notes describing your circumstances.
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