5 Ways to Begin Preparing for Your 2020 Tax Return
By Ashley Sly, CPA
I will admit that I am often accused of being overprepared. Take for instance going to the pool with my two kids. There are the essentials we take along such as lifejackets, sunscreen, and towels but I also feel it’s necessary to take along multiple snack options for everyone along with plenty of drinks and aloe vera. This can drive my husband nuts with the number of bags I pack for a simple trip to the pool. However, being prepared can eliminate stress and allows us to enjoy our pool trip longer because no one is getting hangry, thirsty, or too much sun.
I like to take the same approach with taxes. We are well over halfway through the year, so it’s time to start preparing for your 2020 tax return. There are five things you can consider and prepare for now to provide tax savings or alleviate headaches when you file your 2020 tax return.
- Take Advantage of 2020 Charitable Contribution Provisions - Whether you take the standard deduction or itemize, there are opportunities for tax savings when you donate to nonprofit organizations in 2020. Prior to 2020, taxpayers who took the standard deduction (approximately 85% of all taxpayers) received no benefit for charitable contributions. However, for the 2020 tax year, taxpayers who take the standard deduction are allowed to take a deduction for cash donations up to $300 (it is still unclear if married filing joint would be up to $600). Those who itemize their deductions can now deduct contributions up to 100% of their adjusted gross income in 2020 instead of the 60% limitation in 2019. This means that taxpayers could wipe out their income tax liability in 2020 through charitable donations. What can you do now? If you take the standard deduction make at least a $300 contribution to nonprofit organizations. If you itemize, consider making a larger gift to take advantage of the 100% deduction. Be sure to retain documentation of your gift to provide to your tax preparer.
- Stimulus Payments– There are still a lot of unknowns regarding if and how the stimulus payments will impact taxpayers’ 2020 return. The stimulus payment is not taxable income, however, it is likely you may have to document the amount you received on your 2020 tax return. The amount of payment you received was based on your 2018 or 2019 tax return depending on when you filed your 2019 return. If your income changed drastically from 2018 or 2019 to 2020 and you did not receive the full stimulus payment, you may be eligible to receive additional funds as a credit on your 2020 tax return. What can you do now? Document the amount of stimulus payment you received in March and retain any documentation of any other stimulus payment made in 2020. It is likely you will have to provide this information to your tax preparer and you don’t want to miss out on additional funds or hold up your tax return looking for this information a year after you received the payment.
- Review Your Health Savings Account (HSA) Contributions – Contributions to an HSA are tax-deductible, do not have to be used within one year, grow tax-free, and are distributed tax-free if used for qualified healthcare expenses. If you have a high-deductible insurance plan and are eligible for an HSA, it is recommended you take full advantage of the maximum contribution amounts each year. In 2020, the maximum amount you and your employer together can contribute to an HSA is $3,550 for yourself or $7,100 for a family plan with a catch-up contribution of $1,000 for those 55 and older. What can you do now? If you are eligible and have not already done so, sign up for an HSA to take advantage of tax savings. If you already contribute, make sure you are not over-contributing to your HSA. If you go over the contribution limit, you will need to remove the excess contribution or pay a 6% excise tax and income tax on any excess contribution until corrected. It is easier to adjust your contributions now rather than work with your HSA provider after the fact to withdraw the excess funds.
- Consider Skipping your 2020 Required Minimum Distribution (RMD) – With the CARES act, you can temporarily waive receiving your RMDs in 2020. If you do not need the money, waiving the 2020 distribution allows for additional time for those funds to recover from the stock market downturn. In addition, you can defer your income tax payment on these funds to future years. What can you do now? Discuss your RMDs with your financial provider and consult with your tax preparer to determine what strategy is best for you.
- Make estimated tax payments. If you are expected to owe $1,000 or more when your individual tax return is filed, then you should consider making estimated tax payments to avoid penalties and interest. The IRS has a safe harbor provision that will eliminate these penalties and interest if you pay in at least 90% of your expected 2020 tax liability or at least 100% of your 2019 tax bill for those married filing joint taxpayers with adjusted gross incomes under $150,000 ($75,000 for single) and 110% of your 2019 tax liability for those making more. In addition to eliminating penalties and interest, estimated payments relieve the burden of large lump sum payments due when your tax return is filed. What can you do now? The first and second estimated payment deadlines have passed, however, you can still make payments for the third and fourth quarter. The deadlines are on September 15, 2020 and January 15, 2021. If you are unsure of the estimated payment amounts to make or feel like your income situation has changed for 2020, discuss with your tax preparer to determine estimated payment amounts. Also, if you prefer to make payments electronically, set up your account with the Electronic Federal Tax Payment System (EFTPS) now in order to use it to make a timely third quarter federal tax payment.
Taking the time to prepare for your 2020 taxes now may yield tax savings and eliminate headaches later. If you are unsure if these considerations apply to you, have questions, or are looking for additional tax saving ideas, call or email the MHCS tax team.
Ashley Sly, CPA | Manager