2020 has been full of the unexpected, but this doesn’t mean you should neglect to plan for the New Year. On the contrary, now is a better time than ever to turn your attention to finances, particularly if you (like many others) suffered some financial setbacks this past year. The start of the new decade has also brought substantial financial aid to businesses and employees alike, from the Administration’s stimulus package to PPP loans and forbearance on collecting student loan interest payments. Not to mention, mortgage rates have reached a historic low, and remote work setups have slashed overhead costs for businesses and families alike. As such, it is worth taking stock of both your gains and your losses so that you know where you stand come Tax Day.
Here are eight tips to help you prepare. Please note that this does not substitute for the advice of a qualified financial professional, accountant, or tax attorney. Nonetheless, these tips can serve as a springboard for your conversations with those individuals, as well as some inspiration to start reframing how you think about your finances.
#1: Carefully review your earnings.
Last year, the Trump Administration enacted the Tax Cuts and Jobs Act, which brought monumental changes to the tax code. Among these changes, the Act revised the withholding tables. As such, you may need to confirm what you owe the IRS and ensure you are not withholding too much – or too little – from your current paychecks. To determine whether you are withholding the proper amount, consult the IRS tax withholding estimator or check with your tax preparer. This is particularly important if you made a significant transition this past year, for instance, if you gained, lost, or changed a job, or if you launched a new business.
#2: Find your tax preparer.
Even if TurboTax was just fine in past years, consider whether this may be a good year to bring in the professionals. Particularly with the economic turmoil caused by the pandemic, it may be wise to engage the help of a seasoned expert rather than trying to tackle your taxes yourself. Keep in mind, however, that accountants get busier (and more expensive!) as the tax season approaches, so it is best to reach out well in advance of the year’s end to ensure you are locked in.
#3: Max out your retirement contributions.
As always, bulking up your retirement accounts in the final quarter of the year will reduce your taxable income, and thus, your tax liability. For 2020, the maximum IRA contribution limit is $6,000. Other items to note:
- The catch-up contribution limit is $1,000 for those 50 and older.
- 401(k) participants with incomes below $75,000 ($124,000 for couples) are eligible to make traditional IRA contributions as well.
- The Roth IRA income limit is $139,000 for individuals and $206,000 for couples.
Those aged 49 and younger can max out a traditional IRA by saving $500 per month or by making a lump sum deposit before the 2020 contribution deadline, which is April 15, 2021. Consider these rules in determining how to divert any extra income at the end of the year.
#4: Protect yourself from scams.
You may have noticed an increase in scam calls from companies claiming to be the IRS. However, a government agency will rarely contact you via phone. As such, beware of these arbitrary contact attempts via phone, text, and email. To protect yourself further, consider setting up certain safeguards, like making your tax payments online or by consulting the IRS list of registered preparers to ensure yours is legitimate before divulging your personally-identifying information.
#5: Confirm your standard deduction.
The IRS has issued its annual inflation adjustments for 2021, and among these adjustments is a change in the standard deductions. The new standard deduction for married couples filing jointly in 2021 is $25,100 – a $300 increase from this past year. For single taxpayers and married individuals filing separately, it is increasing to $12,550, and for heads of households, the standard deduction will increase to $18,800. Make sure you consider these changes when creating your financial plans for the New Year.
#6: Review your medical expenses.
If you faced substantial medical expenses this past year, you may be entitled to deduct certain out-of-pocket expenses related to your treatment, such as transportation, lodging, and home healthcare related to your condition. Be sure to consult your accountant or tax attorney to determine whether these deductions apply to you.
#7: Take stock.
If you benefitted personally from the stimulus package, a PPP loan, or another component of the federal CARES act, take some time to figure out how – and if – this impacted your financial standing. This includes not only looking at your gains but also taking inventory of your debt obligations and other liabilities and determining where you stand. Keep in mind that just because you may be permitted to hit “pause” on making certain payments does not mean you are off the hook permanently. If you are in a period of forbearance, create a feasible plan for when and how you will resume your payments and how this will impact your overall repayment timeline.
#8: Plan ahead.
If 2020 taught us anything, it is to expect the unexpected. To ensure you are fully organized for the next tax year and prepared to face any contingencies, start a habit of tracking your finances more closely. Start by compiling all of your W2s, 1099s, medical expense receipts, charitable donations records, previous tax returns, and other financial records so that you are prepared in the event of an audit. While it is a good practice to keep these records for at least three years, you may consider keeping them even longer.
Experienced Tax Attorneys
At Wilson Ratledge, we assist our clients in financial and tax planning. There are numerous factors to consider before making significant financial decisions. Our experienced tax attorneys can discuss your options and help you decide how to manage your money wisely in 2021 and beyond.