With the standard deduction being so high, fewer and fewer US households go the itemized route. Although this does help simplify your tax returns, many of us can be short-changing ourselves by taking the easy way out. Here are 8 tax tips along with some of the most overlooked tax deductions that you still have time to act on to keep more money in your pocket.
Don’t Miss the Deadline
This is one way where many people end up paying more than they should. If you need more time to file due to unforeseen circumstances or to help figure out how to pay the bill or handle your CRD’s (coronavirus-related distributions), be sure to file an extension (to Oct. 15th) by using IRS Form 4868 or by requesting an extension through Free File on IRS.gov. Remember, an extension of time to file is not an extension of time to pay. If you ask for an extension, be sure to estimate your tax liability and pay what you can by May 17th to reduce penalties and interest. If you are going to have trouble paying your tax bill, refer to these tips to mitigate any negative consequences.
Charitable Donations
Even if you are taking the standard deduction, you can deduct up to $300 on your tax return for charitable donations. This is an above-the-line deduction, which refers to deductions that occur above the line that calculates your adjusted gross income (AGI) from which itemized deductions come from. These contributions must have been made in cash. Note that for 2020, the deduction is per tax unit ($300 max). In the 2021 tax year, the charitable deduction applies per filer so a married filing jointly filing could claim a total of $600.
Student Loan Interest
Like the $300 charitable donation deduction, the student loan interest deduction is an above-the-line- deduction, which means you don’t need to itemize to get it. You can deduct up to $2,500 of interest each year up to the actual interest paid. You should get a Form 1098-E for the filing if you paid more than $600 in interest.
Note that that there are income limits for those who can deduct student loan interest. The deduction for single filers and heads of households phases out between $70,000 in modified adjusted gross income (MAGI) and $85,000 in MAGI. For married couples filing jointly, the deduction starts to phase out at $140,000 in MAGI and ends at $170,000.
Contribute to Your IRA(s)
You have until May 17th to make a contribution to a traditional IRA for the 2020 tax year. You can contribute up to $6,000 per person plus an additional $1,000 for those 50 and above. If you or your spouse are not covered by a workplace retirement plan, you can deduct the full amount of your contribution. Otherwise, the deduction is subject to income limits based on MAGI.
Note that you can also contribute to a Roth IRA up to the May 17 deadline. Although there isn’t a deduction available, the opportunity for tax-free income in retirement can make it a great part of your retirement savings strategy. There are income limits, but if you make too much, here is a back-door strategy that still allows you to make a contribution.
Contribute to Your HSA
As with IRAs, you have until May 17th to make a contribution into your HSA (health savings account) for the 2020 tax year. Just be sure you meet these requirements for opening and contributing to an HSA. (You can learn more about the powerful tax efficient savings power of HSAs and a little known loophole on how to further maximize HSA contributions here.)
The maximum annual contribution you can make for 2020 is $3,550 for individual health insurance coverage or $7,100 for family coverage. If you are 55 or older, you can contribute an extra $1,000. This extra $1,000 would apply to your spouse as well. Have them open up their own HSA and make that contribution since only one of you can make the $1,000 contribution to your employer linked HSA plan. (That is a total opportunity of $9,100 for your household in 2020 if you’re both age 55 or older!).
Unemployment Benefits Exclusion
The American Rescue Plan Act, signed into law in March 2021, allows you to exclude up to $10,200 in unemployment compensation received in 2020. This means you don’t have to pay tax on that amount. If you are married and each spouse received unemployment, that limit would apply to each of you. Just note that any amount over the $10,200 limit is taxable, and those with adjusted gross incomes of $150,000 or more aren’t eligible for the exemption.
Already filed taxes? No worries. You won’t have to file an amended return. The IRS plans on automatically recalculating your taxes and refunding any money owed to you. Also, be sure to check any benefits on the state level as those returns may need to be amended to take advantage of the tax break.
Recovery Rebate Credit
When you file your 2020 return, you will be given an opportunity to claim a credit for any partial or full stimulus payments you were eligible for but did not receive. All tax software is expected to be updated and should be able to guide you through the Recovery Rebate Credit Worksheet. If you are doing it yourself without tax software, check out this resource to walk you through the qualifications and how to claim the rebate. Please note that the stimulus payments are not taxable so be sure not to include those payments in your gross income!
Tax-Deductible Expenses For Your Side Hustle
More and more people have taken on side-hustles during the pandemic. As a result, there are quite a few tax benefits that new side hustlers tend to miss. For example, business expenses such as using your home, car, Internet service, phone and even start-up costs can be deducted. You can read more on how that works here, and you can review a list of the most common deductible expenses here. If your side hustle is becoming more of a full-time career, consider looking for an experienced tax professional for specialized tax guidance and tax planning for the future.
So before your time is up, be sure not to overlook some of these last-minute tax tips that help you maximize your refund or minimize your tax bill. If you find yourself feeling increasingly confused or overwhelmed, consider hiring a qualified tax professional or seek the guidance of a Certified Financial Planner™ professional. You may find that the added peace of mind and extra savings are well worth your time!