Five Simple Ways to Improve Your 2020 Tax Planning
With the sweeping modifications engendered by the Tax Cuts and Jobs Act, it is vital to dig into the relevant changes to minimize your tax liability for the upcoming 2020 year.
It is generally the best practice to directly speak with a tax advisor, however if you’re filing alone, below are five easy tax tips to make sure you get the most out of your returns.
Choose Between An Itemized Or Standard Deduction
Starting in 2018, the standard deduction nearly doubled to $24,400 for married couples filing jointly and $12,200 for single filers. There are also new limits on itemized deductions, for example, taxpayer’s deductions for state and local income, sales and property taxes are now limited to a combined, total deduction.
While the standard deduction may be the best choice for most taxpayers, there are many situations where itemizing is more beneficial. For instance, if you have significant medical expenses, investment interest, business expenses or charitable donations. However, taxpayers need to keep every relevant receipt for six years in case of an audit.
Adjust Withholding if Necessary
The new tax law issued updated withholding tables for employers and employees. It is an opportune moment to review and adjust your withholding to not end up owing the IRS more than anticipated.
The IRS provides an IRS Withholding Calculator to determine the amount of tax that should be withheld from your paycheck. If you need to make updates to your employer’s withholding based on your findings, you’ll have to file a new W-4 form.
The Education Savings Plan Option
529 education savings plans provide tax benefits at both state and federal levels. State benefits vary and are mostly tax deductions. At the federal level, 529 plan’s earnings are not subject to federal income taxes. If the 529 funds are used for qualifying educational expenses, they are not subject to federal not state income taxes.
Under the new tax laws, 529 plans can also be used to pay—free from federal income taxes—up to $10,000 of tuition annually for child’s enrollment or attendance at an elementary or secondary school.
Maximize tax-advantaged savings accounts
This one may be well known by anyone discussing tax savings, but they are beneficial in so many ways that it is worth mentioning them. Depending on what is applicable for the taxpayer, tax-advantaged savings accounts can include:
- A 401k if it is an employee benefit
- A traditional or Roth IRA if your 2019 income is below $137,000 for single filers and below $203,000 for married filing jointly
- A health savings account, if you have a qualifying high-deductible health plan
While they all have yearly contribution limits, they are a great way to save on taxes while investing in yourself.
This requirement is for self-employed workers or employees with a side activity. The taxpayer must proactively define what they owe and pay taxes as money is earned each quarter. If you do not pay these quarterly estimated taxes, you will be charged a penalty in addition to a possibly large end of the year tax bill.
These penalties are calculated and charged on a daily basis depending on how late you pay the quarterly tax. In some cases taxpayers do not need to pay estimated taxes, so do your research to avoid any penalties.
About the author
Niccole Mumford is an experienced Senior Tax Associate with a demonstrated history of working in the accounting industry. She is currently designing and developing practice management software @CanopyTax.