Updated Jan. 8, 2020: There’s some good news for anyone worried about owing Uncle Sam this year: You still have time to lower your 2020 taxable income before the April 15 filing deadline. Certain tax deductions are retroactive and there are a few tricks that can maximize your refund.
Here are five ways to lower your 2020 taxable income (or reduce what you owe) before you file your tax returns this year.
1. Make an IRA contribution
Your ability to make tax-deductible contributions to individual retirement accounts for tax year 2020 didn’t expire on Dec. 31. Instead, you can make retroactive contributions to a traditional IRA up until April 15, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting.
“You can make deductible prior-year contributions up until the tax filing deadline, as long as your total contributions aren’t over $5,500,” he says. “The catch-up contribution limit for taxpayers over 50 is $6,500. If you have a SEP IRA, your contributions can’t exceed $55,000 or 25% of your total income (whichever is smaller).”
2. Add money to your HSA
Health savings accounts — tax-advantaged savings vehicles that help people with high-deductible health care plans set aside money for out-of-pocket medical expenses — also allow for retroactive contributions. For tax year 2020, individuals can contribute up to $3,4550 to their HSAs, while families can contribute up to $7,100. These contributions are an "above-the-line" tax deduction.
3. Choose the right deduction strategy
Tax deductions are the expenses you incur throughout the year that you can subtract from your taxable income. When you prepare your tax returns, you’ll need to decide whether to itemize your deductions (tallying up your actual 2018 deductible expenses) or choose the standard deduction (a predetermined amount you can subtract from your income if you don’t itemize). You’ll want to go with the method that reduces your income the most.
For 2019, the standard deduction is expected to be more popular than in prior years. That’s because it nearly doubled under the Tax Cuts and Jobs Act and may exceed the amount that many Americans are able to itemize.
For tax year 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for married couples filing jointly.
“If you have a lot of expenses, it may make more sense financially to itemize your deductions,” Zimmelman says. “But if your deductions are minimal and you’re looking to make your tax return quicker and easier, then the standard deduction is the way to go.”
Rushing to get your returns done in time? Be sure to include these 10 tax forms people commonly forget, where applicable.
4. Don't forget about tax credits
Tax credits reduce the amount of income you owe Uncle Sam. Make sure to check for any and all credits you’re eligible for.
Common tax credits include the Earned Income Tax Credit for Americans with low or moderate incomes, the Child Tax Credit or Child and Dependent Care Credit for families and the Lifetime Learning Credit or American Opportunity Tax Credit for students or parents of kids in college, Zimmelman says.
5. File for an extension or negotiate a repayment strategy
If you need more time to prepare your tax returns, you can request an extension from the Internal Revenue Service. An extension will give you extra time to file, but not to pay, Zimmelman says. You’ll still be responsible for paying by April 15, 2018 to avoid late fees and interest charges.
If you can’t afford your tax bill, you may be able to negotiate a monthly repayment plan or even settle your tax debt for a reduced amount by filing an Offer in Compromise application with the IRS.
Image: Katie Harp