Last year brought big changes for millions of Americans. Many lost their jobs or saw their paychecks cut severely; others worked remotely from home. Some were forced to drain their retirement accounts to pay the bills; others built up their savings with stimulus checks. (Ft. Worth CPA: Saving On 2020 Taxes)
All of these changes may affect your 2020 taxes — for better or for worse. With the following advice, we’ll help you snag the biggest refund available to you. Or at least reduce the amount you’ll owe this year. None of us can afford to leave any money on the table.
Tax tips for non-itemizers
The Tax Cuts and Jobs Act nearly doubled the standard deduction. This significantly reduced the percentage of taxpayers who itemize on their tax return. (The standard deduction for 2020 is $12,400 for singles and $24,800 for married couples filing jointly.) But the goal of simplifying tax preparation has proved elusive. The tax code is replete with credits and deductions for taxpayers who claim the standard deduction. That list got a little longer in 2020.
The CARES Act, the economic stimulus bill enacted in early 2020, includes a provision that allows non-itemizers to deduct $300 in cash contributions to charity. Because the tax break is an above-the-line deduction, it will reduce your adjusted gross income and your taxable income.
The provision was designed to encourage taxpayers to help charities, many of which are struggling to fulfill their mission during the coronavirus pandemic. The deduction is based on your tax return, not per person, so the maximum a married couple who file jointly can deduct is $300.
To claim this deduction, you need to have made a cash contribution to a qualified charity by December 31. Noncash contributions, such as donations of used clothes to Goodwill, as well as donations to donor-advised funds, aren’t eligible. This tax break isn’t available to itemizers: If you still itemize, you’ll claim your charitable contributions on Schedule A (see below).
If you have children who are still dependents, make sure you take advantage of numerous tax breaks for parents:
Child tax credit
A new baby brings sleepless nights, unbounded joy and a $2,000 tax credit. Unlike a deduction, which reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. There’s no limit to how many kids you may claim on a return, as long as they qualify. But the credit begins to disappear as income rises above $400,000 on joint returns and above $200,000 on single and head-of-household returns.
Child care credit
The COVID-19 pandemic forced many schools to switch to remote learning, which required some parents to hire someone to take care of their children while they were at work. If you paid for child care and your children are younger than 13, you’re eligible for a credit of 20% to 35% for up to $3,000 in expenses for one child or $6,000 for two or more. The percentage decreases as income increases.
Tax tips for itemizers
Even with the larger standard deduction, about 10% of taxpayers will still get a lower tax bill by itemizing deductions. Tax software programs or a tax preparer can determine whether you should itemize or claim the standard deduction. However, you’ll need good records to make sure you claim all of the deductible expenses available to you.
Deductions for homeowners
Homeowners with large mortgages are good candidates for itemizing. For home loans acquired after December 15, 2017, you can deduct interest on a mortgage—or mortgages—of up to $750,000. (For loans taken out before that date, you can deduct interest on mortgage debt of up to $1 million.
Property taxes are also deductible—up to a point. The tax overhaul capped deductions for state and local taxes at $10,000. The cap primarily affects homeowners who live in high-tax states, such as New Jersey.
Charitable contributions are deductible, so if your mortgage and property taxes put you close to the itemizer threshold, make sure you claim credit for all of your philanthropy in 2020. And if you were extremely generous last year — perhaps in conjunction with estate planning — you will be able to take advantage of a provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act designed to encourage charitable giving. Ordinarily, the maximum you can deduct for cash contributions is 60% of your adjusted gross income; for 2020, you can deduct up to 100% of your AGI.
If you used the time spent sheltering at home last year to clean out your closets, be sure to claim a deduction for items donated to charity. You can deduct the fair market value of donations of clothes, books and other noncash items. Some tax software will provide guidance on valuing your donated items.
If you had extraordinary medical expenses in 2020—perhaps related to COVID-19 or another catastrophic medical event—you may be able to deduct a portion of your out-of-pocket costs, particularly if your income took a hit. You can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. If your AGI was $50,000, for example, you would only be allowed to deduct the unreimbursed medical expenses that exceeded $3,750. The list of eligible expenses is long, ranging from long-term care to health insurance co-payments to prescription drugs. Costs for dental and vision care that aren’t covered by your insurance are also deductible.
First, talk to your tax pro about available COVID-19 tax relief provisions that could be claimed on your 2020 Form 1040 with tax-saving results. (Ft. Worth CPA: Saving On 2020 Taxes)
Call our office today at (972)-446-1040 or 817-498-1040 to find out more