Year-End Tax Tips
Before Dec. 31, think about how you can help your tax situation for this year. By following year-end tax tips, you can prepare in 2020 to save on taxes in 2021.
Compare standard versus itemized deductions — Your current or planned 2020 itemized deductions might be more than your standard deduction. If so, you’ll save tax dollars by itemizing.
If your itemized deductions are close to your standard deduction in 2020, consider shifting some of your deductions to 2021. At that time, you might be able to itemize more. Conversely, you might know you won’t have as many itemized deductions in 2021 as you do in 2020. If so, consider shifting some deductions from next year to this year. Here are some examples of how shifting deductions can work in your favor:
- You can’t itemize in 2020 but can in 2021. So, consider making your annual charitable donation in January instead of December.
- You’re itemizing in 2020 and can pay real-estate tax in two installments. So, consider making the payment in 2020 that would normally be due in early 2021.
Remember your miscellaneous itemized deductions — Your total miscellaneous itemized deductions subject to 2% of your adjusted gross income (AGI) might be close to or more than 2% of your AGI. If so, consider if you need any items in this category.
Then, buy those items before the end of the year.
However, the total of these expenses might not be close to or more than 2% of your AGI. If so, postpone these expenses until 2021, if possible.
To learn which items are in this category, see Publication 529: Miscellaneous Deductions at www.irs.gov.
Make flexible spending work for you — Make sure you have enough medical expenses in 2020 to meet the amount you set aside in your flexible spending account. If you don’t, you’ll lose the money. If you have extra money in the flexible spending account to spend, you might want to:
- Schedule end-of-year appointments
- Buy new prescription glasses and contact lenses
- Buy hearing aids
- Buy medicines youâ€™ll need in 2021
Submit your receipts for eligible expenses within the time required by the plan. Some plans allow you an extra 2 1/2 months after the end of the year to use the unspent amount. Check with your plan administrator.
Review your medical costs — Keep track of your unreimbursed medical expenses all year long. You can deduct them if they’re more than7.5% of your AGI if you’re under 65 (7.5% if you’re over 65). If so, you might consider having an elective or necessary procedure before year-end.
Check that the procedure is among the qualifying deductible expenses. Many elective procedures don’t qualify for this deduction.
Get serious about retirement — One way to lower your taxable income for the year is to contribute to a retirement plan, like a:
- Deductible IRA
- SIMPLE IRA
You have until Dec. 31 to make contributions to 401(k)s and 403(b)s for 2020. You have until April 16 to make contributions to IRAs and some other plans.
Adopt a charitable attitude — Donate clothing and household goods to charities before Jan. 1, 2021. It’s also deductible on your 2020 return. Get a receipt from the organization you’re donating to. The deduction is limited to the item’s current fair market value (FMV) — what you could sell it for at a garage sale.
Sell off securities — If you have a large net capital gain so far this year, you might want to sell some stock to generate a loss before year end. Doing so could reduce the amount of tax you pay this year. However, if you sell stock to generate a loss, you’re prohibited from purchasing substantially similar stock. This is 30 days before or after the sale that generated the loss.
However, if the securities you sell are mutual-fund shares, you might be able to:
- Reinvest the proceeds in a similar — but not identical — fund
- Maintain your investment strategy,
- Deduct the loss
Whatever you do, don’t let possible tax savings cause you to make a decision contrary to your investment interests.
Investigate before buying mutual funds — If you’re planning to invest a large amount in a mutual fund, find out when the fund declares its dividend. Confirm that the fund isn’t declaring a large amount of dividends in December. If you buy shares before the dividend is declared, you’ll increase your income by the amount of the dividend. This is true even if you reinvest the dividend in new shares. You can get this information at the fund company’s website.
Give the gift of cash –You can give a gift up to $14,000 to any one person free of gift tax. If you’re married, you each can give a person up to $14,000 tax free — $28,000 in total.
In most cases, the gift isn’t complete until the recipient of a check cashes or deposits it. So, confirm the recipient does this by the end of the year.
Don’t let extra money sit around — Consider investing in a short-term CD or a U.S. Treasury bill that matures in 2021 if you:
- Have a large amount of cash to invest
- Want to shift some of your income to 2021
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