2020 has been quite the year. While it may have felt like the year of the coronavirus would never end, it’s December, which means it’s time to reexamine your tax situation and decide if some changes are in order. This blog post will examine a few tips when you start planning for the 2021 tax season.
Tip #1: Make a Charitable Donation – in Cash
Fewer taxpayers itemize their deductions these days, which means fewer taxpayers are taking advantage of the charitable tax deduction. But due to the coronavirus, Congress passed the CARES Act, which has a special provision that allows for a $300 above-the-line deduction for cash donations to eligible charities.
Tip #2: Consider Modifying Your Tax Withholding
If your W-4 tax form wasn’t accurately filled out last tax season, you might have found yourself with a nasty surprise when you filed your 2019 taxes earlier this year. If you’re afraid of making the same mistake, you can use the Tax Withholding Estimator offered by the IRS to see if your employer has been withholding enough of your paycheck this year.
If it shows that you need to increase the amount of taxes withheld from each paycheck, you still have time to complete a new W-4 tax form and add an extra withholding.
Tip #3: Maximize 401(k) Retirement Contributions
Given the financial struggles many individuals encountered because of the coronavirus, they may not have been able to take full advantage of the tax-deductible contributions made to a 401(k). This is especially unfortunate because of the higher contribution limits that went into effect this year.
So if you’re lucky enough to have a little bit of extra cash sitting in an account towards the end of the year, and you haven’t maxed out your 401(k) tax-deductible contributions, think about increasing them before the year is over.
Tip #4: Harvest Your Tax Losses
Before the year is over, look for any securities you are holding where you are currently in the red. If you think it is a good time to sell that stock and take the loss, you will be able to use a certain portion of that loss to reduce any capital gains you may have. But there are two things to remember about this strategy.
First, don’t use the desire for this tax benefit as a reason for selling a security that you know will be smarter to hold on to.
Second, after you sell a security for a loss, you can’t quickly turn around in 2021 and buy it back. There are special “wash rules” that will negate this tax benefit if you do this.
Tip #5: Go to the Doctor
Going to see a doctor or other medical professional in December isn’t a tax benefit by itself. But if you have a flexible spending account to use to help pay for medical expenses, try and take full advantage of them before the year ends.
In most plans, the money in a flexible spending account will be lost at the start of the new year. While some plans allow a limited amount of money to roll over into the next calendar year, not all plans enjoy this benefit.