In a Nutshell
It's easy to push off thoughts of taxes for the spring, but there are moves you can make now to make the April tax deadline a lot less stressful.The holidays are all about family, friends and food. Thinking about your income taxes? Not so much.
But setting aside time to get organized around your taxes now may help you get ahead at tax time next year. Plus, key tax milestones — such as when the IRS opens up for federal tax returns (it’ll be sometime mid- to later January) and the deadline to file your federal tax return (generally April 15) — will arrive before the ink is dry on your New Year’s resolutions.
Here are some simple tips to make the most of the season — the tax season, that is — before the ball drops on 2020.
- Review your withholding.
- Prioritize charitable deductions.
- Guard against tax fraud.
- Open an FSA.
- Gather paperwork now.
- Pad your retirement savings.
1. Review your withholding.
For W-2 workers, it’s a good time to review your paycheck withholding — the amount of federal income taxes taken out of your pay by your employer(s). If it’s too much you may get a refund; too little, you could have taxes due. The IRS has a useful calculator to see how much you should be withholding. Some people love getting a refund at tax time — and we get it — but there can be better ways to save. Consider adjusting your W-4 so less taxes are taken from your paycheck but immediately divert the difference into an interest-bearing savings account. These accounts don’t pay as much interest as they used to, but it’s better than nothing — and now you’ve added to your nest egg.
2. Prioritize charitable deductions.
You have until Dec. 31 this year to claim charitable deductions for the tax year. But whether you’re donating to Goodwill or local disaster relief, you need to document your contributions, whether that’s in cash, a check or some other type of gift. It’s also important to note that you can only deduct charitable contributions if you itemize your deductions vs. taking the standard deduction. If you are unsure if an organization is tax exempt, you can find out with this IRS status check.
3. Guard against tax fraud.
Many people don’t realize tax returns are a magnet for identity theft. In an August 2017 news release, the IRS reported stopping 19 million suspicious returns from 2011 to October 2014. That’s why it’s wise to file your taxes as early as possible and to regularly check your credit reports for accuracy and any potential fraudulent activity.
4. Open an FSA.
Flexible Spending Arrangements (FSAs) can help you save money on health care, but you have to select an FSA during open enrollment periods for your health plan, which can start before the end of the year (check with your employer for exact dates). With these accounts you (or your employer) can set aside up to $2,750 to be used for health-related expenses. The amount you contribute is not subject to federal income tax, Social Security tax or Medicare tax. If you already have an FSA, consider using up your remaining amount before the end of the year. Unspent amounts could be forfeited but it depends on options your employer gives. You might have a grace period or you may carry over up to $500.
5. Gather paperwork now.
Getting your tax receipts organized well in advance of tax day is smart for everyone, but it’s especially critical for the self-employed. Learn more about what you can or cannot deduct when it comes to business expenses with this IRS guide to deducting business expenses.
6. Pad your retirement savings.
As the year rounds out, there is still time to bump up contributions to your 401(k) and/or IRA account. If you’re under 50, you can contribute up to $19,500 to your 401(k) for the year ending Dec. 31, 2020. If you’re 50 or older, you can contribute up to $26,000. For a traditional Individual Retirement Account (IRA) or Roth IRA you can contribute up to $7,000 if you’re 50 or older. Technically, you have until the April tax filing day to add to an IRA and have it “count,” but make sure you indicate the year you want the contribution to be applied to when depositing.
Bottom line
Thinking about these tax moves now can help set you and your family up for a better year ahead. And consider this: Peace of mind when it comes to your taxes might be the best holiday gift of all!