Are you a procrastinator when it comes to filing your annual tax return or gathering the information for your CPA to complete it for you? Do you dread the entire process? You are not alone.
Here are some items to remember when preparing your 2020 Tax Return along with a few that may be different from prior years.
Get organized
Hopefully, you read our Blog posted on July 18, 2020, which gave you some steps to take throughout the year, so you do not have to scramble at the last minute.
Determine your liability
If you have earned income or if there is a gain on the sale of an asset, or another taxable event you will be responsible for payment to the taxman. Be sure to have sufficient income tax withholding or pay your quarterly tax estimates throughout the year to avoid having to pay penalties and interest at tax time.
Standard deduction
The standard deduction for those married filing jointly increased to $24,800 for the tax year 2020, up from $24,400 for 2019.
Charitable contributions
An important CARES Act provision lets you deduct $300 in charitable contributions “above the line”, without having to itemize. This is for single or married couples filing jointly. 2021 will bump up to $600 for married couples.
Waived RMDs
The Coronavirus Aid, Relief, and Economic Security Act of 2020, known as the CARES Act, waived required minimum distributions (RMDs) from retirement accounts for 2020. So, this one-time reprieve means that some retirees will have lower taxable income and thus possibly owe less in federal income taxes.
Higher contribution limits for (some) retirement
You could save money in several types of workplace retirement accounts in 2021 The base contribution limit for 401(k) plans is $19,500 for 2021. The limit for catch-up contributions, which taxpayers age 50 and older can make, is an additional $6,500.
Gifts and estates
The current gift and estate tax exemptions may expire soon. The annual gift tax exclusion for 2021 is $15,000 per donee. A husband and wife can double the impact for a total of $30,000 in tax-free gifts right now to any individual, which can significantly impact estate issues later. President Biden’s proposed tax plans indicate that increases in estate taxes could result in a higher tax on some estates.
Higher contribution limits for HSAs
Contribution limits for health savings accounts (HSAs) tend to increase each year. The 2021 contribution limit for individuals who are eligible and have the following types of high-deductible health insurance policies are:
- Self-only coverage: increased from $3,550 to $3,600
- Family coverage: $7,200 — up from $7,100
- Catchup: Additonal $1,000 contribution for those 55 or older
A higher cap on Social Security payroll taxes
The maximum amount of a worker’s income that is subject to Social Security payroll taxes increased to $142,800 for 2021 – up from $137,700 for 2020.
With a new president, along with a Senate and House majority party aligned with him, there will be expected changes in our tax laws of the future. Read our Blog posted November 13, 2020 that outlines President Biden’s tax plan. It is never too late to start planning for 2021 and you can start by examining your current tax obligations.
Watch for future Blogs as we dig a little deeper.
Sources: Brian Menickella, co-founder of The Beacon Group of Companies, Year-end Tax Planning Tips for 2020; Karla Bowsher, Money Talk News, 10 Ways Your Income Taxes Will Be Different in 2021.
