Whether you still need to file your taxes this year or you’re already thinking ahead to next tax season, you are likely seeking more strategies that you can use to save money on your taxes. To get the most out of your tax savings this year, be sure to take advantage of the following strategies before, during, and after you file your taxes.
Here is how to save money on your 2020 taxes.
Before you sit down to do your taxes, there are a few things you can do to make your filing experience easier and ensure you don’t leave anything out.
Get Important Documents Together
Before you file, be sure to gather any important documents so you don’t forget anything. While it’s obviously important to collect tax forms that report income (like W-2s and 1099s), be sure to also gather receipts for valuable tax deductions and credits such as acknowledgments for the household goods you dropped off at your favorite charity, receipts for higher education expenses outside of what’s reported on IRS Form 1098-T, or important information you need to claim tax benefits for your dependent.
Also have handy Form 1444 and 1444-B issued by the IRS when they sent your first and second stimulus payments. If you didn’t receive the full payment, you may be able to claim more stimulus money in the form of a recovery rebate credit when you file your 2020 taxes, but you will need to reference how much you were paid.
Have the Previous Year’s Tax Information Accessible
Another important item you want to have easily accessible before you file is your previous year’s tax return. Your return is always a good reference point to see what deductions you claimed in a previous year so that you’re able to maximize your tax savings and you don’t forget anything when claiming deductions while filing this year.
In addition, there is a requirement to include your previous year’s adjusted gross income when you e-file your tax return as an additional layer of security, so you may need to reference your previous year’s tax return to find that information.
Take Above-the-Line Deductions
Above-the-line deductions are deductions you can take that reduce gross income, like wages, salaries and interest, to arrive at adjusted gross income.
Some examples of above-the-line deductions you may be eligible for include the student loan deduction (worth up to $2,500), teacher educator expense deduction (worth up to $250) and the deduction for IRA contributions. Under the CARES Act, you can deduct up to $300 in cash donations even if you claim the standard deduction.
With about 90% of taxpayers now taking the standard deduction instead of itemizing their tax deductions, above-the-line deductions can be very valuable in reducing your taxable income if you are eligible.
Explore the Most Missed Credits
There are a few credits that taxpayers tend to miss every year that can be huge savings on your taxes.
The earned income tax credit is one of the most missed – in fact, the IRS states that about 1 out of 5 taxpayers miss it every year. The earned income tax credit can be worth up to $6,660 for a family with three kids, but many taxpayers fail to claim it because they may not realize they are eligible.
Eligibility for the earned income tax credit is based on low to moderate income. Your income may typically be higher than the EITC income threshold, but if you have a loss of wages, you may now be eligible to claim the refundable credit and maximize your tax savings.
Another credit that many taxpayers fail to claim (and often don’t even know about) is the saver’s credit. The saver’s credit is another credit where eligibility is based on income that you may now qualify for if you have lower wages than usual.
If you contributed to your retirement, you should look into the saver’s credit, as it’s a credit that you can receive for contributing to your retirement and can be worth up to $1,000 for single filers and $2,000 for married taxpayers filing jointly. If you faced unemployment due to the events of 2020, you may be eligible for some of these income-based credits.
Under the Coronavirus Response and Relief Supplemental Appropriations Act passed on Dec. 27, 2021, there is also a special lookback provision that allows you to use your 2019 income if it helps you qualify for more earned income tax credit.
Remember Tax Benefits For Your Dependents
Dependents are worth valuable tax deductions and credits. You can take the child tax credit worth up to $2,000 per dependent child under 17.
If you paid for child care (which even includes summer day camp) for your kids, you can claim the child and dependent care credit, which is worth up to $1,050 for one child and up to $2,100 for two or more kids. Additionally, keep in mind that children aren’t the only dependents that can bring you tax benefits.
If you are supporting a relative – or even a boyfriend or girlfriend – you can claim the other dependent credit for non-child dependents (worth up to $500). Just remember to gather the correct Social Security number for your eligible dependents, as their SSN information will be required to claim the valuable tax benefits.
Under the first and second coronavirus relief passed in 2020, stimulus payments were issued to many Americans. In general, the IRS issued payments based on information from either your 2018 or 2019 tax returns and also included stimulus payments for qualified dependents under 17.
If you didn’t receive stimulus payments for your qualifying dependent under 17 in the first and second round of payments, you can claim stimulus for them in the form of a recovery rebate credit when you file your 2020 taxes. This is especially important if you had a baby in 2020 since the IRS had no way to know if you had a baby when they issued the payments.
Maximize Itemized Deductions
Although about 90% of taxpayers will claim the standard deduction instead of itemizing under tax reform, you still have an opportunity to maximize your deductions and bump them over the standard deduction ($12,400 for single taxpayers and $24,800 for married taxpayers filing jointly).
If you find that your itemized deductions – like home mortgage interest and property taxes – are right at the standard deduction, don’t forget that your charitable contributions may bump you over the standard deduction.
Make sure to include household goods and supplies you donated throughout the year, and any travel costs you incurred while volunteering for a charity.
Contribute to Your Retirement
One smart move you can make up until the tax deadline and possibly get tax savings is contributing to your IRA. Typically, you can contribute up until the April 15 tax deadline.
It was just announced that the tax year 2020 federal tax deadline was extended to May 17, 2021. The IRS has yet to issue guidance on the deadline to make a 2020 IRA contribution and make an impact on your 2020 taxes.
Last year the deadline to make a contribution was extended to the new extended deadline, but it may be best to make the contribution as soon as possible to lower your taxable income.
You can contribute up to $6,000 ($7,000 for 50 and up) and may be able to get a deduction for your contribution. You may also get an additional tax savings boost with the saver’s credit just for contributing to your retirement.
If you already filed your taxes and would like to maximize your tax savings even more next tax season, there are moves you can make to ensure that you’re in good shape come filing time next year.
Contribute Some of Your Tax Refund to Your Retirement
If you finished your taxes and your refund is in hand, think about contributing a portion to your retirement. You’ll be building your nest egg and creating tax savings for 2021.
Adjust Your W-4
Even if you received a tax refund this year, the best thing you could do is revisit your W-4. To make sure you give your employer the right W-4 withholding to boost your tax refund – or your take-home pay – you can fill out the new IRS Form W-4.
You should revisit your W-4 every year to ensure it is correct in response to any changes to tax law or your personal situation, such as a job change.