Tax tips & tricks that could save you thousands

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Ajay Kumar, CPA, MBA

Though it’s true that most money-saving options to defer income or accelerate deductions become much more limited after December 31, there is still a lot you can do to make the tax-filing season cheaper and easier. Here are some easy tax tips for the new year to help you lower your taxes, save money when preparing your tax return, and avoid tax penalties.

 

1. Contribute to retirement accounts

If you haven’t already funded your retirement account for 2020, do so by April 15, 2021. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.

  • If you have a Keogh or SEP and you get a filing extension to October 15, 2021, you can wait until then to put 2020 contributions into those accounts.
  • To start tax-free compounding as quickly as possible, however, don’t dawdle in making contributions.

Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax-deferred. It’s hard to find a better deal.

For 2020, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2020 is $57,000.

2. Make a last-minute estimated tax payment

If you didn’t pay enough to the IRS during the year, you may have a big tax bill staring you in the face. Plus, you might owe significant interest and penalties, too.

  • According to IRS rules, you must pay 100% of last year’s tax liability or 90% of this year’s tax or you will owe an underpayment penalty.

If you make an estimated payment by January 15, you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then.

3. Organize your records for tax time

A good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year’s tax return, this year’s W-2s and 1099s, receipts and so on.

4. Itemize your tax deductions

It’s easier to take the standard deduction, but you may save a bundle if you itemize, especially if you are self-employed, own a home or live in a high-tax area.

  • Itemizing is worth it when your qualified expenses add up to more than the 2020 standard deduction of $12,400 for most singles and $24,800 for most married couples filing jointly.
  • Many deductions are well known, such as those for mortgage interest and charitable donations.
  • You can also deduct the portion of medical expenses that exceed 7.5% of your adjusted gross income for 2020.

5. Provide dependent taxpayer IDs on your tax return

Be sure to plug in Taxpayer Identification Numbers (usually Social Security Numbers) for your children and other dependents on your return. Otherwise, the IRS will deny any dependent credits that you might be due, such as the Child Tax Credit.

  1. File and pay on time

If you can’t finish your return on time, make sure you file Form 4868 by April 15, 2021. Form 4868 gives you an extension of the filing deadline until October 15, 2021. On the form, you need to make a reasonable estimate of your tax liability for 2020 and pay any balance due with your request.  Requesting an extension in a timely manner is especially important if you end up owing tax to the IRS.

The author is a CPA, former CEO of Visionary group, and leading Sai CPA Services in his guidance, SAI CPA Services is committed to providing the best possible financial services to its clients. We use the latest technologies, Tax and Accounting Softwares to give efficient, time-bound, and economic solutions.

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