With one year ending and a new one getting ready to start, it is a great time to review your financial TO DO list for the year. Did you miss anything that could help your financial situation or lower your taxes?
With the stock market swings of 2020, did you take advantage of tax harvesting? This is the practice of selling individual stocks, mutual funds, or ETFs at a loss. You sell something at a loss offset capital gains. Just because the value is down today from what it was a few months ago does not mean you have a loss today. The comparison needs to be made between what you purchased the stock or mutual for and what it has for a fair market value today. Consider doing tax harvesting with the guidance of a financial professional you trust.
Taking it a step further, you can deduct up to $3,000 of capital losses more than your capital gains from ordinary income. Any remaining capital losses above that $3,000 can be carried forward to offset capital gains in upcoming years.
Make sure that you have documentation reflecting the amount of stimulus payment that you received this year. On your 2020 tax return, you will need to reconcile what you received and what you were eligible to receive. If you received the correct amount, you would have no tax liability for your stimulus payment. If you received more than you were eligible for, you would have to repay some of the payment as part of filing your tax return. If you did not receive what you were entitled to, you would be able to receive an additional payment as part of filing your tax return. You will need to report what you did receive, so make sure that you have that information available.
The 2020 CARES Act gives taxpayers a charitable deduction even if you take the standard deduction. You can take a deduction of up to $300 if you are claiming the standard deduction. Remember you need documentation showing the contribution amount, the charity donated to, and the date donated. For the $300 deduction, it must be cash expenses. This includes contributions paid via check, payroll deduction, and credit card. For the $300 deduction, you cannot use goods or stock given to charitable organizations. Goods or stocks are still eligible for an itemized deduction. They are not eligible for the $300 above-the-line deduction that everyone is eligible for in 2020.
Do you have a flexible spending account (FSA) for medical expenses? These plans are typically through your employer and differ from a health savings account (HSA). The employer owns FSA accounts. If you left your employer, you would lose any money in that account. FSA funds expire at year-end with a grace period of 2 ½ months after year-end to use funds.
If you have not used your FSA funds, it may be a good time to consider if you need to put as much into FSA next year. It would be best to contribute to your FSA what you need for medical expenses but not beyond that as the funds expire at year-end. If you have not used all the funds for this year, consider ways to spend those funds. You can use them by getting a new pair of glasses, making an extra chiropractic appointment, getting lab work done, seeing a provider, or making sure to get prescription refills.
The funds in your HSA accounts do not expire and can roll over from year to year. You must have a qualifying health plan to be allowed to contribute to an HSA. Your employer may choose to contribute to your HSA. You can also contribute additional amounts to get to the maximum allowable contribution amount each year. What your employer contributed is already deducted as part of your W2. If you make deductions outside of your paycheck, this can be taken as a tax deduction on your tax return.
Are you eligible for an HSA? Have you fully funded it? Have you incurred medical expenses during the year? Consider opening an HSA and putting the dollar amount of your incurred medical expenses into that bank account. You can immediately take those funds back out. What you have done now is enabled yourself to get a tax deduction for the money that you put into the HSA. That tax savings could be $1000 to $2500 depending on the amount, the tax bracket you are in, and if your tax allows for a tax deduction. Consult with your tax preparer if you want to determine how to maximize those savings.
Do you think you can take itemized deductions? Many taxpayers have found with the increased standard deduction, they can no longer itemize. The standard deduction for a single filer has risen to $12,400 and $24,800 for married filing joint filers for 2020. If you think your expenses exceed the standard deduction amount, it is a good time to start getting receipts and assorted paperwork together.
You can claim charitable contributions on your tax return provided you follow the Internal Revenue Service (IRS) guidelines and itemize your deductions on Schedule A. The paper trail is essential here. If you give cash, you need to document it. Smaller contributions may be proven by a bank statement, pay stub, credit card statement, or written communication from the charity with the date and amount. If you donate over $250 to a charity, that charity is required to send you a letter showing the amount donated for the year. The IRS does not equate a pledge with a donation. If you pledge $2,000 to a charity this year and only gift $500, you can only deduct the $500 you gifted.
Get your tax documents organized. If you plan to itemize, get the documents, and receipts you need to take those deductions. Remember what the standard deductions amounts are. Do not waste time chasing paperwork that you will not need if you are taking the standard deduction. If your property taxes are escrowed, you need proof the payments have been made. You will receive Form 1098 in the mail during January for the mortgage and home equity loan interest.
For medical receipts, contact pharmacies or providers for printouts of what you paid during the year. Print out copies of canceled checks to prove provider payments. Payments to Care Credit are not a current medical expense deduction. The medical expense is eligible for the deduction when you put the amount on the credit card. Non-prescription items such as supplements, vitamins, or special food are not considered medical deductions. You can include Medicare premiums and Medicare supplemental premiums. If you made health insurance premium payments that are not pre-tax through an employer, you can add them to the medical expenses on your tax return. Tele-health co-payments and fees are eligible for medical expense deductions if the expense would qualify had the meeting been done in person.
Now is an excellent time to check on the amount you are having withheld for taxes from your wages, unemployment, pensions, IRAs, and Social Security. If you discover that you have withheld too little, you may need to adjust your withholding before the year ends to avoid a balance at tax time. Federal tax withholding adjustments are made on Form W-4. You may also want to consider making an estimated tax payment to avoid a potential under-withholding penalty when you file your tax return.
By getting organized now, you have time to find or request any missing receipts so you can take the deductions and credits. With the concerns of increasing COVID shutdowns, getting documentation from providers, charitable organizations, and financial institutions may take longer than expected. We recommend that you start earlier this year.
Taking time to look at your financial TO DO list can help make sure you do not miss out on improving your financial situation. Everyone’s situation is different. If you think you may not have done everything you can to improve your finances and taxes, reach out to your financial planner and tax preparer. Getting organized in 2020 can help you be ready to tackle 2021!
