Blog posted On December 23, 2020
Most of us feel like it’s still March, but December 31st is fast approaching. And while you’re probably busy enjoying the jolliest season of all, you might also consider preparing your finances for the upcoming tax season. It might be slightly less jolly but maximizing your tax benefits now could help save you thousands of dollars later.
If you’re wondering how you can prepare for the tax season ahead, here are six ways you can maximize returns before December 31st.
Though not all states offer tax benefits for 529 college savings accounts, most do. In many states, income tax benefits are available for any taxpayer who contributes to a 529 college savings plan. Although there are no annual limits to the amount of money you can contribute per year, most states limit the amount of money that is eligible for an income tax deduction or credit. The deadline to apply for these benefits for many states is December 31st.
Normally, the itemized deduction on charitable contributions is limited to 60% of a taxpayer’s adjustable gross income (AGI). However, this year (2020), taxpayers can deduct up to 100% of their eligible charitable contributions from their AGI. Eligible contributions must be made in cash, given to a qualifying organization, and made during the 2020 calendar year. Taxpayers can still make non-cash payments; however, they will be subject to the normal deduction limits.
Depending on when your mortgage loan was opened, you can deduct the interest you’ve paid, if your home is a qualified residence. Couples who file jointly can deduct interest paid on loans of up to $1 million and people who file separately can deduct interest on loans of up to $500,000. In 2020, you can also maximize your mortgage tax benefit by making an extra payment before the end of December.
If you run a small business and have any large upcoming expenses, you might want to consider making the payments before the year is over. “By paying for qualified business expenses before the calendar flips to 2021, you will lower your overall 2020 taxable income,” said Certified Public Accountant Brooke Salvini in a news release for the American Institute of Certified Public Accountants.
If your medical expenses over the past year have exceeded 7.5% of your AGI, then you can likely deduct them from your income as well. The list of expenses that are eligible for deductions is long – to see a list, visit IRS.gov. Again, the bills must be paid out of pocket and made before December 31st, 2020.
Quarterly estimated taxes
Though tax payments for the fourth quarter of 2020 are not due until January 15th, if you make your payment by December 31st, you can deduct the payment on your 2020 federal tax return. “By making a ‘prepayment’ of your state estimated tax payment for the fourth quarter two weeks earlier, you have accelerated the ability to deduct the payment by a year,” said Mike Savage, CEO of 1-800 Accountant.
Before making any tax-related decisions, always consult a financial advisor or tax preparer first. If you have any questions about your mortgage payment deductions for the 2020 calendar year, please let us know!