Year-End Tax Moves That Could Save You Money
You still have time to reduce your 2020 tax bill — or put more money in your pocket — with these tax moves:
Claim your stimulus check. The IRS recently started mailing letters to 9 million people who didn't file a return for 2018 or 2019 and might have missed out on a stimulus check. If you didn't get a check earlier this year (up to $1,200 for singles; $2,400 for married couples, depending on salary and most recent tax return) and think you may qualify, you should register online with the IRS by Nov. 21, 2020, to receive your payment by year end.
If you miss the deadline, you'll still be able to claim the money as a credit on your 2020 tax return.
FSA money: Use it or lose it. If you don't use the pre-tax money in your flexible spending account (FSA) by the end of the plan year, typically Dec. 31, you could forfeit it. Check your employer's rules. Some employers extend the deadline by 2½ months beyond the plan year, while others will allow workers to carry over up to $550 left over in 2020 into next year. FSA money can be used for a wide range of health care expenses, from doctors' visits and deductibles to eyeglasses and thermometers.
Harvest a tax break. If there's a silver lining to investment losses, it's that they can be used to offset investment gains you realized in the year and reduce your taxes. This is why many investors review and reassess their portfolios near the end of the year, balancing the sale of winners and losers.
If your losses exceed your gains, you can subtract up to $3,000 in losses against regular income. And any losses beyond that can be carried forward on next year's tax return.
Boost retirement savings. If you haven't maxed out on your pre-tax contributions to your workplace retirement plan, increase them before year end. You'll pay less in taxes and build a bigger nest egg. In 2020, you can contribute up to $19,500 in a 401, 403(b) or 457 plan, plus an extra $6,500 in catch-up contributions if you're age 50 or over. Learn more about 2020 contribution limits and check out this Grow Your Savings calculator.
If your 457 plan permits, you can double the regular contribution — up to $39,000 in 2020 — for the three years before the normal retirement age of the plan. (You can't use both the age-50 catch-up and pre-retirement catch-up in the same year.)
Take the standard deduction or itemize? Most taxpayers choose the standard deduction — $12,400 in 2020 for singles, $24,800 for joint filers — that's subtracted from adjusted gross income to reduce their tax bite.
But if your deductions exceed that limit, you'll save on taxes by itemizing your deductions on your return. Or, if you're near the threshold, you can exceed it by prepaying some deductible expenses in December, such as state taxes and mortgage payments that are due in January. You can also bunch several years' worth of charitable donations into a single year. An easy way to do that is to make a large deductible contribution in one year to a donor-advised fund — most financial services firms offer them — and decide later how to disburse the money to charities.
Charitable giving. The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily expanded tax breaks for charitable giving. If you don't itemize, you can deduct up to $300 in cash donations to charity in 2020. If you itemize, you can deduct charitable cash donations of up to 100% of your adjusted gross income (up from 60%). Donations to donor-advised funds don't qualify.
Contribute to a 529 college savings plan. This won't reduce your federal taxes, but it could reduce your state income tax bill. Many states allow you to deduct all or some of your contributions to a home state 529 plan. Find out if your state is one of them at www.savingforcollege.com.
Prepare for the return of RMDs. Congress waived required minimum distributions (RMDs) for older investors in 2020 after the stock market plunged. But, they'll be back in 2021. To prepare, you can estimate your RMDs.
Please note: The contents of this publication provided by MissionSquare Retirement is general information regarding your retirement benefits. It is not intended to provide you with or substitute for specific legal, tax, or investment advice. You may want to consult with your legal, tax, or investment advisor to review your own personal situation. Some of the products, services, or funds detailed in this publication may not be available in your plan. This document may contain information obtained from outside sources and it may reference external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy. In addition, rules and laws can change frequently.