7 Ways To Save Big Money On Your 2020 Taxes—Part 1
2020 was a nightmarish year for many. Thanks to recent legislation, you could see a silver lining in the form of major tax breaks when filing your income taxes. First up, the IRS recently announced that the deadline for filing your 2020 federal income taxes has been pushed back to May 17, 2021, which gives you an extra month to get your tax returns filed.
The postponement of the deadline applies to individual taxpayers. However, the extension does not apply to first-quarter 2021 estimated tax payments that many small business owners file. So if you file quarterly taxes for your business, contact your tax advisor now, if you haven’t already done so.
Additionally, the CARES Act passed in March 2020 provides individual taxpayers with several hefty tax-saving opportunities. What’s more, President Biden’s new relief package, known as the American Rescue Plan (ARP), which went into effect in March 2021, offers additional stimulus payments to most Americans and includes significant tax relief for those taxpayers who lost their job and had to rely on unemployment benefits in 2020.
While there are dozens of potential tax breaks available for 2020, here are 7 of the leading ways you can save on your 2020 tax return.
- Stimulus Payments
As part of the CARES Act, millions of Americans received stimulus checks in 2020. Those payments were an advance refundable tax credit on your 2020 taxes. This means that no matter how much you owe (or get back) on your 2020 taxes, you get to keep all of the stimulus money. You also won’t have to pay any taxes on it.
Because the IRS didn’t have everyone’s 2020 tax returns when the stimulus checks were issued, they based the stimulus payments on your 2018 or 2019 returns, whichever one you had most recently filed. The stimulus payments from 2020 phased out at an adjusted gross income (AGI) of $75,000 to $99,000 for singles and $150,000 to $198,000 for married couples filing jointly.
Because that the stimulus payments were based on your AGI for 2018 or 2019 but technically apply to your 2020 AGI, you may find that your payment was either too much or too little. However, even if your financial situation has improved since 2018 or 2019 and you received too much stimulus money based on your 2020 income, you get to keep the overage.
By the same token, if you received too little on your 2020 stimulus, you can claim what you missed in the form of a recovery rebate credit when you file your 2020 taxes. If you are not sure how this would work, here are three scenarios where you may be entitled to additional stimulus money.
- If your AGI for 2018/19 is higher than your AGI in 2020, you can claim the additional amount owed to you when you file your 2020 taxes.
- If you had a child in 2020, but didn’t get the $500 credit for dependent children in your stimulus payment, you can claim the minor child when you file in 2021.
- If someone else claimed the child based on 2018/19 returns, but you can legitimately claim that child on your 2020 return, you can get the $500 tax credit when you file in 2021. Additionally, the person who got it based on 2018/19 returns will not have to pay it back.
- Unemployment Benefits
When the pandemic stalled out the economy, many Americans lost their jobs and were forced to rely on unemployment to pay the bills. That said, unemployment benefits are generally taxable. Therefore, if you took the unemployment benefits, without having taxes automatically deducted, you were looking at having to pay income taxes on that money when you file your 2020 return.
However, taxpayers who received unemployment benefits in 2020 were provided with significant relief with the passage of the American Rescue Plan (ARP). The first $10,200 of your 2020 unemployment benefits are tax-free if your annual household income is less than $150,000 under the ARP. The ARP doesn’t provide a different threshold for single and joint filers. This means both spouses are entitled to the $10,200 tax break if both spouses received the benefits.
Note that if your unemployment benefits exceed $10,200 in 2020, you’ll need to report the excess as taxable income and pay taxes on the amount which is over the limit. Further, if your household income is over $150,000, you’ll need to pay taxes on all of your unemployment benefits.
If you already filed your 2020 return and paid taxes on your unemployment benefits before the passage of the ARP made those benefits tax-free, the IRS plans to automatically process your refund. This means you won’t have to tax any extra steps, such as filing an amended return, to secure the refund. The IRS will release further details on this issue in the coming weeks.
3. Waived RMDs
You are typically required to take an annual required minimum distribution (RMD) from your IRA, 401(k), or other tax-deferred retirement account starting in the year when you turn 72. The CARES Act temporarily waived the RMD requirement for 2020. The waiver also applies if you reached age 70½ in 2019, but waited to take your first RMD until 2020.
RMDs generally count as taxable income. Therefore, taking this waiver means that you may have lower taxable income in 2020. This means that you would owe less income taxes for 2020.
However, there are several factors to consider, including the state of the market and your living expenses, when deciding whether or not to waive your RMDs. Given this, consult with us, as your Personal Family Lawyer®, or your tax professional before making your final decision.
Next week, in part two of this series, we’ll cover the remaining four ways you can save on your 2020 tax bill.
This article is a service of Levi L. Alexander, Personal Family Lawyer®. We do not just draft documents. We help to ensure you make informed and empowered decisions about life and death, for yourself and the people you love. This is why we offer a Family Wealth Planning Session™. During this session, you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session for free.