7 Ways To Save Big Money On Your 2020 Taxes—Part 2
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.
There are dozens of potential tax breaks available for 2020. Last week in part one of this series, we highlighted the first three of seven ways you can save big money on your 2020 tax return. In part two, we’ll discuss the remaining four ways you can save.
- New Rules for Early Withdrawals From Retirement Accounts
If your finances were seriously impacted by last year’s economic turmoil, you may have to withdraw funds from your retirement accounts to cover your expenses. Thanks to new rules under the CARES Act, you have more flexibility to make an emergency withdrawal without incurring the normal penalties from tax-deferred retirement accounts in 2020.
Typically, permanent withdrawals from traditional IRAs or 401(k) accounts are taxed at ordinary income rates. Additionally, pulling out money before age 59 1/2 would also typically cost you a 10% penalty.
Thanks to the CARES Act, you can avoid the 10% penalty on up to $100,000 in pandemic-related distributions from your retirement account in 2020. You are also allowed to spread such distributions over three years in order to reduce the tax impact. You can even opt to put this money back into your retirement account within the three-year period to avoid paying taxes on the money all together.
However, because early withdrawals can negatively impact your retirement savings down the road, if you are looking to take advantage of this provision, you should consult with us, as your Personal Family Lawyer®, and your financial advisor prior to withdrawing any money. Also, employers are not required to participate in this provision of the CARES Act, so you’ll also need to check with your plan administrator to see if it’s available at your workplace.
- Medical Deductions
If you had hefty medical bills in 2020, you might also be able to get some tax relief using increased deductions. Under the CARES Act, you can deduct any medical expenses which are above 7.5% of your adjusted gross income (AGI). Your AGI is your total gross income minus any other deductions you’ve already taken.
For example, if your AGI was $100,000, you can deduct qualified unreimbursed medical expenses that exceeded $7,500 for the year of 2020. However, you have to itemize your deductions in order to write off these expenses. You can meet with us or your CPA to determine if this would make sense for your situation.
- Earned Income Tax Credit
The Earned Income Tax Credit (EIC) is a refundable tax credit for low- and middle-income taxpayers. The amount of credit you can claim depends on your annual income as well as the number of kids you have.
Below are the maximum EITC amounts for 2021, along with the maximum income you can earn before losing the credit. Note: You can’t claim the EIC if you are married but filing separately.
|Number of children||Maximum earned income tax credit||Max earnings,
single or head of household filers
|3 or more||$6,660||$50,954||$56,844|
Additionally, for the 2020 tax year, there are special rules for the EIC due to the pandemic. This new rule is that you can use either your 2019 income or your 2020 income to calculate your EIC and use whichever number gets you the bigger credit. This doesn’t happen automatically, though. Therefore, you should be sure to ask your tax professional to run the numbers both ways and choose the option that offers the most savings.
- Child Tax Credit
If you have minor children aged 16 or younger, the Child Tax Credit is one of the most effective ways to reduce your federal income tax bill. There are special rules for 2020 that can save you even more.
For your 2020 taxes, you can claim up to $2,000 per qualified child as a tax credit, and under rules due to the pandemic. You can use either your 2019 income or your 2020 income to calculate your credit—whichever year offers the most savings. The credit begins to phase out and reduce in value when your AGI reaches $75,000 for single filers, $150,000 for joint filers, and $112,500 for head of household filers.
What’s more, with the passage of the ARP this March, the child tax credit is set to get even bigger in 2021. When you file your taxes next year, the per-child credit will go up to $3,000 or $3,600 depending on your child’s age. Look for a future blog post detailing all of the new tax-saving opportunities available under the ARP for the year of 2021.
Maximize Your Tax Savings for 2020
These are just a few of the tax breaks available for 2020. There are plenty of other deductions and credits that might be up for grabs depending on your situation. Meet with us of your CPA, as your Personal Family Lawyer®, to make sure you don’t miss out on a single one. Contact us today to schedule your visit.
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.