Over the next several weeks, we’ll be highlighting numerous tax planning techniques to minimize your bill. These tips apply to individual taxpayers and businesses alike. We also encourage you to review our blog post on the tax platforms of each Presidential candidate—that will give you some great insight into what to expect from Biden over the next four years, and how best to plan your tax and financial affairs.
Year-end Planning Moves for Individual Taxpayers
Tax Tip #1: Take Advantage of Generous Standard Deduction Allowances
For 2020, the standard deduction amounts are $12,400 for singles and those who use married filing separate status, $24,800 for married joint filing couples, and $18,650 for heads of household. If your total annual itemizable deductions for 2020 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction.
That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.
The easiest deductible expense to accelerate is included in your house payment due on January 1. Accelerating that payment into this year will give you 13 months’ worth of interest in 2020. Mortgage insurance premiums for eligible taxpayers are also deductible in 2020—but will once again be disallowed in 2021 barring extension.
While tax planning, also consider state and local income and property taxes that are due early next year. Prepaying those bills before year-end can decrease your 2020 federal income tax bill, because your itemized deductions will be that much higher. But keep in mind that the maximum amount you can deduct for state and local taxes is $10,000 ($5,000 if you use married filing separate status).
Accelerating other expenditures could cause your itemized deductions to exceed your standard deduction in 2020. For example, consider making bigger charitable donations this year and smaller contributions next year to compensate. The CARES Act offers two unique opportunities for charitable-minded taxpayers in 2020.
Individuals who don’t itemize will be allowed an “above the line” deduction of up to $300 in 2020. For those who do itemize, the CARES Act increases the limit on charitable deductions to 100% of the individual’s Adjusted Gross Income (AGI) for cash contributions made to public charities in 2020. Note that there is no requirement that the contributions be related to COVID-19!
Among the provisions of the Disaster Act set to expire in 2020 is the reduced threshold for the medical expense deduction. You might want to consider accelerating elective medical procedures, dental work, and vision care. For 2020, medical expenses are deductible to the extent they exceed 7.5% of AGI, but that threshold is set to increase to 10% in 2021.
Looking for a Little More Guidance?
Tax planning can get overwhelming really quickly. At Dent Moses, we’re all about providing the highest quality financial management services—with an exceptional level of client service. If you need some tax planning advice and guidance, you’ve come to the right place. Get in touch with us today.