Tax Tips For Your Tax Return In 2021
If you're still looking for ways to maximize your tax deduction in 2021, you've come to the right place. Even though most of your options for tax benefits end on December 31, there is still so much you can do to make your tax deduction bigger after Jan 1. Here are 14 tips for lowering your taxable income, avoid tax penalties, and save money this tax season.
The information below is intended to provide general information only and is not intended to be tax advice. Tax issues are individual to each donor and change year to year. Please check with your own accountants, advisors and tax preparers with regard to all deductions, tax preparation and tax advice issues.
1. Move More Money Into A Retirement Account
You can count your 2020 retirement contributions all the way up to April 15, 2021. This is the last day you can contribute to a Roth IRA or traditional IRA.1.
- You may file for extensions on SEP or Keogh's all the way out to October 15, 2021.
- You want to start contributing sooner than later if you want to reap the benefits of all the tax-free compounding on your IRA.
If you are moving money into your retirement account before the tax deadline of April 15, 2021 you will likely reduce your taxable income. You'll also collect compounding from your tax-free contributions.
Here are the specific requirements for your 2020 IRA contribution deduction:1.
- You cannot be eligible for a company sponsored retirement plan.
- If you are eligible for a company sponsored retirement plan you need to have an adjusted gross income (AGI) of less than $65,000 for single filers, or less than $104,000 for those filing jointly.
- If your spouse is eligible for a company retirement plan but you are not, your contribution to a traditional IRA will be completely deductible for joint filers claiming less than $196,000 AGI.
Here are the differences between a Roth IRA contribution and a traditional IRA contribution:1.
- If you are contributing to a traditional IRA before the tax deadline of April 15, 2021, the maximum deduction cannot exceed $6,000. You may deduct up to $7,000 if you are older than 50 all the way up to the end of 2021. If you are self employed you may deduct up to $57,000 for Keoghs and SEP's.
- Roth IRA's will not lower your taxes but they will be able to give you more money from withdrawals during retirement. Those that earn less than $124,000 (single) or $196,000 (joint) are the only tax filers that can deduct the maximum amount of $6,000 and $7,000 respectively for their 2020 Roth IRA contributions.
- Your tax savings from retirement contributions will be different based on your tax bracket and how many years you have been contributing.
The same tax savings can be filed with a Health Savings Account (HSA). Here are the qualification for HSA contributions: 2.
- The IRS has a requirement for a minimum deductible and annual out of pocket (OOP) amounts.
- Your contributions to your HSA will not lower your taxes if you have Medicare, are a dependent, or if you have other "first-dollar" medical coverage.
You won’t be able to participate in an HSA if any of the following are true:2.
- You have other “first-dollar” medical coverage.
- You're enrolled in Medicare.
- You are claimed as a dependent on another taxpayer’s return.
2. Organize Your Documents For Tax Time
Don't wait until the tax deadline to organize your documents. Getting your tax documents together early can help you score a bigger return.
Her are some helpful tips for staying on top of your tax document organization:
- Have a central location for your receipts and other tax information that is recorded in higher frequency.
- Create a checklist on your phone to control your tax process.
- You'll receive tax information via mail in January. Make sure to keep all of this information in one place.
- File tax documents by category so that you can know where to look when filing.
- Print out a statement for any stocks purchased 0r sold.
- Make sure you receive a tax document from your rental property. These mailed tax documents can often be missed or thrown away.
3. Locate And Fill Out The Proper Tax Forms
The IRS has plenty of resources online that guide you to the proper tax forms.
- The IRS has tax forms that go all the way back to 1980 right on their website.
- Federal or State, the IRS directs you to the tax forms you will need.
- Visit the IRS website to print forms or have them mailed to you.
Websites like TurboTax, TaxAct, and H&R Block are some of the most popular ways to do your taxes online. You can even file your taxes on the IRS website with "free-file".
4. Make Sure To Itemize Your Tax Deduction
Itemizing on your taxes can save you a lot of money on your taxes if you live in a high-tax region. own a house, and especially if you are self-employed.4
- If your expenses on your taxes equal more than 2020's standard deduction of $12,400 (single) and $24,800 (joint), you should consider itemizing your tax deductions.
- If your medical expenses are over 7.5% of your AGI for 2020 you can claim a partial deduction on your taxes.
- Charitable donations, mortgage interest, childhood expenses, and even student loan interest can be itemized.
Donating a car is a great way to lower your taxable income and support a charity of your choosing!
5. Count Your Home Office In Your Tax Return
Self employers with home offices can deduct their expenses for tax purposes even if they don't have a central office location. Here are some rules for itemizing your home office:5
- The space that you claim to be your home office must be used exclusively for your business.
- For renters, you can typically claim a whole month's rent for your home office expenses.
- For owners, you can claim a portion of you house's expenses based on the square footage of your home just for doing business in one room of your home.
Since home office tax deduction restrictions have been loosened, its never been easier to claim expenses for your home office.
6. If You Have Dependents, Include Their ID's
Children are a life-saver when it comes to tax time, make sure you have their Taxpayer ID's included in your tax return or the IRS will deny your dependent credits.6
- Can't find your child's ID? The IRS recommends that you file for a tax deadline extension. Do not file for taxes with a dependents ID missing.
- Hospitals will typically start the Social Security card process when the baby is born but make sure you have your baby's SSN when filing.
- For divorced parents, only one parent may claim a child as a dependent. Parents run the risk of delaying their return by doubly claiming a child.
7. Timing Is Key For Maximizing Your Return
If you did these things before the end of the year you may qualify for some extra deductions:11
- Donate to a qualified 501 (c)(3) charity before December 31 to deduct that item or cash on your taxes.
- Get all of your doctor's appointments and medical treatments done in the end of the year to increase your "medical expense deduction".
- Add to your "mortgage interest deduction" by paying January's mortgage before December 31.
- Purchase office supplies and equipment before the end of the year to deduct even more for your home office deduction.
8. Don't Pay In Late
The IRS recommends filing for an extension rather than paying in late. Filling for the Form 4868 gives you an extended filing deadline all the way up to October 15, 2021. Filing for a tax extension and paying any previous balance owed on your taxes can save you a lot in IRS penalties. Here are some of the penalties you can incur if you pay late on your taxes:7
- Any filing of the Form 4868 helps to stop the IRS on giving you late-filing penalties.
- The penalty for filing late is 4.5% per month of taxes owed and the penalty for paying late is 0.5% of the taxes due per month.
- There is a cap on filing and paying late on your taxes. The IRS can only charge you 22.5% for filing late and 25% for paying late.
9. Make A Payment Before January 15th
Avoid penalties and interest owed to the IRS due to underpaying on your taxes during 2020 by paying an estimated payment before January 15, 2020.3
If you don't pay all of your tax liability for the previous year or 90% of your tax liability for this year, you will owe a penalty for underpayment. Making an estimated payment before the deadline erases the underpayment penalty for the fourth quarter.
10. E-Filling Is The Way To Go
Filing electronically can significantly reduce your tax return waiting time. Direct deposit returns can also reduce the time to get your tax return back to you. Paper returns can add an extra 3-6 weeks on your waiting time.8
Besides processing speed, here are the other reasons to e-file your tax return:8
- The IRS has reported that 20% of paper returns have errors on them compared to to e-filed returns that have under 1% of errors.9
- When you e-file your return, the IRS will let you know that it has received your tax return. If you submit a paper return by mail, you will not know if your return has made it to the IRS, sometimes ending in tax penalties for lost returns.
11. Your Filing Status Is Important
Filing status is something that can affect your tax refund significantly. Sometimes, filing jointly when married is not the best decision when trying to maximize your tax return. Here are some of the reasons to change your filing status this year:10
- If you or your spouse lost their job this year and are paying a large amount of medical expenses you may want to file "married filing separately".
- You can both claim the "child tax credit" when "married filling separately" if you make less than $200,000 AGI. This is a $2,000 credit per child under the age of 17 years old.
Deductions and credits like these should be weighed out when determining your filing statues to make sure you get the biggest return.
If you are supporting a dependent(s) and are not married, filing as the "head of household" can significantly cut your tax bill.10
- A dependent is labeled as a person who you financially supported and lived in your household for over 6 months. It can be a child or an elderly person.
- Filing as "head of household" can be better for you in the long run than filing "single".
12. Find Every Possible Tax Deduction
Here are some overlooked tax deductions that you might be missing out on:11
- State sales tax: You've already paid state sales taxes that you may not be aware of. Visit the IRS website to find out how much you can deduct with the sales tax deduction calculator.
- State income tax paid on last year’s return: You can claim up to $10,000 by claiming last year's state income tax payment as an itemized deduction.
- Student loan interest: Claim a deduction for student loan interest payments, even if you didn't pay the interest yourself! If you are co-signed on a student loan, the person who is obligated to pay the loan is the one that receives the tax deduction.
- Medical miles: If your medical bills added up to more than 7.5% of your adjusted gross income you may qualify for 20 cents per mile.
- Reinvested dividends: Keep track of your mutual funds to make sure you reduce your tax liability this year and reduce your capital gain. Every reinvestment of a mutual fund can be included in your costs.
- Out-of-pocket charitable contributions: Paying for things like fun runs, bake sales, and other charity fundraisers can give you a nice tax deduction when it all adds up.
- Charity miles: If you had to travel for charity work in 2020 you can claim 14 cents per mile driven. If you drove for charity on a consistent basis, your charity miles tax deduction can add up to be a lot.
- Child and dependent care: If you spent $6,000 or less to help a dependent this year, you can use this deduction to qualify for the "child tax credit".
- Earned Income Tax Credit: Working full time with children can be hard for low income families. You can claim a tax credit based on your income and amount of children with the "earned income tax credit"
When it comes to charitable giving, make sure to track these things:11
- The purpose of the charitable giving or amount of miles with the date and amount of miles driven.
- Everything you donate has a market value. Keep track of these things for tax time and be able to prove your donations.
- Keep track of how much you spend on charitable events but don't count the amount of time it took you to participate in the charitable event.
13. Tax Credits Can Turn Your Tax Status From Pay In To Pay Out
Go green and save at tax time with home ownership tax credits:13
- Claim 26% of your qualifying eco-friendly home upgrades this year.
- If you paid for a qualifying energy saving home device in 2020 but didn't use it until 2021, you can carry over the cost into 2021.
- Buy qualifying eco-friendly vehicle to claim up to $7,500 for a tax deduction!
Unlike tax deductions, tax credits can give you more money back on your taxes. Receiving a $1 credit will get you $1 off your taxes. Here are some tax credits you might not be aware of:13
- You can earn up to $6,660 if you are in a qualifying tax bracket with three or more dependents.
- If you are supporting dependents and are living in a lower tax bracket, you can collect the "Earned Income Tax Credit". This is one of the highest unclaimed tax credit to date. Make sure you consider your situation if you are in the lower tax bracket and have dependents, such as elderly people.
- Having children that also need childcare services can qualify you for the "Child and Dependent Care Credit".
- You can still earn a tax credit of $529, even if you have no qualifying dependents, from the "Earned Income Tax Credit".
Claim these tax credits for having a child in college or being a college student:13
- This $2,500 "American Opportunity Credit" only applies to your expenses from your previous 4 years of full time undergraduate school expenses.
- Claim costs up to $10,000 for a possible $2,000 "Lifetime Learning Credit" this year if you are in graduate school or pursuing even higher education.
14. Donate A Car And Get A Tax Deduction
Wheels For Wishes is an IRS 501(c)(3) car donation charity that benefits Make-A-Wish chapters throughout the United States.
We make it very easy to donate your vehicle to charity and maximize your tax deduction. We’ll tow almost any vehicle from almost any location in the U.S.!
Your car donations make wishes come true for Make-A-Wish kids all over the U.S.. Here's how you can donate a car for a tax deduction:
First, fill out our online car donation form or give us a call at 1-855-278-9474. One of our call center representatives will assist you through the donation process. No matter what option you choose to donate your vehicle it will be fast and hassle free!
Next, you will receive a call within 24 hours of the next business day to schedule your free vehicle pickup.
Finally, once your vehicle is received, we will mail a tax-deductible receipt to you within a few weeks.
There are so many ways to save money on your tax return. Wheels For Wishes makes it easy to benefit a great cause and save money on your taxes with one simple car donation.