Still Need to File Your Tax Return? Here are Last-Minute Planning Ideas
Haven't filed your personal tax return yet? No shame there, tax return filing ranks right up there with a visit to the dentist to get cavities filled in terms of unpleasantness, so procrastinating is understandable.
And besides, your delay could pay dividends by implementing some last-minute tax moves that you can still use all the way up to the filing deadline, April 15, 2021.
Here are some ideas that may save you tax money now and/or later down the line:
1. Make a Traditional IRA Contribution
If you've not yet made a deductible IRA contribution for the 2020 tax year, you can still do that until April 15 and still deduct it on your 2020 return. Depending on your earned income, you can potentially make a deductible contribution of up to $6,000 ($7,000 if you were age 50 or older as of December 31, 2020), and if you're married, your spouse can do the same.
Word of caution, your deduction may be limited if you (and/or your spouse, if married) is an active participant in an employer-sponsored retirement plan and your income is too high, so be sure and check those limits before you commit to the contribution.
And here is some big new, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, you now can make IRA contributions regardless of your age. Before the SECURE Act, you lost the right to make traditional IRA contributions after reaching age 70½. That restriction is now gone!
2. Make a Deductible Health Savings Account (HSA) Contribution
If you had a qualifying high-deductible health plan (HDHP) last year, you can still make a deductible HSA contribution for your 2020 tax year if you've not already done so. Like an IRA, the contribution deadline is April 15.
For 2020, the maximum deductible HSA contribution is $3,550 for self-only coverage or $7,100 for family coverage (anything other than self-only coverage).
Don't have an HSA set up yet? No problem! If you're eligible to make an HSA contribution for last year because you had a qualifying HDHP, you have until April 15 to establish an account and make your deductible contribution.
There's more good news. The deduction for HSA contributions is what is called an above-the-line deduction, meaning you can take the deduction whether or not you itemize. Further, the HSA deduction isn't phased out for high-income taxpayers, as long as they have qualifying HDHPs and meet other eligibility requirements. On top of that, any income earned by the funds in the HSA will be forever tax-free so long as they are used for qualifying medical expenses, including over-the-counter medications.
3. Deduct State and Local Sales Taxes (Instead of State and Local Income Taxes)
If you itemize your deductions, you have a choice as to whether to deduct your state income taxes or state and local general sales taxes. Obviously, you normally will want to deduct the larger amount, realizing that under current tax law, regardless of which you choose, you can't deduct more than $10,000 for all categories of state and local taxes combined ($5,000 if you used married filing separate status).
If you can benefit from choosing the sales tax option, you can use an IRS-provided table (based on your income, family size, state of residence, and local sales tax jurisdiction) to figure your allowable sales tax deduction.
Alternatively, if you kept receipts from 2020 purchases and that gives you a bigger write-off, you can add up the actual sales tax amounts and deduct the total, and yes, some people do that!
Even if you use the IRS table, you can add actual sales tax amounts from major purchases, such as:
- Motor vehicles (including motorcycles, off-road vehicles and RVs),
- Aircraft, and
- Home improvements.
In other words, you can deduct actual sales taxes for these major purchases on top of the predetermined amount from the IRS table.
Using the sales tax deduction instead of the state income tax deduction can also lower future taxable income. That is because if you deduct your state income taxes and end up getting some of that back in a state refund, part or all of the refund may be included in your taxable income on the next year's federal return.
4. Contribute to a 529 Education Savings Plan
A contribution to a qualified 529 plan can be a great way to save for future qualified education expenses for you or a member of your family. While there is no federal tax deduction for a 529 contribution, some states do allow you to deduct them. For instance, Arkansas allows for up to a $5,000 529 plan contribution per taxpayer (i.e., $10,000 for a married couple). Further, the money invested in the 529 plan grows tax-free and is never taxed so long as plan distributions are used for qualified education expenses.
5. Deduct noncash donations to charity
Many people make noncash donations to charity during the year, such as donating clothing and household items to your local charity thrift store. Don't forget, if you itemize, you can deduct the current fair market value of such noncash donations in addition to the donations of cash you may have made. These donations can really add up sometimes.
As an aside, don't forget that for 2020 there is also a special $300 charitable deduction available even to nonitemizers for cash donations made during the year.
Author's Note: After this article was written originally, the IRS and the State of Arkansas announced that this year’s 1040 filing deadline is being delayed until May 15, 2021. At this time, guidance has not yet been released as to whether the other April 15 deadlines referred to below are also delayed.