There are a number of opportunities to offset prior-year income and capture credits.
Areas to look at include:
- Retirement plan contributions
Retirement plans: Retroactive contributions
Your traditional Individual Retirement Account, or IRA, offers the biggest potential bang for the buck.
The Internal Revenue Service (IRS) allows taxpayers to make deductible prior-year contributions all the way up to the tax-filing deadline.
For tax year 2020, total contributions to all of your traditional and Roth IRAs for taxpayers under age 50 cannot be more than either $6,000, or your total compensation for the year if you earned less than that amount. Those 50 and older can make an additional $1,000 catch-up contribution, for a total of $7,000.1
Your actual tax deduction, however, may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels.
Eligible taxpayers can also make retroactive contributions to their Roth IRA until April 15. Different phaseout limits apply for Roth contributions.
Because Roth IRAs are funded with after-tax dollars, your contribution will not yield a current-year tax deduction, but it could potentially produce a better investment return since earnings upon retirement can be distributed tax free.
Tax deductions: Roll up your sleeves
Most taxpayers take the standard deduction, a fixed dollar amount set forth by the IRS that reduces the amount of income on which they are taxed.
Why? Because it’s a lot less work. You don’t have to keep track of your expenses, or individually deduct them on IRS Schedule
As a result, many taxpayers who previously itemized deductions may find it more beneficial to claim the standard deduction this year.
Nevertheless, some people may opt-out of a standard deduction because they keep track of their expenses in an organized manner. For example, business owners claiming a tax deduction on vehicle mileage may keep a track of it by using online tools such as MileIQ or similar mileage tracking apps that can track logs and calculate mileage for each trip used for business travel.
The only thing worse than giving Uncle Sam his due is leaving him a tip.
To avoid a potentially hefty late-filing penalty, you must submit your income tax return on time, regardless of whether or not you can afford to pay.
Indeed, the failure-to-file penalty can be as much as 5 percent of your unpaid taxes for each month or part of a month that your tax return is late, up to 25 percent of your unpaid taxes.
Submitting your tax return electronically ensures greater accuracy than mailing it in since the IRS e-file system flags common errors and kicks back returns for correction.
When it comes to lowering your taxable income, you are your best advocate.
Tax deductions, which reduce the amount of your income subject to tax, are great, but tax credits, which reduce your tax bill dollar for dollar, are even better. So don’t leave any tax credits or deductions for which you are eligible on the table.
Families with dependent children may be eligible to claim a credit of up to $2,000 per qualifying child under the Child Tax Credit.
If you paid for someone to care for your child, spouse, or dependent so you could work or look for a job, you may be able to claim the Child and Dependent Care Credit.
Similarly, those paying for higher education expenses may be able to claim one of two tax credits: the American Opportunity Tax Credit, or the Lifetime Learning Credit. You cannot claim both credits for the same student in the same year.
If you haven’t yet filed your tax return, there’s still much you can potentially do to minimize the amount you may owe.
By taking advantage of tax-favored retirement tools, filing an accurate return, and educating yourself on available deductions and credits, you might just save enough to pay off your credit card debt or catch a flight somewhere warm