Tax Strategies for Individuals
Current Tax Strategies for Individuals
If you’re like just about everyone else on the planet, you’ve probably had some struggles with navigating all that’s been happening in 2020. Once we happily bid farewell to this challenging year, the effects of 2020 could certainly still linger—like when you’re filing your annual taxes.
Some good news: 20020 tax laws haven’t changed much in comparison to 2019’s regulations. In fact, only minor changes have occurred since 2018’s tax reforms.
But…your employment situation could have changed dramatically this year. Maybe you lost a job or needed to collect unemployment for a little while. Perhaps, your hours were reduced and as a silver lining, you now find yourself in a lower tax bracket. Or, maybe you even picked up some freelance or gig work to help you stay afloat.
All of these are things that you should consider in your 2020 tax strategy.
Are you planning to file your 2020 taxes as single? If so, then the following are some tax strategies for individuals that you should know about.
Tax Brackets for 2020
Before we start talking about deductions you should consider, let’s take a quick look at which tax bracket you fall under. After all, the amount of taxable income you make plays a big role in the taxes you pay.
Depending on your tax bracket, you pay a flat rate PLUS a percentage of the money you make above the lowest amount of your tax bracket. The more taxable income you make, the more you pay back to the government.
As a single individual, meaning you are not filing as married or head of household, the 2020 tax brackets are as follows according to the IRS:
- Those earning between $0 and $9,875 pay 10% of earnings over $0
- Those earning between $9,875 and $40,124 pay $987.50 plus 12% of the amount over $9,875
- Those earning between $40,125 and $85,525 pay $4,617.50 plus 22% of the amount over $40,125
- Those earning between $85,525 and $163,300 pay $14,605.50 plus 24% of the amount over $85,525
- Those earning between $163,300 and $207,350 pay $33,271.50 plus 32% of the amount over $163,300
- Those earning between $207,350 and $518,400 pay $44,367.50 plus 35% of the amount over $207,350
- And finally, those earning more than $518,400 pay $156,235 plus 37% of the amount over $518,400.
Please note: These are JUST the tax brackets for those filing as single. Tax brackets are different for those filing as head of household, married filing jointly, or married filing separately.
Why is understanding tax brackets so important? Once your taxable income reaches a higher tax bracket, you will be paying significantly more in taxes. For example, if you were making $40,000 a year of taxable income and recently got a raise or took on some freelance work, you may have to pay more than $4,000 in additional taxes.
And, that number jumps dramatically as you enter each new tax bracket.
Those who have taxable earnings close to the limits of the next tax bracket can save A LOT of money if they apply their deductions wisely and stay in the lower tax bracket.
Tax Rates on Long-Term Capital Gains
Do you invest in the stock market? Are you making money with capital gains? Some of that profit is taxable.
As an individual, the tax brackets for capital gains are:
- 0% for gains up to $40,000
- 15% for gains between $40,000 and $441,450
- 20% for gains above $441,450
Standard Deductions for 2020
Many people keep their taxes simple by taking the standard deduction. A standard deduction is a predetermined portion of your income (established by the government) that is not subject to taxes. In the 2018 tax reform, standard deductions nearly doubled. Since then, the standard deduction hasn’t changed much aside from adjusting for inflation.
Why choose the standard deduction? It may take more time, effort, and money to itemize all of your deductions if your tax savings aren’t much higher.
Sure, if you are meticulous about keeping your receipts and recording deductible expenses, you may benefit from itemizing your taxes—especially if you enlist a tax professional who knows all the current tax codes to prepare your return.
In certain circumstances, itemizing may be a better option. If the expenses you can deduct will be more than the standard deduction—and worth your time and effort maintaining records—you should consider itemizing. In a little bit, we’ll talk about some popular tax deductions to help you make the best decision.
But first, let’s take a look at the standard deductions for 2020.
- Filing single: $12,400
- Married filing jointly: $24,800
- Head of household: $18,650
- Married filing separately: $12,400
A majority of filers are eligible for the standard deduction. But, according to the IRS website, those who can’t use the standard deduction include:
- A married individual filing as married filing separately when the spouse itemizes deductions.
- An individual who files a tax return for a period of fewer than 12 months.
- A nonresident alien or dual-status alien during the tax year. If a nonresident alien is married to a U.S. citizen or resident alien they may want to check with a tax professional to see if they qualify for a standard deduction.
Do you think your tax deductions could be more than the standard deduction? Let’s take a look at some of the more popular tax deductions.
Most Popular Itemized Deductions
Thinking of itemizing your tax return? You will have to list all qualifying deductions on a Schedule A and be sure you have the records to prove it. Here are the deductions those itemizing typically use.
Interest on Mortgage Loans
Have you recently bought a house or opened a new mortgage? As an individual, you can claim a deduction on the interest of a mortgage up to $750,000. That amount is cut in half if you are married and filing separately.
If you acquired a mortgage before December 15, 2017, you can deduct mortgage interest on loans up to $1 million.
On a related note, qualified private mortgage insurance (PMI) premiums can also be deducted on your first or second home. PMI is a type of insurance that protects the lender if you start defaulting on your loan. It doesn’t protect you sadly—just your lender.
Typically, PMI is required if you have a conventional mortgage with less than 20% of a down payment on the house you purchased. PMI helps people qualify for mortgages that don’t have the money for big down payments.
The amount you can deduct from PMI premiums depends on your adjusted gross income. Be sure to check with your tax professional if your adjusted gross income is more than $100,000.
State and Local Taxes
If you itemized taxes before 2018, you probably know there was no limit to what you can claim for the state and local tax deduction (SALT). The tax reform changed that. Now the limit for all these taxes is $10,000.
Here is what you can claim:
- State and local real estate taxes
- State and local sales tax OR state or local income tax
Contributions to Charity
Do you have extra money, time, or property that you’re willing to give to a good cause? Your good intentions can also benefit you in the form of a tax deduction. Giving cash to a qualified charitable organization is often fully deductible. Also, any property you give to charity—like an old car—is deductible up to the fair market value. Just make sure to obtain receipts from the organization you’re donating to in case you get audited.
Putting money in savings for your retirement can be tax-deductible. Just make sure you understand the type of retirement plan that you’re using.
For example, if your retirement savings come from a 401(k) plan provided by your employer, your contributions are PRE-TAX. You can’t claim it as a deduction, but your employer doesn’t include your contributions when reporting your taxable income. That being said, when you start taking money out of your 401(k), that money is taxed at an individual’s current income tax rate.
If your employer doesn’t provide a 401(k) plan or you are self-employed, there are other options to save for your retirement. The most common are traditional and Roth IRAs.
Taxing for a traditional IRA is similar to a 401(k) plan. Traditional IRAs are tax-deferred—you pay the taxes once you start withdrawing funds. So, you can claim tax deductions on what you contribute to a traditional IRA in any given year. Currently, the maximum contribution is $6,000 (or $7,000 if you are over 50).
Conversely, a Roth IRA is money contributed after taxes are paid. You won’t be able to claim any deductions for the current year. But, the funds are tax-free once you start withdrawing them.
Be sure to talk to your tax professional about the pros and cons of IRAs and the restrictions on your contributions and deductions based on your individual situation.
Tax Credits For 2020
A tax credit is different than a deduction. Why? If you are eligible for a tax credit, it is directly applied to your tax bill. A deduction, on the other hand, reduces what you report as taxable income.
Put it this way: A $500 tax credit cuts your tax bill by $500. A $500 tax deduction cuts your tax bill by $50 to $200, depending on your tax bracket and other circumstances.
Beginning to see why tax credits should be on your radar when preparing your tax return?
Be aware, however: Many tax credits are income-restricted. This means if your adjusted gross income is more than a predetermined amount, you may only qualify for a portion (or even none) of the tax credit.
Here are some of the most common tax credits for 2020.
Child Tax Credit
Let’s face it, children are expensive. The government helps ease a little of this burden with a $2,000 tax credit for each qualifying child. This amount is even partially refundable—up to $1,400 can go into your pocket if you have a zero tax liability.
Of course, if you are filing as an individual, you want to be sure that no one else is claiming the child in question as a dependent.
Child and Dependent Care Credit
Are you paying for child care so that you can work or attend to other matters? You can receive up to a $3,000 tax credit for qualifying expenses related to child care for a single child. The amount doubles for two or more children.
The amount you receive depends on your qualifying expenses and adjusted gross income. For example, if your AGI is $15,000 or less, 35% of your childcare can be a tax credit. The percentage gradually drops as the AGI gets higher, but everyone is entitled to at least a 20% tax credit for child or dependent care expenses.
However, the child care credit only applies to adults with earned income. Eligible expenses could come from a daycare business or individual that comes to your home to care for your child(ren). As an individual, you cannot claim this credit if you are married and filing separately.
Earned Income Tax Credit (EITC)
We’ve all faced hardships this year. In some cases, our income took a major hit. The Earned Income Tax Credit (EITC), allows individuals (or families) with low incomes to receive a fully refundable tax credit.
For example, in 2020 an individual making less than $15,820 of adjusted gross income can obtain a $538 tax credit. The limitation and credit amount increase dramatically if you have qualifying children. For example, if you are an individual with one qualifying child and have an AGI of $41,756 or less, then you can obtain an EITC credit of $3,584.
Have you returned to school this past year? Then you may qualify for a credit on your tax bill. Two opportunities exist—the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC)—for those pursuing higher education to better their potential for income.
Let’s take a quick look at how these education tax credits work.
The American Opportunity Tax Credit (AOTC)
The AOTC can bring in up to $2,500 in tax credits for qualifying students. If you are in your first four years of post-secondary education, the AOTC can be a great way to get back some of the costs of your education. You need to be enrolled at least half-time in a qualified higher education institution and be pursuing a degree, certificate, or another credential.
In addition, as an individual, your AGI must be less than $80,000.
The AOTC credits you 100% of the first $2,000 in qualified higher education expenses. After that, 25% of the next $2,000 dollars in qualified expenses are credited.
If you have zero tax liability, you can be refunded up to $1,000 thanks to the AOTC.
There are some restrictions and not every higher education expense will qualify. Be sure to talk with your tax professional or learn more at the IRS’s AOTC webpage.
Lifetime Learning Credit (LLC)
If you don’t qualify for the AOTC, all is not lost. The Lifetime Learning Credit allows those returning to higher education—even for a single course—to receive partial credit for these expenses.
The LLC is designed to help those with more modest incomes. An AGI of $59,000 or less for individuals is required to fully qualify for this tax credit. Those with an AGI over $69,000 are not eligible for the LLC.
If you fall into this income range, the LCC tax credit can be worth 20% of up to $10,000 in qualified higher education expenses. Find out more about the lifetime learning credit here.
Unemployed During 2020?
2020 has been anything but ordinary. Sadly, many people had to resort to unemployment benefits during the country’s COVID-19 shutdown.
Here’s something you need to know: unemployment benefits ARE taxable. Yes, the government will send you a Form 1099-G at the start of 2021.
You don’t need to get hit with a big tax bill next year, though. You can complete Form W-4V (voluntary withholding request) to get 10% taken out of your unemployment check. Sure, if you’re going through a hard time, this may seem like a bit more than you can manage. We have no idea what next year will bring, however, so if you can afford that withholding, it’s strongly recommended.
Even if you spent much of 2020 unemployed, be sure to file your tax return as soon as possible. If you lost a high-paying job, you may be eligible to fall into a lower tax bracket. And as you learned earlier, a lower tax bracket can give you significant savings (or even a refund) on your tax bill.
Learning to Adapt During 2020?
Have you taken on odd jobs or freelance work to make ends meet? Guess what? You’re self-employed. That’s a whole other set of tax rules. The income you earn from freelance work isn’t taxed like when you work for a company. This means, come tax time, you may owe more than you think to pay for social security and other taxes.
In fact, you’ll need to file a Form SE (Self-Employment Tax) and attach it to your 1040 return. Depending on the nature of your freelance work, you may be able to deduct expenses to ease the tax burden. Consult with a tax professional to determine eligible expenses for your self-employment income.
Let’s Summarize…Individual Tax Strategies for a Crazy Year
Pre-pandemic, you may have worked at a good-paying job and easily filed your taxes with a standard deduction. Like it or not, times have changed. There’s been a lot of adapting this year, and, well, this could affect how you file taxes as you transition into 2021.
On the bright side, the challenges of 2020 may give you an opportunity to explore tax strategies, deductions, and credits you never even knew about.
So as we usher in a new year hoping things will be much better, you should ask yourself some important questions before filing your individual 2020 tax return:
- Are my earnings bordering on a lower tax bracket due to lost wages?
- Have I pursued higher education to help adapt to the changing world?
- Did I use unemployment benefits or take a big hit in my income?
- Can I save more money by itemizing deductions? Do I have the time and documentation to ensure these savings?
- Have I taken on freelance or gig work to make extra money?
If you answered “yes” to any of these questions, you should consider consulting with a tax professional.
This article only scratches the surface of current tax codes, deductions, and credits. Tax laws are complicated. The DIY mentality may be great for interior painting or fixing a leaky faucet. Doing your own taxes—even with available software—can mean losing out on deductions and credits entitled to you by the law.
Even worse, incorrectly filing your taxes can result in an audit, penalties, and interest charges.
Don’t Waste Your Time Trying to Figure Out Tax Codes
You’ve been through enough this year. Do you really want to sift through the IRS website and figure out what deductions and credits you qualify for?
Do yourself a favor…leave it to the professionals.
The team at Steven Lissner & Company has over three decades of experience helping individuals sift through the onerous details to get the tax benefits they deserve. No matter what your 2020 situation was, we are here to help you.
You’ve had plenty of headaches this year. Don’t let filing your taxes be another. Request a financial consultation today. Or simply give us a call at (973) 917-4080.
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