Tax Tips for 2021Published:
10 Tax Tips for Your Federal Income Taxes
As the end of 2021 approaches, it’s a good idea to review your tax situation and consider any adjustments or obligations that should be taken care of before the year is over.
Here are 10 tax tips to help you this year.
1. Make an Estimated Tax Payment
If you didn’t pay enough tax to the IRS during the year via withholding, you may be facing a large tax bill as well as interest and penalties. You are expected to make quarterly Estimated Tax payments on any taxable income you earn that is not subject to Withholding Tax (i.e. tax that is withheld from your paycheck automatically through your employer). Generally, Estimated Tax payments are due on January 15, April 15, June 15, and September 15.
2. Contribute to Retirement Accounts
Now is a good time to make contributions to your IRA. For 2020, the total contributions you make during the year to all of your traditional IRAs and Roth IRAs cannot be more than $6,000 or your taxable income, whichever is lower. Your traditional IRA contribution may be tax-deductible, depending on your situation. If you (and your spouse) are not covered by a retirement plan at work, you can deduct the full amount of your contribution from your taxes. If you are covered by a retirement plan that is employer-sponsored, your deduction is limited based on your income and filing status.
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3. Review Potential Tax Credits and Tax Deductions
There are a number of federal tax breaks available to individuals – including the Earned Income Tax Credit (EITC), the newly expanded Child Tax Credit (CTC), the Recovery Rebate Credit, a tax deduction for charitable donations, education tax breaks, and more. Make sure to review all the potential tax breaks that you may be eligible for so you can save as much money on your taxes as possible. If you need assistance, consider hiring a reputable tax professional to help guide you.
RELATED: Top COVID-Related Tax Breaks
4. Get a Tax Break for Donating to Charity
In response to the COVID-19 pandemic, the IRS has granted a temporary suspension on the limits for charitable contributions. This refers to donations that are made by individuals to a qualified charitable organization (as recognized by the federal government).
Thanks to this provision, you are allowed to deduct qualified cash donations up to 100% of your adjusted gross income (AGI). (Normally, this is limited to 60% of your AGI.) Contributions that exceed that amount can be carried over to the next tax year.
To qualify for this tax break, your donation must be:
- a cash contribution
- made to a qualifying organization
- made during the calendar year 2020
Note that donations of non-cash property do not qualify for this tax relief, however, you may still claim non-cash contributions as a tax deduction (subject to the normal limits).
5. Decide If You Will Itemize Deductions
When you file your return, you will have the choice of claiming the standard deduction or itemizing your deductions – but you cannot claim both. You should choose whichever option results in the lowest tax for you.
Examples of itemized deductions include: medical expenses, state and local taxes, real estate expenses (e.g., mortgage interest or insurance), charitable gifts, and casualty or theft losses. Once you add up the itemized deductions that you qualify for, you can compare that amount to the standard deduction to see which is better for you to claim.
The standard deduction amount for tax year 2020 is $12,400 for single filers and married taxpayers filing separately, $24,800 for married taxpayers filing jointly, and $18,650 for head of household filers.
RELATED: Should You Itemize Your Deductions?
6. Get a Bigger Tax Refund
Remember that a tax refund is essentially the IRS returning your own money to you – the money you overpaid in taxes during the year. Therefore, it’s generally recommended that you don’t aim for a huge tax refund because it’s like giving the federal government an interest-free loan. To manage the amount of your refund, you can adjust your withholding tax. You can also make sure to take advantage of every tax break that’s available to you, which will help lower your tax burden.
7. Check Your Withholding Tax
Income tax is a pay-as-you-go system, meaning that the federal government expects you to pay your taxes during the year. This is done through Withholding Tax or Estimated Tax. If you’re employed, your employer will withhold tax from your paychecks and send it directly to the federal government. How much is withheld depends on how you fill out Form W-4 (Employee’s Withholding Certificate), which must be submitted to your employer whenever you start a new job. If you want to adjust your withholding tax, you can submit a new Form W-4.
The more tax you have withheld, the bigger your tax refund will be because you’ve essentially overpaid the IRS. It’s wise to adjust your withholding so you’re paying enough to satisfy your tax liability, but not overpaying and letting the IRS hang onto that money all year.
RELATED: Withholding Tax Basics
8. Gather & Organize Your Tax Records
Make sure you have all your tax-related documents in a secure place where you can access them when it’s time to file your annual return. This includes any W-2s, 1099s, schedule K-1s, and receipts, as well as last year’s tax return. Staying organized will save you time and major headaches down the road.
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9. File & Pay Your Taxes Electronically
Filing online is easy and convenient – just make sure you use an authorized IRS e-file provider that is certified to electronically transmit tax returns. Also be sure to use a personal computer to keep your information safe. If you owe taxes, you can also pay your taxes online from your bank account or with a credit card at IRS.gov. If you’re due a tax refund, it’s recommended that you choose the Direct Deposit option to have your refund sent to your bank account.
10. Avoid Tax Scams
Always keep your personal information and tax-related documents in a secure place, and be wary of potential identity thieves and other fraudsters. Many scammers will pose as the IRS or a fake charity to trick victims into providing personal information. Remember that the IRS does not call or email taxpayers; the IRS mails notices/letters to taxpayers when there’s an important matter at hand. For more information about avoid tax scams, see: IRS Warning About Tax Scams for 2021.