The last month of the calendar year can be a helpful time to review your personal finances for a couple key reasons: 1) There may be steps you can still take to reduce your taxable income for the year and get a better tax result, and 2) By reviewing your income, expenses, debt, savings, and tax situation, you can get a true picture of where your money is going and consider any adjustments you want to make in the new year.
Here are a few specifics to consider before the end of the year:
You may qualify for new tax benefits. — Even in a normal year, life changes and new tax laws can affect your tax return. Due to the pandemic this year, millions of Americans had job status and income changes, as well as business ventures, savings accounts and investments affected.
If your income decreased this year, you may be able to benefit from special tax considerations brought on by the CARES Act. It includes provisions to help ease the tax burden on things like hardship withdrawals from long-term savings accounts; and capital losses from investments. Consult a tax professional to make sure you receive the benefits that apply to your specific situation.
On the other hand, some people have retained more of their income this year, due to cancelled vacations and events, reduced commuting and childcare expenses, and spending less by staying at home.
If you have extra money that you can contribute to a tax-advantaged savings plan, you’ll want to make those contributions before the 2020 deadline. This will reduce your taxable income for 2020 and improve your tax result. (Assuming you haven’t already made maximum contributions* for the year.)
Find out the deadline for 2020 savings plan contributions. — For some types of plans, you need to contribute by Dec. 31 to benefit your current year tax return. But for others, you have up until Tax Day in April of the following year to fund the account. (April 15, 2021, in this case.)
For 401(k)s, the deadline to contribute for the current tax year is usually Dec. 31, but your payroll department may need advanced notice. Check with your HR contact or plan administrator for details.
For IRAs and Roth IRAs, you can contribute up until April 15, 2021, to get a deduction on your 2020 tax return. Make sure to specify the contribution is for 2020. If you don’t have an IRA or Roth IRA, you can still open one until April 15.
For Health Savings Accounts (HSAs), you can contribute up until April 15, 2021. If your HSA is through an employer’s plan, check with your HR contact or plan administrator to make sure no restrictions apply.
For 529 College Savings Plans — Several states offer a state income tax deduction or a state tax credit for 529 plan contributions. The majority require you to contribute by Dec. 31, but a few allow contributions up until Tax Day in April. Savingforcollege.com* is a helpful resource on 529 plans.
There’s still time to earn this year’s new deduction for charitable giving. — If you normally itemize deductions on your tax return, you may already be in the habit of tracking charitable donations you’ve made during the year to claim them on your return. But new for this year, the CARES Act provides a potential deduction for those who don’t itemize.
You can now claim up to $300 in monetary charitable donations as an above-the-line deduction (meaning you don’t have to itemize to claim it).
There’s still time to take advantage for 2020 by donating up until Dec. 31. Be sure to get a receipt and save it with your tax records.
Get the most out of healthcare and prescription plans. — Does your plan have an annual deductible that you’ve already met? If so, are there elective healthcare needs you could take care of before the deductible requirement renews? (Don’t forget to consider dental and vision plans too.)
Most importantly, choose to look at 2021 as a fresh new start! — No matter how challenging 2020 has been, the new year will bring an opportunity to reset your financial outlook. Try setting at least one specific goal for yourself to move your financial habits in the direction you want to go.
There may be specific exceptions to these tax laws as described. Always consult a tax professional to understand exactly how tax code and IRS regulations apply to your specific circumstances.