Before we dig into the “year in review,” we’d like to mention a provision that was written in to the CARES Act regarding Donations. Beginning in 2020, there will be an “above the line” charitable deduction (maximum $300) that you will be able to take, even if you don’t itemize. So, save your receipts this year, even if you don’t itemize, those donations will reduce your 2020 tax liability.
This week we would normally be seeing the tax deadline hit and the last minute rush of filers. With the deadline extended the filing season will be drawn out over three more months, but we still encourage you to finalize your return so you can plan accordingly for 2020. Once your return is done you should take time to review the returns and see what the numbers are telling you. Over my years of working with tax returns I have had way too many people tell me they just look to see if they have a refund or owe, sign the return, then stick it in their files. I challenge you not to be one of those individuals. Following are some items I like to look at when assisting with tax planning.
Large Refund- getting a refund is always nice, but if it is a large refund consider why it is so large. If you are over-withholding from your paycheck use the Tax Withholding estimator at www.irs.gov to see how you should adjust your W-4. Your end of the year refund would be smaller, but that could give you several hundred dollars more a month in your budget.
Balance Due - If you owed over $1,000 on your return you will need to make changes or set up quarterly estimated payment to avoid being penalized on the next year’s return. You can also check the withholding tool at irs.gov to adjust your W-4.
Credits - Look on your 1040 at lines 13a (Child tax credit) and 13b (other credits from Schedule 3). If there are entries on those lines you received a tax credit. A credit is a dollar for dollar reduction in your tax so changes in these year to year can make a large impact on whether you receive a refund or owe. Take a look at what the credit was for and if this is something that will be the same next year or will change. If you have a child turning 17 you will not receive the child tax credit of $2,000 the following year, this means your refund would be $2,000 less or you would owe $2,000 more. Conversely think about any credits you may qualify in future years. For example if there is a child heading to college you may qualify for the American Opportunity Credit which is up to $2,500.
Dividends and Capital Gains - If you hold mutual funds or stocks in your portfolio you may have taxable income due to dividends or capital gains distributions. If you find these numbers are large you may want to speak with an advisor to make sure your portfolio is designed correctly for your needs and tax situation.
Overall your tax return tells you a significant amount of information about your financial situation. These are just a few of the big items I take a look at, but each individual is different. It is one of the places where everything comes together for a quick snapshot. I really want to encourage you to take the time to pull out the papers and look it over, make sure you understand what your income and deductions are, and over time learn a little more about how your information comes together on that 1040 each year.