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• Collect W-2s, 1099s, and other information on income and deductions needed to prepare your 2020 tax return. Make your appointment for tax return preparation early to give you time to find any missing information and still meet the filing deadline.
• Check for errors when you receive your 2020 W-2s, 1099s, and other tax information forms. If there are errors, contact the sender immediately and request a corrected copy.
• Check the different filing options you can use on your 2020 tax return. Often a married couple can cut taxes by filing separately if one has lower income but higher medical expenses or other deductions. You have to work out the numbers each way to be sure.
• If you did not contribute the 2020 maximum to your IRA by December 31, 2020, and you make any IRA contributions prior to April 15, 2021, be sure to designate to your bank or other trustee that these 2020 contributions are for 2019 (up to the maximum allowed). You can then deduct these amounts on your 2020 tax return for a quicker tax benefit.
• Make your 2020 retirement plan contributions as early this year as possible in order to maximize your tax-deferred earnings.
• Don’t overlook any of the tax credits available to reduce your 2020 tax bill.
• If you had self-employment income in 2020, you can contribute to a SEP or a Keogh pension plan. (The Keogh had to be in place by December 31, 2020.) Contributions can be made up to the due date of your 2018 tax return, including extensions.
• Schedule your tax appointment well before the filing deadline. Afterward, you may need time to chase down missing records or resolve other problems before the deadline.
• Check for carryover items that could reduce your 2020 taxes. Check prior years for unused items such as capital losses, investment interest expense, business operating losses, and charitable contributions.
• Maximize your child care credit. If you and your spouse are both employed at full- or part-time jobs, make sure you get the maximum benefit from the child care credit. When calculating the credit, remember that you may be able to include the cost of day care, nursery school, babysitting, and summer day camp.
• You have until April 15 to make a 2020 contribution to your individual retirement account (IRA). If you don’t have an IRA, you can establish one and make your contribution by April 15. If your contribution is deductible, meeting the deadline can cut your 2020 taxes. Be sure to make clear to your bank or broker that the contribution is for 2020 even though you’re making it in 2020.
• Review your children’s 2020 tax filing requirements. Unlike other taxpayers, the IRS treats your child differently depending on whether they earn money from work or through investments. All dependent children who earn more than $12,200 of income in 2020 must file a personal income tax return and might owe tax to the IRS. Earned income only applies to wages and salaries your child receives as a result of providing services to an employer, even if only through a part-time job. However, even if your child earns less than $12,200 during 2020, it may be a good idea to file a tax return for them, because they could be eligible for a tax refund. Regardless of the amount of income your child earns, their standard deduction is different than yours. It can never exceed the larger of $1,100 or their earned income plus $350, with the maximum equal to $12,200.
• Tax credits are too valuable to overlook. A tax credit is subtracted directly from the amount of tax you owe, unlike a deduction, which reduces your taxable income. That’s why a credit is always more valuable than a deduction. Credits available to claim on your 2020 tax return include child care, tuition, adoption, and energy improvements.
• If you can’t file your tax return by the April 15 deadline, use Form 4868 to get up to six additional months to complete your return. Even if you have no problem filing by April 15, requesting an extension might be a good idea in some situations, such as when you need more time to make certain employer-provided retirement plan contributions. Be aware that Form 4868 extends only the filing deadline.