Every year brings some changes to the tax code, but 2020 has brought more than most as the COVID-19 pandemic upended life in ways we could never have anticipated. Some of these changes have opened up new tax deductions, while others have eliminated some common tax penalties -- at least for this year.
Staying abreast of these changes is crucial for minimizing your tax liability, so I've outlined three of the most important tax-saving opportunities for 2020 below. They may not all apply to you, but take advantage of the ones that do to help you hold on to more of your money this year.
1. New charitable donation deduction
In past years, you could claim a tax deduction for charitable contributions only if you itemized your deductions. Those who chose the standard deduction because it offered them a better deal never really got any tax benefits from their generosity. This has changed a little this year.
The CARES Act enables anyone who has made a charitable contribution in 2020 to claim a tax deduction of up to $300, regardless of whether they itemize deductions or claim the standard deduction. Your donations must be to a qualifying 501(c)(3) tax-exempt organization and they must be actual donations made this year, not pledges to donate. Money, food, and other donated items all count. If you haven't given at least $300, your charitable contribution deduction will be equal to your donation.
When you make your donation, ask for a receipt from the organization you're donating to, especially if you're donating a large amount. If you purchased food or other items to donate, keep those receipts as well to prove the dollar value of your donations. You won't turn these in with your taxes, but the government will expect to see them if it audits you, and it can disallow your deductions if you cannot prove their legitimacy.
2. Retirement account distribution changes
Some Americans have begun looking to their retirement savings to help them through these challenging times. Normally, distributions from tax-deferred retirement accounts increase your taxable income for the year by that amount, and you pay an extra 10% early-withdrawal penalty if you're under 59 1/2. But that would just be salt in the wound right now, so the government has altered the rules to make these distributions a little less painful.
There's no early withdrawal penalty for retirement account distributions taken due to COVID-19, and you can spread the tax liability out over three years rather than paying for it all in 2020. So if you withdraw $6,000 from your 401(k) for example, you can pay taxes on just $2,000 of your distribution in 2020, add another $2,000 to your tax bill for 2021, and pay for the final $2,000 on your 2022 tax bill, rather than paying taxes on the full $6,000 in 2020. You can still pay all the taxes in one year if you want, but the option to spread it out is nice if you're worried about ending up in a higher tax bracket if you have to pay taxes on the full amount all at once.
You don't have to put your distributions back into your retirement account, though that's an option if you want to and can afford to do so. COVID-19 retirement account distributions that you put back within three years won't count toward your retirement account contribution limit for that year, and you can file an amended tax return for the years you paid taxes on those distributions to recoup those funds.
3. No RMDs for adults 72 and older
Adults 72 and older are generally mandated to take required minimum distributions (RMDs) from all their retirement accounts, except Roth IRAs, every year. But the government has waived this rule in 2020 so that retirees aren't forced to withdraw large sums while the value of their retirement accounts is already down.
You are still free to take as much money out of your retirement accounts as you need to live, and you will pay taxes on that money unless it comes from a Roth account. But you don't have to worry about the government forcing you to withdraw funds. If you are able to get by without taking any money out of your retirement accounts, that might be a smart plan this year, because you'll be giving your savings a little more time to recover from the market crash before you have to use them.
We all want to keep as much of our hard-earned cash as possible, especially this year, so keep these tax-saving tips in mind and use them to your advantage if you can.