I know: You probably have a lot on your mind and don't want to think about taxes until you absolutely have to. But it's actually to your benefit to start thinking about your 2020 taxes now, even if you have months until you need to file them. The decisions you're making right now and over the next several months will dictate how much you owe in taxes and how much you may claim in deductions and credits.
Preparing for next year's tax season now can help you get through your taxes more quickly and make sure you get to keep as much of your own money as possible. Here are three tax tips to keep in mind this year.
1. Stay mindful of which tax bracket you're in
Your tax bracket dictates what percentage of your income you lose to the government. For 2020, they range from 10% to 37%. Your bracket will depend on how much you make during the year and your tax filing status. Here's a guide to help you figure out which tax bracket you might fall into this year.
Your income may be a little different this year, especially if you were unemployed for some time, so it's important to check the tax brackets and monitor your income throughout the year to figure out where you believe you'll fall. If you're at the bottom of a tax bracket, you might be able to move down into a lower tax bracket by using some of the tips below to reduce your taxable income.
2. Contribute to tax-deferred retirement accounts
Tax-deferred retirement account contributions help you prepare for your future while also lowering your tax bill today. You're allowed to contribute up to $19,500 to a 401(k) in 2020, or $26,000 if you're 50 or older. You may also stash up to $6,000 in an IRA, or $7,000 if you're 50 or older. Every dollar you put into a traditional IRA or 401(k) reduces your taxable income for the year by one dollar, and that can potentially drop you into a lower tax bracket, so it's a great choice for those who believe they're in a higher tax bracket now than they will be once they retire. Even if it doesn't lower your tax bracket, it'll still reduce how much money you'll owe income tax on. But keep in mind you will still have to pay taxes on your distributions from these accounts in retirement.
Despite the tax benefits today, tax-deferred retirement accounts aren't always the best choice if you're trying to pay the least in taxes on your retirement savings. If you suspect that you'll be in the same or a higher tax bracket in retirement, Roth accounts are a better choice. You'll pay taxes on these contributions this year, but then you won't owe any taxes on distributions in retirement.
You can also contribute some to each type of retirement savings to take advantage of some tax savings now and some later, but you should favor whichever one will be more beneficial to you over the long run.
3. Keep all of your receipts for deductible expenses
Tax-deferred retirement account contributions aren't the only tax deductions you can claim. You can write off self-employment business expenses, medical bills that exceed 10% of your adjusted gross income (AGI), mortgage interest, some higher education expenses, charitable contributions, and more. The catch is, you need to keep receipts on hand to prove your deductions are legitimate. You don't need to submit them with your taxes, but you must be able to provide them if the government audits you or it will disallow your deductions.
Start a folder where you can keep all of your tax deduction receipts. You may want to highlight relevant expense information on each form so you can quickly find the numbers you need when you fill out your taxes. Don't forget to ask for receipts for charitable donations, and make sure your donations are deductible. If you're donating to a 501(c)(3) organization, you should be in the clear. You must also make charitable contributions before the end of the year if you want them to count as a deduction on this year's taxes. Checks you postdate for the next year don't count.
Keep taxes in your mind throughout the year, and don't overlook opportunities to reduce your taxable income and hold onto your own money. When next year's tax season comes around, you'll be glad you were thinking ahead.