Although 2020 is drawing to a close, there’s still time to maximize your tax deductions and credits to lower your tax bill.
GIVE A GIFT
Typically, you can only deduct your charitable contributions if you itemize deductions on Schedule A. But the CARES Act allows non-itemizers to deduct up to $300 in cash donations to qualified charities. For itemizers, the previous 60% adjusted gross income cap for charitable donations is bumped up to 100% for 2020.
INVEST FOR RETIREMENT
If you’re a freelancer or self-employed, consider starting a simplified employee pension. Also called a SEP IRA, this type of retirement account allows you to contribute up to 25% of your self-employment earnings, with a maximum contribution of $57,000 for 2020. All contributions you make are tax-deductible.
For parents with children under age 17 at the end of the year, the child tax credit can provide a $2,000 credit per qualifying child to lower your tax bill. This is one of the few refundable credits. So if it reduces your tax bill to zero, you may get a partial refund. This credit begins to phase out for individuals with a modified adjusted gross income over $200,000.
Tax credits are still available for installing renewable energy devices on your primary home. Installing things like solar panels, solar water heaters, geothermal pumps and small wind turbines can score you a tax credit of up to 26% of the costs. This credit is non-refundable so any unused credit can be carried forward to future years.
Don’t forget to max out retirement account contributions. Depending on your plan, you may be able to put away $19,500 in your 401(k) or $13,500 in to a SIMPLE IRA and $6,000 into your IRA, if your modified adjusted gross income is less than $65,000 for single filers or $104,000 for married filing joint taxpayers. Each plan also offers those age 50 and older the opportunity to make additional catch-up contributions.