What for many is one of the most dreaded times of the year is upon us: tax season. The 2020 season is unlike the seasons we have seen in the past, bringing with it new laws and regulations for individuals.
For instance, there’s the new 1040-SR tax form for seniors, bigger rewards for those who contributed to a retirement account in 2019, and a new credit for dependents that may actually make you want to file your return.
Even if these changes equal more dollars in your wallet, there will inevitably be some growing pains associated with tax filing. The best way to avoid reprimands from the IRS is to file taxes correctly. If this seems daunting, a little preparation can go a long way.
To help navigate this often-stressful time, we reached out to industry veteran Paul E. Doty, managing partner for The Doty Group in Tacoma. He has more than 40 years of experience in public accounting.
Here are Doty’s top five tax tips for filing individual returns in 2020.
1 IRA Contributions Can Be Made Until April 15
It’s not too late to make certain contributions in order to count for the 2019 tax year. You have until April 15, 2020, to make IRA contributions, SEP-IRA contributions, and HSA contributions that can be a deduction for 2019.
2 Be Mindful of the $10,000 Cap
Under the new tax law that came into effect in 2018, state and local taxes were capped at $10,000, which became a big issue for many taxpayers. However, there is an exception for property taxes related to investment properties. These taxes may be deducted on top of the $10,000 cap.
3 New Credit for Dependents
Most people understand how children can be claimed for the child tax credit, but there is a new credit of up to $500 available for each of your qualifying dependents. It is called the “Credit for Other Dependents,” and you may be able to claim it if you have children 17 or over, including college students, children with Individual Taxpayer Identification Numbers, or other older relatives in your household.
4 Monitor Your Information for No Surprises Later
Tax-related identity theft is on the rise. Many individuals go to file their tax return and find out that someone has already filed fraudulently using their Social Security number. To avoid this surprise, we advise our clients to constantly monitor their financial information, utilize an email attachment safeguard, transfer sensitive files only through encrypted portals or emails, and shred documents containing sensitive information.
5 Organization Is Important
Give yourself time to get organized without waiting until the last minute. If you can’t get your paperwork in order with a long enough lead time, don’t be afraid to file an extension. The estimated balance you owe the IRS will still be due on April 15, but you gain six months to possibly find more deductions and avoid complications, such as receiving an amended 1099 from a brokerage firm and then needing to amend your return. Don’t fall for the myth that an extension increases your likelihood of being audited by the IRS. Rushing to file on time and then having to file an amended return is more likely to trigger an audit.