From pandemic-related stimulus payments to job losses and furloughs, for many taxpayers, next spring's tax season may be more complex than usual. With the end of 2020 rapidly approaching, you should take some time to review your tax situation and make any necessary changes that can help you avoid surprises on April 15, 2021. Below are some steps you can take now to get a jump on next year's tax season.
Check and Adjust Your Withholdings
January can seem like a lifetime ago, and taxpayers who haven't checked their withholdings since then could find themselves facing a potentially larger tax bill (or a smaller refund than expected) if their personal circumstances have changed in the interim. By comparing the amount you've had withheld so far this year with your expected tax liability, you can get a good idea of whether you need to increase or decrease your withholdings through the end of 2020.
For those whose income and deductions haven't much changed since 2019, a quick glance at your 1040 can give you a good idea of what you'll owe for 2020. For others, online tax-forecasting tools can provide an educated guess at your approximate federal income tax liability. If you're likely to owe money in 2021, making an estimated payment now can help you avoid underpayment penalties.
Even though you won't receive your 2020 W-2s, 1099s, or other tax statements until early 2021, organizing the documents you do have can give you a head start for next year. Moreover, much of the information you'll need to input in your tax forms can already be found in your final paystub of 2020 (like federal, state, and FICA withholdings), which means you don't necessarily need to wait until your W-2 arrives before you begin drafting your tax return.
Designating a spot for tax documents (and ensuring all tax documents make it to this spot) can help avoid the hassle of scrambling to find a necessary document. And if you've made withdrawals from an HSA, contributed cash to a charity, or taken any other actions that will need to be reported on your tax form, getting these records in place now could make completing your tax forms far easier when the time comes.
Make Changes Now to Reduce Your Tax Bill
Once you have an idea of your expected tax liability, you'll be better able to plan your tax-deductible contributions. For example, if you're in the 12 percent tax bracket this year instead of the 22 percent bracket, you may decide to convert current retirement contributions or route future contributions to a Roth instead of a traditional IRA. Those who have under-withheld and are expecting a tax bill in April may be able to reduce this bill by boosting their 401(k) or traditional IRA contributions, making a charitable contribution, or opening a Health Savings Account.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.