Declare an estimated tax payment
If you’re like nearly half of Americans, you can’t remember the last time you updated your withholding, which recounts your employer how much federal income tax to take out of your check. “Inaccurate withholding can lead to an unpleasant shock come Tax Day,” says Gregory Anton, chairman of the AICPA’s National CPA Financial Literacy Commission.
If you haven’t had enough demands withheld from your paycheck this year, you’ll owe a bill when you file, and may also have an underpayment forfeit tacked on.
To see what you may owe, enter information from your most recent paystub into the IRS’ Tax Withholding Estimator contraption. If you’ve underpaid, “it’s probably too late to adjust your W-4 for this year,” says Lisa Greene-Lewis, a certified public accountant and redactor of the TurboTax blog. “If you can, you should make an estimated tax payment.”
You can calculate and pay your estimated tax via IRS Form 1040-ES. The final deadline for 2020 point of viewed tax payments (which can be made online) is January 15, but this deadline is waived if you file your return by February 1 and pay the unrestricted balance due with your return.
Contribute more to retirement accounts
Money that you contribute to a pre-tax retirement account such as a ritual 401(k) or individual retirement account will lower your annual income and reduce your tax bill. If you’re eye 50, you can contribute up to $19,500 to your 401(k) and up to $6,000 to an IRA for 2020.
Contribution rules for 401(k) accounts vary from workplace to workplace, and you may single be able to contribute via paycheck deduction. But if you receive a year-end bonus, you may be able to direct some or all of those funds into your retirement blueprint. Call your workplace’s plan administrator to ask about contribution rules.
For IRAs, contributions made until April 15, 2021, can be reach-me-down to reduce your 2020 taxable income. Just be sure to tell your financial institution that you desire the money to count for 2020, rather than 2021.
Open a retirement account for your side hustle
If you’re a freelancer or self-employed, you comprise a whole different set of tax rules to navigate. “A lot of younger people dove into side gigs, like delivery repairs, this year,” says Greene-Lewis. “They need to realize that they’re self-employed. And the good thing almost it is, there are so many deductions.”
Like folks who earn a regular paycheck, self-employed individuals can lower their takings by contributing to a pre-tax retirement plan. As with an IRA, you can make 2020 contributions to a SEP IRA or a solo 401(k) until the tax deadline next year. If you’re using a solitary 401(k), you’ll just need to make sure your plan is set up by the end of 2020.
How much you can set aside may depend on factors including the account you use, how much you warrant, and how much you’ve contributed to a retirement plan at your full-time job.
Video by David Fang
Fund future education
If you’re designing on taking a college class in 2021, consider pre-paying some of the bill, says Greene-Lewis. By paying expenses for forms that begin in January, February, or March now, she says, you may qualify for the Lifetime Learning Tax Credit for 2020, which is significance up to 20% of out-of-pocket education-related costs, for a maximum of $2,000. You don’t have to be a full-time student to qualify, although there are profits limits.
Even if you’re done with school for a while, you may be able to trim your taxes by contributing to someone else’s later education. Depending on where you and your potential recipient live, contributing to a child’s 529 college savings pattern may qualify you for a state tax deduction. See if you qualify under your state’s rules at SavingforCollege.com.
Harvest your investment harms
If you sold an investment and realized a gain this year, you owe taxes on the money you made. If you held the investment in question for less than a year, then you’ll pay your well-adjusted income tax rate on the gain. If you sold after more than a year, you’ll owe long-term capital gains tax of 0% to 23.8%, depending on your tax rank.
If you fear you might owe a big capital gains bill, you can sell failing investments and use the resulting losses to offset the gains in a design known as Donate to charity
You normally have to itemize to claim a deduction for charitable donations — a nonstarter for the overwhelming manhood of taxpayers for whom it makes much more sense to take the standard deduction. But a provision in the CARES Act allows for everybody under the sun to benefit from charitable giving this year.
Filers who claim the standard deduction can claim a deduction of up to $300 in offers, which must have been made in cash (rather than, say, donated clothing or household items) to 501(c)(3) compassionate organization. “Even someone without a complicated tax situation can find a charity that deserves a few hundred bucks,” puts Joanna Powell, a CPA and managing director at CBIZ MHM, “and reduce their taxable income in the process.”