By Sandra Block
Dec. 2, 2020
Use these strategies to trim your upcoming tax bill — and avoid a tax surprise.
GIVE TO CHARITY.
Since the 2017 tax overhaul doubled the standard deduction, the vast majority of taxpayers no longer get a tax break for charitable contributions. But if you make a donation before Dec. 31, you may be eligible for a modest deduction, even if you don’t itemize.
The CARES Act stimulus bill enacted earlier in 2020 year included a one-time, $300 “above the line” deduction for cash contributions to charity. The provision was designed to encourage taxpayers to help charities, many of which are struggling to fulfill their mission during the coronavirus pandemic.
The deduction is tied to tax returns, not individuals, so the maximum a married couple who files jointly can deduct is $300, says Lisa Greene-Lewis, tax expert for TurboTax. The deduction is limited to cash contributions — donations of clothing and household goods to your local Goodwill aren’t eligible. Contributions to donor-advised funds aren’t eligible, either.
Keep a record of your contribution with your tax documents. For donations less than $250, you need a bank record, such as a canceled check or credit card statement. For donations that exceed $250, you should obtain a written acknowledgement from the charity that shows the date of the contribution and the amount and states whether you received any goods or services in exchange for your donation.
If you still itemize, you can deduct charitable gifts made before year-end on Schedule A of your 2020 tax return. You can also deduct contributions to donor-advised funds made before New Year’s Eve.
If you plan to make a major contribution, perhaps as part of your estate plan, note that a separate provision in the CARES Act permits taxpayers to deduct donations of up to 100% of their adjusted gross income. Ordinarily, the cut-off is 60% of AGI. As is the case with the above-the-line deduction, donations to donor-advised funds aren’t eligible for the higher limits.
AVOID AN APRIL SURPRISE.
Millions of Americans filed for unemployment benefits this year. While these benefits provide an important lifeline during tough times, they could also produce an unexpected tax bill.
Unemployment benefits are taxable at the federal level, and most states tax them, too, says Andy Phillips, of H&R Block’s Tax Institute. The CARES Act expanded benefits to include an additional $600 per week through July — and that’s taxable too.
If you’re still receiving benefits, you may want to have taxes withheld on your last few benefit checks, Phillips says. For federal taxes, you can have up to 10% of your benefits withheld by filing W-4V. Contact your state for the appropriate form if you want money withheld for state taxes.
Another option is to make an estimated tax payment on the amount you expect to owe, Phillips says. The deadline for fourth-quarter estimated taxes is January 15, 2021. Paying estimated taxes will help you avoid sticker shock —and a balance you can’t pay — when you file your 2020 tax return.
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