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. This year brings new laws and regulations for individuals, such as the new 1040-SR tax form for seniors and bigger rewards for those who contributed to a retirement account in 2019.
These are just a few of the changes going into effect this year, and 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 Gale Smith of Bellevue-based Gale E. Smith, CPA for guidance. Not only has Smith been an active member of the Eastside small business community for 15 years, but she also has 30 years of tax and accounting experience and loves to help fellow small business owners and individuals brave tax season with confidence.
Here are Smith’s top five tax tips for filing individual returns in 2020.
1. Start Early
Taxes can feel stressful, but procrastination makes the process worse. Designate a folder or envelope for tax documents, and file them immediately. Many tax documents arrive in January, but some come in throughout the year. If you are self-employed, keep timely records throughout the year, especially to document your expenses. For example, phone apps can make tracking business mileage simple. If you own a house, be sure to keep the settlement statement, and receipts for major improvements. Then, as soon you have the necessary documents, start the preparation process.
2. Contribute to IRAs and 401(k)s
Retirement plans are a great way to improve the bottom line on your tax return, while building your nest egg for the golden years. If you are 50 or older, contributing an additional catch-up amount each year is allowed. Even individuals who are self-employed can take advantage of retirement programs; setting up these programs is easier than you might think.
3. Itemizing your deductions might not be necessary
Recent tax law changes sharply increased the standard deduction, and limited or eliminated some itemized deductions. For example, the deduction for property and sales taxes you have paid is capped at $10,000. You might benefit from simply taking the standard deduction, instead of sorting through boxes of receipts.
4. You might need to pay taxes more than once a year
We think of April 15 as “Tax Day.” But the federal tax system is a pay-as-you-go system, so some people need to pay the IRS quarterly if taxes are not withheld on their income. Revenues from self-employment and rental properties commonly require quarterly estimated payments to avoid penalties.
5. Plan for a great tax year in 2020
Tax planning for the current year starts as soon as you finish your taxes for last year. Were you happy with the bottom line? If not, employees can check the amount their employer withholds from paychecks. Recently, the IRS updated the W-4 tax-withholding form and its online calculator, so you can make more informed decisions with those tools. With many factors playing into each person’s unique tax situation, an experienced CPA can help optimize your tax picture and avoid unpleasant surprises.