Tax season is upon us and while tax rates haven’t changed, the past 12 months have brought a flurry of legislation from Congress on how you may—or may not—be taxed. To put you in the right frame of mind to file your 2020 returns, we found five deductions and credits that could make a difference to your bottom line.
- Cash Contributions. Prior to 2020, claiming a charitable deduction on your tax returns was only available if you itemized. In other words, you had to claim more than the standard deduction to get a tax benefit for your charitable contributions. However, recent legislation has made it possible to take a deduction for cash donations (which includes checks, credit card payments or electronic fund transfers) to qualified charities—even if you do not itemize. The upshot: Cash contributions of up to $300 made in 2020 are deductible on your tax return as an above-the-line deduction in addition to the standard deduction.
- Student Loan Interest. In past years, student loan interest could only be deducted if the tax filer was liable for the debt and paid it back themselves. Now there’s an exception. As long as you are not claimed as a dependent on someone else’s tax return, you can deduct up to $2,500 of interest on your student loans—even if someone else is making the payments on your behalf.
- Child and Dependent Care Tax Credit. Tax credits are more valuable than tax deductions because they reduce your tax bill dollar-for-dollar—so you’ll want to take every credit you can. If you paid someone to care for your child or dependent so you could work or go to school in 2020, then you may be eligible to claim this credit. The size of the credit you qualify for depends on your income and how much you spent. The maximum claim is $3,000 for individuals or $6,000 if you file as a couple.
- Home Office Deduction. COVID-19 reshaped our economy in a lot of ways, including accelerating entrepreneurship and home-based businesses. Although this tax deduction is not new in 2020, it will arguably apply to more of us. If you are a small-business owner or entrepreneur using a room in your home as your principal workspace, you may be able to write off items like utilities, rent, mortgage and real estate taxes—but remember, it’s critical to keep accurate and verifiable records. (Note, if you are not self-employed, under current tax law, you cannot claim this deduction.)
- Prior Year State Tax Deduction. If you owed state taxes when you filed in 2019, be sure to incorporate that amount into your itemized deductions. And if you paid more in state and local sales tax than state and local income tax, you can opt to deduct the former. (You are not allowed to deduct both.) Also, remember that starting in 2018, the deduction for state and local taxes was limited to $10,000 per year.
Tax obligations vary from person to person, so we recommend checking in with your accountant or tax preparer or taking advantage of Adviser Investments Tax Solutions, our in-house tax advisory service. If you have any questions, please contact your wealth management team and we will be happy to help you.