Feb. 12 Marked the Start of Tax Season. Here Are 8 Steps to Take Before You File

About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual Fiduciary Financial Planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals. 

Rushing to file your tax return before the deadline may mean making mistakes that could have been avoided. Even now, there is still plenty you can do to plan ahead and prepare before filing your taxes. Here are eight steps designed to help tax filers save money and avoid surprises when filing this year. 

Step #1: Figure Out Your Filing Status

Will you be filing single or jointly this tax year? That’s an easy question for many. But if things change due to marriage, divorce, separation, or a passing, your status will change for the filing period. Identify what status you will be listing for this filing period early because it will greatly impact the rest of your tax return.

Step #2: Consider CARES Act Changes

Several benefits offered to families and businesses through the CARES Act will warrant tax changes for the 2020 tax year. Many of these changes will depend on your personal and business circumstances. Therefore, you should consult a tax specialist before filing in 2020. However, one change is apt to affect some individuals. This change allows filers who choose to take a standard deduction to deduct an additional $300 for eligible charitable contributions made in 2020.¹ Keep this change in mind when calculating the difference between a standard and itemized deduction. 

Step #3: Organize Your Information 

Even if you’re going to ultimately work with a tax professional, using tax software can help you get all of your paperwork together and answer some basic questions. Your preparer may appreciate the organization, and you may be able to save time when meeting with them in-person or virtually.

Step #4: Go Digital

You may find it easier to work through tax documents when they are scanned and organized by topic or deduction type. This is something most people can do on their own. Create a digital folder on a flash drive and have everything ready to file your taxes. Most financial documents provided by a bank, credit card company or even stores can be downloaded, giving you easy access to important financial documents.

Step #5: Hunt Down All Your Charitable Donations

If you opt to take an itemized deduction, your qualifying charitable donations can count towards a tax deduction. But, you can only claim this deduction if you have proof, typically in the form of a donation receipt. Many people have them, but like other receipts, aren’t sure where they place them, often stuffing them in drawers or file-piles. Take some time now and do a thorough sweep for any relevant receipts or documents. 

Step #6: Decide Between Standard and Itemized

Standard deductions for the 2020 tax year are:²

• $12,400 for individuals
• $24,800 for joint
• $18,650 for heads of household

When itemizing your deductions, it’s unwise to take a deduction on a tax return simply because you believe you’re eligible. There should be a supporting document that objectively validates the deduction. Whether that document is a receipt, proof of address, membership, or any other category, you want your paperwork to be able to back up your claims. In an audit, there won’t be time for guessing; you either have the proof or you don’t.

Step #7: Catch Up on Retirement Savings

If you have an IRA, you can still make adjustments for the prior year up until you file your tax return. If you have not maxed out your contribution limits for 2020, you and your financial advisor may find it advantageous to post your retirement contributions to the 2020 tax year, even if it is the beginning of 2021. You may contribute up to $6,000 for those under 50 and $7,000 for those 50 and older to your IRA.³ This can help maximize your deposit ability for the next year and may reduce your taxable income for 2020. 

Step #8: Avoid the Estimated Tax Penalty

If you are a business owner or otherwise earn income that does not have taxes automatically withheld from an employer, estimated tax payments may be required or recommended. While it’s too late to make estimated tax payments for the 2020 tax year, now is a good time to determine if you should be making them for 2021.

Estimated taxes may be required or recommended for those who earn income through:⁴

• Interest
• Dividends
• Alimony
• Self-employment income
• Capital gains
• Prizes
• Awards

Make sure to take your time when filing your 2020 taxes. Double-check this list, and more importantly, contact a tax professional who can help maximize your return and stay on top of recent tax changes for yourself and your business.

Dream Financial Planning Process ™

Whether you're managing student loan debt, starting a family, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals in their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. If you're looking for guidance on Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments, we can help.

Complimentary Consultation

With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio, feel free to send me an e-mail.

Monthly Newsletter

If you're looking to buy your first home, you'll want to read this month's Newsletter. In my February Newsletter, I discuss how student loans could affect your ability to buy a home with Megan Leonhardt of CNBC. There are also blog posts that discuss 7 Tax Deductions For The Self Employed and 4 Common Mistakes Made by First Time Homebuyers.

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