Money Smarts Blog

“The best way to teach your kids about taxes is by eating 30 percent of their ice cream.” – Bill Murray

Whether for personal or business, equating taxes to ice-cream makes the entire topic a little more fun. So, grab a spoon and let’s dive right in to some tried-and-true methods of wrapping up 2020’s finances and starting the next year on the right financial foot.

PRO TIP: If you have a side hustle or own your own business, consider opening a business account. This can provide several advantages, which can include:

• Business credit card perks
• Minimized checking account fees
• Ability to accept credit card payments
• Better-organized business records
• Bonus cash

If you have questions or are interested in a business account, contact a business services team member.

Deductible expenses

Do taxes tend to scramble your brain? Me too. To help level our thinking, I’m sharing some useful information from Camille Paulsen, senior manager at the Chicago metro tax consulting firm Cutrara & Company. According to Paulsen, many of the deductions we used to enjoy, like work-from-home and job search expenses, can no longer be taken as a write-off due to the recent change in tax laws. (Collective sigh.) The good news: If you’re self-employed or a contract worker who uses a room in your home/apartment for work, there are still opportunities to deduct some of these home office expenses.

Ready for a second scoop of ice cream? In Illinois, there are actually some benefits associated with all the remote learning you’ve been helping with at home (hooray). If you’ve had to invest in home technology for your kids to complete their online learning, that could be eligible as a tax deduction along with other K-12 educational expenses. Iowa also provides parents of students in any private or public school a tax credit (up to $250) covering education expenses.

Paulsen recommends keeping a spreadsheet of school-related expenses, along with a folder of receipts related to e-learning and homeschooling for when it comes time to tally up this deduction. Being organized and keeping track of receipts is something I usually put off and later regret. But if you prepare a folder dedicated for your e-learning expenses and home office expenses now, you’ll save money and time.

Home Office Expenses

In order to qualify for home office expenses, be sure your office is in a separate room or group of rooms with clear boundaries, so it doesn’t interfere with personal activities. If your home office takes up 20% of your living space, you can deduct 20% of your:

• Bills for utilities
• Homeowners insurance
• Homeowners association fees
• Security
• General repairs and maintenance

 

Charitable donations

If you’re a compassionate soul who likes to support your favorite non-profits, don’t forget you can use charitable giving as a vehicle to divert otherwise taxed dollars. Just how much do you need to donate to get that tax deduction?

When giving to a charity, make sure the non-profit is a 501(c)(3) public charity or private foundation. You’ll also want to:

• Keep a record of your donation; usually the tax receipt from the charity
• Have a qualified appraisal performed to substantiate the value of any non-cash donations
• File using itemized deductions

Tax laws change so often it’s enough to make anyone’s head spin — and keeps me on my toes. When in doubt, seek the advice of a qualified tax preparer to help file all the proper paperwork and forms.

As I mentioned earlier, organization is key (yes, you can do it). If you have a file/folder just for taxes, put the documents and support information in the file throughout the year, then everything will be at your fingertips when it comes time to file.

Additional considerations

There are a few other considerations, some specific to this year, that can give you a leg-up in 2021.

Waived required minimum distributions (RMDs): The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) waived RMDs from retirement accounts for 2020, which often count as taxable income. This means some retirees will have lower taxable incomes in 2020 and thus possibly owe less 2021 federal income taxes.

Higher standard deductions: For 2020, the married filing jointly deduction is up $400 from 2019, married filing separately is up $200, head of household is up $300 and single is up $200.

Higher contribution limits for retirement and health savings accounts (HSAs): The base contribution limit for 401(k) plans is $19,500, but taxpayers age 50 and older can make an additional $6,500 contribution. In addition, contribution limits for HSAs are also up a little bit from last year, which can benefit you if you plan to utilize an HSA.