Most of us are cheering the rapidly approaching end of tumultuous 2020. I definitely am right there with you with some pre-New Year's Eve joyfulness.
But take a little time off from your anticipatory year-end celebrations to check out these tax moves.
These final three tax tasks for the final three days of the year could pay off at filing time in 2021.
1. Know the value of donating items instead of cash.
You have until Dec. 31 to donate to an IRS-qualified charity so you can claim the gift as a deduction on your 2020 tax return. If you still itemize, then one of the best ways to help others and boost your Schedule A charitable donations is to give household goods in addition to cash contributions.
This include items like clothing that's in good shape but no longer fits, either because your children had growth spurts or COVID-19 precautions led to the coronavirus 15 extra pounds when your gym closed.
But don't forget about other household items, like fancy kitchen gadgets you didn't use even during your pandemic self-isolation or the old desk chair you replaced when you made your spruced up your home office to make it more work-from-home amenable.
The donated goods valuation tables in my earlier post on this topic offer guidelines. They are the fair market value (FMV) of the items' current condition and are based on suggestions provided by Goodwill and the Salvation Army for goods that are commonly dropped off at those charities' donation facilities.
Cars and other vehicles also are often overlooked tax deductible donation options. And while it's no longer as simple as just checking automotive valuation sites like Kelley Blue Book to determine how much to claim, donating your auto is still a worthwhile tax move and opens up all that space in your garage or driveway. Charities that accept vehicular gifts will be happy to explain the giving and potential deduction process.
2. Contribute to your child's 529 plan.
Lots of parents swear by 592 plans. These college savings accounts grow tax-free as long as you eventually use the money to pay for qualifying educational expenses. In addition to the usual classroom-related fees, books, supplies and equipment, tax law changes now make 529 funds available for Kindergarten through grade 12 education costs.
It's always a good idea to put money into tax-favored education plans. Doing so as early as you can means you get the advantage of more compounding of your account's earnings. But year-end amounts count, too!
And Dec. 31 is a key date if your state offers an income tax deduction for contributions to its education savings plan. To make sure you get to claim that deduction for the 2020 tax year, you'll need make your 529 plan contribution by the last day of the year.
SavingForCollege.com has deadline details (and more) on 529 plan contributions in order to claim tax benefits in the 34 states and District of Columbia that offer such tax breaks.
3. Double check your estimated tax payments.
Estimated tax payments are due on income that isn't subject to paycheck withholding. That means the dividend and capital gains distributions from your investments, even if you reinvested them instead of taking the cash. In the Internal Revenue Service's eyes, you've constructively received the money from your assets, meaning it's yours to do with as you wish … and pay tax on, as the IRS wishes demands.
For many, 2020 meant piecing together work through gig jobs after regular employment hours were cut due to pandemic precautions. These freelance or contract jobs mean that you are responsible for making income and self-employment tax payments, typically via estimated tax filings.
And way too many others had to rely on unemployment benefits this year. If you didn't have taxes withheld from these government checks, and most folks don't because they need every last cent to cover living expenses, you should have been making estimated tax payments on the money. Yes, you desperately needed the financial help to tide you over after losing your job when the coronavirus closed your workplace. But unemployment benefits are taxable income, too.
If this is your first time facing these added taxes, you can find more on the process in this previous blog post estimated tax primer. The key thing right now as the tax year winds down is to note a payment is due on Jan. 15, 2021. So now is a good idea to start thinking now about where you're going to get that money.
Maybe use some of those cash Christmas gifts? Yeah, I know it's now how you want to spend the holiday money, but if you underpay your 1040-ES amounts, you'll owe penalties and interest when you file your Form 1040 next year.
You also might find these items of interest:
- 10 tax moves to make in December 2020
- If you receive unemployment benefits, expect to receive Form 1099-G
- Tax rules for donating + different ways to give = special Giving Tuesday Now options
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