Maximize Your Refund with Last Minute Tax Moves
With the electronic filing opening being pushed to February 12th (usually mid-late January) this year, let’s look at some last-minute tax saving strategies before you file. Keep in mind that tax avoidance is about legitimate moves based on your individual facts and circumstances. There’s no secret sauce, just accurate and flexible interpretation of tax laws. A competent tax advisor is your magic bullet.
What is a tax strategy?
It may sound sophisticated, but a tax strategy is just a legal tactic that your specific situation allows for. Some are basic, like making sure you claim the child tax credit for your dependent who is under 17 years old. Others are more complicated, like a back-door Roth contribution. The key is knowing that most tax savings tips are not one-size-fits-all.
Here are five tax strategies you should consider before you file:
1. Get Some Scratch Together
You may have the opportunity to contribute to a retirement account before April to help lower your tax liability. I love the idea of investing in myself more than investing in the federal government. I proudly pay whatever tax I owe; I’m just going to ensure that amount is as low as legally possible. Getting the money together can be difficult, but if you can you’ll end up paying your future self and saving upfront. It’s like having your cake and eating it too, but without the calories.
2. Prepare Thyself for Judgement is at Hand
You need to prepare for your tax filing by putting all your numbers and official documents together. No one else walked a mile in your shoes last year, and initially you’ll need to rely on your own insight into your finances. Remember, filling out a tax return is a lot like setting up your dating profile. Highlight the pros, minimize the cons, and really sweat every entry line! Outright lying won’t get you anywhere substantive in the long run, it’s just going to backfire. Ultimately you need good data to complete a good tax return. Garbage in, garbage out. If you don’t take the time to make sure you’re prepared, the garbage out is going to cost you big time.
3. Who You Gonna Call?
A competent tax advisor! Bill Murray just involuntarily cringed somewhere after that. Heck, so did I just typing it. This may come across as self-serving, but you really should engage a tax advisor when completing your taxes. An in-house study showed that self-prepared returns are missing on average over $700 worth of credits and deductions. I have countless cases of people who came to see me, and I saved them more in tax than what I charged them for the filing. It also wraps it up nice and neat by a professional and takes that stress off your plate. If this is true for you, it becomes almost fiscally irresponsible to complete the filing yourself. Taken to the extremes, I worked on a case last month that saved a taxpayer over $87,000 in a single year. You don’t know what you don’t know, so don’t take the risk that you’re leaving money on the table.
4. Back to the Future
Take time with your tax advisor to review your W-4 form at your job. You may not have the correct withholding elections made for the coming year. This can be a tough one if you’re expecting any significant change throughout the year, but a tax advisor worth their salt can pivot based on changing circumstances. Context is king here, so the more context you can provide, the better estimates can be formed.
We’ll make this last one unique to the 2020 tax filing since many things have been up in the air this filing season.
5. Show me the Money
Sorry folks, I was born in the 80s and it’s really showing today. If you qualified for a full or partial stimulus payment (Economic Impact Payment, or EIP) in 2020, you’ll have to calculate whether you qualify for what’s called a recovery rebate credit. The credit could result in a follow-up payment for some taxpayers. This means you need to know exactly how much you received in your EIP.
Here’s where it gets tricky. Finding out how much you received in the EIP round #1 and round #2 isn’t too difficult, but the IRS is asking that we reference Notice 1444 and Notice 1444-B when completing our tax returns this year. Based on their instructions, the Notice 1444 was sent out within 15 days of your EIP deposit. While I can appreciate that’s what they’ve said, the reality has come to look quite different. Amongst my entire tax advisor team, only one person received this notice. While we don’t have any additional direction from the IRS yet, I do hope they’ll be re-issuing these notices, and including the second-round payment, sometime this tax season.
A quick recap:
- Set money aside to invest in a pre-tax retirement account that will save on taxes now.
- Be prepared for your tax appointment, don’t wing it.
- Consult with a competent tax advisor.
- Review your W-4 form for accuracy and plan for the new year.
- Know your stimulus payments received.
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Kevin Molen
Advisory Services Manager
