Are you worried because the deadline for filing federal income taxes is May 17 and your refund wouldn’t buy a stamp to mail your tax return? Or are you scared that you’re going to have to pay a big tax bill? Stop wailing and rending your garments and read these six tax tips that could help reduce your 2020 taxes. You never know: You might be able to turn that tax bill into a refund.
1. Traditional IRA contributions
You have until May 17 to make a contribution to a traditional IRA for the 2020 tax year. Your contribution can reduce your taxable income, which, in turn, would reduce the amount of tax you owe. You can contribute up to $6,000 per person under the age of 50 for 2020. People who are 50 and older can contribute up to $7,000. You can only contribute earned income to an IRA; Social Security payments, pension payouts, dividends and other types of income don’t count.
If neither you nor your spouse is covered by a workplace retirement plan such as a 401(k), you can deduct the full amount of your contribution. The deduction faces limits if you or your spouse is covered by a retirement plan at work, or if your modified adjusted gross income (MAGI) exceeds certain levels.
And here’s another nice thing about this tax year: There is no longer an age limit on making contributions to a traditional IRA. Prior to 2020, the cutoff was age 70 1/2. There also is no age limit for contributing to a Roth IRA, but note that Roth contributions aren’t tax deductible, since withdrawals in retirement are tax-free.
2020 deduction limits for traditional IRAs, if covered by retirement plans
|Filing status||2020 MAGI||Deduction|
|Single or head of household||≤$65,000||Full deduction up to contribution limit|
|>$65,000 and <$75,000||Partial deduction|
|Married filing jointly or qualified widow(er)||≤$104,000||Full deduction up to contribution limit|
|>$104,000 and <$124,000||Partial deduction|
|Married filing separately||<$10,000||Partial deduction|
2. Health savings accounts (HSAs)
As with IRAs, you have until May 17 to make an HSA contribution for the 2020 tax year. The maximum annual contribution you can make is $3,550 for yourself only, or $7,100 for families. If you’re 55 or older, you can toss in another $1,000.
The catch: You need to be insured by a high-deductible health plan (HDHP) to make a contribution. To qualify as an HDHP for 2020, the plan must have a minimum annual deductible of $1,400 for individuals and $2,800 for families. It also must have an out-of-pocket maximum of $6,900 for individuals and $13,800 for families.
For those who can get them, HSAs offer a host of tax advantages. Your pretax contributions lower your taxable income, which then lowers your taxes owed. As long as you withdraw money from your HSA to pay for approved health care expenses, it’s free from taxes — even the interest you earn. And while you can’t contribute to an HSA once you enroll in Medicare, you can use tax-free HSA withdrawals to pay Medicare Part B, Part D and Medicare Advantage premiums.
3. Unemployment benefits
If you received state unemployment benefits last year, you may have gotten something unwelcome in the mail: Form 1099-G, which shows you how much your unemployment benefits were. Why is this unwelcome? Those benefits are taxable.
Fortunately, the American Rescue Plan Act, signed into law in March, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on that amount. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable. Those with adjusted gross income of $150,000 or more aren’t eligible for the exemption.
If you already filed taxes before the exemption became law, don’t send an amended return. The IRS will automatically recalculate your taxes and refund any money owed to you. By excluding $10,200 in income, an individual in the 12 percent tax bracket would save $1,224 on taxes. Also, be sure to check if your state is offering a break on unemployment income this year. If so, you may need to amend your state return.
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4. Student loan interest
Most people know that mortgage interest is deductible, but most student loan interest is deductible, too. You can deduct up to $2,500 in interest each year, or the amount you actually paid, whichever is smaller. If you paid more than $600 in interest, you should get a Form 1098-E, Student Loan Interest Statement.
One nice thing about the student loan interest deduction: You don’t need to itemize to get it. It’s an adjustment to income, so you are eligible even if you take the standard deduction, which most taxpayers do. Tax folks call this an above-the-line deduction, because it’s above the line that calculates your adjusted gross income.
Keep in mind that there are income limits for those who deduct student loan interest. The deduction for single filers and heads of households phases out between $70,000 in modified adjusted gross income (MAGI) and $85,000 in MAGI. For married couples filing jointly, the deduction starts to phase out at $140,000 in MAGI and ends at $170,000.
5. Charitable donations
Even if you’re taking the standard deduction, you can deduct up to $300 on your tax return for charitable donations. Like student loan interest, this is an above-the-line deduction.
This deduction has to be for charitable deductions you made in 2020. And the deductions must have been made in cash; clothing, household items or used cars don’t count. Items donated to charity are eligible for a deduction if you itemize.
The $300 is “per tax unit” for 2020, which means that single filers and joint filers only get $300 per return. In the 2021 tax year, the charitable deduction for cash donations increases to $300 per filer, so married couples filing jointly could each claim $300, for a total of $600.
6. Long-term care expenses
Sometimes an extra deduction will take you over a high hurdle — such as the current standard deduction. You need to have more in itemized deductions than the standardized deduction to make itemizing worthwhile. In the 2020 tax year, the standard deduction is $12,400 for single filers, $18,650 for heads of household and $24,800 for married people filing jointly. It’s even bigger for taxpayers 65 and older. The standard deduction is so large today that just 14 percent of the population itemizes.
If you’re close to overcoming the standard deduction, however, don’t forget to deduct the premiums you pay for long-term care insurance. This counts as a medical expense deduction, which means you can only deduct the amount of your qualifying medical expenses that exceed 7.5 percent of your adjusted gross income. If you had adjusted gross income of $50,000, for example, you could only deduct the medical expenses that exceed $3,750.
Be that as it may, long-term care premiums aren’t cheap, and the IRS allows you to deduct an increasing amount of those premiums as you get older. In the 2020 tax year, for example, someone who is 51 to 60 in the taxable year can deduct $1,630 in long-term care premiums. The amount rises to $4,350 for those 61 to 70 and $5,430 for those 71 and older. Be aware that the deduction is mainly for traditional long-term care policies. Some newer hybrid life insurance policies may not qualify. Be sure to ask your agent about how much, if any, of your premium is deductible.
What you pay for certain long-term care services can also qualify as medical expenses for tax purposes, helping to get above the 7.5 percent threshold. The expenses must be unreimbursed and medically necessary for a critically ill individual, and can include diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, according to the IRS, as well as maintenance and personal care services. See IRS Publication 502 for the full list of qualifying medical expenses.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.