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Gather These Tax Documents Now for Your Upcoming Tax Filing

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In 2019, over 155 million individual income tax returns were filed with the Internal Revenue Service (IRS). To make that happen, most filers have to collect a variety of  tax documents before each filing. That way, they can provide the IRS with accurate information and make sure that they are paying their fair share or getting any refund due. Whether you plan to handle your taxes on your own or want to hire a professional, having the right documentation is a must. If you aren’t sure what you need, here’s an overview that you can use as a checklist.

Personal Information

When you complete your taxes, you have to provide certain personal information. This includes details about you and potentially your spouse, children, or anyone who may qualify as a dependent.

If you want to make sure that what you list is accurate, certain documents can help. Here are some that are worth gathering before you start your tax return:

  • Government-Issued ID Cards or Driver’s Licenses
  • Birth Certificates
  • Social Security Cards
  • Tax ID Number

Income

In order to file your taxes, you need to be able to record information about your income during the previous year. That means you’ll need specific documents that show what you earned in 2019.

In most cases, you’ll receive tax documents from employers, companies you contracted for, or certain other individuals. This can include:

  • W-2 Forms
  • 1099-MISC
  • 1099-K

Additionally, there are other forms of income that create tax documents. If you have investments, you may receive:

  • 1099-B for broker-handled transactions
  • 1099-S for stock sales
  • 1099-INT for interest earnings
  • 1099-DIV for dividends
  • 1099-R for distributions

Individuals who receive certain government benefits also receive tax forms. This can include the following forms:

  • 1099-G
  • 1099-SSA
  • 1099-RRB

However, not all income sources will automatically provide you with a document. If you have earnings that won’t be reported on a W-2 or 1099, then you may need other records, including (but not limited to):

  • Bank Statements
  • Payment Management Transaction Records (PayPal, Venmo, etc.)

Deductions

If you want to claim certain deductions, you may need certain documents. Exactly what you need depends on your situation.

In some cases, you’ll receive forms from another entity, such as your mortgage or student loan lender or your educational institution. However, some deductions may require you to gather up bills or bank statements.

Here’s a look at what you’ll need in various scenarios:

  • Retirement Accounts: W-2 for 401(k)s or TSPs and IRS Form 5498 for IRAs
  • Educational Expenses: IRS Form 1098-T for school costs and IRS Form 1098-E for student loans
  • Medical Deductions: Medical bills and bank statements
  • Health insurance: IRS Form 1095-A, 1095-B, or 1095-C
  • HSA Contributions: 5498-SA
  • Mortgage Interest: IRS Form 1098 from the lender
  • Property Taxes: IRS Form 1098 from your lender (if they are handling your property taxes) or property tax bills and bank statements
  • Charitable Donations: Bank statements and receipts
  • Business Expenses: Receipts, bills, and bank statements
  • Work Driving: Mileage records
  • Home Office Deduction: Measurement of the size of the home office
  • Childcare: Provider’s tax ID, bills, and receipts

Payments

If you work for an employer who provides you with a W-2, your tax payment information will be on that document. However, if you are self-employed and have been making estimated tax payments, you’ll need those records as well. That means you’ll need to gather your 1040-ES. Usually, it is available through the IRS website. By viewing your IRS account, you can retrieve those details.

Could You Need to Gather Other Documents?

While the information above will cover most tax filers, there are situations where additional documents could be necessary. For example, those who were impacted by a federally-declared disaster might need records that document their property losses, repair costs, insurance claims, FEMA assistance details, and similar information.

Similarly, educators are allowed to deduct up to $250 of classroom supplies. As a result, to claim that deduction, a qualifying educator would need receipts that reflect those costs.

There can be other situations where more documentation is also helpful. If you are concerned that you may overlook an important document, it may be wise to consult with a tax professional. They can examine your personal situation and see what additional information may be relevant, beneficial, or necessary to complete your taxes properly, record all of your income, and give you access to credits or deductions that you may be owed.

 

Can you think of any other  tax documents people should gather in preparation for their upcoming tax filing? Share your thoughts in the comments below.

 

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Here are the 2020 Income Tax Brackets

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income tax bracket

While 2019 has yet to formally come to a close, many people still want to look forward. As they begin to prepare their taxes for the 2019 tax year, filers who want to get ahead for the 2020 tax year should start planning. By understanding the 2020 income tax brackets, you can make wise choices regarding your income, possible deductions, retirement plan contributions, and more. Here’s a look at what 2020 has in store.

How Tax Brackets Work

Many people wrongly assume that their tax bracket dictates the rate they pay on all of their income. However, that isn’t how the tax system works. Instead, the rate only applies to the income within that particular range. For example, single filers who have $12,000 in taxable income during the 2020 tax year mistakenly believe that they owe 12 percent on all of it – which would make their owed tax total $1,440 – but that isn’t the case.

In 2020, the person above will pay 10 percent on the first $9,875 of their taxable income, even if they earn more. That $9,875 falls into the first tax bracket, which has a 10 percent rate. They only owe 12 percent on the taxable income above $9,875 up to the $40,125 mark, as the amount above $40,125 goes into the next higher bracket).

A person who earns $12,000 during the tax year will pay 10 percent of the first $9,875, or $987.50. Then, they owe 12 percent on the remaining $2,175, or $225. That makes their total $1,242.50.

This makes tax brackets look fairly complex. However, once you understand how they work, it’s possible to handle the calculations, allowing you to plan.

2020 Income Tax Brackets for Single Filers

If you aren’t married during 2020 and don’t qualify as a surviving spouse or head of household, the following tax brackets will apply:

  • Income from $0 to $9,875 – 10 percent
  • Income from $9,875 to $40,125 – 12 percent
  • Income from $40,125 to $85,525 – 22 percent
  • Income from $85,525 to $163,300 – 24 percent
  • Income from $163,300 to $207,350 – 32 percent
  • Income from $207,350 to $518,400 – 35 percent
  • Income above $518,400 – 37 percent

2020 Income Tax Brackets for Head of Household Filers

If you aren’t married but provide financial support or a home to a qualifying relative – such as a child or parent – you may qualify as a head of household. This gives you a different filing status, and you’re tax burden will align with the brackets below:

  • Income from $0 to $14,100 – 10 percent
  • Income from $14,100 to $53,700 – 12 percent
  • Income from $53,700 to $85,500 – 22 percent
  • Income from $85,500 to $163,300 – 24 percent
  • Income from $163,300 to $207,350 – 32 percent
  • Income from $207,350 to $518,400 – 35 percent
  • Income above $518,400 – 37 percent

2020 Income Tax Brackets for Married Filing Jointly Taxpayers

If you are married and you are filing jointly with your spouse, you’ll use these brackets. Additionally, surviving spouses may be able to use these brackets for a period following the death of their spouse:

  • Income from $0 to $19,750 – 10 percent
  • Income from $19,750 to $80,250 – 12 percent
  • Income from $80,250 to $171,050 – 22 percent
  • Income from $171,050 to $326,600 – 24 percent
  • Income from $326,600 to $414,700 – 32 percent
  • Income from $414,700 to $622,050 – 35 percent
  • Income above $622,050 – 37 percent

2020 Income Tax Brackets for Married Filing Separately Taxpayers

Married couples do have the option of filing separate returns. If you choose this route, here are your tax brackets:

  • Income from $0 to $9,875 – 10 percent
  • Income from $9,875 to $40,125 – 12 percent
  • Income from $40,125 to $85,525 – 22 percent
  • Income from $85,525 to $163,300 – 24 percent
  • Income from $163,300 to $207,350 – 32 percent
  • Income from $207,350 to $311,025 – 35 percent
  • Income above $311,025 – 37 percent

2020 Trust and Estate Tax Brackets

Not everyone is aware that trusts and estates pay income taxes, but they do. Any retained income (money that isn’t distributed to beneficiaries) are taxed based on the following brackets:

  • Income from $0 to $2,600 – 10 percent
  • Income from $2,600 to $9,450 – 24 percent
  • Income from $9,450 to $12,950 – 35 percent
  • Income above $12,950 – 37 percent

Why Do Tax Brackets Change from One Year to Another?

There are several reasons why a tax bracket may change. In some cases, they are adjusted for inflation, reflecting the shift in the buying power of a dollar. In others, Congress and the President pass legislation that alters the brackets. For example, the tax reform efforts that happened as 2017 drew to a close are affecting the 2020 tax brackets. That legislation will keep having an impact until the start of 2026 unless new action is taken prior to that time.

Planning for Your 2020 Taxes

By referring to the brackets above, you can estimate your 2020 tax bill. However, if you do decide to perform the calculations, it’s important to remember that these brackets apply to your taxable income, not all of the money you make. You’ll need to account for any deductions you may receive to determine what your taxable income will look like in the coming year to get a more accurate picture.

It’s also possible to use the tables above to see how certain financial moves impact your tax bracket and rates. Certain deductions, like contributing to tax-deferred retirement accounts, reduce your taxable income, and are under your control, at least to a degree. For example, you can see how contributing various amounts (up to the maximum) to a tax-deferred retirement account impacts your tax bill, allowing you to decide how you want to fund that account in 2020.

Ultimately, the brackets above are a potential planning tool. It allows you to make wise choices that could lower your tax burden or understand how certain financial situations will affect what you owe. That way, you can have more control over what you pay or, at least, be prepared for the bill that will inevitably come.

 

Do you worry about your tax bracket? Why or why not? Share your thoughts in the comments below.

 

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Lower Your Tax Bill With These 5 Moves

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Lower Your Tax Bill With These 5 Moves

While the new year is on the horizon, that doesn’t mean your tax bill is set in stone already. There are certain moves that you can make now that will reduce what you owe. However, you may need to act quickly if you want to benefit from those financial choices this tax year. Here’s a look at five moves that can help you lower your upcoming tax bill.

1. Fully Fund a Tax-Deferred Retirement Account

If you have reached the maximum contribution limit on your tax-deferred retirement account, you still have time. By fully funding your 401(k) or traditional IRA, you are reducing your taxable income, lowering your tax burden.

In 2019, you are allowed to contribute up to $6,000 in an IRA and up to $19,000 in a 401(k). Those over the age of 50 can also make catch-up contributions, essentially increasing the maximum they can sock away in those accounts and the associated tax benefit. For IRAs, the catch-up is an additional $1,000. For a 401(k), it’s an additional $6,000.

By maxing out your contributions to a 401(k) and an IRA, if you’re 50 years old or younger, you could reduce your taxable income by $25,000. Those over 50, you could potentially reduce it by $32,000 by maxing your contributions and adding in the catch-ups.

2. Don’t Overlook Itemizing

While the standard deduction amount means many tax filers won’t benefit from itemizing their deductions, that isn’t the case for everyone. If you want to find out which route is best for you, you’ll need to do the math.

If you’ve had medical expenses that exceed 10 percent of your income, have donated a significant amount to charity, or have enough potential deductions that could push you over the threshold if you itemize, then it’s worth seeing if this approach could benefit you. Additionally, if you realize that you are very close to the standard deduction when you itemize, you could potentially make financial moves to push your itemized total over the threshold (such as donating more to charity or handling a medical issue you’ve been putting off), allowing you to claim a bigger deduction.

This option might be particularly beneficial to those who can handle certain deductible actions for 2020 before 2019 ends. For example, if you usually donate a certain amount to charity each year and you did so in 2019, then consider making 2020’s donation now if it will push you over the line.

3. Claim Every Deductible Business Expense

Many business owners and self-employed individuals have a wide range of deductions they can claim. However, many people miss out on some because they didn’t realize it was an option. Additionally, some filers forgo a deduction because they are worried they’ll get audited, even if it would be completely legal.

As long as a taxpayer is following the rules laid out by the IRS, they should never skip a deduction. If the deduction is legitimate, even if they are audited, they should come out on the other side without a penalty. Just make sure you are ready to prove that you are complying with the laws, which typically isn’t as difficult as it sounds, by being aware of the requirements, preserving the right records, and otherwise having evidence regarding why your action was legit.

4. Unload Losing Investments

If your portfolio is being weighed down by some losing investments, now might be the time to unload them. By selling, you may be able to deduct the losses, effectively offsetting a portion of your taxable gains on your other investments.

It’s important to note that selling an investment solely for a tax deduction isn’t typically a smart choice. If you wanted to get that stock back within 30 days, the IRS could actually take back your deduction, altering your tax bill. As a result, it’s best only to sell investments that no longer work for your portfolio.

5. Stash Cash for College

If you need to save for your education or a child’s future schooling, putting the money into a 529 plan can lower your tax burden on the state level. While there isn’t a federal deduction for investing in a 529 college savings plan, if you live in a state that has an income tax, this can be a smart move for reducing your overall burden.

Just be aware that, if you aren’t the beneficiary, you could encounter gift tax consequences when you contribute to a 529 plan. If the amount you put in the account along with the value of any other financial gifts exceeds $15,000, gift taxes could kick in, creating a different kind of tax burden.

Ultimately, all of the tips above can help you lower your tax bill this year. Consider all of the options above and see if any would benefit you.

 

Do you know of other ways a household can lower their tax bill? Share your thoughts in the comments below.

 

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How the Secure Act Could Change Heir Rights

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The Secure Act

The Secure Act has been languishing in the Senate for some time. However, that doesn’t mean it won’t pass and, if it does, it could have a significant impact on your retirement accounts. While many would consider the changes beneficial, others aren’t so sure. If approved, the Secure Act changes how inherited IRAs would be managed, and not everyone is thrilled about it.

How the Secure Act Changes Heir Rights

If the Secure Act goes into effect, it will fundamentally alter how non-spouse heirs of an IRA can handle the money. Under current law, a non-spouse beneficiary has the ability to stretch out over the course of their life expectancy the minimum required distributions; an approach often referred to as the “stretch IRA.”

The current approach allows more of the money to remain in the account, giving the IRA the ability to grow tax-deferred for longer. Plus, since the withdrawal sizes would potentially be smaller, it provides the heir with a chance to reduce their tax liability each year.

However, if the Secure Act becomes law, the stretch IRA method won’t be available. Instead, non-spouse heirs would have to empty the account within ten years. This means, for heirs who would usually have spread the withdrawals out over a longer period, they have to remove more money annually than they would under the old law. Since the withdrawals will be larger and are taxable, their tax burden goes up accordingly.

Plus, the increase in the heir’s tax bill might not just impact the withdrawals. It could also affect their earned income, making larger payments even more costly.

Estate Planning for the Secure Act

Since the Secure Act would alter non-spouse heir rights for IRA, it may fundamentally change how a person handles estate planning. The new rule could be a burden on the original IRA owner’s family, so they might choose a different tactic.

Under current law, younger heirs get a significant benefit. They can make smaller withdrawals over the course of their life, allowing them to benefit substantially from compounding. In some cases, it may make leaving an IRA to a child – say, to help fund a grandchild’s college education – a less viable option.

Not All Heirs Impacted

It is important to note that not all heirs would be impacted by the change. Aside from spouses, beneficiaries who are 10 years (or less) younger than the account holder, the minor child of the account holder, or are chronically ill or disabled aren’t affected by this part of the Secure Act (if it becomes law). However, an heir that falls into every other category would be, so account holders may choose to leave their IRA to another family member who would get the most benefit instead of the person they would prefer.

The Secure Act hasn’t passed yet, and it’s possible that it never will. But, by understanding how it can impact an inheritance, account holders can make plans now. That way, if the Secure Act becomes law, they can adjust their strategy if necessary.

 

Do changes to heir rights worry you? Why or why not? Share your thoughts in the comments below.

 

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Property Tax Bill Too High? Here’s How to Appeal

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Many homeowners have seen the value of their homes rise dramatically over recent years. As a result, property taxes are generally trending upward too. You can’t always avoid a tax increase based on the higher value. However, if your new property tax bill is unreasonable in comparison to appreciation in your region, you might have grounds for an appeal. If your appeal is justified and determined to be sound, your property tax bill may go down. If you believe your property tax bill is too high, here’s what you need to know about appealing.

When You Can Appeal Your Property Tax Bill

Once you receive your new property tax bill, you only have a limited amount of time to appeal. Exactly how much time you get depends on your jurisdiction, so it can vary from one state or county to the next.

In most cases, you have 90 days to appeal after you receive the new assessment. However, some locations only give you 30 days, so it is best to act quickly.

If the appeals window closes, you will have to pay the amount on your property tax bill. Failing to do so comes with consequences. First, you’ll have penalties and fines for missing your payment. The government can also put a tax lien on your home. In the worst-case scenario, a tax lien can lead to a foreclosure.

Thoroughly Read Your Assessment Letter

Before you initiate an appeal, read your property tax bill carefully. Make sure the details about your property are accurate and take a look at the value assigned to your home and land. If there is an error in the property description, such as an incorrect lot size, the wrong number of bedrooms, or similar error, then that could lead to a high bill that is fairly easy to appeal.

Then, if you don’t spot a blatant error, look over the calculations that determined your property tax bill. How a jurisdiction assigns value for tax assessments differs from determining fair market value for home sales. In most cases, the math itself will be sound. However, it is always wise to learn how the numbers are calculated before you appeal.

Get the Lowdown on Neighboring Properties

You never want to appeal your property tax bill without having a reasonable case showing that it is too high. While appealing without just-cause won’t necessarily lead to a penalty, it does mean you could waste valuable time on a fruitless venture.

Often, the easiest way to make sure you have a decent case is to explore comparable nearby properties, or “comps,” as realtors call them. Research your neighborhood and identify nearby homes. Look for houses with similar features to yours, including the overall size, style, condition, and the number of rooms. Additionally, make sure you compare lot sizes as well, as differences in the amount of land can lead to dramatically different tax assessments.

Once you find a few comps, you need to look up the tax assessments on those properties. Usually, local governments maintain publicly accessible databases, making the information relatively easy to track down. Head to your local Tax Assessor’s Office or Land Records Office website to see if the database is available. If not, you may need to speak with a real estate agent or those neighbors to see if they will share the details.

If you discover that your property tax bill is higher than the comps, you may have a good case. However, even if theirs are similar, if you can demonstrate that those properties are better than yours, you may also be able to get your tax bill lowered.

Present Your Case to the Local Assessor

Once you have built your case, you’ll need to contact your local assessor. Usually, your property tax bill will have instructions on how to proceed with an appeal. However, if you need additional guidance, contact the assessor’s office to discuss the next steps.

Most appeals processes are incredibly formal. You need to follow them precisely if you want your appeal to move forward. Typically, you’ll need to complete a form and submit your evidence. Once complete, the review period can take several months. When they have rendered a decision, you’ll usually receive notification in writing.

Appealing the Decision

If the initial appeal didn’t go your way, you could opt to appeal that review. Usually, you’ll have to pay a small filing fee and submit a request to the appeals board. Then, you can challenge the decision and hope for a better outcome.

Appealing the review can be a lengthy process, especially in larger jurisdictions. In some cases, it may take a year to get a decision.

Risks of Appealing Your Property Tax Bill

Appealing your tax bill can come with risks. While the chance is fairly small, the assessor or appeals board could determine that your property assessment was too low, leaving you with an even higher tax bill.

At times, even if your bill is lowered, the amount is so small that it may not be worth the effort. Similarly, if the change is slight, you may come out financially behind if you paid more than your bill was lowered when you filed for an appeal.

Finally, if you intend to sell your home soon, a drop in the assessed value of your home could hurt you. You may get stuck with a lower sales price since the assessor or board reduced the value.

Have you ever had to appeal your property tax bill? Share your experience in the comments below.

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Guide to Charitable Deductions Under New Tax Laws

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charitable deductions

There are so many great reasons to give to charity. Being passionate about a cause motivates many people to give. However, the fact that you can get charitable deductions has always helped a bit. You get to benefit on your taxes when you give to others, provided you follow certain rules in your giving.

However, the tax laws have changed. As a result, fewer people are itemizing their deductions. If you don’t itemize, then you don’t take your charitable deductions into account at all on your taxes. Should you still keep giving to charity? If you do, can you benefit on your taxes at all now? Find the answers below.

Why Do You Give to Charity?

Before we get into the nitty-gritty of how the new tax laws affect charitable deductions, let’s take a moment to consider why we give to charity in the first place. If you’ve gotten so wrapped up in the tax benefits, then you’re really missing the point.

Of course, yes, those tax benefits are nice. However, they’re the icing on the cake. If I’m having trouble deciding between two different places to give my money, then I might choose the one that has non-profit status and therefore allows me to take charitable deductions. However, if I am passionate about a particular cause, I’ll give to it whether I get a tax break from it or not.

Common Reasons People Give to Charity

So, first things first, consider your priorities. People give to charity for all different types of reasons. Common reasons people cite include to:

  • Gain a sense of empowerment over sometimes seemingly-hopeless issues
  • Give back to an organization that has helped them in times of need
  • Help after a particular story moves them
  • Participate in a community as part of their spiritual beliefs
  • Provide help to people who need it because it’s the compassionate thing to do; a sense of duty
  • Reduce guilt over a particular situation
  • Support a cause the individual really believes in
  • Support something a loved one says is important to them
  • Teach children how to help others

Additionally, it feels good to give to others when you have the resources to do so. Undoubtedly, sometimes egoism is also at play; people give because they want others to see them giving.

It’s helpful to know what motivates you. Think about it and put that at the forefront of your mind when it comes to donating in the year to come.

Tax Reform Has Increased Standard Deduction

When it comes to charitable donations, people give in part because they get back. Specifically, they get a break on their taxes. However, you have to take itemized deductions in order to benefit from charitable deductions.

Changes in tax law radically altered the standard deduction. The new reforms started with 2018 tax filing and will continue through 2025. With the new rules, the standard deduction has increased dramatically. Individuals can take a $12,000 standard deduction. Couples who are married and filing jointly can deduct $24,000.

One report indicates that this has had a dramatic impact on the number of people bothering to take itemized deductions. Tax Foundation reports that among people earning between $10,000 and $200,000, standard deductions will decrease by between 63% and 70%. In other words, the majority of taxpayers will not itemize deductions, at least not for the next eight years.

Two Aspects of Tax Reform Encourage Charitable Deductions

There’s something really important to remember here. You do not have to take the standard deduction. You can still opt to itemize deductions. Although many people are opting to take the standard deduction, you can still review both options and choose the one that makes the most sense for you.

If you are passionate about charitable giving, then you might find that it’s actually best to continue to take the standard deductions. If you do, then you can still get the charitable deductions that you’re used to from the past. In fact, two huge changes within the new tax reform rules actually provide an incentive to continue donating to charity.

You Can Now Deduct More for Charitable Giving

First off, you can actually now deduct more for charitable donations than you could in the past. Prior to the tax reform, you could donate in cash up to 50% of your adjusted gross income. If you donated more than that in cash contributions, then it didn’t count toward your deduction.

However, the new rules bump that up another 10%. So, you can now deduct up to 60% of your adjusted gross income if you give that in cash contributions. Be sure to check the exact rules as they apply to your situation. There are certain regulations and limitations on this new part of the law.

You Can Now Itemize More Deductions

If you do decide to itemize your deductions, you’re not going to be capped in the way that you were in the past. Prior to the tax reform, there was a limit on your total itemized deductions. However, until the end of 2025, that limit has been lifted. You can take as much as you’re legally allowed as far as deductions go.

As for charitable giving, this means that whatever you give, you can deduct. In the past, you might have realized that you were capped out and chosen not to give anything more to charity until the next year. However, if you have the funds, you can donate them, because you’re now allowed to count them all towards your itemized deductions.

Should You Give to Charity Despite Changes in Tax Law?

If tax deductions are a primary motivator for giving to charity, then you have to weigh the pros and cons of donating under the new law. People who can give a lot then take itemized deductions will see the tax benefits that they’re seeking.

If you’re like most people, though, the tax benefits are only one reason that you give to charity. If you look at all of the other good reasons to give to others, then you might determine that it’s worth donating even if you do end up taking the standard tax deduction next year.

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