Selena Maranjian (TMFSelena)

A little time spent learning about taxes can save
you hundreds — or even thousands — of dollars.

Don’t look now, but tax season is getting closer. It’s not
something most of us enjoy thinking about or dealing with
— indeed, 16% of respondents to an AARP survey said
they’d rather spend a night at the airport than prepare their
taxes, while 36% would just as soon visit the DMV.

If you approach tax season prepared, though, and you’re
able to shrink your tax bill via some savvy moves, then
maybe it won’t be so bad. Here are five valuable tax tips
you can use in 2020 and in the years ahead.

Tip No. 1: Be organized

It’s a little late to do a great job with this tip, but it’s not too
late. Ideally, have a folder or box where you place taxrelated
receipts and documents throughout the year. (After
all, you might spend some money on a tax-deductible
medical expense in May — and you don’t want to forget
about it.) Once you’re sitting down to prepare your return,
all the papers you need will be in one place. Even if you’re
using a tax professional to prepare your tax return, it will be
very helpful to be able to hand over all your necessary
documentation instead of having to hunt for it.

Tip No. 2: Take advantage of IRAs and 401(k)s

It’s vital for most of us to be saving and investing for
retirement, and it’s very helpful to do so using taxadvantaged
accounts such as IRAs and 401(k)s.

There are two main kinds of IRAs and 401(k)s: traditional
and Roth. Traditional accounts offer an up-front tax break:
You contribute money on a pre-tax basis, thereby reducing
your taxable income for the year of the contribution. If you
contribute, say, $5,000, you deduct that from your taxable
income and avoid paying taxes on it. With a 24% tax
bracket, you could shrink your tax bill by $1,200.

Roth accounts offer a back-end tax break: You contribute
money on an after-tax basis, so your taxable income isn’t
reduced and your tax bill for the year of contribution
doesn’t shrink. But, if you follow the rules, when you
withdraw money from the account in retirement,
it will be tax-free income.

Tip No. 3: Keep up with changes to tax laws

Next, it’s important to keep up with developments in tax
law. Otherwise, you might not realize that the amount you
can contribute to various accounts has changed or that
certain deductions are no longer allowed. Some years offer
more changes than others — the Tax Cuts and Jobs Act of
2017 ushered in lots of change, such as doubling the
standard deduction and reducing various tax rates — rules
that are in effect now, for your 2019 tax return that you’ll
prepare in 2020 and for future years.

Here are three changes that take place for tax year 2019:

Alimony payments from divorce or separation
agreements made or changed in 2019 or later will not
be deductible.

The penalty if you don’t have health insurance (and
didn’t receive an exemption) has been eliminated.

The threshold for deducting qualifying medical and
dental expenses has risen from 7.5% of your adjusted
gross income (AGI) to 10%, making it harder to deduct
those expenses. So, if your AGI is $60,000, you could
only deduct those qualifying expenses that exceed
$6,000. Expenses of $7,000? You can deduct $1,000.
Expenses of $4,000? You’re out of luck. (Remember,
though, that the standard deduction is now much
higher than it was in recent years, so many more
people should simply take that instead of itemizing.)

Tip No. 4: Be thorough and report all your income

It can be tempting or easy to omit some income when
preparing your taxes — if only because you forgot some
income. That can be a costly blunder, however, and one
that can be prevented if you’re organized and keep good
records of all your earnings. You might have a small job on
the side, for example, or you may be earning a little extra
income making and selling things online.

Many sources of income will send you end-of-year
documents, such as the W-2 form from your employer or
1099 forms from your bank and/or brokerage detailing
income from sources such as dividends or interest. That
information also makes its way to the Internal Revenue
Service, which is expecting you to report it. Failure to do so
will likely be noticed.

For less-formal income you receive, it may be your
responsibility to keep track of it and ensure that you have
sufficient funds on hand to pay your tax bill come April.
Those who earn significant sums on the side may need to
pay quarterly estimated taxes to the government as well —
that’s when you pay your taxes in installments throughout
the year, as many self-employed folks do. The many people
who just file and pay taxes once a year can do so because
their employers have been withholding taxes throughout
the year — they have, therefore, been paying throughout
the year, too.

Tip No. 5: Consider hiring a tax pro

Finally, because tax laws are so complicated and subject to
change, consider not preparing your tax return on your
own. If your situation is very simple, such as if you’re single,
with no dependents, no investments, and no income other
than a salary, you could do well to use a tax preparation
software package.

But those with more complicated financial lives should
consider using a good tax pro’s services. After all, he or she
spends a lot of time keeping up with tax laws and knows
about available strategies that can minimize your taxes. But
don’t just sign up with a stranger at a kiosk you run across –
– ask for strong recommendations from friends or family or
look into nearby enrolled agents (those who are authorized
to represent you before the IRS) and interview a few before
selecting who to hire.

Taxes aren’t exciting, but it’s well worth your time to read
up on tax basics, including deductions and credits available
to you that can shrink your tax bill.