After enacting the most sweeping tax reform in three decades in December 2017, Congress pounced again in December 2019, extending (sometimes retroactively) and modifying a slew of tax breaks and revamping rules about retirement accounts.
Given all that, it’s easy to feel overwhelmed. Here are five tips to help reduce tax filing stress and to minimize the chance of future problems with the Internal Revenue Service.
Find Last-Minute Deductions
If you’re bummed out about writing a big check to the IRS, consider writing a check that benefits you—and your retirement—instead. While it’s too late for employees to top up 2019 contributions to a 401(k), you might still be able to deduct 2019 contributions to an individual retirement account (IRA), a health savings account (HSA) or, if you’re self-employed (or have side gig income), a SEP-IRA.
To qualify for an HSA, you must be covered under a high-deductible health plan. For 2019, you can contribute up to $3,500 to your HSA if you have single coverage or $7,000 if you have family coverage. Plus, if you’re over age 55, you can kick in an extra $1,000. Not only are contributions to HSAs tax-deductible, but withdrawals for qualified health-care expenses are also tax-free. Even better, you can invest your HSA balance, allowing it to grow tax-free for future medical expenses, including in retirement.
Depending on your income and whether you have a workplace retirement plan, you may be able to deduct up to $6,000 in contributions to a traditional IRA for 2019 so long as you’re under the age of 70½. (For 2020 and later, there is no age limit.) The catch-up rules apply to IRAs, too, to the tune of $1,000 in extra contributions if you’re 50 or over.
You must make 2019 contributions to an HSA or IRA by April 15. If you’re self-employed and file for a tax extension, you can contribute to your SEP-IRA until October 15 or the date you file your return, whichever is earlier.
Watch for Form 1040 Changes
The IRS eliminated Forms 1040EZ and 1040A in 2019 but has introduced a new form in 2020: Form 1040-SR, U.S. Tax Return for Seniors. It’s designed for older taxpayers with bigger print and increased attention to the additional standard deduction for those 65 or older.
Meanwhile, there were a few notable changes to Form 1040. Among them? A question about cryptocurrency. You’ll see the new language at the top of Schedule 1. Don’t skip this question; the IRS has made no secret of its belief that taxpayers are not properly reporting their crypto transactions.
For 2019, there are only three numbered schedules, down from six in 2018. Schedules 2 and 4 were combined into a revised Schedule 2 (where you will report any additional taxes you may owe), while Schedules 3 and 5 were combined into a revised Schedule 3 (where you will report any credits that you didn’t otherwise claim). It sounds confusing, but you won’t notice the changes if you’re using tax software.
And no, you’re not missing a section: For 2019, you no longer need to make a shared responsibility payment or file Form 8965 if you didn’t have health insurance for part or all of 2019.
Check for Common Mistakes
Before you mail your return—or hit send to e-file—double-check to make sure that you didn’t make any of these common mistakes.
Math mistakes. It’s easy to misread a column or transpose a number—so double-check the numbers entered and the math, even if you use software or a tax professional. If you don’t catch it, the IRS’ computers will.
Wrong or missing social security numbers or names. The names and Social Security numbers on your tax return should match the names as they appear on the respective Social Security cards.
Filing status errors. There are five filing statuses to choose from: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child. For federal income tax status, marital status is determined by state law as of the last day of the calendar year. For example, if you are married on December 31, you are considered married for the year. Click for more on filing status.
Forms not signed. An unsigned tax return isn’t a timely filed return. Keep in mind that for a joint return, both spouses must sign for it to be valid. E-filed tax returns also require a signature of sorts—you must include a Personal Identification Number (PIN); you can use your prior PIN if you e-filed last year.
Safeguard Your Financial Data
If you use tax or other software, make sure that it’s secure and up to date, and don’t transmit or enter financial information on websites that aren’t secure (look for “https” in the web address). Use encryption programs and strong passwords to protect sensitive digital data, and, of course, back it up. Don’t share passwords or PINs, and don’t give this information out over the phone or via email. Remember, the IRS does not initiate calls or emails without sending a letter first.
If you use a tax preparer, and you’re not sure how your financial data is stored or protected, ask. Tax preparers are prime targets for identity thieves and are required to have an information security plan. Do your part too; examine with care the origin of messages claiming to be from a tax provider.
The IRS now has dedicated a section of its website to address identity theft and data security protection for taxpayers, tax professionals and businesses. You can report suspicious online or emailed tax-related phishing scams to email@example.com.
Tweak Tax Payments for 2020
Once you’ve signed and submitted your return, don’t put it away just yet. Instead, use it to tweak your tax payments for 2020.
If your refund was unexpectedly large, take steps now to ensure that you have more money in your pocket throughout the year—and don’t provide Uncle Sam with an interest-free loan. The IRS’ new Tax Withholding Estimator should help you determine if you’re having too much tax withheld from your paycheck. If you are, give your employer a new form W-4, Employee’s Withholding Allowance Certificate.
Did you owe more than expected? Adjust withholding or consider whether you need to make (or increase) estimated payments throughout the year. If you don’t pay—through estimated and withholding—at least 90% of the tax that you owe or 100% of the tax that you owed in the prior year, you may owe a penalty. (The percentage is 110% of prior year’s tax if your adjusted gross income on that return was at least $150,000.) Don’t panic: the underpayment penalty is just interest, and exceptions and waiver provisions apply. Also, there’s generally no penalty if you owe less than $1,000 in extra tax.