Editor’s note: On March 17, 2021 the IRS extended the federal filing and payment deadline for the 2020 tax year from April 15 to May 17.  You can read more about it here.

Tax season is here and it’s time to start thinking about your 2020 tax return. Dealing with your taxes doesn’t have to be daunting. Here are eight ways you can get ready to file your 2020 tax return, whether you’re working with an accountant or tax preparation software like TurboTax.

1. Mark your calendar

Highlight April 15 on your calendar before you do anything else. This is the date by which you must either file your taxes or Form 4686 to get a tax extension. It’s also the deadline to contribute to an Individual Retirement Account (IRA) for 2020 if you haven’t already maxed yours out. You don’t need to wait until April 15 to submit your tax return  — you can do so as soon as you have all the necessary documents. 

2. Gather your documents

Starting in January, you should receive tax paperwork from your employer and your banks. The documents you’ll need to file your taxes will vary depending on your situation. 

Here are some of the forms you might need:

  • W-2 from your employer
  • Schedule K-1 for income received from an estate, trust, partnership, or S-corporation
  • 1095-A for health insurance through the Health Insurance Marketplace
  • 5498 for contributions made to IRAs
  • 1098 for mortgage interest
  • 1098-E for student loan interest

You may also need various kinds of 1099s, including:

  • 1099-NEC (formerly 1099-MISC) for income from contract work over $600
  • 1099-DIV for earnings from stocks and mutual funds
  • 1099-INT for interest from bank accounts, CDs, and other accounts
  • 1099-B for income from selling stocks, bonds, or mutual funds
  • 1099-R for distributions from retirement accounts or pensions

Other employer provided forms might include:

  • 3921 for exercise of incentive stock options
  • 3922 for acquisitions or purchases through an Employee Stock Purchase Plan (ESPP)

Wealthfront clients can download their tax documents (1099-R for IRA withdrawals and consolidated 1099s for taxable accounts) directly from their dashboard by clicking on the menu item labeled “Documents.” These forms will become available in February, but you may receive additional correction documents going into March.

3. Review your year

Was 2020 a big year for you? If so, those life events may come with some tax breaks.

If you got married: It’s time to decide if you’ll file your taxes separately or jointly. For most people, it makes sense to file your taxes jointly. This article can show you exactly how to decide. For example, if you or your spouse has an income-based student loan, filing separately could keep your payments from dramatically increasing.

If you purchased a home: You may be able to deduct your mortgage interest (on mortgages up to $750,000) and property taxes (part of your SALT burden; limited to $10,000 a year).

If you had a baby: You’ll likely get a $2,000 tax credit that’s even refundable up to $1,400, although this credit starts phasing out if you are married, file jointly, and your income is above $400,000. You may also be eligible for tax credits for child care. Remember to fill out a new W-4 with your employer, as you’ll now have an additional withholding allowance.

4. Decide if you’ll itemize

When it comes to tax deductions, you have two options: 

  1. Claim the standard deduction. This allows you to deduct $12,400 (for single filers) or $24,800 (for joint filers) from your taxable income this year.
  2. Itemize your deductions instead.

To decide if you want to itemize, add up your various deductible expenses such as:

  • Medical bills
  • Charitable contributions
  • State and local taxes
  • Property taxes
  • Investment interest expenses
  • Mortgage interest payments

If the total reaches more than $12,400 (for single filers) or $24,800 (for joint filers), you’ll want to itemize and need to file a Schedule A (Form 1040). If you choose not to itemize, you’ll file a return claiming the standard deduction and Schedule A won’t be included. If your spouse itemizes, then you’ll need to do so as well.

Regardless of whether you take the standard deduction or itemize, you can take what are called “above-the-line” deductions which will further reduce your taxable income. 

Above-the-line deductions include:

  • Student loan interest payments
  • Unreimbursed moving expenses for a job
  • Health savings account (HSA) contributions
  • 401(k) contributions
  • SEP-IRA contributions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed in March 2020, allows for a $300 above-the-line charitable deduction. The deductions under the CARES Act must be in cash (checks and credit card payments qualify but securities and household items do not), and given to a 501(c)(3) public charity directly. 

5. Contribute to your IRA

Individual Retirement Accounts (or IRAs) are a great type of account to consider as you save for retirement. If you’re planning to contribute to an IRA for the 2020 tax year, April 15 is the deadline to do so. The annual contribution limit is $6,000 ($7,000 if you are 50 or older). 

If you’re interested in funding an IRA but you’re not sure which kind to use, check out Wealthfront’s IRA Account Selection Tool to learn more about your IRA eligibility. Wealthfront offers traditional IRAs, Roth IRAs, and SEP IRAs, as well as easy Roth conversions. You can transfer funds directly from your Cash Account to your Wealthfront IRA.

6. Use your harvested losses

2020 was a volatile year for financial markets. If you were a Wealthfront client, you likely received enough benefit from our Tax-Loss Harvesting service to cover our annual 0.25% advisory fee several times over

Tax-loss harvesting involves selling investments that have declined in value, generating a loss you can use to lower your taxes. If you have a Wealthfront Investment Account, we automatically harvest your losses for you.  If you use TurboTax, you can automatically import your tax-loss harvesting information.

7. Consider working with a professional

If this sounds complicated, especially if you sold employee stock options this past year, it’s a good time to ask yourself if you should hire an accountant. Typically, this is a good move if your taxes are complex –– say, you own a business, you’re subject to the Alternative Minimum Tax (AMT), or you receive K-1s. For more information about who should consider hiring an accountant, check out our blog post on the subject. If you do decide to hire an accountant, here are 11 questions to ask first.

If you plan to file your own tax return, there are a number of tax preparation programs to choose from including TurboTax, Credit Karma Tax, TaxAct, and TaxSlayer. Wealthfront clients who use TurboTax will get $15 off a Premier and $20 off a Self-Employed filing. We make it easy to import your Tax-Loss Harvesting and Stock-level Tax-Loss Harvesting information, and you can securely link to your Wealthfront account using an app-specific password.

8. Determine how you’ll pay

Depending on your tax withholdings and the estimated taxes you’ve paid on any income not subject to withholding, you could either receive a refund from the IRS or owe money on your 2020 taxes. 

If you think you might owe money, now is a good time to plan for how you’ll pay. You can use your account and routing numbers to pay your tax bill (up to the ACH limit of $25,000) directly from your Wealthfront Cash Account if you have checking features activated. 

If you have enough cash on hand, you’re all set. But if you need to bridge the gap between paychecks and have a Wealthfront Investment Account balance of at least $25,000, you can use our Portfolio Line of Credit  to get cash as soon as the next day. Your Wealthfront Portfolio Line of Credit is secured by your investment portfolio and allows you to immediately access a low-interest loan without disrupting your investment strategy, making it a good option to consider at tax time.

Tax time rolls around every year, and many people dread it. But if you’re prepared with your paperwork and have a plan, there’s nothing to fear. We hope these eight steps will help set you up for a less stressful tax season.

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Disclosure

Cash Account is offered by Wealthfront Brokerage LLC (“Wealthfront Brokerage”), a member of FINRA/SIPC. Neither Wealthfront Brokerage nor any of its affiliates are a bank, and Cash Account is not a checking or savings account. We convey funds to partner banks who accept and maintain deposits, provide the interest rate, and provide FDIC insurance. Investment management and advisory services are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC registered investment adviser, and financial planning tools are provided by Wealthfront Software LLC (“Wealthfront”).

Portfolio Line of Credit is a margin lending product offered exclusively to clients of Wealthfront Advisers by Wealthfront Brokerage LLC. You should consider the risks and benefits specific to margin when evaluating your options. Learn more about these risks in the Margin Handbook.

Wealthfront Advisers and its affiliates do not provide legal or tax advice and do not assume any liability for the tax consequences of any client transaction. Clients should consult with their personal tax advisors regarding the tax consequences of investing with Wealthfront Advisers and engaging in these tax strategies, based on their particular circumstances. Clients and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor’s personal tax returns. Wealthfront Advisers assumes no responsibility for the tax consequences to any investor of any transaction. Nothing in this communication should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.

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About the author(s)

The Wealthfront Team believes everyone deserves access to sophisticated financial advice. The team includes Certified Financial Planners (CFPs), Chartered Financial Analysts (CFAs), a Certified Public Accountant (CPA), and individuals with Series 7 and Series 66 registrations from FINRA. Collectively, the Wealthfront Team has decades of experience helping people build secure and rewarding financial lives. View all posts by The Wealthfront Team

Scott Peterson is a Partner in Moss Adams Private Client Practice. He has practiced public accounting since 2009. He focuses on the tax aspects of estate planning, including gift planning and trust taxation, to help his clients achieve their financial goals and manage their tax liabilities efficiently. He can be reached at (408) 558-3274 or scott.peterson@mossadams.com. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC. View all posts by Scott Peterson, CPA

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