Steps to take this week to reduce your income taxes for 2020

HOUSTON - Looking to cut your federal income tax bill next year? There are steps you can take in the next two days before the New Year that may reduce it.    

New this year, the CARES Act allows you to claim a tax credit for donating up to $300 to charity before January 1, even if you take the standard deduction. 

"Maybe there's somebody you're wanting to give to and you haven't given up to $300 this year, so that's something you might consider doing," said Certified Public Accountant Ed Gardner.

If your medical expenses were more than 7.5% of your adjusted gross income this year, you can deduct them if you itemize if you pay those bills before Friday. You can use leftover money in your Flex Spending Account. In fact, you need to spend that money down before you lose it on January 1. 

You can also maximize retirement contributions. 

"Under age 50, you can give $6,000. There's what's called a catch-up where you can give an extra thousand over 50, and that's both on an IRA and a Roth IRA," explained Gardner.

You can pay some 2021 expenses early and deduct them, such as your January mortgage payment or two-quarters of your property taxes.

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You can also offset capital gains by harvesting your losses. 

"Maybe you have some stocks that are down and have been down for a long time and you don't think they're really going to go up. You might want to go ahead and sell those stocks this year," said Gardner.

You won't owe taxes on your stimulus check. It's a tax credit. If you never received the first stimulus check or didn't get the full amount owed to you, you can claim the Recovery Rebate Credit on your 2020 tax return.

As for those work-from-home expenses, you may be able to deduct some if you work for yourself, but not if you work for someone else and receive a W-2. 

If you took a hardship withdrawal from your 401k this year, you will have to pay income taxes on it, but that can be spread over three years or you can pay the withdrawal back. 

If the IRS paid you interest on a late tax refund, you will have to pay taxes on interest over $10. 

And unemployment benefits are taxable income. If you didn't have withholdings taken out and cannot afford to pay your taxes next year, the IRS says file a return on time with what you can pay. You can call them at 800-829-1040 to discuss your situation. You may be able to get an extension, an installment plan, or an offer in compromise.

And remember President Trump's payroll tax cut that took effect in September? If withholdings from your paycheck were reduced this fall to give you more take-home pay, you'll have smaller paychecks starting in January. That's when withholdings will return to normal levels, plus you'll have the withholdings that weren't taken out this fall.