How to navigate your 2020 tax filing
For starters, you may still be able to capture a tax deduction by contributing to a traditional IRA by the new deadline. If you had earned income last year, you also may be able to contribute to a Roth IRA for 2020, which can be a great long-term wealth building move, but it will not lower your 2020 tax bill. There is a $7,000 maximum contribution if you turned age 50 or older in 2020, and everyone else can contribute $6,000.
If you have self-employment income, you can open a 2020 company retirement plan. as late as Oct. 15 to save on your 2020 tax return. An accountant can determine eligibility and contribution maximums, which can be as high as $57,000 for a business owner.
A lesser used way to save is to open and fund a Health Savings Account (HSA), a tax-advantaged investment account that is tied to a qualifying high deductible health insurance plan. The HSA offers both a deduction on your 2020 tax return and tax-free withdrawals to cover future health eligible expenses. You can put in up to $3,550 for 2020 as an individual or up to $7,100 for families. Ages 55 or older can put in another $1,000 for 2020.
As you prepare to file your 2020 taxes, there are unique tax changes that impact last year’s charitable donations, retirement plan withdrawals and stimulus payments.
The 2020 CARES Act allows you to deduct 100% of your adjusted gross income (AGI) through cash charitable donations in 2021. Additionally, all taxpayers can capture up to a $300 deduction in 2020 for charitable donations made in cash.
Withdrawals from an IRA and 401(k) in 2020 are also treated differently. There are no required minimum distributions (RMDs) from any retirement accounts in 2020, whether 401(k), IRA, or another type of plan. This also applies if you are a beneficiary of an inherited account.
If you were affected by COVID-19 and are under the age of 59 ½ , you could have taken penalty-free early withdrawals up to $100,000 from your company retirement plan in 2020. These withdrawals are still taxable and should be factored into your 2020 tax return. You can spread the taxes owed over the next three years.
Stimulus payments received in 2020 are not treated as taxable income on your 2020 federal income tax return. Basically, these payments are considered advances for your 2020 tax year credits, so if you received the full amount you are entitled to, then you have essentially claimed the full credit amount early. On the other hand, if you received less than you are entitled to, you can still claim the additional amount of the credit on your 2020 tax return.
Don’t confuse unemployment benefits with stimulus income received in 2020. Unemployment benefits remain taxable for all taxpayers and should be included on your 2020 return.
Understanding all latest and unique tax law changes will not be easy, but as you can see there is still time and opportunity to save on your 2020 taxes. Most people will wait until the last minute to file their taxes, but clearly you can benefit by planning ahead.
Kendall King is founder and CEO of Castleview Wealth Advisors in Oklahoma City.