The arrival of 2021, as welcome as it was, put a damper on most of Americans’ moves to lower their 2020 tax bills. The window for things like making charitable donations or taking capital losses to offset gains is it slammed on December 31.
But there are still some things people can do now to reduce last year’s taxes. Several involve contributions to retirement accounts, with deadlines until October 15. Another could reduce penalties for taxpayers behind on last year’s tax payments.
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Of course, it is not so clear when the 2020 taxes will be due, which affects some of these deadlines. Internal Revenue Service Commissioner Charles Rettig has said he wants to stick with April 15, but some in Congress and professional groups like the American Institute of Public Accountants are calling for a delay due to disruptions from the pandemic. For Texas and Oklahoma residents and business owners, the April date has already been pushed back to June 15 due to fierce storms in February.
Clarification is likely to come soon. Whether or not the April due date is delayed, here are the steps taxpayers can take to reduce Uncle Sam’s 2020 bills.
Contribute to a traditional IRA
Many taxpayers can contribute up to $ 6,000 to a traditional individual retirement account or a Roth IRA for 2020, but only a contribution to a traditional IRA will reduce 2020 taxes. The maximum is $ 7,000 for people age 50 and older, and not there is an age limit for those who can contribute.
For now, the 2020 deadline for traditional and Roth IRA contributions is April 15, except for people in Texas and Oklahoma, where it is June 15. If the IRS delays the April deadline for more taxpayers, the IRA deadline will follow suit.
Contributions to traditional IRAs are tax deductible up front, so they cut your 2020 taxes, while withdrawals during retirement are often taxable. The reverse is usually true for Roth IRAs – there is no upfront deduction, but withdrawals during retirement are usually tax-free. (In both types of accounts, growth and income are tax-free.)
To contribute to either type of IRA, a contributor must have “earned” income, such as wages, self-employment, or taxable alimony, up to the amount of the contribution. So if a teen earns $ 4,000 from a part-time job and $ 2,000 of investment income from day trading, they could deposit up to $ 4,000 in a traditional or Roth IRA, not $ 6,000. (This young man may want to opt for a Roth IRA because the total earnings are too small to trigger income tax.)
Married couples have advantages with IRA accounts. If one spouse has earned income but the other has little or no income, a contribution can often be made to a traditional or Roth IRA for the low-income spouse.
If you are considering this measure, be aware of the income limits that limit deductions from traditional IRAs. They apply if a single taxpayer or the spouse of a married couple is covered by a retirement plan at work, such as a 401 (k). To check this, see box 13 of the W-2 form.
For 2020, the deduction begins to be eliminated at $ 65,000 adjusted gross income for most single taxpayers and $ 104,000 for most joint taxpayers if both partners are covered by retirement plans. But here’s another blessing for married couples: If only one spouse is covered by a retirement plan, the income phasing out for a traditional IRA deduction for the uncovered spouse starts at a much higher $ 196,000.
While the deductions are great, savers should consider whether to forego the upfront tax cancellation of a traditional IRA and opt for a Roth IRA because of its tax-free withdrawals.
Contribute to a SEP IRA or Solo 401 (k)
Many taxpayers with self-employment income can make tax-deductible contributions to these plans. They often have more generous contribution limits and deadlines than traditional IRAs or Roth IRAs.
With a Simplified Employee Pension IRA, or SEP IRA, a taxpayer can still make a 2020 tax deductible contribution of up to $ 57,000. These accounts can be set up and financed until September 15 or October 15, depending on the type of entity, if the taxpayer has requested a six-month extension to file the 2020 tax return, according to Ian Berger, a specialized attorney. in this area.
A Solo 401 (k) is more complex to set up but can bring greater benefits. By 2020, the business owner and their spouse who have business profits can make annual tax-deductible contributions of up to $ 57,000, plus an additional $ 6,500 each if they are age 50 or older, as long as the business has no other employees . .
The timelines for establishing new Solo 401 (k) for 2020 in 2021 have been clouded by a recent law change. Berger believes that unless part of the Solo 401 (k) is established in 2020, the additional contributions of $ 6,500 are not allowed. But the rest of the plan can be configured and financed until September 15 or October 15, depending on the entity, if the taxpayer has a six-month filing extension.
Contribute to a health savings account
Taxpayers covered by approved 2020 high-deductible health plans have until April 15 to make tax-deductible contributions to their 2020 health savings accounts, or until June 15 if they are in Texas or Oklahoma. If the IRS extends the tax due date, this deadline will also be extended.
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For HSAs that cover one person, the 2020 deduction can be up to $ 3,550, plus $ 1,000 for people 55 and older. For a family, the limit is $ 7,100, plus $ 1,000 if the HSA owner is 55 or older. There are no income limits.
HSA withdrawals are tax-free if they are used for a wide range of medical expenses that are broader than what insurance reimburses. (For a list, see IRS Publication 502). Upon turning 65, an HSA owner can make penalty-free withdrawals for non-medical expenses, although these payments are taxable.
What if a worker with a company-funded HSA and a high deductible plan was laid off in 2020? Sarah Brenner, an attorney and HSA specialist, says the worker will likely be able to take deductions for making the remaining HSA contributions if they had high deductible health coverage after leaving work.
Make a payment to reduce tax penalties
More people than usual could owe penalties for underpayment of taxes in 2020 due to unemployment benefits and other pandemic problems. This penalty is assessed daily based on current interest rates and recently reached around 3% per year.
Despite requests from tax professionals, the IRS has not said whether it will provide relief from these penalties for 2020.
Taxpayers who cannot file a return at this time can make a payment of part or all of the overdue tax to stop or reduce the penalty. There are several forms of payment, including IRS Direct Payment.
Write to Laura Saunders at [email protected]
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