Tax Planning To-Do’s to Meet 2020 Deadlines
Tax Planning To-Do’s to Meet 2020 Deadlines
As is often the case at the end of each year, many people are finding themselves in tax planning mode. With deadlines for 2019 taxes ranging from end-of-year through the April 15, 2020 tax filing deadline, it can be tough to manage and prioritize actions. To offer a helping hand in that endeavor, here is a list of our top tax planning “to-do’s” for consideration:
IRA Contributions (Traditional, Roth, SEP, SIMPLE)
Many are familiar with the ability to shelter income through IRA contributions, which can be done at any point up until April 15, 2020 (or until October 15, 2020, in some cases) for the 2019 tax year. A few things to keep in mind:
Earned Income Requirement
Eligibility for such contributions requires you to have the equivalent amount of earned income (wages, salaries, tips, and other taxable employee compensation) in the same tax year. One exception is spouses; as long as one spouse has the equivalent amount of earned income, both spouses are eligible to make contributions to their respective IRAs for the year. And depending on whether a retirement plan covers one spouse through work, you may or may not be able to deduct a traditional IRA contribution.
Once you turn 50, you are entitled to a “catch-up” contribution to both your 401k and IRA, allowing for an additional $6,000 to be deferred into a 401k and $1,000 into an IRA. Keep in mind that this is a lump-sum allowance the day you turn age 50, meaning that even if your 50th birthday is in December, you are still eligible to contribute the full amount of the catch-up for the year.
Traditional and Roth contributions are due by April 15, 2020, regardless of whether you file an extension. SEP contributions are due by the employer’s filing deadline plus extensions, usually October 15th. SIMPLE IRAs have different deadlines depending on whether the contribution is coded as employee or employer.
Health savings accounts are another tax-advantaged account designed specifically for medical expenses, allowing individuals to shelter up to $3,500 of income annually (or $7,000 if contributing for a family) through HSA deferrals. Similar to IRA contributions, these deferrals can be done up until April 15, 2020, and there is an additional catch-up contribution of $1000 for those aged 55 or older. Keep in mind that you must be covered by a qualified high deductible health plan to be eligible to make contributions in any given year (a qualified HDHP must have a deductible of at least $1,350 for an individual or $2,700 for a family).
Many individuals give generously to charities and may be able to deduct those contributions for tax purposes. Keep in mind that for charitable contributions to count as deductions against your 2019 income, they must be completed by 12/31. This deadline applies to all donations, including cash, Qualified Charitable Rollovers from IRAs, and contributions to Donor Advised Funds.
Required Minimum Distributions
Once you reach age 70 ½, the IRS requires you to take an annual minimum distribution from your tax-deferred retirement accounts (IRAs & 401ks). These distributions must be taken by December 31st of the year they are due, or else the distribution is subject to a hefty 50% penalty.
One exception to this rule is allowed for your first required distribution in the year you turn 70 ½. For your first distribution, you are allowed to defer taking until April 1st of the following year. However, you are still required to take your second distribution by the 12/31 deadline in the same year, which typically makes this not advantageous as it results in two-year’s-worth of minimum distributions being reportable in the same tax year. However, this may be worth considering if you anticipate a significant income drop in the year following your first RMD.
While Roth contributions can be made up until the tax filing deadline for 2019, conversions must be done by 12/31 of the tax year. Roth conversions can be a powerful tax planning tool in years where total income is anticipated to be significantly reduced (either due to lower realized income or higher deductions from strategies like front-loaded charitable contributions or doubling-up property taxes). Conversions allow you to move all or part of funds from a Traditional IRA into a Roth IRA. Taxes are paid in the year of recognition but then grow tax-free over the life of the Roth and are not subject to future RMDs. While there are limits on contributions, another big benefit of conversions is that there are no income limits or caps on the amount one can convert into a Roth. Careful planning has become even more crucial when making conversions after the new Tax Cuts and Jobs Act, as it removed the ability to recharacterize conversions up to the tax filing deadline. Thus, once a conversion is made, it cannot be undone as was previously allowed.
Tax Loss Harvesting
Throughout the year, brokerage accounts earn interest, dividends, and capital gains that are taxable to the account owner in the year they are earned. This can have a sizeable impact on one’s tax liability depending on the amount realized. One strategy to help minimize reportable gains is to review any holdings that have declined in value and recognize those losses before the year-end. Since gains and losses are netted together when filing, losses can help offset total realized gains and, in turn, reduce one’s total tax due. As your wealth manager, brokerage accounts that are managed directly by Slaughter Associates are automatically reviewed to identify and optimize these opportunities.
Proactively working with your advisor alongside your tax professional can ensure that all “to-do’s” are optimized and completed on time.