Make 2020 Less Taxing


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Make 2020 Less Taxing

Most people start thinking about taxes at the end of the year, and then do a deep dive in the spring.

But it’s much smarter to analyze your tax situation mid-year, for two reasons:

  • You’re far enough into the year to have a good understanding of your likely tax situation
  • You have time to make adjustments or take other actions to improve your tax situation

This year, with many people’s financial situation changing because of COVID-19, it’s particularly smart to evaluate your taxes and overall financial situation now.

Taxes and the CARES Act

The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March of this year, made a number of changes in the tax laws. They included:

  • Rebates of up to $1,200 for adults and $500 for children under 18
  • Penalty waivers for taking an early distribution from a retirement account
  • Suspension of the Required Minimum distribution for filers 70 ½
  • Increased deductions and relaxed rules for charitable deductions
  • Tax-free student loan payments of up to $5,250 by employers on an employee’s behalf

There were also several changes for businesses, especially small businesses.

Is my rebate a tax refund advance?

Many folks wonder if the rebate they received earlier this year was really an advance of anticipated refunds for 2020. Since over 73% of all filers receive a refund, that’s a legitimate concern.

The short answer: no. The recovery rebates are an additional refundable tax credit that will be applied to 2020 tax returns; the rebate will not affect the amount of taxes you owe for 2020. The rebate will be listed on your 2020 tax return as a tax credit already received. If your return shows that you’re owed a refund of, say, $500, you’ll still receive that refund in full when you file for 2020.

In addition:

If you, your spouse or a dependent was diagnosed with COVID-19 or financially harmed because of a quarantine, business closure, layoff, or reduced hours, you can withdraw up to $100,000 from your IRA, pension plan, or 401(k) plan without incurring the 10% early distribution penalty. Withdrawals will still be taxed as ordinary income over three years. Withdrawals can be re-contributed during the same three years to avoid taxes and get your retirement back on track.

If you turned 70 ½ in 2019, your required minimum distribution was waived for 2020. You may make a withdrawal if you wish.

If you normally claim the standard deduction, in 2020 you can now take an above-the-line deduction for up to $300 of cash contributions to public charities. If you itemize deductions, the normal 60% of AGI limitation on charitable contributions is waived for 2020, so you can elect to deduct 100% of your cash contributions to public charities.

Adjusting for 2020

Millions of Americans have seen changes to their income and financial situations in 2020, and chances are many more will before the year ends. Now is the time to review your likely income, AGI, and deductions for the year. Take a look at your withholding amount and any unemployment benefits. If your withholding amount no longer reflects your likely tax situation for 2020, now is the time to adjust it.

Unemployment insurance benefits are taxable, and must be reported as part of your gross income for both federal and state tax purposes. You can choose to have either federal or state taxes deducted from your benefits before you receive them when first filing for unemployment. If you choose to have taxes deducted, you will be sent a W-4 form that you must complete, sign, and return before any taxes can be withheld.

Also, if a portion of your salary was paid by your employer under the Payroll Protection Plan (PPP), that has no bearing on your tax liability. PPP funds will affect your employer’s tax situation, but not yours as an employee.

Future tax savings

A mid-year review is also an excellent time to look at strategies that can save on taxes now, in the future, and even in retirement. Work with your financial planner and, if necessary, your accountant, to see what combination of pre-tax retirement plans, Roth-IRAs, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) make sense for you. Many people don’t realize that some of those accounts, such as HSAs, have benefits that include both medical expenses and retirement income.

Now, while you have the time, talk to your financial planner about money moves you should make now that reflect your 2020 financial and tax situation. Those are decisions that can work in your favor for many years to come.

Interested in learning more about the tax moves you need to make before the end of the year? Check out our Lunch & Learn for more information. 

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