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Tax season is officially here, and now we have all been given relief for this confusing filing year until May 17th. Even with just a month to spare, there may still be strategies worth exploring to help reduce your tax lability:
1. Maximize Contributions to Retirement Accounts
Retirement accounts offer great tax benefits. You have until the April tax filing deadline to contribute to an IRA. For 2020, you could contribute up to $6,000 or $7,000 if you are age 50 or older. Depending on your adjusted gross income, your contribution may be fully tax deductible. If you have a qualified plan with your employer, your IRA contribution is not tax deductible, but it still may be worthwhile to make a contribution because it grows tax-deferred until you are required to take distributions.
You can contribute to a Roth IRA if your modified adjusted gross income for 2020 was less than $208,000 if married filing jointly or $140,000 for single filers. There is no tax deduction for contributions made to a Roth IRA but the money grows tax-deferred, and your earnings ca be withdrawn tax-free in the long run. There are no mandatory distributions for a Roth IRA, which is an added bonus.
2. Home Office Deduction, Do You Qualify?
Since many people spent most of 2020 working from home, you may be asking “Do I qualify for the home office deduction?”. The quick answer is, “maybe,” but you only qualify if you are self-employed. Employees can no longer deduct home office expenses. This deduction was eliminated for employees in the 2017 tax reform law.
For those who are self-employed and may qualify, the rules are strict for claiming a deduction. Self-employed individuals can deduct office expenses on Schedule C of Form 1040. The most important test is: do you use your home “regularly and exclusively” as your principal place of business. If you only work from home part of the year then you can only claim the deduction for the portion of the year that satisfies the “regularly and exclusively” requirements.
The amount of the deduction for self-employed individuals is also subject to various limitations. Be sure to discuss your personal situation with your tax professional.
3. Understanding your 2020 Required Minimum Distribution (RMD) Rollover
Under the CARES Act, IRA owners were not required to take distributions from their IRAs last year. Taxpayers who had already taken their required minimum distributions early in 2020, were given the opportunity to reverse all or part of their distribution by returning funds to their IRA.
Those same taxpayers may have been surprised when they received a 1099 for the distribution they reversed back to their IRA. However, this is standard process. You will need to report both the withdrawal and the “rollover” on your 2020 tax return.
Taxpayers will be eventually receiving Form 5498 which will verify the rollover, but these are usually not distributed until May. Still, you do not need to wait to receive the form in order to file your taxes. Your tax preparer will confirm with you how much of your distributions was reversed in 2020 and then they will report both the distributions and the rollover (redeposit) on your return. The form 5498 is simply an information form so the IRS can verify the information reported on your tax return.
4. Your Estimates are Still Due April 15, 2021
To add even more confusion to this year’s tax fillings, the latest extension from the IRS does not apply to payments for estimated taxes. Your first quarter estimated tax payments are still due April 15, 2021, so be sure to touch base with your tax professional now.
For further information on the latest updates from the IRS, here is a link to the press release.
The deadline to file your taxes is quickly approaching. Now is the time make sure everything is in order and to think about any opportunities you may have missed to lower your tax bill.
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