The 2020 tax return season is finally reaching its filing deadline. With over 126 million tax returns received by the IRS as of May 5, it seems that most taxpayers have filed. However, there are always taxpayers who wait until the deadline to file their returns. As a result, with the new deadline of May 17, 2021 looming, there are some last-minute opportunities these taxpayers might want to utilize.
Taking advantage of tax filing opportunities is not simply about lowering your tax bill. Making proactive choices with taxes is an element of good financial planning. Wealth is not created merely by having a significant amount of income. It requires applying discipline and structure to that income. In addition to thinking about how the decisions will impact their present circumstances, taxpayers must also consider the benefits to their future selves.
As the filing deadline approaches, here are some opportunities taxpayers should consider before filing their returns.
Traditional and Roth IRAs
Most Americans feel they are behind on retirement savings. One of the best and most efficient tax planning techniques is to fund an IRA. For 2020, taxpayers can fund the lesser of $6,000 or earned income into an IRA. For those age 50 and over, an additional $1,000 contribution is allowed.
This contribution for 2020 can be made until the tax filing deadline of May 17, 2021.
There is a difference between funding a traditional IRA versus a Roth IRA. When a traditional IRA is funded, the taxpayer gets a tax deduction and the money grows tax deferred. When distributions are taken, they are subject to ordinary income tax.
In comparison, a Roth IRA is funded with after-tax dollars. The funds grow tax deferred, but the distributions come out tax free.
While a Roth IRA is often the more appealing vehicle, a taxpayer’s eligibility for the Roth IRA is determined by their modified adjusted gross income (MAGI). For married filing joint filers, a Roth IRA can be funded with a MAGI up to $196,000 (with a reduced contribution that phases out at $206,000); for single and head of household filers, the MAGI limit is $124,000 (with reduced contribution that phases out at $139,000)
Future Health Care Costs
One of the most powerful tax and financial planning tools is a Health Savings Account or HSA. This account is the holy grail of tax planning as it is triple tax exempt. The taxpayer funds the account with a tax-deductible contribution; the money grows tax-deferred; and distributions are tax-free provided the funds are used for qualified medical expenses.
For 2020, the HSA funding limits are $3,550 for single taxpayers and $7,100 for families. For taxpayers over age 55, an additional catch-up contribution of $1,000 is allowed. Like the IRA and Roth IRA, this account can be funded for 2020 until the tax filing deadline of May 17, 2021. Further, it is an above the line deduction that can help save money.
There is often confusion about eligibility for this account. A taxpayer can fund an HSA if they have a high deductible health care plan that is HSA compatible. Such health care plans are becoming more commonplace.
Self-Employed Benefits
Finally, for those who are self-employed and have not filed yet, there is always the option of funding a SEP-IRA. A SEP IRA is an IRA for self-employed individuals that can be funded for 2020 with the lesser of 25% of compensation or $57,000. It is a deductible contribution and the upper limit is much higher than that of a traditional IRA. Self-employed, high-earning taxpayers may be able to fund more than the $6,000 limit of an IRA.
The best news is that a SEP IRA, unlike the traditional IRA, Roth IRA or HSA, does not have to be funded by May 17, 2021. A SEP IRA can be funded at any time until the taxpayer files their tax return and with a filing extension, this could be as late as October 15, 2021.
Taking Proactive Steps
With the tax filing deadline quickly approaching, taxpayers still have a few maneuvers that can benefit their bottom line. It is always good to explore options that may lower one’s tax liability as well as move their financial planning forward. And if it is not possible for tax year 2020, keep in mind, these opportunities are available for 2021 until April 15, 2022.