Time for Mid-year Tax Planning
Whew! Our extended tax filing season that delayed the original filing date to July 15 has come and gone. Maybe you got your return filed; maybe not and you're on extension. Either way, believe it or not, NOW is the time to consider your 2020 tax situation.
With the pandemic, resulting law changes already made and likely still to come, job losses, pay cuts, etc., taxes for 2020 are shaping up to be, well, potentially more complicated. And let's not even talk about the political season we're in. A change in administration or control of Congress would undoubtedly result in major change in the tax system.
Frankly, that may happen anyway as the government ultimately has to find a way to pay for the pandemic related stimulus it has or will proffer.
With all that in mind, here are some mid-year ideas to consider that could save you money.
Roll Over Your Required Minimum Distribution (RMD)
I list this first because you have a limited amount of time (by August 31) to take advantage of a special rule. If you have a tax-favored retirement account, such as an IRA or 401(k), you may know that once you reach age 72 (70½ before 2020) you have to annually take an RMD on those investments. Not taking your RMD can cost you a 50% penalty.
The RMD requirement was suspended for 2020 under the recently passed CARES Act. But what if you have already taken your RMD before knowing this? The IRS recently said it will allow you to roll the RMD back into your account to take advantage of this one-year rule, but you HAVE TO DO SO by August 31.
They are also waiving the normal rule that allows only one IRA-to-IRA rollover per year.
Time to Review Your Investments
It's been a bit of a wild ride in the stock market this year, so now is a good time to take stock (pardon the pun) in your portfolio. Perhaps earlier in the year you sold some things off that generated short-term capital gains. Such gains will be taxed at your top marginal tax rate. If so, now might be a good time to see if you have any losses you could harvest. Such losses can offset taxable gains, plus up to $3,000 in excess losses can offset other types of income.
On the other hand, if you have an overall loss thus far, now might be a good time to sell investments in a gain position (particularly higher taxed short-term gains), thus sheltering those gains from tax by the losses previously realized.
Be a Giver
The CARES Act increased the incentive to make charitable donations in 2020. Normally, you have to itemize deductions to get a tax benefit from giving. However, in 2020, all taxpayers can take up to a $300 charitable deduction whether you itemize or not. While clear guidance has not yet been issued, we believe this means a couple that files a joint return gets to deduct $600.
If you do itemize, the new law allows you to deduct cash donations up to 100% of your adjust gross income (AGI) in 2020. The normal limit for cash donations is 60% of AGI.
Do You Need Child Care?
If you are like many parents of school age children who work outside the home, and the pandemic has resulted in your kids not being able to go to school and/or after-school care programs, you may be wondering what to do. One idea that could also save you some tax money is to consider hiring a trusted family member to care for your kiddos. Maybe a retired relative with some free time and could use some extra spending money, for example.
As long as you (and your spouse, if married) are working and the caregiving relative is not your own child under the age of 18, what you pay for this care should qualify for the dependent care tax credit. Depending on your income, the Child and Dependent Care Credit can get you 20% to 35% of up to $3,000 of child care and similar costs for a child under 13, or for an incapacitated spouse, parent, or other dependent (up to $6,000 of expenses for two or more dependents).
Pay Your Taxes
Ok, I'm not trying to be a wise guy and this may sound obvious. But due to the pandemic, the IRS extended the due date for paying any 2019 taxes dues, as well as the first two 2020 estimated tax payments until July 15. Many took advantage of this deferral, and are now playing catch up.
While it may be tempting to put off making some of those payments even longer, that comes at a price. The IRS will charge you interest on the amounts not paid when due. And for last year's taxes that are still due, it charges an additional late payment penalty of ½% per month. So, the sooner you can pay what is now due, the more money you will save.
If you've taken the time to read this far, likely you've found at least one nugget here that you can use, and hopefully more. Putting them in to action can make tax time for 2020 a bit less taxing (yes, I know, terrible pun again)!