Last year was one for the history books. It was downright eventful and left many people confused about all the changes that were taking place.
A pandemic spread across our nation resulting in a quarantine that tested and shook our economy. The government responded with substantial incentives and laws. A presidential election and several changes to tax legislation and pension schemes were mixed.
Here’s a look at what you might need to think about when planning your tax for this year.
Contributions to your traditional IRA can be made until April 15 to count for 2020. The limit is $ 6,000 ($ 1,000 catching up for those over 50). Be wary of the deductibility of traditional IRA contributions and follow the rules relating to them, especially when filing your own taxes.
Considerations for the Roth IRA
Remember that your contribution to your Roth IRA will count towards the grand total of $ 6,000 for IRA accounts but may still be made up until April 15, 2021 and will continue to be treated as a 2020 contribution. There are income restrictions on Roth IRA contributions, but not on the Roth TSP.
You may want to consider Roth conversions if you think you will be in a higher bracket going forward. Perhaps you are retired or only work part-time. Low-income years can be good years to convert into money that grows tax-free. You cannot convert your traditional TSP, but traditional IRA funds are eligible.
Your 2021 contribution limit is $ 19,500 for TSP deferrals ($ 6,500 to catch up for those over 50). Therefore, plan your TSP withholding this year accordingly. Make a habit of increasing your TSP dues by 1% each year if you can.
Qualified Charitable Distributions (QCD) After age 70, you can send distributions from an IRA directly to a qualified not-for-profit organization. This QCD allows the distribution to qualify and count towards your RMDs but is not treated as taxable income. If you are a nonprofit and you are the right age, this strategy should be used to achieve both goals at the same time. This strategy allows individuals to distribute up to $ 100,000 per year. Consider this for 2021 when RMDs return.
Qualified donations to charity
Qualifying charitable donations up to $ 300 may be deducted above the border deduction for 2020 under the CARES Act. That amount was extended for 202. Individual applicants can deduct up to $ 300, and joint filing of marriages can deduct $ 600 for monetary gifts to charity in 2021.
Keep records of donations to nonprofits. Keep good records; they can help clear your taxes.
Charitable Remainder Trusts
Charitable foundations are a tax-exempt way of giving assets to beneficiaries for a period of time before donating the rest to charity. Work with the right professionals to make sure you take full advantage of the tax opportunities.
Tax-Loss HarvestingTax-Loss Harvesting is a strategy in which investors sell underperforming taxable assets and use the losses to offset profits, reducing their taxable income. If you were in a high income year ago or have had significant losses, this strategy should be considered. Lots of crop portfolio losses towards the end of the year, but you should consider these opportunities year round.
A health savings account (HSA) is a tax-privileged account with which qualified health needs are covered. HSAs can be used as long-term investment vehicles so that you can save tax-privileged retirement costs. You must be enrolled on a high deductible health insurance plan to contribute.
A 529 is a tax-privileged savings plan that can be used for qualified educational expenses. Money that goes into a 529 is deductible in most states, and you can fully fund 529 plans for yourself, children, grandchildren, and other family members. Check with your state to find out which tax break rules apply in your state. Be careful though, distributions of 529 must qualify or face a penalty.
Estate planning and asset transfers
Annual gift tax exclusion of $ 15,000
This is the amount a person can give away every year without tax. Talk to your counselors about strategically using this exclusion in your estate plan. Don’t confuse this with the lifelong gift tax exemption.
Lifetime exemption amount / discount exemption amount
For 2021 that’s $ 11.7 million, which is an overall lifetime and a discount. If your estate exceeds this amount, estate taxes of up to 40% may apply.
Wills and Trusts
Tax season is a great time to check out the details of your wills, trusts, beneficiaries, etc., especially given the SECURE Act and its complexities around retirement accounts and the new RMD deadlines. Find out about the SECURE Act.
New tax concerns for 2021
The SECURE Act requires that many inherited retirement accounts must be completely used up within 10 years. 2020 was the first year these new rules came into effect. 2021 will be the first year the SECURE Act’s 10-year clock starts running. Make sure this is reflected in your financial plan.
Required minimum distributions are secured
If you are the RMD age (72) or previously the lower age of 70.5, these distribution requirements apply again. Inherited accounts will continue to meet their needs.
The CARES Act included favorable tax rules on most types of TSP withdrawals and other retirement accounts for attendees affected by COVID-19. In addition, a new temporary payout option was created that dispensed with the usual payout requirements for ongoing operations and enabled all participants affected by COVID to waive withholding tax. This was a total of up to $ 100,000 raised within the 2020 calendar year. However, you may be able to apply for the exemption retrospectively if you made a distribution in 2020 and met the other qualifications.
Extended retirement loans
Loan provisions from retirement plans have been significantly eased for those living in qualified disaster areas or those who have suffered a loss from the disaster (including COVID and other disasters). They also allowed TSP attendees affected by COVID to suspend TSP loan payments for 2020 and doubled the loan amount allowed. The deadlines for the increased loan maximum, suspension of loan payments and accepting withdrawals under the CARES law have expired. If you made a withdrawal from your TSP account in 2020, you may want to review information about the favorable tax treatment provided by CARES, including whether your withdrawal is eligible and, if so, how you can take advantage of it.
If you’d like a short, free e-book that delves into some of these topics in more depth, email us at [email protected] and mention “E-Book” in the subject line. Have fun planning!
Tax source: irs.gov
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