Tax Planning

Do not forget about these final minute tax planning concepts that may prevent cash

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The 2020 tax return season is finally reaching its registration deadline. With over 126 million tax returns filed with the IRS on May 5th, it appears that most taxpayers have filed. However, there are always taxpayers who wait until the filing date to file their tax return. As a result, with the new May 17, 2021 deadline coming, there are some last minute opportunities that these taxpayers may want to take advantage of.

Using tax return options is not just about reducing your tax burden. Making proactive decisions about taxes is an element of good financial planning. Prosperity does not only come from a substantial income. It takes discipline and structure to apply to this income. Taxpayers need to consider not only how the decisions will affect their present circumstances, but also consider the benefits to their future selves.

As the filing deadline approaches, taxpayers should consider a few options before filing their tax 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 finance an IRA. For 2020, taxpayers can fund less than $ 6,000 or earned income into an IRA. An additional $ 1,000 contribution is allowed for those aged 50 and over.

This contribution for 2020 can be paid up to the tax return deadline on May 17, 2021.

There is a difference between funding a traditional IRA and a Roth IRA. When a traditional IRA is funded, the taxpayer receives a tax deduction and the money grows deferred for tax purposes. If distributions are made, they are subject to normal income tax.

In comparison, a Roth IRA is funded with dollars after taxes. The funds grow deferred for tax purposes, but the distributions are tax-free.

While a Roth IRA is often the more attractive vehicle, a taxpayer’s eligibility for the Roth IRA is determined by their modified adjusted gross income (MAGI). For married joint applicants, a Roth IRA can be funded with a MAGI of up to $ 196,000 (with a reduced contribution that expires at $ 206,000). For sole and household heads, the MAGI limit is $ 124,000 (with a reduced contribution of $ 139,000).

Future healthcare costs

One of the most powerful tax and financial planning tools is a health savings account (HSA). This account is the holy grail of tax planning triple tax free. The taxpayer finances the account with a tax-deductible contribution; the money grows deferred for tax purposes; and distributions are tax exempt provided the funds are used for qualified medical expenses.

For 2020, the HSA funding limits are $ 3,550 for individual taxpayers and $ 7,100 for families. An additional $ 1,000 catch-up contribution is allowed for taxpayers over 55 years of age. Like the IRA and the Roth IRA, this account can be funded until the tax filing deadline on May 17, 2021 for 2020. Additionally, it’s an over-the-top deduction that can help save you money.

There is often confusion about who is allowed to use this account. A taxpayer can fund an HSA if they have an HSA-compatible health insurance plan with a high deductible. Such health plans are becoming more common.

Independent services

After all, self-employed people who have not yet submitted an application always have the option of financing a SEP-IRA. A SEP IRA is a self-employed IRA that can be funded with less than 25% of the compensation or $ 57,000 for 2020. It’s a deductible contribution and the cap is much higher than that of a traditional IRA. Self-employed, high-income taxpayers can potentially fund more than the $ 6,000 limit on an IRA.

The best news is that, unlike the traditional IRA, Roth IRA, or HSA, a SEP IRA does Not must be funded by May 17, 2021. A SEP IRA can be funded at any time until the taxpayer submits his tax return. With an extension of the submission, this can be until October 15, 2021.

Take proactive steps

As the deadline for filing taxes is fast approaching, taxpayers still have some maneuvers that can benefit their bottom line. It’s always good to consider options that can lower tax liability and advance financial planning. And if it is not possible for the 2020 tax year, keep in mind that those opportunities are available for 2021 through April 15, 2022.

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