Last Week’s Question of the Week: According to Social Security, if you were born after 1960, your full retirement age is what? Is it age 62, 67, or 72?
ANSWER: If you are born after 1960, your FRA is age 67.
HOST: Your topic today is some end of year tax planning tips to end this year strong and prepare for the filing of your 2020 taxes next year.
KLAAS FINANCIAL: This has been an interesting year with regards to our income taxes. But let’s start with a look at the number of people who filed income taxes here in the United States. For tax year 2019, in 2020, over 143,906,000 filed taxes. WOW, that is a lot!
Another interesting fact: In 2018, the average American family in the middle 20% of income earners paid $15,748 in taxes to federal, state, and local governments. This includes direct taxes, such as income taxes, as well indirect taxes, like payroll taxes.
- Some people received stimulus payments back in the Spring/Summer. If you received a stimulus payment, it will not be income taxable.
- Some people received higher unemployment payments in 2020. Remember all unemployment income is taxable.
- In 2020 our income tax deadline was extended from April 15th to July 15th. In 2021, (as of today) the filing deadline is Thursday, April 15th.
Disclaimer: We like to remind our listeners that we are not accountants and for their own specific tax advice, they should seek out a tax professional. However, we do work with several accountants and over the years we have accumulated some good practices with which to help our clients.
If you haven’t already done so, create a 2020 tax file. This could either be a paper one, or an electronic folder in which to secure all of the W-2’s, 1099’s and other tax statements when they show up. At the same time, create one for 2021 to improve your processes for next year.
Documents that reflect your income: W-2 and 1099 forms that you will receive at the end of the year or early in January reflect your sources of income which may have come your way. The most common 1099’s are 1099-Div, and 1099-R (Distributions from pensions, annuities, retirement plans, IRA’s or Insurance Contracts). Other 1099’s are for independent contractor income, Social Security income, government payments etc. Remember a lot of these statements may not come in the mail any longer, because more and more people have them available online. You can download them as soon as they become available.
Make a list of what documents you will expecting. Here are the deadlines that you can expect to receive or see the generated statements: Jan 31st for IRA’s. Feb. 15th, March 15th for other investments.
Figure out who will be doing your taxes. Are you going to prepare your own taxes with tax software, or hire a tax preparer, CPA etc.? Is this the year to make a change? Don’t spend so much time worrying about saving money on not hiring others to help with taxes, when sometimes you may miss out on deductions that could have saved you even more money.
Consider still contributing to your Traditional IRA or Roth IRA before you file (you have up to April 15, 2021 to contribute)
HOST: Is it too late to add money into my 401k at work for 2020?
KLAAS FINANCIAL: No, you still have a few paychecks left for your contributions to be added but time is running out. Remember that into your 401k or 403b or other retirement accounts at work, you can only add pre-tax money through a direct contribution (coming out of your payroll check). Your total contribution allowed in 2020 is $19,500 if you are under 50; if you are over you can add another $6500 on top of that for a total contribution of $26,000.
If you are planning on making an IRA contribution you do have until April 15th of next year to make additional contributions.
Why would you want to add more into your retirement plan at work? You don’t want to miss out on a match your employer may be giving you. You don’t want to pay more income tax on your earnings that you have to. Putting away tax deferred money is usually preferred. (Unless you are younger and wanting to contribute to a ROTH account.) No one in retirement ever says they put away too much money!
HOST: What if I want to use tax software to do my taxes? Any recommendations?
KLAAS FINANCIAL: Yes, many people will use Turbo Tax, HR Block, Tax Slayer etc. You can also go directly to the IRS and work with their IRS Free File Program. IRS Free File lets you prepare and file your federal income tax online for free. They will connect you with a filing partner site which is free and will offer up fillable forms. It’s safe, easy and no cost to you. You can pick an option based on your income. The tax software will ask for specific forms.
If you receive an unexpected form after you have filed, then you will have to amend your return which will cost money if you have an accountant doing this, so it is best to ensure that all your information is accurate and complete before you file your taxes.
1099 Forms: If you received income other than that from your employer over the last taxable year, then you will need to file a 1099 form. There are several different kinds of 1099 forms and they will be labeled differently. For example, if you worked as an independent contractor and earned more than $600 last year in rent or compensation, you will need to file a 1099. Concurrently, if you earned dividends and/or distributions from your stock portfolio last year, a 1099 (albeit a different type) will also be required. You will also need a 1099 if you received government payouts (like unemployment), made a withdrawal from a taxable retirement account, or if you had a debt cancellation.
1098 Forms for Interest Deductions: If you plan on claiming a deduction because of your mortgage interest, you will need form 1098 from your mortgage company. You can also deduct student loan interest that you paid over the year. The company will issue you a 1098-E form.
HOST: Does everyone have to file a tax return?
KLAAS FINANCIAL: Great question! There are situations where you don’t need to file. The IRS considers your age, your filing status and your income. If you did not have any income probably not, but it would be worth discussing with your tax preparer just to be sure. You also do not want to leave potential losses that you experienced on the table, that could be carried forward to another year.
As long as you don’t have a type of income that requires you to file a return for other reasons, like self-employment income, generally you don’t need to file a return as long as your income is less than your standard deduction. For example, in 2020, you don’t need to file a tax return if all of the following are true for you:
- Under age 65
- Earn less than $12,400 (which is the 2020 standard deduction for a single taxpayer)
HOST: What if my spouse passed away this year, or maybe I got divorced, is there something different I need to do when I file my taxes?
KLAAS FINANCIAL: Yes, changes in your filing status are important. If you got married, divorced or lost a loved one, your status has changed. Did you have a child (tax deduction) or maybe one of your children is now out on their own? Can you still deduct for them? Remember this will affect their tax forms as well.
Another good idea is to schedule an appointment with your accountant now for a future date when you think you will have all of your documents.
HOST: What if I need to file an extension for my taxes next year, what should I know?
KLAAS FINANCIAL: First of all, schedule your accountant as soon as you can in 2021 so that they can help you know which documents you should be waiting for.
Be ready for an extension if necessary. Sometimes taxes are more complex than you expect. If you are unable to complete your 2020 federal tax return by the April deadline (April 15 in 2021) you’ll first need to file an extension with the IRS to avoid any potential late-filing or late payment penalties. Filing an extension will allow you to push your deadline back six months to October 15, 2021.
It is important to keep in mind an extension only pushes back the due date for the filing of your tax documents. It does not give you extra time to pay on any taxes you may owe. If you believe you will owe money this year, you will need to estimate the amount after filing for an extension and make a payment by the April deadline.
HOST: What are some other ideas for me to enhance my tax planning today?
KLAAS FINANCIAL: Simplify, Consolidate and Diversify. One idea is to reduce the number of your accounts. We call this account clutter. If you have multiple accounts with the same titling, several IRA’s and old 401ks, you should consider consolidating these accounts. Doing so will make it easier to see your true overall asset allocation mix. With fewer accounts you can keep track of websites, passwords and keep beneficiary designations up to date. After-tax accounts have to be looked at more carefully before combining, but perhaps taking a loss, or taking a gain may make sense for you this year.
Another area to eradicate is credit clutter. Do you really need all those credit cards accounts? Do you have multiple loans such as student loans, car loans etc? Fewer accounts will protect yourself from possible identity theft and make sorting out your tax forms easier!
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.