As we get into tax season, filing for 2020 is fundamentally different from most tax years, especially in light of Covid and the stimulus packages passed last year. We thought it would be helpful to share a few general tax tips to keep in mind as you’re working with your tax advisor.
The first thing to consider is the tax stimulus credits. The EIP (Economic Impact Payment, aka stimulus check) is actually a 2020 tax credit that was advanced to taxpayers as part of the Cares Act. Certain qualifications, such as income levels and dependency status, impact the amount the taxpayer may receive. The first round allowed for a maximum of $1200 per qualifying adult and $500 per qualifying dependent child (age 16 and under). The second round allowed for $600 per adult and $600 for dependents 16 and under.
Another consideration during 2020 tax preparation is the group of taxpayers caught in in-between – taxpayers age 17 and over, usually high school and college children still claimed as dependents by their parent. When filing 2020 tax returns, parents and their dependents need to consider whether it makes sense to still claim the dependent child. Parents may phase out of education tax credits, the child may have graduated during the tax year but still eligible to be claimed, or perhaps 529 plan money was used to pay college expenses. In those cases it may be better for the child to claim themselves to take advantage of the education credits and qualify for up to $1800 of the EIP.
What most people don’t understand is that if you haven’t yet received the stimulus check yet, or, if you retired in 2020 or your financial circumstances changed dramatically last year, you may still be eligible to receive a credit on your 2020 taxes of up to the full amount of $5,800 for a family of 4, or even more if you have eligible dependents.
For example, at Lineweaver Financial Group Tax Services, we had several clients who had buyouts in 2019, so they had very high income. But, in their first year of retirement, 2020, they met the criteria to qualify for the stimulus credits. When you work with your tax professional, make sure to talk through the eligibility requirements and if you’ve received any payments. You may be surprised who is able to qualify.
Another notable change was that you didn’t have to take required minimum distributions in 2020, but as far as we know, you will in 2021. That’s something you’ll want to take into account in your planning for the coming year. You are still able to use Qualified Charitable Distributions or QCDs to reduce your tax burden or Donor Advised Funds. There’s also an above the line deduction of up to $300 provided for by the CARES Act. That has also been extended into 2021 and will be available up to $600 for those married filing jointly.
There’s also still time to fund things like Health Savings Accounts, Simplified Employee Pension Plans, Roth or Traditional IRAs for 2020. You have up until April 15th to fund those. For those high-income earners, you may be able to fund a back-door ROTH. You can avoid the income restrictions by funding a traditional IRA and then converting to it. Although, there are many nuances to this strategy, so speak with your tax advisor about it before making any decisions.
Finally, deadlines changed last year, as the country grappled with COVID. Although the IRS did delay the start of tax season by a few weeks this year, it looks as though, at least for now, that filing deadlines will be the same as they have in past years, meaning that everything has to be filed by April 15th.
This is a particularly tricky tax year, given COVID, stimulus checks, and the way that many peoples’ finances may have changed dramatically over the last year. We’re here to answer your questions, help get federal, state, and city returns filed, and we take the time to have tax planning discussions with all of our clients, to help set them up for success in the future.