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10 Tax Tips That Could Save You Money Now

Consider these ideas that could potentially reduce your tax bill or increase your refund

10 Tax Tips That Could Save You Money Now image

THOUGH IT’S FIRST AND FOREMOST A HEALTH ISSUE, the coronavirus has significantly affected many people’s finances. New legislation, most notably the CARES Act (for “Coronavirus Aid, Relief, and Economic Security Act”), offers some relief that could affect your taxes this year. Even working remotely could have tax implications. With these considerations, and additional changes that may emerge in coming months, now is a good time to talk with your personal tax professional about how they could affect the decisions you make.

The ideas below are suggested by tax accountant Vinay Navani of WilkinGuttenplan. Discuss them with your personal tax professional to see whether they might make sense for you.

1. Take stock of your financial picture

As a CPA and shareholder at WilkinGuttenplan, Mr. Navani is not affiliated with Merrill. Opinions provided are his, do not necessarily reflect those of Merrill and may be subject to change. Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

If 2020 is a down year for your income as a result of the coronavirus or other factors, and your job or business offers flexibility on when you get paid, you may have some options. For taxpayers who have more flexibility as to when income is received, consider accelerating income in 2020, Navani suggests. That could ease next year’s tax bill, especially if you believe that policy changes could result in higher taxes.

The good news is that you won’t have to pay income tax on any stimulus money you may have received from the government earlier this year. Nor will stimulus payments reduce any refund you may be due.1 But because the stimulus is classified as an advance tax credit, you may be required to include it on your 2020 tax return for documentation purposes.

2. Keep track of where you’ve worked remotely

The coronavirus has enabled millions of people to work from almost anywhere, including, possibly, a vacation property or a relative’s home in a different state. Working from home does not automatically qualify you for a tax deduction. In fact, the rules surrounding home office deductions are strict. However, if you are working in a different state, your taxes could be impacted. Once you reach 183 days (more than half the year), your temporary state, if it taxes income, may consider you a resident and tax your total income. However, make sure you pay attention to each state’s particular rules, as 183 days is not the universal threshold. Even if you haven’t passed half a year, some states expect partial income tax based on the number of days you worked there—though your home state may allow you a credit for whatever you owe to the temporary one, Navani says. Some states have issued guidance in this area and due to coronavirus would not count days present in the state. Other states have remained silent on this matter. Track your days carefully and work with your tax advisor to determine the best approach for your situation.

Working remotely out of state? Once you reach 183 days, your temporary state, if it taxes income, may tax your total income.

Depending upon your situation, this year could be an advantageous time to convert from a traditional IRA to a Roth IRA.

3. Max out on your retirement plan

The SECURE Act of 2019 (for “Setting Every Community Up for Retirement Enhancement Act”) eliminated the 70½ age limit for contributing to a traditional IRA while raising the age for required minimum distributions (RMDs) from retirement plans from 70½ to 72.2 For 2020, the CARES Act waived RMDs for IRAs and 401(k)s, and most other defined contribution plans.3 That all adds up to new incentives to keep saving longer, Navani notes. Regardless of your age, you may want to increase contributions to your 401(k)s, IRA or other retirement plan to reach the maximum contribution amount, he suggests—and if you’ll be age 50 or older during the calendar year, consider “catch-up” contributions. You generally have until the end of the tax year to contribute to a 401(k) plan and until April 15 of the following year to contribute to an IRA for the previous tax year.

4. Consider converting your traditional IRA to a Roth IRA

Anyone can convert all or a portion of their assets in a traditional IRA (or other eligible retirement plan) to a Roth IRA. (The deadline for doing so is December 31.) Why might this move make sense? Unlike with a traditional IRA, qualified distributions of converted amounts from a Roth IRA aren’t generally subject to federal income taxes, if at least five years have passed since the conversion, and you are age 59½ or older. However, you’re required to pay income taxes on the amount of your deductible contributions as well as any associated earnings when you convert from your traditional IRA to a Roth IRA—or, if you don't convert, when you retire and take withdrawals from your traditional IRA.

Depending upon your situation, this year could be an advantageous time to convert, Navani says. If you’ve lost money in your traditional IRA, it could be a good idea to move these assets to a Roth IRA before the market fully rebounds. Though the converted amount is generally subject to federal (and state) income taxes, the amount of your taxable income may be lower because the value of your account may have dropped. If your total income is down this year, you may be able to pay taxes on the conversion at a lower marginal tax rate. And for those who anticipate higher tax rates in the future, a current conversion to a Roth IRA will cause the converted amount to be taxed at today’s rates rather than potentially higher future rates. Consult with your tax advisor to see if this approach might be appropriate.

5. Use stock losses to offset capital gains

While investment markets rebounded quickly after sharp coronavirus-related drops earlier this year, some industries continue to suffer. Now may be a good time to consider selling some underperforming investments, generating a capital loss before the end of the year—which could help offset the capital gains you realize from selling better-performing stocks. You may generally deduct up to $3,000 ($1,500 if married and filing separately) of capital losses in excess of capital gains per year from your ordinary income. If your net capital losses exceed the yearly limit of $3,000 ($1,500 if married and filing a separate return), you can carry over the unused losses to the following year. Taxpayers who believe they could see substantially higher capital gains rates may want to consider accelerating gains into this year. That way, they are subject to a federal rate of up to 20% as opposed to future years at a federal rate potentially as much as 39.6% (in either case, those gains would likely also be subject to a 3.8% Net Investment Income Tax).

Both health savings accounts and flexible spending accounts could allow you to sock away pretax contributions for qualified medical expenses.

6. Look for tax-aware investing strategies

If your modified adjusted gross income is at least $200,000 ($250,000 for married couples filing jointly or qualifying widow or widower, $125,000 for married filing separately), you're subject to a 3.8% Net Investment Income Tax on either your net investment income or your modified adjusted gross income over the threshold amount, whichever is less. (Your tax advisor will understand.) Putting a portion of your income into investments not generally subject to federal income taxes, such as tax-free municipal bonds, may not affect your tax picture this year, but could potentially ease your tax burden down the road, when these investments start generating income.

7. Fund a 529 education savings plan

By putting money into a 529 education savings plan account, you can give a tax-free gift to a beneficiary of any age. (To find out more about contribution limits, see our Contribution Limits and Tax Reference Guide.) You may also be able to contribute up to five years’ worth of gifts per beneficiary in one year. 529s may be used to pay for qualified higher education expenses of the beneficiary—say, for instance, a child or grandchild—at an eligible educational institution. That includes the ability to pay up to $10,000 of elementary or secondary school tuition expenses annually from all 529 accounts for a beneficiary. In addition, 529s may be used for certain expenses of participation in a certified apprenticeship program, and for repayments of principal or interest on qualified education loans of the beneficiary or sibling of the beneficiary (up to a lifetime maximum of $10,000 per individual).4 Withdrawals for the purposes described above are free from federal income tax. (Some states have not conformed to federal tax rules, so it is important to determine if any of these withdrawals would trigger state income tax.) Note that if you receive a refund from an eligible educational institution, generally you may re-contribute the refunded amount to the 529 within 60 days without adverse income tax consequences.5

8. Decide whether itemizing is still for you

Current tax laws allow for a large standard deduction. They also place somewhat strict limits on itemized deductions, including a $10,000 cap on property and state and local income tax deductions. Taking the standard deduction instead of itemizing may make tax preparation simpler, Navani says. There are some key things to keep in mind regarding charitable donations. In most cases, the amount of charitable cash contributions that can be itemized is limited to a percentage of your adjusted gross income. Qualified contributions, on the other hand, aren’t subject to this limitation. Because of the CARES Act, you can now deduct up to $300 of certain cash charitable donations in 2020, even if you take the standard deduction. Prior to 2020, only itemizers could claim charitable deductions.

You can find more information about the rules and limits for itemizing charitable donations at irs.gov. Work closely with your tax specialist to make sure itemizing is an appropriate choice.

See more about giving to your favorite charities in item 10 below.

9. Cover health care costs during coronavirus and beyond

If you, your spouse or a dependent has been diagnosed with the coronavirus or you have experienced certain adverse financial consequences due to the coronavirus, you may be able to take distributions of up to $100,000 from eligible retirement plans without paying the usual 10 percent additional federal tax for distributions before age 59½, under the provisions of the CARES Act. Though you will owe federal income tax on the distributions, you have the ability to include the distributions in income ratably over three years. And, if you repay the distribution to your plan or IRA within three years, you can undo the tax consequences of the distribution.6

Beyond the immediate health crisis, both health savings accounts (HSAs) and flexible spending accounts (FSAs) could allow you to sock away pretax contributions to pay for certain medical expenses your insurance doesn’t cover. (For more on HSA contribution and plan limits, see our Contribution Limits and Tax Reference Guide.)

10. Give to your favorite charity—or your family

If you regularly give to charities, consider putting several years’ worth of gifts into a donor-advised fund (DAF) for a single year, Navani suggests. “Then, you can spread out the giving from the DAF over the next several years.”

Another change: Thanks to the CARES Act, taxpayers who itemize in 2020 can deduct cash charitable contributions made to certain qualifying charities (not including DAFs) of as much as 100 percent of their adjusted gross income, up from 60 percent. While very few taxpayers can afford that level of generosity, Navani notes, this provision could work to the benefit of, say, a retired person with significant assets and modest living expenses.

You can give as many family members as you like up to $15,000 per year ($30,000 from a married couple electing to split gifts) each without being subject to gift tax. Generally, once the gift is made, your estate will not pay estate taxes on it, and it will not be considered taxable income for the recipient. However, also remember that the donor’s income tax basis carries over to the gift’s recipient, subject to a few qualifications—which means that in some cases, waiting to give could make sense. Also, the lifetime federal gift and estate tax exemption has more than doubled, to $11.58 million for individuals in 2020 ($23.16 million for married couples7), meaning that far fewer estates will owe estate tax.

These limits change on an annual basis, so please visit irs.gov for the latest information.


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