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Tax Considerations for the 2020 Tax Season

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Paul F. Ciccarelli CFP®, CHFC®, CLU®

2020 was a whirlwind of a year. With the vast array of ongoing events and calamities, it is understandable if tax season has slipped your mind. However, as you gather your tax information for your CPA, keep in mind the important items below. Because of the various ACTS due to the COVID-19 virus, many of the tax planning opportunities we took advantage of this past year are not necessarily reported on a 1099 or other IRS notifications. You will have to include additional tax information on stimulus checks received, RMD rollbacks, ROTH conversions which were done in 2020. Below are some provisions you may want to consider for the 2020 tax season.

Retirement Plans

The CARES Act and the SECURE Act both have provisions affecting retirement accounts. 

Both acts significantly impact required minimum distributions (RMDs). For example, under the SECURE Act, the beginning age for taking RMDs rises from 70½ to 72. (This change only applies to account owners who turn 70½ after 2019.)

The CARES Act allowed seniors to skip their RMDs in 2020 without penalty. In addition, the CARES ACT allowed individuals to rollback any RMD’s taken during 2020 as long as the rollback occurred before August 15th, 2020. It is important that you provide any information on rollbacks that were done during the 2020 tax year to your CPA so that they ensure you do not pay taxes on a distribution that was rolled back to your IRA. Also, important to provide your CPA with any ROTH conversions done during the year so your CPA can properly account for them on your 1040 return.

The SECURE Act also allows owners of traditional IRAs to make contributions past the age of 70½ starting in 2020 if they have earned income (either W-2 or 1099misc).

In addition to the RMD suspension mentioned above, the CARES Act includes a few other key retirement-related tax breaks for 2020. First, it waives the 10% penalty on pre-age-59½ payouts from retirement accounts for up to $100,000 of coronavirus-related payouts. A coronavirus-related distribution can also be included in income in equal installments over a three-year period, and you have three years to put the money back into your retirement account and undo the tax consequences of the distribution. If you’ve taken advantage of this coronavirus-related easing, you must attach Form 8915-E to your return to spread out the tax on the distributions. Second, the CARES Act allowed eligible individuals to borrow more from workplace plans such as 401(k)s—up to the lesser of $100,000 or 100% of the account balance—until September 23, 2020. Repayments on retirement plan loans due in 2020 are also delayed for one year.

Many key dollar limits on retirement plans and Simple IRAs are higher in 2020, too. The maximum 401(k) contribution for 2020 is $19,500, but those born before 1971 can put in $6,500 more (both amounts are $500 higher than in 2019). The caps apply to 403(b) and 457 plans as well. The 2020 cap on contributions to SIMPLE IRAs is $13,500 ($500 more than in 2019), plus $3,000 extra for people age 50 and up. The 2020 contribution limit for IRAs remained at $6,000 (or $7,000 for individuals age 50 or above).

Recovery Rebate Credits

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-Related Tax Relief Act, most Americans received one or two stimulus checks in 2020. Both the first- and second-round payments were phased out for joint filers with adjusted gross incomes above $150,000, head-of-household filers with AGIs above $112,500, and single filers with AGIs above $75,000.

Technically, your stimulus checks were an advance payment of a special 2020 tax credit known as the recovery rebate credit. When you file your 2020 return, your CPA will have to reconcile the stimulus checks you received with the recovery rebate credit you’re entitled to claim. Your CPA will need to know the amount of the checks you received during 2020 so they may report it on your tax return.

For most people, the combined total of your stimulus check payments will equal the tax credit allowed. In that case, your credit will be reduced to zero. However, if your stimulus checks were less than your credit amount, the tax you owe will be reduced by the difference (and you might even receive a refund). And if the combined total of your stimulus checks was more than your credit amount, you generally won’t have to repay the difference to the IRS. Also, note that the stimulus check payments are not taxable!

If you haven’t maxed out your IRA or ROTH IRA contributions for 2020, you still have time to do so before April 15, 2021.

Keep in mind, because of all of the one-time tax provisions we received in 2020, you may need to provide more information to the CPA at tax time so they can be sure to complete the 1040 returns correctly. We suggest you pull the information and place it in your 2020 tax file as you prepare it for your CPA. We will be providing information to you and your CPA on opportunities we assisted you with in 2020.

If you have any questions or concerns about filing for 2020, now is a great time to reach out to your financial advisor and CPA to ensure you are on track.

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

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