Breaking the Code: 2020 Actions Effecting 2019 Tax Returns
By: Rachel Speigle Dunnigan, CPA, MSA, CFP®
Didn’t 2020 just begin? How is it March already?! Don’t worry, we’re thinking the exact same thing. While a lot of your tax documents should have been received by now (or are in process), we wanted to quickly talk about some actions that you could take in 2020 to impact your 2019 tax returns.
Individual Retirement Accounts
If you haven’t done so already, there is still time to contribute to your retirement accounts. This is true for traditional IRAs (deductible or not) and Roth IRAs. The deadline for this contribution is the same as the tax deadline – April 15, 2020.
There are some stipulations that surround these contributions, which we’re outlining here for your knowledge:
You must have eligible compensation in order to contribute. The definition of compensation is fairly overarching, including wages, salaries, commissions, earnings from a trade or business, alimony, or separate maintenance payments. If your spouse is the sole earner in the family, you may be able to use your spouse’s compensation in order to contribute.
There is a maximum contribution for individuals. For 2019, this amount was increased to $6,000 per year. If you reached age 50 by the end of 2019, you can contribute a catch-up contribution – an additional $1,000.
There are no longer age restrictions for contributions. Prior to the Secure Act (Jeff wrote about this topic in January, link here!), taxpayers were limited by an age cap. This is incredibly helpful with longer life expectancies and older working ages.
Deductibility is determined by a series of rules. In order for your contribution to be deductible, you must not be eligible to participate in a company retirement plan and have an AGI of under $64,000 (single) or $103,000 (married). While Roth IRA contributions have income restrictions and are not deductible, a Roth contribution may be a better choice because the withdrawal can be tax-free down the road in retirement.
A quick tip! If you decide to make your contribution between January 1, 2020 and April 15, 2020, be sure to let your financial institution know which year the contribution should be applied.
Self-Employed Retirement Accounts – Keoghs and SEPs
For these types of retirement accounts, there are additional rules, highlighted below:
The deadline is increased to allow for an extension. This allows taxpayers that extend their tax returns to wait until October 15, 2020 to contribute for tax year 2019. Don’t forget, however, that the tax-deferred compounding earnings don’t occur until you contribute, so don’t delay too long!
The maximum contribution is more flexible than Individual Retirement Accounts. Self-employed persons can contribute up to $56,000 or 25% of the employee’s compensation in 2019.
While we try to communicate the many options for our clients when finalizing tax returns during the spring and summer, we are happy to assist with questions regarding new retirement accounts as you receive and review your tax returns.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.