April 15th is tax filing deadline and it will be here before we know it.
Not to fret though as your tax preparer can file for a six month extension by filing form 4868 by April 15th of 2021.
Here is a list of some strategies you can employ to reduce your tax liability for 2020 tax year. Bear in mind, some of these strategies generally apply each year so this is the perfect time to reach out to your Certified Financial Planner™ practitioner or tax preparer and implement a plan for 2021 and beyond.
One can fully contribute to a deductible IRA regardless of age as long as they have earned income and meet the following rules:
If covered by a workplace retirement plan, and filing single, your income cannot exceed $65,000 or $104,000 if married filing jointly.
If your spouse is covered by a workplace plan and you are not, joint income can be up to $196,000.
If neither are covered by a workplace retirement plan, there are no income limits for deductibility.
Key point – IRA maximum contributions are as follows: $6,000 if one is under age 50 and $7,000 if over age 50. (One doesn't need to be over 50 when the contribution is made as long as they are 50 by year end). Lastly, to contribute the $6,000 max or ($7,000 if over 50) one must have at least that much in earned income.
2. SEP IRA's
For those that have self-employment income in 2020, they can establish a SEP IRA and fund it up until tax filing deadline plus extension. The contribution limit is based on income and your tax preparer will let you know the max you can contribute.
3. Charitable contributions
One does not need to itemize their deductions to take up to $300 in charitable deductions if filing single or $600 if married filing jointly for the 2020 tax year. Add up your contributions to see what you have donated.
If you happen to itemize, you can deduct donations up to 100% of your adjusted gross income through 2021.
4. Medical Expense deductions
The new law presently changed the threshold to 7.5% of adjusted gross income from 10% so for those that have high medical expenses might find they now can take advantage of this new lower threshold.
5. Contribute to an HSA or Health Savings account and FSA's or Flexible Spending account
For those that have seen my video on HSA's (click HERE to watch) know for the right person, these vehicles can be a great way to not only reduce taxes but also build up savings to be used in the future for medical expenses and the money comes out tax free (assuming the money is for qualified medical expenses). The main hurdle is one must be enrolled in a high deductible health insurance plan.
Key point- A change was made to the rule on when money in an FSA has to be used by. Generally, this account needed to be emptied by 12/31 however, due to COVID, one now has into the following year to use any left over money. Again, the video walks you through how these work in more detail.
As I mentioned, this is a perfect time to get a plan in place going forward to not only take advantage of strategies that will reduce your taxes going forward, but also put you in a better place financially for years to come. Roth conversions, Qualified Charitable Distributions, and annual gifting are just three strategies that could make sense going forward.
Got questions? If you would like to schedule a complimentary call, click HERE to see my calendar or just shoot me an email or give me a call.
In good health.
All the best.
Rick Fingerman, CFP®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.