April 15 is not that far off, but you still have time to make some moves that could favorably affect your tax returns. Specifically, you may want to consider some tax-smart contributions.
You have until the April 15 filing deadline to contribute to an IRA, or to open one for the 2020 tax year. When you invest in a traditional IRA, your earnings can grow on a tax-deferred basis and your contributions may be tax deductible, depending on your income level. And starting with 2020, you can fund a traditional IRA past age 70½. If you invest in a Roth IRA, your contributions aren’t deductible, but your earnings can grow tax free if you don’t take withdrawals until you’re at least 59½ and you’ve had your account for five years. For the 2020 tax year, you can put up to $6,000 in an IRA, or $7,000 if you’re 50 or older. (If you’re a high earner, your Roth IRA contributions may be reduced or eliminated.)
Another type of tax-smart contribution is a “recontribution” – which requires some explanation. As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, if you were affected by the COVID-19 pandemic and you were under 59 ½, you could take withdrawals – technically called “distributions“ – of up to $100,000 from your retirement accounts, such as your IRA and 401(k), without paying a 10%penalty. Plus, you could include these withdrawals as taxable income over three years. However, you could also recontribute all or part of the withdrawals back into your retirement accounts for up to three years after taking the money. Because it’s generally a good idea to avoid dipping into retirement accounts before you’re retired, this ability to recontribute can be valuable.
And here’s the potential tax benefit: Any money you recontribute before the tax filing deadline of April 15 (or later, if you get an extension) can be excluded from your 2020 tax return, possibly reducing your taxes. Therefore, your recontribution can offer two potential advantages: more money in your retirement accounts and a tax break this year.
Your tax advisor can help you determine if the withdrawals you took from your retirement plans in 2020 were pandemic-related and qualify for the special treatment described above. Generally, you simply need to demonstrate that you were physically or financially affected by COVID-19.
Here’s one more tax-related contribution that may be relevant to you: a charitable gift. A few years ago, new legislation greatly expanded the standard deduction, which led far fewer people to itemize. Consequently, their charitable contributions didn’t provide the same tax benefit they had previously. The CARES Act authorized an “above-the-line” deduction for cash contributions to qualified charities for those who don’t itemize. For 2020, the maximum deduction was $300; this provision has been extended for 2021, with a new provision allowing a $600 deduction for joint filers. If you do itemize deductions, you’ll want to note that the CARES Act also suspended the 60% of adjusted gross income limit for cash gifts in 2020, a change that has been carried over to 2021.
To learn more about how your contributions, in various forms, can affect your taxes, consult with your tax advisor. The more you know, the better your decisions.
***This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones. Member SIPC.***
