Tax season is officially here, and now we’ve all been given relief for this confusing filing year until May 17. Even with just a month to spare, there may still be strategies worth exploring with your clients to help reduce their tax lability:
Maximize Contributions to Retirement Accounts
Retirement accounts offer great tax benefits. Your clients have until the April tax filing deadline to contribute to an individual retirement account. For 2020, they can contribute up to $6,000 or $7,000 if they’re 50 or older. Depending on their adjusted gross income, their contribution may be fully tax deductible. If they have a qualified plan with their employer, their IRA contribution isn’t tax deductible, but it still may be worthwhile to make a contribution because it grows tax-deferred until they’re required to take distributions.
They can contribute to a Roth IRA if their modified adjusted gross income for 2020 was less than $208,000 if married filing jointly or $140,000 for single filers. There’s no tax deduction for contributions made to a Roth IRA but the money grows tax-deferred, and their earnings can be withdrawn tax-free in the long run. There are no mandatory distributions for a Roth IRA, which is an added bonus.
Eligibility for Home Office Deduction
Since many clients spent most of 2020 working from home, they may be asking “Do I qualify for the home office deduction?” The quick answer is, “maybe,” but they only qualify if they’re self-employed. Employees can no longer deduct home office expenses. This deduction was eliminated for employees in the 2017 tax reform law.
For those who are self-employed and may qualify, the rules are strict for claiming a deduction. Self-employed individuals can deduct office expenses on Schedule C of Form 1040. The most important test is: Does your client use their home “regularly and exclusively” as their principal place of business. If they only work from home part of the year, then they can only claim the deduction for the portion of the year that satisfies the “regularly and exclusively” requirements.
The amount of the deduction for self-employed individuals is also subject to various limitations.
Understanding 2020 RMD Rollover
Under the Coronavirus Aid, Relief, and Economic Security Act, IRA owners weren’t required to take required minimum distributions (RMDs) from their IRAs last year. Taxpayers who had already taken their RMDs early in 2020 were given the opportunity to reverse all or part of their distribution by returning funds to their IRA.
Those same taxpayers may have been surprised when they received a 1099 for the distribution they reversed back to their IRA. However, this is standard process. Your clients will need to report both the withdrawal and the “rollover” on their 2020 tax return.
Taxpayers will be eventually receiving Form 5498, which will verify the rollover, but these usually aren’t distributed until May. Still, your clients don’t need to wait to receive the form in order to file their taxes. Their tax preparer will confirm with them how much of their distributions was reversed in 2020 and then they’ll report both the distributions and the rollover (redeposit) on their return. The IRS uses Form 5498 to verify the information reported on their tax return.
Estimates are Still Due April 15, 2021
To add even more confusion to this year’s tax fillings, the latest extension from the IRS doesn’t apply to payments for estimated taxes. First quarter estimated tax payments are still due April 15, 2021.
For further information on the latest updates from the IRS, here’s a link to the press release: https://www.irs.gov/newsroom/tax-day-for-individuals-extended-to-may-17-treasury-irs-extend-filing-and-payment-deadline
