This tax season may be a bit different for many Americans, due to economic uncertainty and changes amidst the COVID-19 pandemic. Giving your tax return a bit of extra attention and effort could help avoid problems or identify additional opportunities. Here are five tips investors may want to try before filing their 2020 taxes.
1. Start Preparing Now
Federal tax deadline was extended to May 17th, 2021. And some states that were recently impacted by winter storms, including Texas, Louisiana, and Oklahoma, have a separately extended deadline of June 15th, 2021. Be sure to check with your specific state though because many state tax deadlines have not been changed.
There were some major financial changes we experienced in 2020 thanks to the coronavirus. The IRS issued approximately 160 million Economic Impact Payments which totaled over $270 billion, some small businesses received Paycheck Protection Program loans to stay afloat and millions of Americans filed for unemployment. If you received any aid from these payment programs, it will more than likely affect your 2020 tax situation.
With all of this economic uncertainty, tax filers should work with their tax preparer to determine how government assistance received in 2020 will be reflected when filing in 2021. Start preparing now and you has time to adjust and make changes to address an increase or decrease in your tax obligations this season.
2. Taking Advantage of CARES Provisions
Required Minimum Distributions (RMDs) were waived in 2020. Since this legislation did not come out until a few months into 2020, some proactive investors had already taken their RMDs. They were given the change to reverse the RMDs and put the withdrawal back into the IRA by August 31st, 2020. If you were one of those taking advantage of this “RMD reversal” make sure you properly report that the money went back into the IRA and thus was not a taxable distribution. This process was also permitted for Inherited IRAs.
Another important part of CARES Act was qualified distributions from eligible retirement plans. If you were eligible and took advantage of this, then you could take up to $100k out and avoid the 10% early withdrawal penalty if under 59.5. You will need to report the distribution as taxable but you have the choice of either reporting the full amount as income in 2020 or spreading it evenly over three tax years (2020, 2021, and 2022). If you chose the latter, it will be important to track this for the next few tax years.
3. Don’t Claim It If You Can’t Prove It
If a tax filer claims a deduction on their taxes, they need to be able to prove it with the proper documentation or paperwork.
There’s a lot of this type of play in the investor world, whether it’s real estate preparation costs for house-flipping or broker commissions for stock trades. Either way, you need receipts and objective documentation to prove your costs. No matter how experienced your opinion is, that simply is not enough evidence. Again, if you can’t prove it, don’t claim it.
4. Report All Earnings, Including Offshore Income
Seven years ago, the IRS aggressively enhanced its ability to match income reporting to find possibilities of underreported income, particularly with those who receive 1099 and 1098 interest reporting. To best avoid penalties or an audit, report everything you know you earned, even if it was never paid as a paycheck – such as prize money, dividends or another form of passive income. If you don’t, there is a good possibility the IRS will notice.
With a global market, the opportunity for offshore investing is far greater now, and that includes income invested in foreign accounts. If you have investments such as these, remember to report any interest or profit gains. The IRS proactively checks with foreign banks and can easily obtain accountholder records. Those who omit or fail to report such investments may face a costly penalty. Report all your earnings, even in foreign accounts. You are not the exception. Be wise!
5. Think About Going Long
It’s easy to get caught up in the chase for short turnarounds on a stock, but your capital gains taxes may be lower if you hold onto your investments longer than the short-term period. If you’re already in a good position with a stock and want to save on taxes, you may choose not to give up your profits on a short term sale. If you hold a stock for more than one year, you will only pay capital gains tax upon the sale of the stock. These rates fall between 0-20% currently and are typically lower than your marginal tax bracket. However, if you sell a stock within one year of purchasing, you will be subject to ordinary income tax at your current marginal tax bracket. If you must liquidate a stock holding for personal cash needs, it makes more sense to do so with a stock you have held longer than one year.
The 2021 tax filing will be a big change for some, but that doesn’t mean you can’t plan for it. If this past year has taught us anything, it’s the importance of being prepared, so the earlier you start working on your taxes, the more room you have to maneuver and make the necessary changes.
Still have tax questions? Join us Wednesday March 24th for FJY Live: Tax Talk to learn what tax strategies can be applied today to help your tax situation? Looking ahead – what changes should you expect under the new administration? How do financial advisors and CPAs work together as a team? Register here!
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.