As the official July 15, 2020 tax day deadline is fast approaching and plenty of taxpayers have yet to file 2019 returns and 2020 estimated payments, the Internal Revenue Service is urging folks to file and pay electronically, and reminding everyone that you can file your return and later contribute to a retirement account for tax savings.
Taxpayers and tax preparers alike are feeling the pressure. “I have clients who absolutely should have been out months ago and now I’m hounding them,” says Tara Mandel, a CPA in Wyckoff, N.J. “Let’s close the tax year and move on!”
It’s been a long tax season like no other. The IRS has struggled to serve taxpayers during the Covid-19 pandemic, with tax refund delays, collections notices with past due dates and missing stimulus payments. At the same time, the IRS has issued guidance on coronavirus-related tax relief for retirement account owners. Just last month the IRS expanded eligibility for IRA & 401(k) loans and distributions. The IRS also granted broad and surprising rollover relief to all who took 2020 required minimum distributions from IRAs and 401(k)s, meaning pretty much everyone, even inherited IRA owners, can redeposit unwanted RMDs.
It’s not too late to lessen your tax bite. Millions who face tax bills on July 15 can lessen the tax bite by saving for retirement.
Back in March, the IRS clarified that the deadline for making Individual Retirement Account and Health Savings Account contributions for the 2019 tax year was extended from April 15 to July 15, 2020. Once you’ve missed the deadline for contributing to a certain tax year, you’ve lost the opportunity to get those dollars in the account, growing tax-deferred in an IRA, or tax-free in a Roth IRA or HSA.
In Notice IR 2020-146, the IRS says: Taxpayers can file their 2019 tax return now and claim the deduction before the contribution is actually made. But the contribution must then be made by the July 15 due date of the return, not including extensions.
The maximum amount you can contribute to an IRA for the 2019 tax year is $6,000—or $7,000 if you’re 50 or older (including a $1,000 catch-up contribution). You can deduct the full amount of your traditional IRA contribution from your income, reducing your tax bill.
Is it deductible? In 2019, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $64,000 and $74,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $103,000 to $123,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000 in 2019.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $193,000 to $203,000 for married couples filing jointly, and $122,000 to $137,000 for singles and heads of household. But note, if you earn too much to contribute to a Roth IRA directly, you can contribute to an IRA, and then convert it to a Roth IRA.
The maximum amount you can contribute to a Health Savings Account is $3,500 for individual coverage or $7,000 for family coverage (you have to have a qualifying high deductible health plan to open one of these triple tax-advantaged accounts). The secret: You don’t have to spend down HSAs for current healthcare expenses. Rather, you can invest the money you stash in the account and use it later for out-of-pocket healthcare needs in retirement. Fund it anyway. You can even use HSA money to save on a typical trip to the CVS: a tax relief provision tucked in the last Covid-19 stimulus package lets you use money you stash in an HSA for over-the-counter medications like Tylenol or Flonase as well as menstrual products like tampons and pads.
If you’re making the contribution to an account you already have set up by moving money into it from a brokerage account, make sure you designate it as a 2019 tax year contribution. Alternatively, you can mail your contribution and meet the deadline with a postmark by July 15.
Estimated payments made easy. If you’ve picked up a gig job, you probably have to pay in estimated tax payments for the first time. You figure how much income you brought in in a given quarter and pay in the estimated income tax, and another 15% for self-employment tax. Estimated payments are typically due quarterly, but for income earned in 2020, both the first quarter deadline of April 15 and the second quarter deadline of June 15 were moved to July 15. You can combine the two quarterly payments into one payment and pay online at IRS Direct Pay by entering information from a prior tax return to verify your identity, and then including your bank routing number and account number. It’s really easy. You get an email confirmation right away, and then you’ll see the ACH debit on your online bank statement labelled IRS USATAXPYMT.
If you want to get a head start on saving for retirement for 2020, based on your gig income, that will reduce the amount you have to pay in estimated payments for income tax, but you should still be putting in the 15% for self-employment tax. Depending on the amount of income you expect to earn, start saving with a Roth or traditional IRA, and then consider a SEP-IRA or if you want to sock away the most possible, a solo 401(k).