April 15th Here We Come
The year 2020 is in the books (thankfully), but now it is tax time. While 2019’s tax filing deadline was pushed back to July 15th due to COVID-19, 2020’s tax filing deadline is back to the standard April 15th. Maybe we are on track for some semblance of “normalcy” in 2021? Here are some things to consider before filing.
Regardless of the year, we tend to see a mad dash of IRA contributions – Roth and Traditional – prior to the deadline. Maximum Traditional IRA and Roth IRA contributions for 2020 are capped at $6,000 per individual, with a $1,000 “catch-up” contribution allowed for those age 50 or older. Remember, 2020 contributions are allowed until April 15th of 2021.
Roth IRA’s do not offer any income tax deduction up-front but grow tax-free and are typically distributed free of income tax. Funding eligibility is based on filing status and Modified Adjusted Gross Income. However, a “backdoor” Roth strategy can be implemented to circumvent these requirements.
One of the most frequently asked questions around tax time is, “can I contribute to an IRA?” This is typically referring to a Traditional IRA, where folks are hoping to get a deduction and lower their taxable income. This can be tricky. Individuals can always contribute to a Traditional IRA as long as they or their spouse has “earned income. However, the contributions may or may not be deductible.
Traditional IRA deductibility is based on a combination of Modified Adjusted Gross Income and whether or not you or your spouse benefits from an Employer sponsored plan such as a 401(k). First off, if you are not covered by a retirement plan at work you can receive full IRA deduction regardless of your MAGI. If you are married and covered by a retirement plan, your MAGI must be less than $124,000 to qualify for IRA deductibility. If you are single and covered, that number drops to below $75,000. A married, non-working individual qualifies for deductibility if their spouse has earned income and MAGI is less than $206,000.
It may be worth asking your tax professional which filing status makes the most sense for you. It is not always in a couples’ best interest to file “Married Filing Jointly.” While dependent on multiple factors, you may save tax dollars by filing separately. Filing separately can be especially unique for those couples with student loans, particularly if one spouse is on an income-based repayment plan angling for forgiveness. Filing separately sometimes reduces the loan holder’s monthly payments, freeing up cash-flow to save for the tax bill at forgiveness. This example is very high-level, and the decision to file separately should be supported by the math of a detailed student loan analysis.
It may be beneficial to allow your CPA or accounting professional to connect with your CFP or financial advisor. The world of tax and investments often intertwines and having your trusted advisors on the same page can help avoid confusion and align both parties on short and long-term tax planning strategies. Examples include but are not limited to gain harvesting, gifting strategies, and funding Roth vs. Traditional retirement accounts.
Ryan Glinn is a financial advisor with W3 Wealth Management LLC.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.
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