The outbreak of the coronavirus pandemic hasn’t only affected our social lives and health, but has also affected many people’s finances. New legislation like the CARES Act (Coronavirus Aid Relief and Economic Security Act) offers some relief that could affect your tax payments this year. When working remotely, you could also have tax implications and additional charges that may emerge in the future. With these considerations, now is the best time to discuss with tax specialists from https://taxfyle.com/ who will discuss your taxes based on your decisions.
Here are some tips you can use that could potentially increase your tax refund or reduce your tax bill.
- Take stock of your financial picture.
If this year was a challenge for your income due to coronavirus or any other factors, and your business or job offers flexibility when you can get paid, you may have several options. If you’re a taxpayer who enjoys the flexibility of receiving your income, you should consider accelerating your income in 2020. This way, it could ease next year’s tax bill, especially if you believe policy changes could result in higher taxes.
The good news is that you don’t have to pay income tax or any stimulus money you may have received from the government at the beginning of the year. The stimulus payments will also not reduce any refunds you’re due. Although the stimulus is classified as an advance tax credit, you’re still required to include it in your 2020 tax return for documentation purposes.
- Keep track of where you may have worked remotely.
The pandemic has enabled most people to work from anywhere to maintain social distance and stop the spread of the virus. However, working from home doesn’t automatically qualify you for a tax deduction. Rules surrounding home deductions are very strict. However, if you’re working from a different state, it may affect your taxes. Once you reach the 183 days, which are more than half a year, the state you temporarily reside in may consider you a resident and will tax your total income.
Ensure that you pay attention to the tax rules of the state you’re working from, as you may find the 183 days isn’t the universal threshold. Even if you haven’t stayed for more than half a year, some states still expect some income tax based on the days you may have worked there, and your state will owe you credit for the amount you owe the temporary state.
In some states, they have guidance on this particular area, and due to the pandemic, they aren’t counting days you may be present in their state. However, other states have remained silent on the matter, so it’s crucial to track your days. Work with your tax specialist to determine the best approach for your situation.
- Max out on your retirement plan.
The SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 eliminated the age limit of seventy and half years for contributing to a traditional IRA. It also raised the age required for minimum distributions (RMDs) from retirement plans, from 70.5 years to 72.
This year, the CARES Act has waived RMDs for IRAs and 401(k) s and other defined contributions. This all adds up to new incentives to keep saving for longer. Regardless of how old you are, you may want to increase your contributions to the 401(k)s or any other retirement plans to reach the maximum contribution amount. If you’re 50 years or older during this calendar year, you should consider making catch-up contributions. You have until the end of the year to contribute to any retirement plan like the IRA, or until April 15 of the following year to contribute to a retirement plan for the previous year.
- You may consider converting your traditional IRA to Roth IRA.
You can convert a portion or all of your assets in a traditional IRA or any other qualified retirement plan to a Roth IRA, and the deadline for doing this is December 31. This would make more sense because, unlike a traditional IRA, qualified distribution of the converted amount from a Roth IRA isn’t eligible for federal income taxes if five years have passed, and you’re 59 and a half years or older. However, you’re still required to pay income taxes on the number of your deductible contributions, plus any associated earnings when you switch from a traditional IRA to Roth IRA, or if you don’t change, you retire, and take withdrawals from your traditional IRA.
Depending on your situation, this year could be a great time to convert. If you’ve lost money in your traditional IRA, it would be a good idea to move your assets to a Roth IRA before the market fully rebounds. Although the converted amount is subject to federal and state income taxes, the amount of your taxable income may appear lower because the value of your account may have decreased.
If your total income is low this year, you may be able to pay taxes on the conversion at a lower tax rate. For the people who anticipate higher tax rates in the future, today’s conversion to a Roth IRA will make the converted amount taxed at the current rates, rather than potentially higher future rates. You may wish to consult your tax advisor to see if this approach is appropriate.
- Cover healthcare costs during the pandemic.
Suppose you or your spouse contracts COVID-19 or have experienced severe financial losses due to the pandemic. In that case, you may take distributions of up to $100,000 from eligible retirement plans, without paying the usual 10% additional federal tax for distribution before the ages of 59 and a half under the provisions of the CARES Act. Although you’ll still owe the federal income tax on the distributions, you can include the distributions in income over three years. If you pay the distributions to IRA within the three years, you can undo the distribution’s tax consequences.