I know what you are thinking. It is on everyone’s mind. “2020 was so much fun, such a great year, I wish it would stay 2020 forever.” (Disclaimer: as a new father, I am now qualified to make bad jokes). Well, unfortunately I cannot bring back 2020, but I do have some good news: there’s still time to make some financial decisions today that will impact your 2020 taxes.
First on the list: IRA contributions. The deadline is Tax Day (which, so far for most of us, is still April 15, 2021*) to make a Traditional or Roth IRA contribution for 2020. Contributions can be up to the lesser of earned income or $6,000. Those who turned age 50 (or older) during 2020 can make an extra $1,000 “catch-up” contribution.
To make a Roth IRA contribution, first confirm your eligibility. To be eligible for a full Roth IRA contribution, your 2020 modified AGI must be under $196,000 (married filing jointly) or $124,000 (single). Looking forward, for 2021 the maximum Traditional and Roth IRA contribution limits are the same, but the MAGI thresholds for Roth IRA eligibility have been increased slightly to $198,000 (MFJ) and $125,000 (single).
Quick side note: at Ballast we spend a lot of time collaborating with our clients and their CPAs together to help with these and other tax-related decisions. We are always happy to help, and when we all get involved and are on the same page together, our clients tend to end up with better results.
To the self-employed or business owners with SEP or SIMPLE IRAs: now is a good time to ask your CPA to calculate the amount you can contribute for 2020. These contributions can be made up to the tax filing deadline. For LLCs, that’s April 15, 2021 and for S-Corps it is March 15, 2021. Note that filing a tax extension will similarly extend the SEP and SIMPLE IRA contribution deadline.
Another call back to 2020: partially through the year Congress decided that people who would otherwise have to take a required minimum distribution (RMD) did not have to take their RMD in 2020. At that point in the year, some people had already taken their RMD. In that situation, Congress allowed people to return their RMD back into their retirement accounts with no tax consequence. This was true not only for IRAs, but also for 401(k)s, 403(b)s, etc.
Those who took then returned their RMD, whether from an IRA, 401(k), or 403(b), will receive a 1099-R for the initial distribution, but it will only show the initial payout – it will not show that the funds were returned to the account. This is happening to nearly everyone who took then timely returned their RMD in 2020.
If you returned your RMD in 2020 within the timeframe that Congress allowed, be sure to communicate that to your CPA. Essentially, the initial distribution will show up on your 1040 on line 4a as an “IRA distribution,” but done properly, the returned RMD will not show up on line 4b as a “taxable amount.” Your CPA will know how to code it on the tax return so that it ends up being a non-taxable event.
As always, if you have any questions on any of this, or if you know of anyone who might like a little help in these areas, please do not hesitate to contact our office.
* If you live in Texas or another state impacted by the recent winter storms and you receive FEMA disaster declarations, many contribution and tax-related deadlines have been pushed back until June 15, 2021.
See: Victims of Texas winter storms get deadline extensions and other tax relief; https://www.irs.gov/newsroom/victims-of-texas-winter-storms-get-deadline-extensions-and-other-tax-relief (February 22, 2021).