Tax season is officially here, and now we’ve all got relief for this confusing filing year through May 17th. Even if there is only a month left, there may still be strategies worth exploring with your clients to reduce their tax liability:
Maximize contributions to retirement accounts
Retirement accounts offer great tax advantages. Your customers have until the tax deadline in April to contribute to an individual retirement account. For 2020, they can contribute up to $ 6,000 or $ 7,000 if they are 50 or older. Depending on your adjusted gross income, your contribution may be fully tax deductible. If they have a qualifying plan with their employer, their IRA contribution will not be tax deductible, but it may still be worth making a contribution as it becomes deferred for tax until they have to make distributions.
You can contribute to a Roth IRA if your 2020 Modified Adjusted Gross Income was less than $ 208,000 if the marriage was filed together, or $ 140,000 for single applicants. There is no tax deduction for contributions to a Roth IRA, but the money grows deferred for tax purposes and your income can be deducted tax-free in the long term. There are no mandatory payouts for a Roth IRA, which is an added bonus.
Entitlement to home office deduction
Since many customers have been working from home for most of 2020, they may be wondering, “Do I qualify for the Home Office Deduction?” The quick answer is “maybe”, but they will only qualify if they are self-employed. Employees can no longer deduct home office costs. This deduction was deleted for employees in the Tax Reform Act 2017.
For those who are self-employed and can qualify, there are strict rules for claiming a deduction. The self-employed can deduct office expenses according to Appendix C of Form 1040. The most important test is: Does your customer use their home “regularly and exclusively” as their main place of business. If you only work from home part of the year, you can only claim the allowance for the part of the year that “regularly and exclusively” meets the requirements.
The amount of the self-employed deduction is also subject to various restrictions.
Understanding the RMD rollover 2020
Under the Coronavirus aid, aid and economic security According to the law, IRA owners did not have to accept the Minimum Required Distributions (RMDs) from their IRAs last year. Taxpayers who had already drawn their RMDs in early 2020 had the option to reverse their distribution in whole or in part by returning funds to their IRA.
The same taxpayers may have been surprised to receive 1099 for distribution, which they returned to their IRA. However, this is a standard process. Your customers must report both the payout and the “rollover” in their 2020 tax return.
Taxpayers will eventually receive Form 5498 which is used to verify the rollover. However, these are usually not distributed until May. Still, your customers don’t have to wait to get the form to file their taxes. Your tax advisor will confirm how much of your distributions were reversed in 2020 and then they will report both the distributions and the rollover (redeposit) upon your return. The IRS uses Form 5498 to verify the information submitted on its tax return.
Estimates are due April 15, 2021
To make this year’s tax fills even more confusing, the latest addition to the IRS does not apply to estimated tax payments. The estimated tax payments for the first quarter are due April 15th, 2021.
Further information on the latest updates from the IRS can be found here as a link to the press release: https://www.irs.gov/newsroom/tax-day-for-individuals-extended-to-may-17-treasury-irs-extend-filing-and-payment-deadline