In an already complex year, taxpayers got a slight reprieve when the IRS extended the federal income tax filing deadline to July 15, 2020. (Most states followed suit, although not all.) With Tax Day 2020 quickly approaching, taxpayers have just under two weeks remaining to organize their information and to file their 2019 federal returns—or a request for an extension.
What last-minute tips do you need to complete your 2019 tax return?
For starters, the CARES Act brought about important changes taxpayers should know about specific to retirement accounts that affect both this tax year (2019) and next (2020). These changes are in addition to modifications that were legislated in late 2019 after the 2018 implementation of the Tax Cuts and Jobs Act of 2017, which affected a number of common deductions.
For many people, filing their 2019 income tax returns provides an opportunity to plan for next year’s 2020 tax year filings. There are some differences between 2019 and 2020, also discussed here, that you’ll want to understand so you can be better prepared next April.
Below, tax professionals weigh in on the top items on your impending 2019 return that may need your attention, including retirement accounts, tax deductions and the process for filing and paying taxes owed. Read up, get organized and know what you need to do to meet this year’s later filing deadline and avoid penalties.
CARES Act Changes for Retirement Accounts
There are a number of moving parts when it comes to retirement accounts for tax year 2019, thanks to the CARES Act and the extension of the federal tax filing deadline to July 15. To keep you from feeling overwhelmed, let’s examine each component separately to help you work through the changes and exceptions, and discover whether you need to address them in your tax return.
Are You Contributing to an IRA?
If so, you have until July 15, 2020 to max out your annual traditional or Roth IRA contribution for 2019. The annual IRA contribution limits for 2019 (and for 2020) are $6,000 for individuals under age 50 and $7,000 for those 50 or older. (For the purposes of your 2019 contribution, what counts is your age on December 31, 2019.)
In addition, if you have not been contributing to an IRA in 2019, you now have until July 15 to open a new IRA account and make the full annual contribution permitted to you for tax year 2019.
Are You Subject to Required Minimum Distributions?
The CARES Act has suspended required minimum distributions (RMDs) for all tax-advantaged retirement plan participants and beneficiaries for 2020. It’s a universal suspension for all RMDs from any retirement account that requires them (including annuity contracts held in tax-advantaged retirement accounts) and even inherited IRAs—there’s no need to demonstrate you’ve been impacted by COVID-19 to qualify.
For the 2019 tax year, this only affects retirement account owners who turned 70 1/2 in 2019, who would have been required to take their first RMD by April 1, 2020. If you took that RMD during 2019, there is no relief offered. But, if you were waiting until April 1 to take your RMD, now you don’t have to.
You may want to reach out to a tax professional for assistance before filing, especially with distributions affected by the CARES Act and other changes due to recent legislation.
Deductions always feel like a moving target, so which changes do you most need to know about to help you prep for filing by July 15? Jean Wells, CPA, and Associate Professor of Accounting at Howard University School of Business, has tips for taxpayers to help you navigate key deductions changes.
Have You Taken the Private Mortgage Insurance (PMI) Deduction?
The PMI deduction expired at the end of 2017, but the deduction is back, thanks to new legislation in December of 2019, known as the Consolidated Appropriations Act, 2020, Wells notes.
“The PMI deduction is retroactive to 2018 and 2019 and taxpayers can also file amended returns for 2018 and 2019 to include the deductions as itemized deductions, thereby reducing their taxable income,” says Wells. “For taxpayers that have not yet filed their 2019 returns, they can include the PMI on their return. The deduction is also available for 2020.”
Do You Have Medical Expense Deductions?
Changes made by the Appropriations Act lowered the threshold for individuals to be able to deduct medical expenses. For 2019 (and also for 2020), unreimbursed qualified medical expenses are deductible—for taxpayers who itemize—to the extent those expenses exceed 7.5% of the taxpayer’s adjusted gross income (AGI). This threshold is scheduled to revert to 10% for 2021.
The lower threshold may mean that more taxpayers can qualify to claim these expenses and itemize deductions on Schedule A for the 2019 tax year.
Are You Worried About Deductions That Have Been Eliminated?
Many deductions that were longstanding were eliminated or significantly reduced with the tax code changes that were implemented in 2018 by the Tax Cuts and Jobs Act. Because these changes still may feel new, Wells advises taxpayers to be aware of the following revisions and eliminated deductions:
- State and local taxes. The deduction for state income, sales and property taxes combined is limited to $10,000 per year.
- Unreimbursed employee expenses. These deductions have been eliminated.
- Moving expenses. These deductions have been eliminated except for military personnel.
- Alimony deductions. These deductions have been eliminated for divorce decrees finalized after December 31, 2018.
- Casualty loss deductions. These deductions have been severely restricted to only casualties that occur in federally declared disaster areas.
Tax Extensions and Payments
Now that you’ve navigated your retirement accounts and deductions, you’re ready either to file your 2019 federal taxes or to request an extension. If you’re ready to file, go ahead and get filing. If you’re considering an extension, owe 2019 taxes or are curious about how to pay the taxes you owe, keep reading.
Are You Not Ready to File?
Filing an extension is better than not filing at all.
“If you fail to file your tax return by the due date including extensions, you will be subject to the 5% failure-to-file penalty, which is charged each month the tax return is late up to five months (or until 25% is reached),” says Kenesha Coleman, CPA, of ColemanTax. “If your tax return is over 60 days late including extensions, there is a minimum failure-to-file penalty of $435 or 100% of the tax due, whichever is less.”
Are You Considering Filing an Extension?
“If a person is considering filing a tax return extension this year, they need to remember that a tax extension grants them an extension to file their tax returns only,” says Coleman. “The tax return extension does not grant them an extension to pay the tax due.”
Any taxes due still need to be paid by this year’s Tax Day of July 15. While an extension gives you more time to complete your paperwork, don’t forget that you’ll start accumulating interest on any unpaid taxes on July 16. This interest will compound daily until the bill is paid in full. The current IRS annual interest rate is 5% but can change.
Do You Owe Taxes This Year?
If you’re looking at your tax return and are afraid to file because you don’t know how you’ll pay the taxes you owe, Coleman has some words of encouragement. “Even though it won’t feel good to see that you may owe a huge amount in taxes that you can’t pay, it is better to know and do something about it, than to not do anything at all,” she says.
“Not taking care of your tax responsibilities will only make your situation worse because you will be assessed penalties and interest on top of the tax you owe,” says Coleman. “If you fail to pay your tax due by the due date, you will be subject to a 0.5% failure-to-pay penalty on the tax not paid by the due date. This will be a recurring charge on the remaining unpaid for each month or partial month after the tax due date until the tax is fully paid or 25% is reached.”
Paying via credit card might look like an option to help you avoid penalties, but Coleman’s reserved in her recommendation for using credit. “I would only advise you to use a credit card to pay your tax liability in full if, and only if, your credit card interest rate plus any other transaction fees are less than the IRS’s interest rate plus transaction fees and any accruing penalties. Right now, the IRS’s interest rate is 5%.”
The IRS offers two types of payment plans: Short-term plans are available if you only need up to 120 days to pay what you owe. Long-term payment plans can help those with more substantial obligations; these plans offer from 120 days to up to 72 months to pay the taxes owed. Taxpayers can apply online, directly through the IRS website.
“Once you complete your online application, you will receive an immediate notification of whether your payment plan has been approved,” says Coleman.
Do You Need Help Filing Your 2019 Tax Return?
If you’re strapped for cash and need assistance with filing your returns or an extension, Coleman suggests exploring the IRS’s resource hub. Here, taxpayers can find out how to prepare and file tax returns, and file for tax extensions, for free.
If these resources don’t meet your needs and you can’t afford to hire a tax professional, Coleman says the next best alternative is buying commercial tax preparation software. “The available software on the market now can be purchased for a fraction of the cost of a tax advisor, are easy to use and provide step-by-step guidance on how to complete your tax return,” she says.
Finally, Coleman says taxpayers should keep in mind that they have one more bit of relief available from the IRS: “If you fail to file your tax return and/or pay the tax due and you are assessed any of the penalties mentioned above, remember that you have a one-time penalty abatement that you can take advantage of to get rid of the penalties that have been assessed to you,” she says.
You may qualify if you have met all of the following:
- You’ve had no penalties for the last three tax years before the tax year in which you received a penalty, and
- You’ve filed all currently required tax returns or filed an extension for those returns, and
- You’ve paid or arranged to pay any tax due.
“Since the failure-to-pay penalty will continue to accrue until after all the tax due is paid, you should wait until you’ve fully paid the tax due before requesting penalty abatement,” Coleman says.
Looking Toward Your 2020 Taxes
A good personal finance rule of thumb is to use your income tax return—whenever you file it—to plan for the next year. Looking toward the 2020 tax year, for which the filing deadline is April 15, 2021, the same three themes apply: retirement accounts, tax deductions and the process for filing and paying taxes owed.
CARES Act Changes for Retirement Accounts
As stated earlier, the CARES Act addresses the potential losses of earnings and income many Americans have suffered due to COVID-19 in 2020. Specific to retirement accounts, there are changes to RMDs, early withdrawals and loan repayment.
RMDs. The CARES Act has suspended the requirement for tax-advantaged retirement plan participants and beneficiaries to take an RMD for calendar year 2020. This waiver applies to IRAs, 401(k)s and inherited accounts, and to anyone who is subject to an RMD, regardless of age.
If you are one of the retirement account owners who turned 70 1/2 in 2019, as described earlier, the timing of any RMD you took is what will affect your 2020 taxes. If you took the RMD for 2019 between January and April of 2020, new guidance issued by the IRS in June offers relief: You now have until August 31 to put the RMD funds back into your retirement account, if you wish.
Early withdrawals. If, in 2020, you took an early withdrawal of up to $100,000 from a tax-advantaged retirement account in order to bridge an economic gap caused by the coronavirus pandemic, you must meet the following IRS guidelines to avoid paying the 10% early withdrawal penalty:
- You must have been diagnosed with COVID-19, or
- Have a dependent or spouse diagnosed with COVID-19, or
- Have experienced financial hardship as a result of the COVID-19 crisis, such as getting laid off, being quarantined, had a reduction in work hours or lack of access to childcare.
If you can’t prove that you meet these criteria, you could be subject to both the 10% early withdrawal penalty and federal income tax on your early distribution.
For those who took an early withdrawal and met the criteria above, there are three additional features you need to be aware of:
- Redeposit rules. You have the option to redeposit all or some of the early distribution within three years. Any repayments you make will not be counted toward your annual contribution limits.
- Paying taxes on withdrawals. The CARES Act gives you up to three years to pay income taxes on the portion of a withdrawal that isn’t redeposited.
- No mandatory tax withholding. CARES Act-compliant early distributions are not subject to the usual mandatory 20% tax withholding.
Loans and repayment. The CARES Act doubles the limit on loans taken out from certain tax-advantaged retirement plans to $100,000. Loans from a retirement plan have a maximum term of five years, and repayment begins immediately. However, the CARES Act suspends payments due on retirement plan loans taken out under the CARES Act for 2020, extending the term to six years.
If you have an existing loan from your retirement plan, be sure to check with your employer on your plan’s specifics, as employers are able to suspend repayment requirements for loans taken out pre-CARES Act for a period of up to one year.
Specific to deducting unreimbursed qualified medical expenses (provided you itemize), the threshold for deducting these expenses in 2020 remains lower: at 7.5% of your AGI, rather than 10%, to which the threshold will return in 2021. “Taxpayers should plan to schedule medical procedures in 2020 to take advantage of the lower threshold in 2020 instead of waiting until 2021,” says Wells. Here’s an example of how putting possible procedures off until 2021 could impact your deductions:
The taxpayer has an AGI of $100,000 and $20,000 of medical expenses. In 2020, with the 7.5% threshold ($100,000 x 7.5% = $7,500), the taxpayer can deduct $12,500 of their unreimbursed qualified medical expenses. In 2021, with the 10% threshold ($100,000 x 10% = $10,000), only $10,000 of those expenses could be deducted. By waiting until 2021, the taxpayer loses a deduction of $2,500.
2020 Estimated Tax Payments
If you’re a small business owner or a self-employed person, it’s likely that you file quarterly estimated taxes. Due to the coronavirus pandemic, the dates for filing estimated taxes have changed for 2020. Here are the revised due dates:
- Q1 (January 1 to March 31, 2020): due July 15
- Q2 (April 1 to May 31, 2020): due July 15
- Q3 (June 1 to August 31, 2020): due September 15
- Q4 (September 1 to December 31, 2020): due January 15, 2021
In an ordinary year, the Q1 payment is due in April and the Q2 payment is due in June.
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