It may be surprising to hear, but many people are so anxious to get their filing done ahead of time, they file their taxes before receiving all the proper documentation they need to ensure their information is accurate. This can lead to mistakes and processing delays.
MISTAKE #2: Missing Eligible Credits and Deductions
There are many credits and deductions you may be eligible for. But some of these, like the Earned Income Tax Credit, the Child Tax Credit, energy tax credits, and various itemized deductions, can be difficult to figure out, causing some to skip out on them entirely. This is why working with a good tax professional can really pay off.
MISTAKE #3: Forgetting to Contribute to an IRA
Some taxpayers forget to contribute to an Individual Retirement Account each year. These contributions are tax-deferred, meaning they can help reduce your taxable income. For the 2023 tax year, the contribution limit is $6,500 for those under age 50 and $7,500 for those over.*
MISTAKE #4: Not Reporting All Income
Many taxpayers only think of their paycheck when reporting income, forgetting to factor in dividends, bank interest, and other income sources. This information is critical for both calculating the credits and deductions you can take as well as the refund you are entitled to.
* “IRA Contribution Limits” – Internal Revenue Service
As financial advisors, do you believe that’s the phrase we get paid for the most? That’s because we earn our keep by keeping clients from making some very big mistakes with their money.
Now, as we experience a market correction and spate of scary headlines, we think it’s time to go over what the biggest mistakes are:
1. Speculating when you think you are investing
This happens during good markets and bad ones. Invest during dips if you have the money, but never if you don’t. (See Mistake #2.) Never invest because you heard a hot tip. Hot things burn. We never speculate. We follow rules to know when to buy, sell, or hold.
2. Borrowing to invest
No, you should never take a home equity loan to invest when the market goes down. (Or up, for that matter.)
3. Investing dollars you will spend in less than five years
These dollars should go into your emergency opportunity fund. Therefore, we have income in a preservation portfolio, and we replenish often.
4. Investing for an interest rate instead of total return
Interest will never be high enough to beat the cost of living. Owning at least a portion of your overall portfolio is an investment that gives you both growth and dividends that will keep you ahead of inflation.
5. Letting taxes be the tail that wags the dog
You may or may not pay a capital gains tax, but that doesn’t mean taxes should rule the decision-making process. It is an important piece we don’t overlook, but it is just a piece. We will help you look at all the reasons to sell an investment or not.
6. Waiting to sell something bad until the price gets back to what you paid for it.
You may recoup your losses sooner by moving to something better.
7. Under-diversify
This can be having five different mutual funds in five different places, but they all own the same stock. Often, we suggest rolling over retirement plans when you retire to control your diversification. If you own, for example, the “ABC Growth Fund” and “XYZ Growth Fund” and they both own large portions of Apple stock, for example, you have less diversification than you think.
8. Feelings of euphoria…or panic!
Emotions are natural. We get excited when things are going well. We get fearful when they are going poorly. But emotions have no place in making investment decisions. Your investment decisions are directed by your plan and only your plan.
Maybe we should have started with that last sentence as the headline! Plans, your plans, dictate every recommendation our team makes. And it’s often why the second most worthwhile phrase we say is, “Have your plans changed?”
So, as we go through the ups and downs of the current market volatility, always remember to follow the plan. Remember, too, that if you decide to do something else, well…
If you haven’t already contributed to an IRA (Individual Retirement Account), there’s still time to do so. Many people don’t know that the 2020 contribution deadline is actually April 15, 2021.1 However, if you do decide to contribute, you must designate the year you are contributing for. (In this case, 2020.) Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact us if you have any questions or need help.
For 2020, the maximum amount you can contribute is $6,000, or $7,000 if you’re over the age of 50.2 This applies to both traditional and Roth IRAs. If you’re unsure whether to contribute, remember:
Contributions to traditional IRAs are often tax-deductible. And while distributions from IRAs are taxed as income, your tax-rate after retirement could possibly be lower than it is now, lessening the impact.
Contributions to a Roth IRA, on the other hand, are made with after-tax assets. However, the advantage of a Roth IRA is that withdrawals are usually tax-free.
Whichever type you use, IRAs provide a great, tax-advantaged way to save for retirement.
If you have yet to set up an IRA for 2020, you can still do that. The deadline to establish an IRA is also April 15th. In other words, if you want to take advantage of the benefits an IRA has to offer, there’s still time to do so, either by contributing to an existing account or by establishing a new one.
If you have any questions about IRAs – whether one is right for you, how it should be managed, or anything else – please give us a call at Minich MacGregor Wealth Managment. We’d be happy to help you.
P.S. Speaking of taxes, a number of clients have asked us about the delivery of their 1099’s. They are generated by Schwab and their deadline was extended to Friday, February 19th. This means the 1099’s should be in the mail within the next day or so. Be sure to factor in several days (at least) for delivery by the USPS.
P.P.S. Please remember, you will only receive a 1099 if you have a taxable account or if you took a distribution from an IRA. If you do NOT have Schwab accounts, please disregard as it does not apply.
As expected, the IRS has adjusted the 2020 tax brackets based on inflation. They are as follows:
Tax Rate
Single
Married, filing jointly
Head of Household
10%
0 to $9,875
0 to $19,750
0 to $14,100
12%
$9,876 to $40,125
$19,751 to $80,250
$14,101 to $53,700
22%
$40,126 to $85,525
$80,251 to $171,050
$53,701 to $85,500
24%
$85,526 to $163,300
$171,051 to $326,600
$85,501 to $163,300
32%
$163,301 to $207,350
$326,601 to $414,700
$163,301 to $207,350
35%
$207,351 to $518,400
$414,701 to $622,050
$207,351 to $518,400
37%
$518,401 and up
$622,050 and up
$518,401 and up
CHANGES TO DEDUCTIONS1
Per the IRS, the standard deduction is “a specific dollar amount that reduces the amount of income on which you’ve been taxed.”2
The IRS has increased the standard deduction for 2020. For singles, the standard deduction is now $12,400, up from $12,200. For married couples filing jointly, it is $24,800, up from $24,400. For heads of households, the standard deduction is $18,650, up from $18,350.
Remember, you can’t take the standard deduction if you also itemize deductions. And for married couples filing separately, both spouses must take the same type of deduction. So, if one spouse chooses to itemize, the other spouse must as well.
CHANGES TO CAPITAL GAINS1
The income threshold for long-term capital gains rates has also gone up.
Tax Rate
Single
Married, filing jointly
Head of Household
0%
0 to $40,000
0 to $80,000
0 to $53,600
15%
$40,001 to $441,450
$80,001 to $496,600
$53,601 to $469,050
20%
$441,451 and up
$496,601 and up
$469,051 and up
CHANGES TO 401(K)S3
For 401(k) and 403(b) plans , the maximum contribution limit for 2020 is now $19,500, up from $19,000 last year. Those age 50 or older can also contribute an additional $6,500, using what’s known as a catch-up contribution. That’s also up $500 from last year.
CHANGES TO IRAS4
In December, Congress passed a new bill called the SECURE Act. The bill, which went into effect on January 1, wasn’t about the tax code per se, but it did make some important tax-related changes to IRAs.
Before the SECURE Act, owners of a traditional IRA would have to begin making withdrawals at age 70½. (These are called required minimum distributions, or RMDs.) Now, that age has increased to 72. That means retirees have an additional 18 months to benefit from the tax advantages that come with IRAs.
Another change is for new parents. Previously, a non-retired person had to be 59½ years old to make early withdrawals from a traditional IRA. If they withdrew money earlier than that, they would have to pay a penalty of 10% on the amount they took out, except in a few extraordinary circumstances.
Under the SECURE Act, new parents can now withdraw funds penalty-free to help cover birth and adoption expenses. This is especially helpful for younger parents who have high deductible insurance plans. There is a $5,000 cap on withdrawals, though, and they need to be made within one year of the birth or adoption.
By the way, if you haven’t already contributed to an IRA, there’s still time to do so. Many people don’t know that the 2019 contribution deadline is actually April 15, 2020.5 However, if you do decide to contribute, you must designate the year you are contributing for. (In this case, 2019.) Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact me if you have any questions or need help.
For 2019, the maximum amount you can contribute is $6,000, or $7,000 if you’re over the age of 50.5 This applies to both traditional and Roth IRAs.
If you have yet to set up an IRA for 2019, you can still do that. The deadline to establish an IRA is also April 15th. In other words, if you want to take advantage of the benefits an IRA has to offer, there’s still time to do so, either by contributing to an existing account or by establishing a new one.
CHANGES TO 529 PLANS4
Another tax-related change is for parents and grandparents with 529 plans.
As you may know, any funds invested in a 529 plan can be used to help pay for college expenses, like lodging or tuition. The best part is that the funds are exempt from federal taxes, and often state taxes, too, so long as they’re used solely for education expenses.
Under the SECURE Act, parents with 529 plans can make a tax-free withdrawal of up to $10,000 to help pay off their child’s student loans. This number is per person, not per plan, which means another $10,000 can be withdrawn to help pay the student debt for each of the plan beneficiary’s siblings!
CHANGES TO ESTATE TAXES1
For 2020, the estate tax exemption will be $11,580,000 per individual. That’s up from $11.4 million in 2019. That means any estates worth less than this amount will be exempt from paying the estate tax.
***
We hope you found this information helpful. Obviously, it’s not a completely exhaustive list of every tax change for 2020. But it is an overview of some of the most important ones. If you have any questions or concerns, please let us know.
4 Text of “SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT” (page 1532), Senate Appropriations Committee, December 16, 2019. HYPERLINK “https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF” https://www.appropriations.senate.gov/imo/media/doc/H1865PLT_44.PDF
