While a lot of things might feel like they’re out of your control, especially now during the COVID-19 crisis, there is one thing that remains in your control: your taxes.
Rather than wasting time worrying about things that you can’t control, we like to encourage clients to focus on what they can control — and your taxes are one of the more important things that you have control over when planning for your ideal financial and retirement picture.
Now that tax season has returned once more, we’re here to share some key considerations for you to keep in mind, especially when it comes to recent tax law changes from 2017’s Tax Cuts and Jobs Act, 2019’s SECURE Act, and 2020’s CARES Act. While these new tax laws may seem confusing to many, we’re here to simplify the most important parts of these tax laws so you can make the most of these taxes changes in 2020 and beyond.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act was introduced in 2017 and is still impacting our taxes today. In fact, the changes introduced by this act will carry on until 2025 — so expect that its changes will continue to be relevant to you over the next few years.
One of the biggest changes introduced by this act was the lowering of taxes. Because of this, if you’re in a certain tax bracket now, like the 12% or 22% bracket, you can likely expect your tax rates to go up come 2026.
But why is important to think about this now? Because by being proactive and thinking ahead, you can take advantage of your tax rates now and think strategically about what you can do to pay taxes at a lower rate today to help you save on taxes down the line when they’re at a higher rate.
Another big change the TCJA introduced was the doubling of the standard deduction. This helps a lot of people, however when you’re somebody who is big on charitable giving, these standard deductions might not allow you to itemize your deductions around your giving. However, just because of this change, we don’t want you to stop giving to charity. Instead, it’s important to realize that the way you were filing in the past might no longer be beneficial to you tax-wise.
If you’re charitable and want to give away money in a way that also benefits you tax-wise, here are three options to consider:
Bunching Together Charitable Contributions
The government doesn’t force you to give your charitable donations in December or in January. Instead, it could be more beneficial to you to bunch together your charitable contributions. Bunching charitable contributions is where you intentionally take one or two years worth of deductions, or contributions, and put them together into one tax year. For example, you could choose to double up on your giving in December, or skip giving in December altogether and instead give more in January. When you bunch your giving into one year, then you’re more likely to get that itemized deduction. Plus, the organizations you’re giving to still receive the same amount that you had intended to give in the first place!
Qualified Charitable Distributions
When you’re over the age of 70 and a half, you have the ability to take money from your IRA accounts and to give it directly to charity. This rule is called qualified charitable distributions. When you give that money to charity, you’ll also get to give it without paying income tax on the money, which you would need to do if you were to pull money out of your IRA regularly. This way, instead of filling out a form, getting the money, and then writing a check to charity, you can actually save some time and get some tax help by sending your charitable distributions from your Traditional IRA.
Donor Advised Funds
Donor advised funds are a way of supercharging your bunched deductions. With this type of fund, can get a tax deduction the year you put money into the fund, and then you can let that fund pay out to the charities of your choice on a consistent basis over time.
For example, with a donor advised fund, you can take three-years worth of contributions and put it into the fund. Then, the fund can pay out to the charity over the next two or three years but you’ll be able to get all the deductions to show up in that one tax year when you put the money into the fund. It’s a great way to get the tax deduction when you want and give to the charity when you want; even if that’s two different years.
The SECURE ACT
The SECURE Act, which was introduced in December 2019, doesn’t change the importance of tax planning. It just gives you some new information and new ways to look at tax planning.
We have a podcast that breaks down the important changes introduced by this act here. But, we just want to re-iterate two important things introduced by the act.
Required Minimum Distributions
With this act, the required minimum distribution age moved from age 70 and a half to age 72. This can simplify things for people a bit, since some people who were born in the same year, depending on whether they were born in the first or second half of the year, might have a different year in which they turn 70 and a half. With 72, everyone born in the same year will hit that age in the same year.
It’s important to still remember that they left qualified charitable distribution age to 70 and a half. So while you might no longer be forced to take money out of your IRA at 70 and half, you can take money from your IRA at that age to make use of qualified charitable distributions.
This was another major change with the SECURE Act. Before the act, you used to be able to leave IRA money to your kids or grandkids and they could take that money out slowly over time for basically their life expectancy, perhaps 30 or 40 years. Now, with the act, they’ve shrunk down the time in which beneficiaries can take money out to 10 years.
That means if you have a trust where you’re planning on having your IRA money go into that trust and go from there to the kids or grandkids, you might want to talk to your financial advisor and to review that. There might be some changes that you have to make there since the time frame in which your beneficiary has to take the money has changed.
Because of COVID-19, the CARES Act passed in March 2020 to change some tax rules to help keep people working, and paying their rent and mortgages. As with other tax law changes, there are some parts of the CARES Act you probably want to take advantage of — and some that you might want to be a bit more careful with.
Here are some changes from the CARES Act for you to keep in mind:
The federal tax filing deadline and tax payment date has been pushed back to July 15th, 2020. If you haven’t already, you now you have three extra months to file your taxes.
HSAs and IRAs
If you contribute to a health savings account (HSA), a traditional IRA, or a Roth IRA, you now have until July 15th to go and make contributions for the prior year. If you’re in a situation where you have lots of extra time on your hands because of stay-at-home orders, now might be a good time to revisit your financial picture and ask yourself: Do I have extra money? Should I be adding it to my HSA or IRA or Roth IRA for last year (2019)?
Another key part of the CARES Act is the recovery rebate. With this rebate, it’s important to understand that it is not a subsidy. The government isn’t giving everyone a certain dollar amount for free. Instead, what they’re doing is giving what they call a pre-refundable tax credit — in other words, they’re simply giving you a refund on your taxes ahead of time.
Even when you get that money, that $1,200 or however much it happens to be for your family, you’re still going to have that money showing up as part of your 2020 tax returns. Don’t be surprised if, a year from now when you’re doing your taxes for 2020, they ask you some questions about the rebate. Why? Because they’ll likely be looking through your income to make sure you qualified for it.
With the rebate, they’re giving out $1,200 per person and $500 per child under 17 years old. To ensure that the money is going to those who really need it, they have defined those who are eligible for the rebate as people who are single and make $75,000 or below, or married couples who make $150,000 or below. If you make more than that, then the government will start taking back a little bit of the rebate because they figure you’re already making a lot of money and you’ll be fine without the rebate.
If you haven’t yet filed your 2019 taxes, they’ll look at your 2018 taxes to determine whether you qualify. If you have filed, they’ll choose whichever year, between 2019 and 2018, has a higher number. So if your 2018 income was low but in 2019 you sold a business or some stock, for example, and your income was higher, you might not get that tax credit.
If you had a high tax year in 2018 and a low tax year in 2019 but haven’t filed yet, perhaps now is the time to go and file so that you get the lower income in there for when you’re assessed for the rebate. But the opposite is also true if you had lower income in 2018 than 2019 — maybe take the extended date and don’t file just yet.
IRA and 401(k) Withdrawals
Another new rule introduced by the CARES act revolves around withdrawing from your IRA and 401(k). They’ve now changed the rules to allow you to take up to $100,000 out of IRAs and 401(k)s without the 10% penalty (if you’re below the age of 59 and a half). Usually, they penalize you because they want you to take that money out for retirement, but they figure that now with COVID-19, we’re in a situation where you might need the money earlier.
However, while you might need to take some money out of your accounts, remember: you still will owe taxes on your 401(k) and on your IRA withdrawals. Just because there are no penalties doesn’t mean there are no taxes.
Another thing to keep in mind is that this is a time where the markets are down. Is this the time when you want to sell your investments and take money out of your accounts? Or would you rather wait and let the market come back up?
Required Minimum Distributions
If you are someone with a required minimum distribution, with this new act, you no longer have to take your distributions in 2020 if you don’t need them. But you still can take money out and if you are over 70 and a half you should use the Qualified Charitable Distribution rules to help give money to the churches and charities you love to support.
What Hasn’t Changed
While a lot has changed over the past few months, a few things haven’t changed. One thing that remains the same is that tax planning is still important. Every single time they come out with new tax laws, it’s important to keep up with the changes so you can take the best advantages of them and see where you can make the most of it — and we’re here to help you keep up with, and understand, these laws and how they affect you.
This is what we do all the time with clients. If you have an idea of how the actions you take today could affect you over time, you can then make some good decisions that will save you some tax money. If you’d like more insight on tax planning and how we can help, visit our contact us page to learn how you can get in touch with us!