While I often talk to people about how tax planning should be year-round, it obviously gets the most attention at the beginning of the year when tax preparation begins in earnest.
Planning at the beginning of the year should be focused on the following;
- What are your retirement contributions plans? Are you focused on 401(k), IRA, or both? If you are contributing to an IRA, can you contribute to a Roth?
- What are your education savings goals? Are you contributing to a 529 that offers a state tax deduction?
- If you qualify, will you be making HSA contributions?
- Will you be making charitable contributions? If so, will they be consistent contributions or more sporadic?
- Do you need to make any adjustments for the loss of any exemptions that could significantly impact your tax owed?
One specific point of emphasis that I make every year is regarding 401(k) contributions. I strongly encourage people to contribute enough to receive their full company match if offered. Ensuring that your contributions meet the qualifications is essentially receiving free money.
Depending upon your financial and tax situation, you may also want to consider Roth contributions vs. Traditional.
A Notable Change in the W-4 Form
While we enter our second tax preparation season post the Jobs and Tax act of 2017, there continue to be changes that you should be aware of. Most notably, the W-4 has been changed in 2020.
The W-4 was built around personal and dependent exemptions, which the Jobs and Tax act of 2017 eliminated. The new design, per the IRS, “reduces the form’s complexity and increases the transparency and accuracy of the withholding system. While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.”
You are not required to furnish a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently furnished Form W-4. However, if you have owed additional tax after preparing your return, or would like to increase the amount of your potential refund, then you should look at updating your W-4.
The IRS has made available a Withholding Calculator to help you determine how much you should be withholding. You can increase your withholdings further by specifying an additional flat dollar amount to be set aside for each pay period.
Tax Changes Continue
Each year there are notable changes in contributions or income limits that may affect your overall wealth management plan and specifically your tax plan. Below are some of the notable tax changes that could affect you.
- Qualified Dividend and Long-Term Capital Gains Rates:
- 0%: Single taxpayers with incomes between $0 and $40,000; married couples filing jointly with incomes between $0 and $80,000.
- 15%: Single taxpayers with incomes between $40,000 and $441,500; married couples filing jointly with incomes between $80,001 and $496,600.
- 20%: Single taxpayers with incomes over $441,500; married couples filing jointly with incomes over $496,000.
- IRA contribution limits (Roth or traditional): $6,000 under age 50/$7,000 over age 50. No ChangeIncome limits for deductible IRA contribution, single filers or married couples filing jointly who are not covered by a retirement plan at work: None; fully deductible contribution.
- Single: Modified adjusted gross income under $65,000–fully deductible contribution; between $65,000 and $75,000–partially deductible contribution; more than $75,000–contribution not deductible.
- Married: Modified adjusted gross income under $104,000–fully deductible contribution; between $104,000 and $124,000–partially deductible contribution; more than $124,000–contribution not deductible.
- Income limits for nondeductible IRA contributions: None.
- Income limits for Roth IRA contribution:
- Single: Modified adjusted gross income under $124,000–full Roth contribution; between $124,000 and $139,000–partial Roth contribution; more than $139,000–no Roth contribution.
- Married couples filing jointly: Modified adjusted gross income under $196,000–full Roth contribution; between $196,000 and $206,000–partial Roth contribution; more than $206,000–no Roth contribution.
- Contribution limits for 401(k), 403(b), 457 plans, or self-employed 401(k) (traditional or Roth): $19,500 under age 50; $26,000 for age 50 and older. Increase of $500 from 2019.
- Total 401(k) contribution limits, including employer (pretax, Roth, after-tax) and employee contributions and forfeitures: $57,000 if under age 50; $63,500 if 50-plus. Increase of $1,000 from 2019.
- SEP IRA contribution limit: The lesser of 25% of compensation or $57,000. An increase of $1,000 from 2019.
- Health savings account contribution limits:
- Single: $3,550 (under 55); $4,500 (over 55). Increase of $50 from 2019.
- Family: $7,100 (contributor under 55); $8,000 (contributor 55-plus). Increase of $100 from 2019.
- Section 529 college-savings account contribution limit: Per IRS guidelines, contributions cannot exceed an amount necessary to provide education for a beneficiary. Deduction amounts vary by state, and those contributing vast amounts may have to file a gift tax form. Section 529 college savings account income limit: None.
- Lifetime Gift and Estate Tax Exemption: $11.58 million per individual and $23.16 million for couples.
2020: Important Tax Dates to Remember
- Jan. 1: New IRA, retirement plan, and HSA contribution and income limits went into effect for the 2020 tax year, as listed above.
- Jan. 15: Estimated tax payments due for the fourth quarter of 2019.
- April 15: Individual tax returns (or extension request forms) due for 2019 tax year.
- Estimated tax payments due for the first quarter of 2020.
- Last day to contribute to IRA for 2019 tax year (2019 contribution limits: $6,000 under age 50; $7,000 for age 50 and above).
- Last day to contribute to health savings accounts for 2019 tax year (2019 contribution limits: $3,500 for single coverage, contributor under age 55; $4,500 for single coverage, contributor age 55 and above; $7,000 for family coverage, contributor under age 55; $8,000 for family coverage, contributor age 55 and above).
- June 15: Estimated tax payments due for the second quarter of 2020.
- Sept. 15: Estimated tax payments due for the third quarter of 2020.
- Oct. 15: Individual tax returns due for taxpayers who received a six-month extension.
- Dec. 31:
- Required Minimum Distributions (RMD) – If a person turned 70½ in 2019, that person must take an RMD in 2019, 2020, and beyond. When a person turns 72, that person must take an RMD from traditional IRAs and 401(k)s; those RMDs are based on their balances at the end of 2019.
- Last day to make contributions to company retirement plans (401(k), 403(b), 457) for 2019 tax year.
By understanding tax code changes and knowing essential dates, you can put together a plan that should integrate well into your overall long-term wealth management plan.
Two Sides of The Refund Fence
People frequently ask me, “should I expect a big refund or try to minimize the amount that I may owe?” The answer depends on your personality and your savings habits.
For those that insist on not letting the government hold onto one more red cent than they should, your answer is clear. Try to get the amount owed at the end of the year as close to zero as possible by claiming the correct amount of allowances or by having additional money withheld from your paycheck.
I always try to answer this question from a savings perspective; are you a good saver or not? If you are not a good saver, it may be a good idea to let the government hold onto a bit more of your money so that you do get a refund.
Having the government hold onto your money, think of it as a forced way to save that you cannot touch. Yes, I get the fact that you are not earning interest on your money, but that might outweigh your inability not to spend the money if you see it every pay period.
The trick in expecting a large refund is knowing what you want to do with that money. Having a specific goal in mind as to what to do with your refund should help guide your decision.
For questions about any wealth planning and asset management topics, do not hesitate to contact me to find out what options may be best for your own personal situation.