Planning for your taxes takes more than a few hours every Spring. Proper planning throughout the year can mean more money in your pocket and less headaches in April. Follow these tips for a more effective tax strategy in 2020.
Check your paycheck withholdings.
As you file your taxes for last year, did you end up overpaying throughout the year? If so, consider adjusting your tax withholdings now to maximize your monthly cash flow. If you end up owing more, withholding more each paycheck is an option, as is making a deductible IRA contribution.
Remember the tax law changes in 2018? Not only was a larger standard deduction put in place, but the child tax credit doubled.
What else has changed? Starting this year, the IRS has a new W-4. This is the form you give your employer to calculate the federal income tax withholding from your paycheck. You don’t have to redo your W-4, unless you start a new job or make changes to your withholdings. The updated version seems to be much easier as it removed the need to calculate the number of allowances.
Check your Roth IRA eligibility.
The ability to contribute to a Roth IRA is dependent on your modified adjusted gross income for that year. In 2020, a couple filing taxes jointly is not eligible to contribute to a Roth IRA if their modified adjusted gross income is $206,000 or more. Need to lower your adjusted gross income to make Roth contributions? Try saving in your pre-tax 401k at work. This will lower your income. In 2020 you can defer up to $19,500 in your 401k.
|Married filing jointly
||Less than $196,000
||$6,000 ($7,000 if 50 or older)
|$196,000 to $206,000
|$206,000 or more
|Single, head of household, or married filing separately
||Less than $124,000
||$6,000 ($7,000 if 50 or older)
|$124,000 to $139,000
||Contribution is reduced
|$139,000 or more
Note that adjusted gross income is the number before your standard or itemized deductions.
Review retirement plans for your business.
If you are a business owner, consider your retirement plan options to help save money in taxes while building wealth:
- SEP IRA—this type of IRA can potentially mean more tax savings than a Traditional IRA. In 2020, your business can contribute up to 25% of your compensation to a SEP IRA, up to $57,000 (a $1,000 increase from 2019). Note: the business is the one making the contribution and it works best if you are self-employed. If you have employees, you need to contribute the same percentage of their compensation to their SEP IRA as well.
- Individual/Solo 401(k)—for self-employed people with no employees, an Individual 401(k) allows you to contribute $57,000 in 2020, plus an additional $6,500 if you are over the age of 50. If you’d rather build wealth in a tax-free Roth IRA, you can even contribute $19,500 of that $57,000 to a Roth 401(k).
- Defined Benefit Plan—for a high-income self-employed individual seeking maximum tax savings, a defined benefit plan can allow contributions over $100,000 each year.
New retirees can file to avoid additional Medicare costs.
For new retirees over age 65 who also enroll in Medicare, some simple tax planning can save a few hundred dollars each month on Medicare Part B and Part D premiums.
Your monthly Part B and D premiums each year are based on your modified adjusted gross income from two years ago (so your 2020 premiums are based on your income from 2018). While many people pay the “standard” monthly premium of $144.60 for Medicare Part B (up $9.10 from 2019), people with higher income pay an Income Related Monthly Adjustment Amount (IRMAA), which increases your costs.
The IRS has outlined only a few specific “life-changing” events that may get you a reduction in your additional IRMAA costs. One of these is “work stoppage” (i.e. retiring). Higher income earners that retire can file an IRS form to report their work stoppage and avoid having their income from two years ago (when they were employed) used to determine their Medicare costs in retirement.
Did you know you can make retirement contributions for your 2019 taxes until April 15? Open an IRA with Stewardship Financial today!