As we kick off April and financial literacy month, we want to remind you about the tax deadline extension the IRS instated this year. Due to the coronavirus pandemic, the federal government extended this year’s federal income tax filing deadline from April 15, 2021, to May 17, 2021. This extension automatically applies to filing and payments. So, if you owe taxes for 2020, you have until May 17, 2021, to pay them without interest or penalties. This extension applies to all filers, including businesses, individuals, trusts, estates, and more. This gives you plenty more time to fund your HSA’s along with your Traditional or Roth IRA’s (depending on what you are eligible for).
Taxes likely won’t be the only aspect of your finances to be affected by the COVID-19 pandemic. Speak with your financial professional or tax professional about your particular situation. Before making any decisions, make sure to check your state deadlines to ensure there are no different cut-offs you must comply with. Check out the video below as Brad discusses the unemployment benefits and how those will affect your tax situation this year. As always, if you have any questions, please reach out to us at firstname.lastname@example.org or schedule a 30-minute introductory call here.
With tax season in full speed and the recent influx of DIY traders, it’s a great time to discuss the tax implications of capital gains in the market and how to better educate traders who are lacking the knowledge of the implications when trading the stock market.
In a recent twitter thread, tweeters were discussing the lack of education platforms like Robinhood provide on capital gains and wash sale rules. With the recent short squeeze stocks and bitcoin craze, people have been seeing enormous gains in the market, yet do not know what to do with the gains once they make them.
Pictured above is a snippet from a NAPFA forum where a guy started with $30,000 in his Robinhood account, transacted $45,000,000 in 2020, for a net profit of $45,000. However, when he received his 1099B, he had accumulated 1.4 million dollars in capital gains and a $800 tax bill. Because of his lack of knowledge about wash sale rules and the tax implications of capital gains, he saw a huge tax hit.
With financial literacy month just days away, this example is extremely timely and important to bring light to. As you can see, there is such a large gap in financial literacy in this country, especially surrounding the implications of trading and behavioral biases involved. Please inquire with a financial professional before making major moves in the market. It’s important to fully understand the implications of your decisions and how they will affect all aspects of your portfolio. If you have any questions, please reach out to us at email@example.com or schedule a 30-minute complimentary appointment here.
For those scrambling to get their tax returns together before next month’s deadline, you’re in luck. The federal income tax filing deadline has been extended one month, the Internal Revenue Service (IRS) and the U.S. Treasury Department announced this week. It’s official. The federal income tax filing due date for individuals for the 2020 tax year is now May 17, 2021 instead of April 15, 2021.
The 2021 tax filing season began on February 12th, 2021. The IRS is still urging Americans to file as soon as possible even though the deadline has been extended. The filing deadline extension applies to individual taxpayers, including those who pay self-employment tax, the IRS said. After May 17, Americans who have not filed will be subject to penalties, interest and additions to tax.
Because the tax deadline has been extended, that means you have more time to fund your retirement accounts as well. Take advantage of this extension to make sure you are well prepared for the May deadline. If you have any questions regarding this year’s tax return, as always, reach out to your tax professionals or CPA for guidance on your particular circumstance. Additionally, for more detailed information, check out the IRS website detailing the fine print of this extension. As always, you can reach us with any questions at firstname.lastname@example.org or schedule a complimentary 30-minute consultation here.
On Wednesday March 10th, Congress approved the American Rescue Plan, the third stimulus relief package since the pandemic started a year ago. The $1.9 trillion American Rescue Plan Act includes measures ranging from stimulus checks to child tax credits, jobless benefits to vaccine-distribution funds, healthcare subsidies to restaurant aid. The legislation is the largest aid package to pass since widespread restrictions tied to the coronavirus pandemic began in March 2020.
Here’s what to know:
Federal unemployment benefits of $300 per week have been extended until early September.
If you collected unemployment in 2020 or do so in 2021, you do not owe taxes on the first $10,200 in assistance.
Lots of people will receive $1,400 stimulus checks in the coming weeks. Individuals with an adjusted gross income of $75,000 or less and married couples earning $150,000 or less qualify.
Most Americans with kids will qualify for a new child tax credit: $3,600 per year for every child under 6 and $3,000 for each kid ages 6-17.
Aside from these stimulus bill changes, tax day, April 15th, remains the same. Make sure to file your return on or before that date to avoid penalties. Check out our definitive guide to your 2021 tax return with detailed information on this year’s tax season. In addition, make sure to fund your retirement accounts by this year’s deadline. We will continue to monitor any changes to 2021 filing dates, but we recommend to check with your CPA with any questions on your situation.
If you have any questions on the third stimulus package and what it entails, please reach out to us at email@example.com or schedule a complimentary 30-minute introductory call here.
The IRS has tons of rules and forms when it comes to your tax return. And a ton of those rules affect investing for retirement, so we rounded them up in one place. Below are some of the many limits that affect your retirement savings for the 2021 tax year. Click here for this downloadable pdf.
Contribution limits on retirement accounts
Annual 401(k) contribution limit
$19,500 if you’re under 50 years old, and $26,000 if you’re over 50. If you have both a traditional and a Roth 401(k), that’s the total limit you can contribute across both accounts.
Annual IRA contribution limit
$6,000 if you’re under 50, and $7,000 if you’re over 50. Again, this is the total contribution limit across both traditional and Roth IRAs.
Annual SEP IRA and Solo 401(k) contribution limits
25% of your “net earnings from self-employment” or $58,000, whichever is lower.
Annual SIMPLE IRA and SIMPLE 401(k) contribution limits
$13,500 if you’re under 50, and $16,500 if you’re over 50. (Btw, these count toward your overall 401(k) contribution limit, too.)
Income limits to contribute to a Roth IRA
Depending on your modified adjusted gross income (MAGI), you might be partially or fully ineligible to contribute to a Roth IRA. Note that these limits don’t apply to Roth 401(k)s. (Those don’t have income limits at all.)
If your filing status is single, head of household, or married filing separately
If your MAGI is over $140,000, you can’t contribute to a Roth IRA. If it’s between $125,000 and $140,000, you can contribute a reduced amount. And if it’s less than $125,000, you can contribute up to the full $6,000 / $7,000 limit.
Except: If your status is married filing separately and you lived with your spouse at any time during the year, you can’t use a Roth IRA if your MAGI is over $10,000. If it’s under $10,000, you can contribute a reduced amount.
If your filing status is married filing jointly or qualifying widow(er)
If your MAGI is over $208,000, you can’t contribute to a Roth IRA. If it’s between $198,000 and $208,000, you can contribute a reduced amount. And if it’s less than $198,000, you can contribute up to the full $6,000 / $7,000 limit.
Income limits to deduct traditional IRA contributions
Anyone with an earned income (investment income doesn’t count) can contribute to a traditional IRA up to the limit. If your MAGI is greater than a certain amount, you may be partially or fully ineligible to deduct them on your tax return, though.
If you are covered by a retirement plan at work (ie 401(k), SEP IRA)
If your filing status is single or head of household
If your MAGI is over $76,000, you can’t deduct your traditional IRA contributions. If it’s between $66,000 and $76,000, you can deduct a reduced amount. And if it’s less than $66,000, you can deduct up to the full $6,000 / $7,000 contribution limit.
If your filing status is married filing jointly or qualifying widow(er)
If your MAGI is over $125,000, you can’t deduct your traditional IRA contributions. If it’s between $105,000 and $125,000, you can deduct a reduced amount. And if it’s less than $105,000, you can deduct up to the full $6,000 / $7,000 contribution limit.
If your filing status is married filing separately
If your MAGI is over $10,000, you can’t deduct your traditional IRA contributions. If it’s under $10,000, you can deduct a reduced amount.
If you aren’t covered by a retirement plan at work (ie, 401(k), SEP IRA)
If your filing status is single, head of household, or qualifying widow(er)
None. You can deduct up to the full $6,000 / $7,000 contribution limit.
If your filing status is married filing jointly or separately
If neither you nor your spouse is covered by a retirement plan at work, there’s no income limit. You can deduct up to the full $6,000 / $7,000 contribution limit.
But say your spouse is covered by a retirement plan at work:
If you file jointly and your MAGI is over $208,000, you can’t deduct your traditional IRA contributions. If it’s between $198,000 and $208,000, you can deduct a reduced amount. And if it’s less than $198,000, you can deduct up to the full $6,000 / $7,000 contribution limit.
If you file separately and your MAGI is over $10,000, you can’t deduct your traditional IRA contributions. If it’s under $10,000, you can deduct a reduced amount.
Limit on indirect IRA rollovers per year
You can’t do an indirect rollover from one IRA into another IRA more than once a year. That’s not once per calendar year, or even once per tax year — it’s once per rolling 12-month period.
This applies whether it’s traditional-to-traditional or Roth-to-Roth. However, direct rollovers don’t count, and traditional-to-Roth conversions don’t count. (Neither do rollovers from your employer retirement plan, like a 401(k) — those are different.)
Age limits on retirement accounts
There’s no age limit on IRAs. But you do have to stop contributing to your other tax-advantaged retirement accounts when you hit age 70½ — unless you’re still working, in which case you can keep contributing to a plan that’s sponsored by that employer.
And at age 72, you have to start taking required minimum distributions (RMDs) from your retirement accounts (except for Roth IRAs — no RMDs on those). If you’re still working, RMDs on non-IRA retirement accounts can be waived, unless you own 5% or more of the company that employs you. (The CARES Act waived all RMDs for 2020, but 2021 RMDs seem to be back on. We’ll update this page in the event that changes.)
Those are the limits you need to know about. Now go forth and invest for that dream retirement.
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Taxpayers will have another shot at a package of tax breaks that would have otherwise expired at the end of 2020. The omnibus spending and coronavirus relief bill recently passed by Congress includes many tax provisions, including the extension of various expiring provisions, extensions and expansions of certain earlier pandemic tax relief provisions, and more.
Some of these deductions and credits have been made permanent, while others have been extended until the end of 2025 — the date when some of the individual provisions from the Tax Cuts and Jobs Act will expire.
Here are the extenders that are incorporated in the latest Covid relief bill:
Back when the Tax Cuts and Jobs Act took effect in 2018, individuals who itemized deductions on their federal income tax return were able to deduct qualifying medical expenses that exceeded 7.5% of their adjusted gross income.
Initially, this provision was set to expire at the end of 2018 and the threshold would have gone up to 10% of adjusted gross income. Lawmakers sought to keep the expense threshold at 7.5% through the end of 2020 and with the passage of the Covid relief act, the lower threshold is now permanent.
However, you can only take this deduction if you itemize on your return. The standard deduction for 2020 is $12,400 for singles and $24,800 for married-filing-jointly.
Lifetime learning credit vs. tuition deduction
The qualified tuition deduction granted an above-the-line write-off for parents of college kids – they could deduct up to $4,000 a year in higher-education tuition costs and other expenses.
Though this tax break was up for renewal at the end of 2020, Congress repealed it in the Covid relief act and expanded the lifetime learning credit instead. This learning credit is worth up to $2,000 per return and can be used to offset the cost of undergraduate, graduate and professional degree courses.
These changes go into effect starting in 2021 and the adjustment eliminates confusion for taxpayers waffling between education credits or the deduction. Deductions reduce your taxable income based on your federal income tax bracket so the higher your bracket, the greater the savings. Meanwhile, credits lower your tax liability on a dollar-for-dollar basis which makes them valuable even if you’re in a lower tax bracket.
Debt forgiveness amid foreclosure
Normally, debt cancellation or forgiveness results in a tax on the borrower. The amount the lender wipes from the balance is deemed income. However, a special tax extender softens the blow for homeowners who’ve had a mortgage balance forgiven due to a short sale or a foreclosure on the dwelling, applicable to debt discharged before Jan. 1, 2021.
This tax break remained intact, but the amount of forgiven debt that can be excluded from your gross income has been reduced. Joint taxpayers can now exclude up to $750,000 in discharged debt ($350,000 for singles), down from an exclusion of up to $2 million for joint taxpayers ($1 million for singles).
This modified write-off is in effect until the end of 2025.
Mortgage insurance premiums
Private mortgage insurance premiums are the additional expense you pay each month if your original down payment on your home was less than 20% of the sales price. The private mortgage insurance tax extender (available through 2021) allows you to deduct these premiums, but only if you itemize deductions.
Those who qualify may be able to deduct the interest on their mortgage and home equity loan or line of credit, up to $750,000 in total qualified residence loans, but the loans must go toward buying, building or substantially improving your home to qualify for the write-off.
Employer payments toward student debt
Due to the CARES Act, employers can make payments toward employees’ student loans and have that amount — up to $5,250 annually — excluded from workers’ taxable income. Though this provision was set to expire at the end of 2020, the new Covid bill grants further relief, allowing the exclusion to apply to payments made through the end of 2025.
Green tax breaks
Here are a few environmentally conscious tax credits that have been renewed through 2021, most of which are most relevant to individual taxpayers.
If you have any questions on how these tax extenders may apply to you, please contact a trusted tax professional. We’d love to help you start 2021 on the right foot by creating a financial plan that will work for you, regardless of your circumstances or the size of your portfolio. Please contact us today to set up a free 30-minute consultation or check out our other blogs related to this topic.
Whether workers get a windfall from Uncle Sam or wind up owing taxes mostly comes down to filling out one form correctly – and few people are doing it. In fact, 45% of the people polled by the American Institute of CPAs said they don’t know when they last reviewed the amount of tax withheld from their paychecks.
It turns out that many people are unfamiliar with W-4 forms that allow them to determine whether they’re owing or getting a tax refund. While taxes and filing a tax return may seem daunting, it’s important to remain on top of the situation to know how it will impact your finances.
While many people assume they just owe taxes, it’s important to note that it is not always the case. Indeed, the IRS issued 125.3 million refunds for the 2019 year, with recipients getting back an average of $2,535, according to agency data as of Nov. 20.
With 2021 just around the corner, now is the perfect time to reassess your withholdings so that you can start the new year on the right foot. People who become more familiar with their W-4 seem to be able to get their withholdings to be more realistic. Any changes to your exemptions would take effect at the start of the year if you do it now.
It’s also important to be aware of the “feel-good effect.” While it feels good to get a hefty check from the IRS in the spring, it really means that you voluntarily overpaid Uncle Sam in the prior year. In other words, your withholding was too high and you took home less cash.
Meanwhile, if you wound up owing the taxman, you may have pocketed more money – but you also paid too little in tax over the year.
Employers use this document alongside the tax withholding tables to figure out how much income tax gets pulled from your paycheck. The W-4 considers the number of dependents in your home, your filing status – single, married and filing jointly, or head of household – the income you bring in and whether you take the standard deduction or itemize deductions on your tax return. Key life events also warrant updating tax withholding, including getting married or divorced or having a child.
While tax season can be confusing and stressful, it’s crucial to understand your situation. Consider seeking help from a financial advisor or accountant when it comes to your taxes to help you better understand your withholdings. If you have any questions, please reach out to us at firstname.lastname@example.org or schedule a complimentary 30-minute consultation.
When preparing your finances for 2021, make sure to review your workplace benefits for next year before the open enrollment period comes to a close. Your household finances for next year could depend on it. An interesting CNBC article discussed the benefits you can unravel within your workplace health-care and ways to maximize it.
After one of the most difficult and financially stressful years for many Americans, digging back into the details of workplace benefits like health savings accounts, or HSAs, and flexible spending accounts (FSAs) is probably the last thing you want to do.
Overcome that fatigue and get to it.
Every year, we take a brief look at these options and plans, but COVID-19 has greatly changed the optics of these plans. For some, the coronavirus pandemic had led to much higher medical expenses than expected this year. For others, it has prevented them from accessing health care they expected to use, due to community lockdowns and overburdened health-care facilities.
Workplace health-care plans require a fresh look going forward, especially after COVID-19. Talk to your HR rep and discuss the details of options open to you. Below we will touch on a few potential options and benefits you should consider.
The Tax Benefits of HSA’s
First part of your workplace benefits to analyze is HSAs. HSAs, available to savers with a high-deductible plan — that is, one with a deductible of at least $1,400 for self-only health coverage — have three key tax benefits.
First, they allow participants to contribute money to the account either pre-tax or on a tax-deductible basis.
Second, the investable funds accumulate free of taxes. Finally, you can withdraw the money tax-free if it’s used for eligible health-care expenses. You don’t need to spend the balance down each year, as unused funds in the account roll forward, regardless of how much you spend. Employers can also boost your savings with a matching contribution.
The Ins and Outs of Medical FSAs
Medical FSAs share some commonalities with HSAs.Both allow for pre-tax contributions. Balances can also be used on tax-free basis if it’s for qualified medical expenses. In 2020 and 2021, you can contribute up to $2,750 to a medical FSA.
You generally can’t contribute to both an HSA and a medical FSA at the same time.
The major difference between the two accounts is that FSAs have a “use it or lose it” stipulation that requires participants either spend the money they save or forfeit the funds to their employer at year-end. Firms may choose to let employees roll over some of the money — that is, up to $550 for funds from the 2020 plan year — or they may give them a grace period up until March 15 of the following year to use the funding.
Dependent care FSAs
Another area to analyze within your workplace benefits are Dependent Care FSAs. Dependent care FSAs, which help employees offset dependent and childcare costs, have been dramatically affected by the pandemic and resulting community shutdowns. Generally, a worker can save up to $5,000 in one of these accounts on a pre-tax basis, but again, the funds must be used up by the end of the year or they’re forfeited.
Due to Covid-19, daycare centers in many parts of the country have been closed for much of the year. What’s more, many employees found themselves working from home and taking care of their children themselves, which means they could have hefty balances in these dependent care FSAs.
The IRS addressed this situation by allowing employers to give workers the option of changing the amount they’d normally defer in the middle of the year.
That option may not be available next year, so be thoughtful about the money you commit to these dependent care FSAs as you decide how to proceed in 2021.
Given the crazy year we’ve had, it’s important to take a deeper look at all your options when it comes to your workplace benefits. The coronavirus pandemic has shown us what unprecedented circumstances can cause and the importance of taking advantage of all the benefits that are available to you. If you have any questions, please reach out at email@example.com and make sure to also take a look at other tips and advice written in our blogs.
As we’ve all been waiting to hear about the outcome and policy changes from the Jackson Hole symposium, there’ve been some updates that you should know. In a major policy pivot, the Federal Reserve said it will allow inflation to run “hotter than normal” to help the economy bounce back from the coronavirus crisis, meaning the Fed will be less likely to hike interest rates. This will allow borrowers to benefit from cheap money for a longer period of time. According to some commentary, this policy change is meant as a stimulus, to get people to spend more.
Although the federal funds rate, which is what banks charge one another for short-term borrowing, is not the rate that consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day. For example, most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.
Since the central bank lowered its benchmark rate to near zero in March, credit card rates have hit a low of 16.03%, on average, according to Bankrate.com. Other short-term borrowing rates are even lower. The average interest rate on personal loans is currently about 12.07% and home equity lines of credit are as low as 4.79%, according to Bankrate, both notably less than the APR on a credit card.
On the flipside, the Fed’s willingness to tolerate higher inflation means that longer-term loans will offer less opportunities for borrowers. “Low inflation has helped suppress mortgage rates,” said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace. “If you let inflation go up, mortgage rates will also go higher.”
With these cheaper loans for a longer period of time, it’s important to take a look at where you can lock in those lower rates, such as through credit card balance transfers or refinancing your mortgage. If you have any questions about this new policy, and want to see how this could be an advantage for your portfolio, please reach out to us at firstname.lastname@example.org and we would be happy to discuss with you.
With the election around the corner and recent news of Joe Biden’s running mate, Kamala Harris, we wanted to take a look at his proposed tax plan and what impact it may have on the finances and current tax plans of Americans.
As Biden accepts his party’s nomination for president this week at the Democratic National Convention, high-income earners are beginning to wonder if it’s time to revisit their tax plans. Indeed, taxpayers with taxable income over $400,000 could see their individual income taxes tick up under a Biden presidency. The former vice president has also called for raising taxes on wealth transfer.
Below we will outline Biden’s proposed tax plan, which CNBC has sliced into two categories, income taxes and estate planning.
On the income tax side, Biden calls for raising the top individual income tax rate to 39.6% from 37%, and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.
He’s also talking about an increase to payroll taxes. Biden would apply the 12.4% portion of the Social Security tax — which is normally shared by both the employee and employer — to earnings over $400,000, the Tax Policy Center found. Currently, the Social Security tax is subject to a wage cap of $137,700 and is adjusted annually.
Finally, Biden would also boost rates on long-term capital gains and qualified dividends to 39.6% — the same top rate as ordinary income — for those with income over $1 million, according to theTax Foundation. The long-term capital gains tax rate in 2020 is 20% for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly).
Last month, the Democratic presidential contender collaborated with Sen. Bernie Sanders, I-Vt., and the two formed six task forces to release a 110-page policy document. The document gives some insight on what we might expect from a Biden administration. “Estate taxes should also be raised back to the historical norm,” the task force wrote in the policy plan.
Indeed, the Tax Cuts and Jobs Act roughly doubled the amount that you can transfer to other people — either at death or as a gift during life — without facing the 40% estate and gift tax. The gift-and-estate tax exemption is $11.58 million per individual in 2020.
Biden has set his sights on the “step-up in basis,” a provision in the tax code that allows an individual to hold onto an asset for years, watch it appreciate and then bequeath it to an heir at death. The owner’s basis — the original investment in the asset — steps up to market value at death, which means the heir is subject to little to no capital gains taxes if he sells it. Biden proposes taxing the unrealized capital gains in the asset at death, which essentially does away with the step-up. Wealthy households are likely to use gifting strategies to head off this change, said Bertles of Tiedemann Advisors. “This can be as simple as giving assets to a trust or outright to kids or grandkids while using the exemption,” he said.
Make sure to take a look at Biden’s proposal and think about how that may impact your situation. In just a few short months, this plan could be put into effect, so start thinking about any changes you could make to your tax plan and talk to an advisor for some guidance. As always, we are here to help if you have any questions regarding what these changes could mean for you.