Last year, American taxpayers were granted a reprieve from the dreaded annual April 15 due date for personal tax returns. While it seemed like a great idea at the time, we were not able to completely avoid the unpleasant chore, because July 15 became the 2020 due date. There was, however, a useful side benefit. While tax filing can always be extended to October 15 by filing Form 4868, any money owed is still due on April 15. In 2020, COVID-19 relief allowed us to delay sending in all money due until July 15. That helped many Americans with their struggling cash flow.
Right now, there is a push in Congress to emulate 2020 by delaying both filing and paying dates. Due to an unusually harsh winter storm in the South, taxpayers in designated disaster areas have been granted a delay for their 2020 taxes. For affected people, business tax returns, personal tax returns, IRS deposits, taxes owed for last year, and 2021 Quarterly Estimate #1 (Form 1040-ES) are delayed until June 15, 2021. The rest of us will apparently be held to the usual April 15 date (extendable for filing, but not for paying).
Many politicians and taxpayers would prefer to have the entire U.S. population receive the same delay to June 15, 2021. Apparently, this is a decision IRS can make, and the House of Representatives has made a formal request for the delay. There is no indication at this time that IRS will respond positively.
Since the usual April 15 deadline is now only a month away, most tax preparers are likely advising their clients to operate on a “business as usual” assumption. Even if you file for an automatic extension of your personal tax return, be sure to have paid in sufficient amounts to either cover your actual liability, or to have satisfied one of the “safe harbor” provisions. Your preparer will assist you in meeting these goals. Van Wie Financial is not a tax preparer, and cannot give tax advice. We can, however, help you plan for your future tax situation.
Given the number, size, and complexity of bills in front of Congress, it will take weeks to sort out the many provisions that have been slipped into recent legislation behind the “Great Wall” currently surrounding the capitol.
Assuming the 2021 filing deadline for most 2020 tax returns will remain April 15, there are steps you can take to improve your own situation before filing. Perhaps the easiest and most common tax reducer is the Traditional IRA, which can be funded for last year until the April 15 filing date. There are some qualifications for the tax deduction, but most working Americans are eligible. It has become easy to fund an IRA, even allowing tax refund money to be diverted to last year’s IRA.
Small business owners can open and/or fund small business Retirement Accounts, including SEP IRAs and Individual(k) Plans, until their actual filing date. The Plan type available to any individual depends on the nature and size of the business, and a competent financial advisor should be consulted.
For some tax-reducing transactions, it is already too late to affect 2020 returns. However, the next 4 weeks afford many people an opportunity to reduce future taxes, improve future financial independence, and better plan for cash flow. Now is a perfect time for planning 2021 taxes.
This is also a good time to remind taxpayers that 2021 charitable contributions are deductible “above the line” up to $300 for individuals, and $600 for married filing jointly. These are the most lucrative deductions, as they do not require itemizing to reduce taxable income. “Above the line” donations paid from personal funds during the calendar year must be documented by qualified recipients.
As a great planning tool, when your numbers are finalized, take the opportunity to analyze and adjust your withholding. If you are owed a large refund, decrease your withholding and divert the difference to savings, whether for retirement or your cash reserve. If you owe too much, increase your withholding if necessary, but see if you can increase your 401(k) deferral, or make deductible IRA contributions.
Whether or not we finally arrive at an extended filing date, it is smart to get and stay organized now. Van Wie Financial routinely assists clients with tax planning. We can and will work with clients’ tax preparers to implement plans, once made. Don’t get caught unaware of your situation and get a large, unexpected “April Surprise,” even if it turns out to be in June.
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