After a year of so much uncertainty and isolation for many, we can vow to focus on our physical health and our mental health as we head into 2021. Having a good financial plan in place will help you create peace around the issue of money and that can translate into positive health benefits, both physically and mentally. Oftentimes, tax season has the opposite affect and may cause us anxiety as we await the outcome of our potential tax liability to the IRS and State agencies. We may feel overwhelmed by the task of attempting to gather our tax information in time for the filing deadlines. We want to bring you peace of mind during tax filing season, too so here are a few things to begin to work on now.
Let’s start with a few reminders:
- As a security reminder, the IRS will never, ever call you on the phone and ask you to provide personal information. They will always send you a letter. Do not give out any information to anyone who is identifying themselves as an IRS agent.
- NEW THIS YEAR!!……Your tax forms (for the accounts that we manage for you) are now available in the Vault of your Seaside Portal . No more logging into the custodian’s website or waiting for your forms by regular mail. The 1099’s will be in the vault no later than February 15th. Let us know if you need help logging into the Seaside Website or accessing your documents.
- During the volatility in the stock market in March 2020, we opportunistically harvested losses in your taxable accounts. This strategy will allow you to use the losses that we intentionally harvested to offset future gains or to use as an offset some of your income. When you see the large losses on your tax form this year just remember we did this strategically. Please revisit our previous blog on the benefits of tax loss harvesting. (Click here)
- When you have filed your taxes with the IRS and the appropriate state agency, please upload a copy of your tax return to the Shared Documents folder in the Vault of your Seaside Portal so we can review it for planning opportunities. To do this you will login to your Seaside Portal => Vault => Shared Documents => Tax Returns => Upload => Files => select your file. You can also drag and drop the file right into the shared documents folder.
Let’s continue with ideas to help you organize your tax file:
Contributions to Traditional/Roth IRAs
If you made contributions to your Traditional IRAs and/or Roth IRAs, deducting the contribution is dependent on income and eligibility for qualified retirement plans through an employer. Roth IRA contribution eligibility is dependent on income. See the table below for income limits to contribute to a Roth IRA.
We recommend supplying details of all contributions to your tax professional. Form 5498 may be of help.
Charitable Distributions from IRAs
If you made distributions directly from IRAs to charitable organizations, Form 1099-R will not break these out, as custodians do not take a view on whether the destination charity is “qualified” or not. A charity must be a 501(c)(3) organization to qualify for Qualified Charitable Distribution (QCD) treatment.
We recommend supplying details of all donations from retirement accounts to your tax professional.
60 Day Rollovers
If you made a distribution from a retirement account that got deposited back into a retirement account within 60 days, Form 1099-R will not show this as a tax-free rollover, as custodians do not take a view on whether the rollover took place within the required 60 days and if all other rules were followed.
We recommend supplying details of all 60-day rollovers to your tax professional.
If you completed a Roth conversion during 2021, these transactions are reported on Form 8606 of the tax return. This is especially critical in cases where there is any after-tax basis in the source account. Note that the end of year balance for all IRAs is needed to determine the percentage of a Roth conversion that is considered after-tax basis vs. taxable.
We recommend supplying details of all Roth conversions and end of year balances to your tax professional.
Gave to a Donor Advised Fund or Gave from a Donor Advised Fund
Did you donate to a charity from a Donor Advised Fund in 2020? Note that this contribution to charity is not deductible for tax purposes. This is because deductions related to Donor Advised Funds occur when the donation is made to the fund, rather than out of the fund to some other charity.
Did you donate to a Donor Advised Fund during 2020? This transaction counts as a charitable contribution for tax purposes.
We recommend detailing out which donations to charities came from donor advised funds vs. other sources and how much was contributed to your donor advised fund in 2020.
Interest on Intra-Family Loans
If you received interest from a personal loan, for which you are unlikely to receive a 1099-INT, we recommend detailing out the interest received for your tax professional.
An amortization schedule will be helpful if payments included both interest and principal.
Long Term Care Insurance Premiums
If you paid premiums on long term care insurance, this expense may be deductible as a medical expense on Schedule A.
We recommend providing information on long term care insurance premiums to your tax professional.
Personal Gifts Above Annual Exclusion Amount
If you made gifts during the year that may have exceeded the annual exclusion amount ($15,000 per person).
We recommend disclosing the details of any large gifts to your tax professional, as your lifetime exemption amount may be impacted.
If you contributed to an HSA account, this contribution should be deductible, subject to eligibility.
We recommend supplying details of all HSA contributions to your tax professional.
529 Plan Contributions
Did you contribute to a 529 Plan Account for anyone? These contributions are deductible in some states (but not California).
We recommend supplying details of all 529 plan contributions to your tax professional.
Resident Municipal Bond Interest
If you received municipal bond interest from your state of residence, this amount is noteworthy because it should be exempt from both Federal and state taxes.
We recommend supplying details of resident municipal bond interest to your tax professional.
Contributing to a Roth IRA for 2020, but find you are now above the income limit to contribute: If you contributed to a Roth IRA in 2020 and find yourself above the income threshold for contributing, please remove your contributions before filing your taxes to avoid an excise tax from the IRS. The income threshold is below:
Conversely, if you find that you are eligible to contribute to a Roth IRA or Traditional IRA and you have not done so yet for 2020, you still have time.
Coronavirus Aid, Relief, and Economic Security (CARES) Act and the COVID-related Tax Relief Act
If you are eligible and you did not receive a stimulus check, you may be receiving it as a Recovery Rebate Credit. This is a credit against your 2020 income tax. Generally, this credit will increase the amount of your tax refund or decrease the amount of tax you owe.
Please don’t hesitate to contact us for situations that need our guidance in between our regularly scheduled meetings. We look forward to seeing you soon!