It’s Not Too Late To Get These Tax Breaks for 2020
Even though 2020 is over, it’s not too late to take advantage of some extra tax breaks for the year. But you need to take action soon and contribute to these tax-advantaged accounts before April 15. Don’t overlook these extra opportunities to save money on your 2020 taxes or build tax-free savings for the future — or both.
Tax-Advantaged Savings in an IRA
Even if you already contributed to a 401(k) or other retirement-savings plans at work, you still have time to contribute to an IRA, too. You have until April 15 to contribute up to $6,000 to an IRA for 2020, or up to $7,000 if you were 50 or older last year.
Your contributions may be tax-deductible depending on your income and whether or not you (or your spouse) had a retirement plan at work last year. See the IRS’ IRA Deduction Limits factsheet for more information.
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Or you could contribute to a Roth IRA, which doesn’t lower your taxable income now but grows tax-free for the future. You can make Roth contributions for 2020 if your modified adjusted gross income was less than $139,000 if you’re single or $206,000 if you’re married filing jointly. The contribution amount starts to phase out for singles who earned more than $124,000 or joint filers who earned more than $196,000. You can withdraw your Roth contributions at any time without taxes or penalties, making it a good place to save if you worry you might need the money in an emergency, and you can withdraw the earnings tax-free after age 59 ½, as long as you’ve had a Roth for at least five years.
And a bonus for some low- to moderate-income people who contribute to an IRA or other retirement-savings plan: You may also qualify for the retirement saver’s tax credit, which could reduce your tax liability by up to $1,000 for singles or $2,000 for married couples filing jointly. To qualify for the credit, your 2020 income must be $32,500 or less for single filers, $48,750 or less if filing as head of household, or $65,000 or less for married couples filing jointly. See the IRS’ Retirement Savings Contributions Credit factsheet for more information.
You usually need to earn income from working to be able to contribute to an IRA. But if you earn income and your spouse does not, you can contribute to a spousal IRA on his or her behalf. You can contribute up to $6,000 for 2020, or up to $7,000 if your spouse was 50 or older last year. The IRA can either be traditional or a Roth, based on your joint income.
Roth IRA for a Kid Who Worked Last Year
Children of any age who earned money from working in 2020 can contribute to a Roth IRA for the year, too — whether they had a summer job, part-time job or even if they just did some babysitting or lawnmowing. They can contribute up to the amount of money they earned from working, with a $6,000 maximum for 2020. They don’t need to contribute their own money; you can give them the money or match their contributions. If the child is a minor, you’ll need to open a custodial Roth IRA and sign some extra forms. Starting the savings habit when they’re young can make a huge difference in their financial future. The money can grow tax-free for decades, but they can also access the contributions without penalties or taxes anytime.
Retirement Savings for Freelancers
If you had any self-employed income in 2020 — whether you did freelance work on the side, started your own business or did some consulting work between jobs last year — you can make tax-deductible contributions to a retirement savings plan.
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You can either save in a Simplified Employee Pension (SEP) or a solo 401(k). A SEP is easiest to set up and is offered by most brokerage firms, mutual fund companies and banks that offer IRAs. You can contribute up to about 20% of your net income from self-employment to a SEP, with a $57,000 maximum in 2020. Or you may be able to save more in a solo 401(k). With this type of plan, you can contribute up to 100% of your self-employed income, with a $19,500 maximum in 2020 (or $26,000 if 50 or older), plus about 20% of your net income from self-employment, up to a total contribution limit of $57,000 for 2020 (or $63,000 if 50 or older).
Your SEP contributions are tax-deductible and grow tax-deferred until you withdraw the money in retirement. With a solo 401(k), you can either make tax-deductible contributions or you can make Roth solo 401(k) contributions, which don’t reduce your taxable income now but grow tax-free for retirement.
Make Tax-Deductible Contributions to a Health Savings Account
An HSA provides a triple tax break, and you still have time to make tax-deductible contributions. To qualify for 2020, you must have had an HSA-eligible health insurance policy with a deductible of at least $1,400 for self-only health insurance coverage or $2,800 for family coverage. You have until April 15 to contribute up to $3,550 if you had self-only coverage, or up to $7,100 if you had family coverage (plus $1,000 if you were 55 or older).
You can contribute the full amount if you had an HSA-eligible policy for the full year. If you only had HSA-eligible coverage for the first few months of 2020, then your contribution amount is prorated based on the number of months you had the high-deductible policy. And there’s an interesting quirk of the law: If you had eligible coverage on Dec. 1, 2020, but not for the full year, you can still make the full year’s contribution, said Roy Ramthun, president of HSA consulting services. In that case, however, you’ll need to keep an eligible policy for all of 2021.
You can withdraw the HSA money tax-free for eligible medical expenses at any time — either now or in the future.
Contribute To a 529 College Savings Plan
Many states offer a tax break for contributing to a 529 college savings plan, but they generally require you to make the contributions by Dec. 31 to qualify for that year’s deduction. But a few give you until April 15 to make tax-deductible contributions for 2020, including Georgia, Mississippi, Oklahoma, South Carolina and Wisconsin, according to AKF Consulting Group, a municipal advisor to state administrators of 529 plans nationwide. Taxpayers in these states need to contribute to their own state’s 529 plan to be eligible for the break. See Savingforcollege.com for details about each state’s tax rules.
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