To say it’s been a crazy year is an understatement. With a global pandemic, market uncertainty, and political and social unrest, there were a lot of changes this year, including to the tax code. Below are a few items you’ll need to pay attention to before year-end.
Payroll Tax Cut:
Effective September 1st, President Trump passed an executive order to defer social security taxes for those individuals who make less than $104,000 (or $4,000 biweekly). Since the employee portion of the Social Security tax is 6.2%, if you qualified and your employer opted-in, you received a temporary 6.2% raise. Great news…right?
Not so fast – as of the time of this post, the payroll tax cut expires at the end of the year (it’s not so much a cut as simply a deferral). The funds will need to be paid back in the first four months of 2021, at which time you will be responsible for the original 6.2% social security tax and the previous four months’ tax cut. Be cautious about spending your extra bump in pay – you’ll be paying it back!
Coronavirus Aid, Relief, and Economic Security (CARES) Act:
Another result of the unprecedented year we’ve had so far is the CARES Act, signed into law in April in response to the economic impact of COVID-19. While there were a lot of new provisions in this Act, there are two which we think are most applicable to 20 and 30-somethings (both of which as of now are only available in 2020):
- Employers may contribute up to $5,250 annually toward student loans, and the payments would be excluded from an employee’s income. Ask your employer about their policy on this.
- If you take the standard deduction (like most people), a charitable contribution of up to $300 is available. If you itemize, the limit on charitable contributions has been expanded to 100% of your adjusted gross income if you make a cash donation.
Setting Every Community Up for Retirement Enhancement (SECURE) Act:
Prior to 2020, if you inherited an IRA from a parent, you were able to withdraw a small required percentage annually, while the remaining funds continued to grow tax deferred. This was advantageous from a tax perspective because it allowed you to stretch income over several years and potentially lessened the tax bite. The SECURE Act eliminated this ability and now, you must deplete the inherited IRA within 10 years (with a few exceptions, found here). Not necessarily great news if you happen to inherit an IRA from your parents.
What is good news is that the SECURE Act also expanded 529 college savings plans to allow for payment of student loans. If you don’t already have one, you can open up a 529 in your name, contribute the amount you planned on paying in that year, and then distribute up to $10,000 in student loan payments. Many states offer state tax deductions for making 529 plan contributions so you could have an added state tax benefit for going this route. Here is a link to deductions available by state. You have until year-end to contribute for 2020 and this is something you should consider if you have children as well.
If you can, consider increasing retirement plan contributions – the maximum for 2020 is $19,500 for 401(k)/403(b) plans for everyone under age 50. It is one way to save for the future while reducing your taxable income.
If you haven’t already done so, now is a great time to share your tax return with your advisor. There are a lot of tax ramifications this year and you don’t want to miss out on opportunities to potentially lower taxes! If you don’t have an advisor, the team at Glassman Wealth would be happy to talk with you about your options.