To prepare for tax filing season, there are several things you should take into consideration.
Gather your tax forms and documents well in advance of the April filing deadline.
Most tax forms are available from employers, schools and financial institutions in January and February. You can use your prior year tax return as a guide to determine which tax documents to gather. If you have experienced any changes in your tax situation since last year, you may have additional documents that need to be included in your 2020 tax return. If you have not received an anticipated tax document by the end of February, call the provider to ask for a replacement.
Check your payroll withholding and estimated tax payments.
Throughout the year and during major life events (such as marriage, retirement or a change in income), it is important to check the amount being withheld for Federal and state taxes to ensure that your tax liability will be covered. Not withholding enough from wages or retirement income can lead to a larger, and sometimes unexpected, tax bill. Additionally, underpayment penalties and interest may be assessed by the IRS. Withholding too much tax puts your funds on hold until your tax refund is received, resulting in potentially missed investment opportunities. To change your withholding elections, submit a new W-4 form to your employer or financial institution.
The same goes for paying quarterly estimated taxes. Consult your tax advisor to ensure that enough tax is being paid in quarterly to avoid a large bill and underpayment penalties and interest at tax time.
File your return, or an extension, by the April 15th tax deadline.
Filing your tax return and paying the balance due on time is very important in order to avoid late filing and late payment penalties (and a pile of tax notices). If you cannot file on time you may request a 6-month extension of time to file, which extends the filing due date for Form 1040 until October 15th.
It is also very important to pay the balance due on time. If you are requesting an extension for your tax return, please note that an extension of time to file is not an extension of time to pay. Make your best estimate of the tax due and remit payment with your extension request.
The IRS offers several options for making payments, including paying online through EFPTS, credit card or bank account debit. Same-day wire, electronic funds withdrawal (during e-filing), check or money orders are also available options. If you cannot meet your tax obligation, a payment plan can be requested by contacting the IRS. Please visit the IRS’ payment website for more information: www.irs.gov/payments.
Required Minimum Distributions.
Upon reaching the required beginning age, owners of IRA accounts and retirement plans are generally required to take a required minimum distribution (RMD) each year. For tax year 2020, no RMDs were required due to the ongoing coronavirus pandemic, as provided for in the CARES Act. Unless further legislation is passed, RMDs will be required for tax year 2021.
Please note that under the SECURE Act passed in late December 2019, the required beginning age changed from age 70½ to age 72, for those who had not reached the required beginning age before January 1, 2020.
If you are charitably-inclined and have reached age 70 ½, you may make distributions directly to charity out of your IRA account without creating additional taxable income. The maximum amount that can be donated to charity from your IRA is $100,000 per year, per taxpayer. Upon reaching age 72, charitable IRA distributions can also help satisfy your RMD requirements in a tax-free manner.
Please consult your team of advisors for more information on planning for RMDs.