Planning for 2020 Taxes
If you are expecting a refund with your July 15th filing for 2019 taxes, consider applying it towards your 1st and 2nd quarterly estimated payments for 2020. This action could increase your cash flow, so you would not need to pay until the third and fourth quarter estimates are due.
July 15th – the deadline for filing 2019 taxes and the first and second quarter of 2020’s federal estimated payments – is less than 30 days away! Decisions made today can significantly affect your current cash flow and 2020 tax liability. It is imperative that you speak to both your accountant and financial advisor in order to plan appropriately.
Send in your 2019 tax documents as soon as possible and begin exploring options for reducing your 2020 liability. Your accountant can assess your financial situation to help manage your cash flow and tax liability during this particularly turbulent time.
Both state and federal governments have delayed filing dates to ease financial stress during this time. The following changes will not incur interest or penalties due to the delay:
- Federal income tax normally due on April 15, 2020, is now due July 15, 2020.
- Connecticut, New Jersey, and New York state income tax, normally due on April 15, 2020, is now due July 15, 2020.
- Federal 1st quarter estimated payments, normally due on April 15, 2020, have been moved to July 15, 2020. Additionally, the 2nd quarter estimate has recently been changed from being due June 15, 2020, to July 15, 2020.
- Connecticut 1st and 2nd quarter estimates, normally due April 15, 2020, and June 15, 2020, respectively, have both been moved to July 15, 2020.
- New Jersey 1st quarter estimate, normally due April 15, 2020, has been moved to July 15, 2020.
- New Jersey 2nd quarter estimate due June 15, 2020, has remained unchanged.
- New York 1st quarter estimate, normally due April 15, 2020, has been changed to June 15, 2020.
- New York 2nd quarter estimate, normally due June 15, 2020, is now due July 15, 2020.
- Contributions made to IRAs and HSAs (health savings accounts) by July 15, 2020 can be counted for 2019 tax year purposes.
Individuals needing additional time can apply for a filing extension until October 15, 2020, but will still need to estimate and pay 2019 taxes by July 15th to avoid penalties.
Managing Retirement Accounts
Recent pandemic-related legislation offers opportunities to reduce 2020 tax liability. Consult both your financial advisor and tax accountant to develop a personal strategy.
- RMDs – The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) waived 2020 RMDs (required minimum distributions) for retirement accounts. In addition, The SECURE Act, passed last December, established 72 as the new age when individuals must begin taking RMDs. The longer investments remain in retirement accounts, the longer they can grow, tax-free. Delaying RMDs also protects you from “locking in” losses in unsettled markets.
- IRA withdrawals – If you, your spouse, or a dependent has been diagnosed with COVID-19, or you have experienced financial harm due to the pandemic, you can receive favorable tax treatment for withdrawals from your retirement fund from January 1–December 31, 2020.
- Individuals under 59 ½ will not be charged a 10% early withdrawal fee for 2020 distributions.
- For three years from the day following withdrawal, the sum can be “repaid” to the retirement account and treated as a tax-free rollover.
- Withdrawals that are not repaid become taxable over three years, beginning in 2020.
Strategies for Volatile Markets
Consult both your financial advisor and tax accountant to develop a personal strategy in light of recent market gyrations.
- Roth conversions – If your investment portfolio has suffered losses, you may want to consider converting a retirement account to a Roth IRA. That would mean paying tax today on the reduced assets, which could then grow tax-free, with no subsequent RMDs and no tax liability upon withdrawal.
- Tax loss harvesting – Given the recent poor market performance, you may want to evaluate selling securities at a loss to offset capital gains.
- Lifetime gifting – Gift taxes are assessed based on worth as of the date of the gift, so there may be benefits to giving away assets that have recently lost value. Gifting throughout life reduces estate tax at time of death.