Well, unless something major has happened since I sat down to write this column, for once, things seem pretty calm tax wise. There is the annual concern over various provisions which are phasing in or phasing out, and the matter of indexed adjustments to the wages/earnings subject to social security or self-employment taxes, but no drastic overhauls of the tax code which we have seen in prior years. So, with that caveat, we can look at more pragmatic ways to reduce taxes for both 2019 and 2020.
Itemizing just got a little easier for people with medical deductions. The floor for deducting medical deductions as an itemized deduction was scheduled to increase from 7.5 percent of your adjusted gross income (AGI) in 2019 to 10 percent for 2020. That would have been a 33 percent increase in the threshold. Extender legislation signed on December 20, 2019, keeps the 7.5 percent threshold. If your AGI is $100,000, then you will have to have more than $7,500 in medical deductions to deduct them in 2019 and 2020 after the extender bill’s enactment. Even then, that deduction, plus your other deductions, must exceed $24,800 for married filing joint tax filers and $12,400 for single individuals. As always, only the medical expenses in excess of the 7.5 percent limit are deductible.
With reference to IRA and retirement plan contributions, you have until April 15, 2020, to make a contribution to your IRA and still get the deduction for 2019. That goes for Roth IRA’s as well. A Roth IRA must be established by April 15th in order to make a contribution for the prior year, and the contribution also has to be made by that date. Also, note that the maximum amount you can put into an IRA has increased to $6,000 in 2019. If you are over 50, the maximum amount is increased by the $1,000 catch-up contribution or a total of $7,000.
If you are self-employed, you can establish a different type of retirement plan known as a SEP-IRA. For SEP-IRA’s, not only can you set them up by October 15, 2020, which is the extended due date for filing your 2019 1040, but you also have until that date to make a contribution to the plan and deduct it on your 2019 tax return!
Note that if you are making a contribution for the prior year to any retirement plan, whether or not it is a contribution to a SEP-IRA, or a traditional IRA, you must designate that the contribution is for that prior year. Otherwise it will be counted as a current year contribution for 2020 and not be deductible on your 2019 tax return.
The same rules apply for those of you contributing to your Roth IRA in 2020 but for the 2019 tax year. Roth contributions must be made before April 15, 2020, in order to count for the 2019 tax year. While you don’t get a deduction for your Roth contribution regardless when it is made, if you miss doing one by the above due date, you lose the ability to make a Roth contribution for that year.
An often overlooked deduction may be your Health Savings Account (HSA). For individual coverage the limit for those with qualifying high deductible health insurance policies is $3,500 (up by $50 from 2018) and the deduction for those with qualifying family coverage will increase to $7,000 (up by $100 from 2018). If you haven’t made the maximum contribution to your HSA yet, you have until April 15, 2020, to do so. Be sure you designate it as a contribution for the prior year. If you are 55 or older and not enrolled in Medicare, you can do a catch-up HSA contribution of $1,000 in addition to the above limits.
As always, there are numerous rules which may affect your implementation of any of the topics covered in this column, and also as noted, Congress has a sneaky way of passing law changes at the drop of a hat, so please do your research or contact your tax advisor before undertaking any of the strategies mentioned here.