Author: Nick Prigitano
Where does the time go? The year 2019 came and went, and we’re already two months into 2020! If you’re like many Americans, you’re busy gathering your tax documents to begin filing your tax return for last year. But before you finalize everything make sure you’re taking advantage of all that 2019 has to offer. There are still some tax moves you can make for last year, and make sure you’re capitalizing on every deduction you can!
Prior Year Contributions:
Although 2019 is over, you can still credit some retirement account contributions to 2019. You have until the tax filing deadline to do this which is April 15th for most. But for some states, like Massachusetts, the deadline is longer in some years (like 2018), due to the Patriot’s Day holiday. However, for tax year 2019 the filing deadline in Massachusetts is April 15th, not April 17th like last year.1 So, if you live in MA, be sure to finalize your return and finish any last-minute tax moves before then.
Both traditional and Roth IRA contributions can be made for 2019 before the tax filing deadline. This is not true for other retirement accounts like a 401k. If you did not max out your 401k for 2019 you are out of luck. However, for IRAs you can contribute $6,000 if under 50, and $7,000 if you were 50 or over in 2019, if you do so before 4/15/2020.
The key here is to make sure your investment company marks the contribution correctly as prior-year (2019). Most investment firms will code a contribution to the current year, 2020, by default. You likely will need to tell them, or check off a certain box, to designate it for 2019.
You also need to ensure you meet the eligibility requirements to make an IRA or Roth contribution. If you’re contributing for last year, the income limits to 2019 apply, not the increased limits for 2020.
In order to make a Roth IRA contribution you must have earned income, and your adjusted gross income (AGI), which is line 8b on the standard 1040 tax return, must be below $122,000 if filing Single or $193,000 if Joint to be able to make a full contribution.
If you want your traditional IRA contribution to be tax-deductible, there are a few rules to follow. If you are not covered by a retirement plan through work, there is no income threshold. Regardless of how much income you make you can take the deduction. However, if you are covered by a workplace retirement plan, like a 401k, your AGI must be below a certain amount in order to claim the deduction. In this case your AGI must be below $64,000 if filing Single or $103,000 if Joint. If you noticed, if you’re able to make a deductible IRA contribution your AGI is low enough to make a Roth instead. This also means that you are in a relatively low tax bracket and you may get a better future benefit by make a Roth contribution instead. Before you make a deductible IRA contribution, we would suggest speaking with a financial planner about the pros and cons of doing this.
If your income is above both the Roth contribution and deductible IRA contribution limits you may not be out of luck! You can instead make what’s called a non-deductible IRA contribution. In this scenario you would still contribute to a traditional IRA but would not receive any immediate tax benefit on your tax return for doing so. There are potentially good reasons for doing this. This is also something you should speak with a financial advisor or tax professional about before making the contribution (especially if you already have an IRA balance).
Health Savings Account
Another retirement account that allows for a prior year contribution is a Health Savings Account (HSA). These accounts are a financial planner’s dream. They offer triple tax benefits. Contributions are deductible, if invested they can grow tax deferred, and can be withdrawn tax-free for qualified medical expenses. They are the only current retirement account to offer the triple-tax benefit. In addition, the tax deduction does not phase out, regardless of your income.
The big question is, do you qualify? Note that you must have an HSA-eligible health plan in order to setup an HSA. If you are eligible to contribute to an HSA there is almost no reason not to contribute the maximum because of the incredible tax benefits. For 2019 those eligible to make a full contribution are allowed $3,500 if on an individual plan, and $7,000 if on a family. If you’re over age 55 (Not 50 like IRAs) you can make an additional $1,000 contribution. For a more thorough explanation of HSAs you can read our blog post on them.
Do you do any self-employed work?
When it comes to taxes, business owners, or those who do self-employed work on the side, they have it much harder. If you’re one of these individuals you need to keep meticulous records of not only your income, but also your expenses throughout the year. Now’s the time to make sure you don’t miss any obvious expenses that can reduce your business income. In today’s tech driven economy more and more people can do work on the side remotely, providing more opportunities to earn additional income. Here are a few things to look out for so you’re not paying extra tax on your self-employed income.
Track your mileage:
Most people don’t forget to expense the common business expenses like software and office supplies. However, what often gets overlooked is mileage for business. When you use your own car for business the miles you travel are a deductible business expense. It’s important to note that this only applies to miles driven for business, not the total number of miles you drive during the year.
If only a portion of your income comes from self-employed endeavors the easiest way to take a deduction is by using the IRS standard mileage rate. This number changes year to year, but any tax preparer software will have that updated automatically. For 2019 the IRS mileage rate is 58 cents a mile.2
If you didn’t keep good records last year, it’s going to be difficult to accurately report your business miles traveled. But 2020 is a new year with new opportunities. The wonders of technology make mileage tracking easier than ever. There are numerous apps that you can use which will keep track of mileage for you. You just need to go in and tell it to track before you start to travel. A few examples are Mileage Expense Log, MileIQ, or TripLog.
Do you use a home office?
As many self-employed people know, it’s much easier to get work done when you have a specifically designated area for working. It separates work and life and makes it easier to buckle down to get work done, and also transition out of the work day. That’s why it’s not uncommon to have a home office. If you do have a home office as a business owner you are allowed to deduct certain home expenses based on that area.
The IRS definition for whether a home office is eligible for deduction is “only if that portion is exclusively used on a regular basis for business purposes.” That’s why is crucial that a home office is separate and is not used for other purposes than for business. If this is the case, then you need to determine how large the room is, and possibly what percentage it is of your entire living space. Note that you can’t claim the home office deduction if you also rent office space.
The IRS provides two methods for calculating deductible expenses, the Simplified Option or the Regular Method. Which method you should use depends on the complexity of your situation. Items that you may be able to deduct as a portion for business purposes included: mortgage interest, real estate taxes, and depreciation. These calculations can get quite complex so we suggest working with a qualified tax preparer to ensure accuracy.
Qualified Business Income (QBI)
A new deduction that came out of the Tax Cuts and Jobs Act (TCJA) was the introduction of the Qualified Business Income Deduction (QBI). This deduction was designed for small business owners/self-employed persons to give them an additional deduction to reduce their business tax rates closer to the recently reduced corporate tax rates. The rules on who can claim the deduction and the calculation of the amount can be complex. However, these calculations typically only come into consideration if you’re earning a relatively high income. For simplicity purposes, we’ll discuss the deduction high-level.
The deduction is 20% of qualified business income which is generally the income you earn from your self-employed business less any adjustments (typically self-employed health insurance, self-employed retirement plan contributions, and self-employment taxes). The remainder income is eligible for this additional deduction assuming your total income is low enough. For 2019 the income limitations are $321,400 if filing Jointly and $160,700 for Single filers.
As an example, assume you earn $100k salary from work, also earn $13,000 from consulting and file Single. For simplicity, from your $13,000 of consulting you pay $3,000 of self-employment taxes and retirement. In this case your income is below the $160,700 threshold and you have $10,000 of QBI income ($13,000 - $3,000). Your $10,000 of QBI income is eligible for the 20% deduction ($2,000) from your total income.
There are many additional nuances to this deduction. You may still be able to take the deduction even if your income is higher than the above limits, but additional restrictions apply. For accurately reporting and calculating any QBI income and the deduction we suggest working with a financial planner or qualified tax professional.
Just because the calendar year has ended doesn’t mean there still aren’t things to consider on your 2019 tax return. Whether it is making a last-minute contribution to a retirement account, or ensuring none of your eligible deductions slip through the cracks there is a lot to think about. While you can’t go back and make-up contributions you’ve missed beyond last year, you can amend tax returns for up to three years. If you missed the QBI deduction or substantial business expenses you may have an opportunity to correct it. Working with a qualified tax preparer or financial planner can help ensure you don’t miss anything this year or help fix past mistakes.