In this episode Evan Shorten and Elean Mendoza discuss a few important considerations to keep mind as you prepare to file your 2020 taxes.
Intro
Welcome to the Paragon Podcast. A podcast focusing on the needs of high net-worth individuals and their families. We discuss the markets, tax strategies, and how to better manage wealth with the goal of living better for today while planning for tomorrow.
Elean
Hello and welcome to the Paragon Podcast. I’m Elean Mendoza and I’m here with Evan Shorten, the firm’s founder and principal.
Evan
Hello, this is Evan. I want to thank you for listening to the podcast and I encourage you to subscribe on Youtube, the Apple Podcasts App, or Stitcher Radio on Android. If you would like to learn more about our firm, you can visit us at paragonfinancialpartners.com.
Elean
So it’s the middle of February and that can mean only one thing – we are officially in tax season and it’s time to start gathering all your tax forms. By this point, you should have been issued your W-2 by your employer; your 1099 brokerage statements should be available; and if you receive income as part of a partnership, your K-1 should hopefully be arriving by March 15th, but be aware some partnerships may push the envelope to the tax deadline. An important item you want to pay especially close attention to is your tax-loss information which should be listed in your brokerage’s 1099 statements.
Evan
If you work with an advisor and you have trouble finding some of these statements, they may be able to provide you your 1099s for any accounts they manage directly.
Elean
Ok, so let’s first discuss tax-loss carry forward. While many people understand the basics of it, there are still some nuanced financial planning strategies around it that I don’t think get a lot of attention.
Evan
The basic premise of a tax-loss carry forward is, if you itemize your tax return it helps with reducing your future capital gains. Essentially we want to offset as many capital gains with capital losses in order to reduce our capital gains tax liability. The great thing about tax-loss carry forward is that any unused losses from previous years can be used to offset capital gains in the current tax year, regardless of how old or how far back those unused tax-losses are from.
Elean
Also, to learn more about capital gains, losses, and tax-loss harvesting in more detail, please have a listen to our last podcast episode were we discussed that very topic. If you’re listening on YouTube we’ll include a link to that episode in the description of the video. Otherwise, you should be able to find the episode in the episodes list of whichever podcast app you’re listening on.
Evan
Another component of tax-loss carry forward is that it can help you reduce up to $3,000 of ordinary income if you have more capital losses than capital gains. Where this gets interesting from a financial planning standpoint, and you alluded to this earlier, is it could help you with managing your Medicare Part B premium. To put it simply, similar to how a tax brackets determine your federal income tax rate, there are also tax brackets that determine your Medicare Part B premium and we can take advantage of unused tax-loss carry forwards to help stay within a tax bracket or possibly move you move down a bracket.
I also want to mention one last thing relating to tax-losses. If you itemize your taxes you have the ability to carry your tax-losses forward into future years. If you take the standard deduction, you don’t have that ability, but you can still deduct up to $3,000 of ordinary income using any excess capital losses you realized during this tax filing year.
Further for 2020, if you do take the standard deduction and you’re trying to find other ways to lower your income, the CARES Act allows your household to deduct $300 for charitable giving. That’s a one-time deduction specific to the 2020 tax year.
Elean
Ok, another item to touch on with respects to tax season is retirement account contributions. If you contribute to a traditional IRA or Roth IRA, you can still make your full 2020 contribution up until the April 15th tax deadline. For the year 2020, you can contribute a maximum of $6,000 to a traditional or Roth IRA and if you’re age 50 or older, you can contribute up to $7,000; and don’t forget, if you contribute to a traditional IRA you can deduct that contribution from your income to help you lower your taxable income.
If you’re self-employed or own your own business, you have a few more options available to you.
Evan
Yes, for example, if you contribute to a SEP-IRA or a profit-sharing plan, you can contribute up to 25% of your income or $57,000 – whichever is the lesser amount. There are also other retirement options, contribution limits, and deadlines for those who own their own business. Those accounts may range from defined benefit pension plans, I401k plans, and SIMPLE IRA, but for those types of accounts we highly suggest you consult your financial advisor or tax accountant.
While we’re on the topic of self-employed business owners. I also want to briefly clarify some confusion around the home office deduction. Essentially, self-employed individuals, independent contractors, and gig economy workers who use part of their home for business may be able to deduct expenses for the business use of their home – and it doesn’t matter whether you own or rent. If your employer has given you the ability to work from home during the pandemic, unfortunately you do not qualify for the home office deduction. So to reiterate, it only applies to self-employed individuals, independent contractors, and gig economy workers.
Elean
Let’s also quickly talk about medical deductions. If you itemize your deductions and your qualified unreimbursed medical expenses exceed 7.5% of your adjusted gross income, you can deduct the amount that exceeds 7.5%.
Evan
And the two keywords here are “unreimbursed” and “qualified.” Unreimbursed is pretty self-explanatory. It’s the amount not covered or reimbursed by your insurance or other health benefits you might receive. The other keyword, “qualified”, has a lot of flexibility. Qualified expenses broadly range from acupuncture to X-rays, caregivers, prescription drugs, glasses, contacts, hearings aids and so on. Additionally, you can also deduct expenses you pay when you travel for medical care such as your mileage and parking fees. For a detailed list, I encourage you to visit the IRS website.
Lastly, I also want to mention one other thing that can make tax season a little easier for you. If you work with several professionals to help manage your finances such as a tax accountant, a financial advisor, a bookkeeper, and so on. You should consider introducing them to each other as they can work together with compiling your information, documents, and keeping track of your records.
Elean
Yes that’s a great point. It’s often times a lot easier for us to ask a client’s accountant for tax information than it is to have a client have to go dig it up themselves.
With that, I want to thank everyone for listening to the Paragon Podcast. If you have any questions about the topics we cover or would like to discuss your specific situation, you can always reach us at [email protected].
Evan
Yes. Thank you for listening and please subscribe to our Podcast on Youtube, the Apple podcasts App, or Stitcher Radio. Until next time. Bye.
