Financial Tune Up – How to Review Your 2020 Tax Return

Our topic on this episode of the Ready for Retirement podcast is part one of the financial tune-up series: How to Review Your 2020 Tax Return.

Questions answered: What does my 2020 Tax Return tell me about how best to manage my financial situation? What tax planning strategies can I implement to improve my financial future? What is the best approach for my individual situation? 

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Checklist: What Issues Should I Consider When Reviewing My 2020 Tax Return

Key Points

• This episode is Part 1 of a 4-Part Mini Series.
• Standard Deduction v. Itemized Deduction
  • Standard Deduction for Single filer is $12,400 and $24,800 for those MFJ (Married Filing Jointly).
    • If you chose the Standard Deduction in 2020 and made cash contributions to qualifying charities, you can deduct up to $300, even if you didn’t itemize your deductions.
    • Review the Tax Form 1040, line 10b.
  • If you are married and need to protect yourself against liability, have a large disparity between each spouse’s income, or if one spouse has large itemized deductions, you may want to consider filing jointly, and filing separately.
    • To determine what’s best for you, you can compare the net tax liability of each scenario.
      • Filing MFJ is often the best way, but in certain scenarios MFS (Married Filing Separately) can actually decrease your tax bill.
• Are you recently divorced or has your spouse passed away?
  • Review your filing status at the top of Form 1040. 
    • If you’re divorced and the divorce is finalized before the end of the year, you cannot file MFJ (Married Filing Jointly).
    • If your spouse passes away during the year, you can file MFJ in the year that your spouse passed away.
      • Example: If your spouse passes away in April, you can still file MFJ if your spouse is no longer living by the end of the year.
    • If you entered into a divorce after January 1st, 2019, Alimony is not deductible by the payer or taxable to the recipient.
      • If your divorce agreement was entered after January 1st, 2019 and you were paying Alimony, it is no longer deductible and if you’re receiving Alimony, it is no longer taxable to you. 
        • This presents a tax planning opportunity to those who are receiving Alimony. 
• Were you eligible for economic impact payments in 2020 without receiving the full amount?
  • You can claim the recovery rebate payment on Form 1040, line 30. 
• Did you pay any AMT (Alternative Minimum Tax)?
  • This can be found on Form 6251.
  • If so, look at strategies that reduce AMT.
    • Strategies include minimizing large capital gains or harvesting losses.
      • Can you sell losses and purchase investments that are very similar, but not the same, to use the losses to offset some of the income.
    • If you paid a significant amount of AMT in 2019, view Form 88018801 to see if you received a credit that can be applied to the next year.
• Are you and your spouse 65 or older?
  • If so, you qualify for a higher standard deduction.
    • Standard Deduction for Single filer is $12,400 and $24,800 for those MFJ (Married Filing Jointly).
    • If you or your spouse are over age 65, you receive an additional $1,300 you can deduct and if both you and your spouse are over age 65, you receive an additional $2,600.
• Did you fail to withhold enough taxes or underpay on the estimated payments?
  • If so, review Form 2210 and Form 1040, line 38 to view the penalty amount. 
    • The IRS will penalize you if you fail to withhold the correct amount. 
    • Ensure you’re making sufficient tax payments to avoid potential penalties.
• Investment Income – is there any interest/dividends being reported?
  • Interest being reported will be shown on Form 1040, line 2a & 2b.
  • Dividends being reported will be on Form 1040, 3a & 3b. 
    • If there are values on these lines, view your Schedule B.
      • This will show you which of your accounts are generating income and whether or not the interest is taxable or tax-exempt and which of the dividends are ordinary dividends v. qualified dividends. 
• Modified Adjusted Gross Income
  • Is your MAGI above $200,000 (Single) or $250,00 (MFJ) and do you have significant NII (Net Investment Income)?
    • Net Investment Income can be found on Form 8960.
    • If your MAGI is above these thresholds, any income on Capital Gains, Interest, Distributions, etc. is subject to the NII, which is an additional 3.8% tax in addition to Federal & State taxes.
• Did you have any capital gains/losses?
  • This can be viewed on Form 1040, line 7.
    • If you had capital gains/losses, view Schedule D, line 13 to view your Capital Gain Distributions.
      • Schedule D, line 14 & 16 will show you short-term and long-term carryovers.
      • $3,000 of losses can be offset against ordinary income.
• Retirement Plan Issues
  • Did you reach your required begin date or do you have an Inherited IRA?
    • The CARES ACT in 2020 waived all RMDs (Required Minimum Distributions).
      • If you did not take a distribution in 2020, you are not subject to a penalty.
      • In 2021, you will be subject to RMDs if you’ve reached your required begin date or have an Inherited IRA.
• Are you at least age 70 ½ and complete a QCD (Qualified Charitable Distribution)?
  • You can send up to $100,000 from your IRA to a charity of your choice, which avoids taxes on that money.
    • This amount should be included on Form 1040, line 4b.
• Did you ever make a non-deductible IRA contribution?
  • When you do a Roth Conversion, you make a contribution to a non-deductible IRA and then convert it.
    • If you did this, ensure you formed Form 8606.
      • Ensure you’re tracking the cost basis so when you convert or take a distribution, you’re not paying any additional amounts on taxes.
• Did you withdraw any funds from an IRA that hold after-tax contributions?
  • If so, check Form 8606 to ensure taxable/non-taxable distribution was calculated correctly.
• Did you convert amounts from an IRA to a Roth IRA?
  • If so, check Form 8606 to ensure any non-deductible distributions are treated as non-taxable.
• Did you move money from a 401(k) to an IRA?
  • Ensure the 401(k) rollover was treated as a rollover and not a distribution by verifying Form 1040, line 4a shows the amount of the distribution and line 4b shows “0” to ensure there was no distribution.
  • If you took a distribution from another account throughout the year, that would also show up on Form 1040, line 4b.
• Did you take any non-qualified distributions from a 529 plan?
  • If so, file Form 5329 to calculate the penalty which will carryover to Schedule 2, line 6 to help determine how much is taxable.
• Did you have any large medical expenses?
  • If so, view Schedule A, line 1.
    • Reminder: You can only deduct medical expenses in excess of a certain % of your income.
      • Any income in excess of 7.5% of your Adjusted Gross Income can be deductible depending on age and other factors.
      • Be sure to count Medicare Premiums & Long-Term Care Premiums.
• Are there any state benefits you’re taking advantage of?
  • For example, certain states don’t tax Social Security (ex: California).
• Do you own any rental real estate?
  • If so, review Schedule E to see expenses deducted.
    • This is where Mortgage Interest would be listed (not Schedule A).

Checklist: What Issues Should I Consider When Reviewing My 2020 Tax Return

Timestamps

1:44 – Introduction

3:20- Standard v. Itemized Deductions

7:00 – Alimony

8:49 – Alternative Minimum Tax (AMT)

9:22 – Standard Deduction (if over age 65)

13:16 – Net Investment Income

17:25 – Cost Basis

21:19 – Rental Real Estate

22:00 – Aligning Your Investments With Your Financial Goals

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