Gifts From the IRS: Breathing Room and IRA Opportunity

The IRS is giving individual taxpayers an extra month to file 2020 tax returns and make payments — and the extended deadline means you have additional time to make IRA contributions.

Citing the complexities arising from the coronavirus pandemic and government stimulus payments, the IRS announced that the April 15 filing deadline has been moved to May 17. While the change provides breathing room for individual taxpayers, including those who pay self-employment tax, the April 15 deadline still applies for the first-quarter 2021 estimated tax payments that small-business owners may owe. 

According to the IRS, there is nothing stopping taxpayers, including those who are owed refunds, from filing early. The IRS delay does not affect state tax-return deadlines. Although California and other states like New Jersey and Wisconsin have elected to follow the IRS’s lead. Click here to see which states have extended their filing deadlines. Besides, Texas, Oklahoma, and Louisiana residents still have until June 15 to file their taxes due to a previous extension the IRS granted following the February winter storms. 

This marks the second time during the coronavirus pandemic that the IRS has delayed tax deadlines nationwide; last year’s delay was three months. Accountants and lawmakers had recently pushed the IRS for additional filing time, citing households’ pandemic-related hardships and complications arising from the government’s efforts to help. For example, the $1.9 trillion stimulus bill, signed just days ago, provides taxpayers with a new exemption on up to $10,200 of jobless benefits. If you have already filed your 2020 taxes, the IRS will automatically process refunds of taxes paid on those benefits. But it may still be worth checking in with your accountant to make sure you haven’t left money on the table.

Now about the opportunity: 

IRA account holders who have not already reached their 2020 contribution limit ($6,000 per person; people over age 50 can add a $1,000 catch-up contribution) are eligible to add funds up until the filing deadline. If you expect to have extra money from the recent stimulus payments and have not maxed out your IRA, the universe may be sending you a message.

The opportunity does not extend to 401(k) plans and most other similar retirement plans. Whose tax benefits only extend to the end of the calendar year.

By the way, the filing deadline delay also means. That you have until May 17 to contribute to a health savings account for the 2020 tax year. The contribution limits for 2020: $3,550 for an individual HSA owner and $7,100 for a family. Those age 55 or older can contribute an additional $1,000.

As we noted in a recent blog, IRA contributions are a smart way to both minimize your 2020 taxable income and help you build long-term wealth. Contributions to traditional IRAs are tax-deferred, so each dollar you add reduces your taxable income. Investment gains within your IRA are tax-free, and distributions during your retirement years are taxed as ordinary income. 

But if you have extra cash, perhaps from the stimulus, don’t rule out contributing to a Roth IRA. Roth contributions don’t reduce your taxable income, but funds in the accounts grow and are ultimately distributed tax-free. In general, those who believe their tax rate may be higher in the future should consider it. Roth IRAs and Roth 401(k)s.

Traditional IRAs can be converted to Roths, but the process triggers taxes. This brings us back to the current round of stimulus checks. If you’ve wanted to do a Roth conversion but have been wary of the tax hit. Your stimulus check may help you offset it. 

As always, check-in with your financial advisor before making a Roth conversion or making any other significant financial decision.