Hello, October!
You’re always welcome at my house. I love your cooler temperatures that let me open windows and doors and put an end to exorbitant air conditioning costs.
I love the color changes of trees and shrubs.
And I love the candy that I accidentally (really!) over-buy in preparation for the young ghouls and goblins that knock on our front door each Oct. 31.
I suspect I’m not alone in appreciating the arrival of autumn. But amid all these annual fall festivities, we need to make at least a few tax moves that could help out our upcoming tax bill and/or help us more tax-efficiently cover some usual costs.
Here are six October tax moves to consider.
1. File your extended return: You have two seeks to finish up your Form 1040 and get it to the Internal Revenue Service. Miss this deadline and the tax agency will start tacking on late-filing penalties. And if you didn’t pay enough when you filed for extension months ago, penalties and interest on the due tax balance are accruing.
Remember that the IRS/Free File Alliance partnership of Free File is still available. You can use this no-cost online tax prep and e-filing method as long as your adjusted gross income is $69,000 or less.
| Extraordinary Events Mean Even More Time to File Some taxpayers get additional days to finish up their tax returns, but the situations that allow this added time are far from ideal. Members of the military serving in combat zones can get an extra 180 days from their last day in those dangerous areas to file their tax returns. You can get more information at the IRS web page on combat zone service extended deadlines and IRS Publication 3, Armed Forces Guide to Taxes. People who’ve been through a major disaster also usually are provided extra time to file. That’s the case now for individuals and business owners in the wakes of:Iowa derecho — extended returns due by Dec. 15California wildfires — extended returns due by Dec. 15Louisiana areas hit by Hurricane Laura — extended returns due by Dec. 31Oregon wildfires — extended returns due Jan. 15, 2021Alabama areas hit by Hurricane Sally — extended returns due Jan. 15, 2021 Taxpayers affected by natural disasters can find more in IRS Publication 547, the IRS web page Tax Relief in Disaster Situations special web page (click on the 2020 link for latest disaster/tax news) and the ol’ blog’s special Storm Warnings collection. |
2. Review your flexible spending account: Medical issues have been on most people’s minds due to COVID-19 and its physical and emotional stresses. If you went to the doctor more than usual, either in person or via a tele-med exam, you probably used up more of your medical flexible spending account (FSA). Take a look at how much you have left and what the rest of this year’s paycheck contributions to your FSA will mean for its balance. It could affect discretionary health moves you make the rest of the year. If on the other hand you have a large FSA sum, it’s time to start thinking about how to spend that sucker down so that you don’t forfeit the money.
3. Examine your investments: The markets have been on some wild rides this year. While you have until the end of the tax year to make moves that could help reduce your 2020 bill, it’s always better to do so earlier. That way you won’t have to make any hurried decisions to beat the Dec. 31 deadline. A review now also will give you time to implement strategies. Even if you don’t execute any transactions right now, you’ll have idea of what assets you want to keep and which should go and what their tax implications might be.
If you sell assets you’ve owned for more that year, you’ll owe tax on the profits at a lower long-term capital gains rate. You can offset any gains (and taxes) by selling poorly performing stocks and taking the loss. Again, such financial moves are not to be made lightly or in haste. And while taxes are an important factor, they should be the sole or predominant reasons behind your investment plans.
4. Put money into a 529 plan: Despite the coronavirus pandemic, schools at all levels have resumed in some form. And colleges are still charging plenty even for online or hybrid remote/in-person classes. Since that’s on your mind, why not set aside some for future higher education semesters in a 529 plan(s) for your youngster(s).College is definitely different this year as students adjust to learning during the COVID-19 pandemic. (Photo by Gustavo Fring via Pexels.com)
You won’t get any immediate federal tax break for contributions to these college educational savings vehicles, but some states do offer tax deductions to their residents. The main appeals of 529s, though, are that the money grows tax-free and what you do eventually withdraw to pay eligible college costs also is nontaxable.
5. Adjust your withholding: If you were able to continue working after COVID-19 consumed our lives, great! But even if your life didn’t change that much, it’s still a good idea to look at how much in taxes is coming out of your paychecks. If you’re overwithholding, it could be a good idea to give your employer a new W-4 so you’ll get more cash each pay period. You can use that money to set up an emergency savings account, just in case we have a phase 2 coronavirus wave and you need money to meet unexpected expenses.
If you were furloughed because of COVID-19 then rehired, you also should look at refining your withholding, especially if you got some gig jobs in between to tide you over. You’ll owe taxes on that money. You can cover that IRS debt by making estimated tax payments or by increasing your withholding at your salaried job to cover your freelance earnings.
6. Contribute to, or open, a self-employed retirement account: Speaking of those side hustles that got you through COVID-created salary reductions, you must pay tax on these self-employment earnings. But you also can put some of that money into a separate retirement plan. A SEP, or Simplified Employee Pension, plan via an IRA is an easy one to establish. And if you got an extension to file your return, before you send in that Form 1040 (and Schedule C for your gig earnings) take time to contribute to or establish a self-employed retirement plan. Unlike IRAs, you have until your filing deadline, including extensions, to put money into (or even open) these nest eggs.
There’s also an immediate tax benefit. Contributions to self-employed retirement plans are an above-the-line deduction, which lowers your gross income and eventual taxable income. I don’t know about you, but I much prefer putting money into accounts for me instead of sending more tax dollars to the U.S. Treasury.
More October tax moves: If any of these actions fit your personal tax and financial situations, take advantage of them this month.
They, along with more October Tax Moves I’ll be posting shortly — I’m running a bit slow on this first day of 2020’s final quarter — over in their regular place in the ol’ blog’s right column could help lower your upcoming tax bill or provide tax-favored ways to enhance your future financial foundation.
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