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Money and Your Goals

Tax Planning 2020: Behind the Headlines

Be sure to investigate these and other key tax-code developments as the filing deadline nears.

Thanks to the IRS's postponement of the personal-tax filing deadline to July 15, you'll now have a little more time to better understand some of the tax-code updates that can work in your favor. Many of these have occurred since last tax season – and not all of them are Covid-19-related.

As part of tax-code revisions enacted in 2018, the IRS is making annual tax-bracket adjustments and increases to the standard deduction to maintain the impact of any tax reductions. So for example, a married couple, filing jointly for Tax Year 2018 with a total income of $168,000 who were in the 24% tax bracket, are now at 22%. Similar across-the-board adjustments are already on tap for April 2021 filings. The upshot: Keep track of these extra savings and consider how they can contribute to your financial plan.

2019: A Focus on Retirement Funds

Those approaching retirement should keep tabs on retirement-account changes made in 2019 through the Setting Every Community Up for Retirement Enhancement (SECURE) Act, effective as of Jan. 1, 2020. Key changes impact when and how you can contribute and withdraw money from pre-tax funds in IRAs and 401(k) accounts. In addition, new guidelines change the requirements for beneficiaries' account withdrawals.

With these changes also comes increased flexibility: Since the age for starting Required Minimum Distributions (RMDs) is now 72 years of age (it was formerly 70 ½), your investments have more time to appreciate (if market conditions are favorable). You can now also continue working, and still make account contribution to your traditional IRA as you always have. However, a key downside of the SECURE Act is a new restriction that requires heirs of pre-tax retirement accounts to generally withdraw the account assets within 10 years (instead of based on their life expectancy). Given this last revision, you may want to confer with your financial professional and attorney to talk about investment alternatives that better support your estate plan goals.

Here & Now: Comprehensive Coronavirus Relief

If you've lost your job or experience other economic hardships as a direct result of the current downturn, the Coronavirus Aid, Relief, and Economic Security Act (CARES) can help.

Tax-related provisions in this estimated $2.3 trillion relief package offer an extended list of penalty-free and/or tax-deferred retirement-account withdrawals up to $100,000 for those experiencing hardships.

Commenting on the hardship provision, Todd Yeiter, Thrivent's Director of Product and Advice Consulting, says:

"It may seem like a great idea at first to spread that tax out. But due to possible changes in tax brackets down the road, it may make sense to pay it off in the first year, in the event that taxes rise." 

Talk with your financial professional and your accountant before making any moves, to ensure that you're using this CARES provision to your best advantage.

What Lies Ahead

Financial professional and CPA Debra Taylor echoes Yeiter's concern about potentially higher taxes to come: "The CARES Act is creating a $2 trillion-plus addition to the Federal deficit, and taxes may be filling part of that gap."

To avoid having your future retirement withdrawals being taxed at those higher rates, Taylor suggests converting traditional IRAs and other pre-tax accounts into Roth IRAs, to avoid paying higher taxes, while also shielding heirs from any increased tax burden.

These and other top-line changes, while affecting your tax filing this year and into the future, also come with deeper potential impacts on your overall financial vision, including retirement and estate planning, and even day-to-day cashflow. Be sure to consult with your tax professional about your current tax obligations and discuss with your financial professional the ways you can optimize your tax picture going forward. Thrivent's "What If" software can aid that conversation, by plotting out various income and investment scenarios and their tax consequences.

Ready, Set, File

Have these documents and information ready for your accountant:

    • Income from all sources. This goes well beyond your W-2 or 1099 freelance income above $600, to include proceeds from:
      • Interest on cash accounts
      • Capital gains on investments
      • Investment-property income
      • Alimony
      • Social Security payments
      • Jury duty
      • Gaming proceeds

(And don't forget payments for services rendered via virtual exchanges like PayPal or Venmo.)

    • Expenses include:
      • Property taxes
      • Medican bills*
      • Child care costs
      • Tuition and related educational expenses
      • Retirement plan contributions
      • Interest on mortgage and student loans
      • Chartiable contributions*
*Exceeding the standard deductions.

Visit Thrivent's Tax Resource Center for more useful income-tax filing tips.

Some Things Remain the Same

The IRS reports that nine out of ten taxpayers who are due a refund and file electronically will receive it in 21 days or less. And if you can't file on July 15 for any reason, the Oct. 15 extension still applies. Be sure to apply in advance – and be prepared to pay the interest accrued since July 15 on any payment due.