With the coronavirus pandemic still raging on, taxes might not be on the top of your mind. However, this might be the best time to look for financial benefits that can ease some of your burdens during these challenging times.
The coronavirus crisis has impacted our financial institutions and the IRS as well. That is why it’s important to be aware of the changed scenario. These three tax steps shared by The Motley Fool talks about the key financial and tax changes caused due to COVID-19 and how you can navigate them.
“1. File your 2019 taxes ASAP
“If you have all of your tax documents at your disposal, the sooner you submit your return, the sooner you’ll get the refund you may be due. And if you’re not owed a refund, the sooner you know how much tax you owe, the sooner you can come up with a plan for how you’ll tackle that debt.
Incidentally, you may need to wait longer than usual this year to collect a tax refund. Because the IRS is unable to process paper returns due to COVID-19-related adjustments in operation and staff, anyone who files on paper is due for a long wait. But even electronically filed returns are seeing refund delays, so if you expect money back from the IRS, don’t wait until July to ask for it.
2. Take losses strategically
Though the stock market has, as of this writing, recovered some of the COVID-19-related losses it took earlier in the year, a lot of portfolio values are still down. Selling investments in a panic is not a good idea, as doing means locking in losses. But if you have a specific investment in your portfolio you were thinking of getting rid of anyway, unloading it while it’s down could help you reap some savings for the current tax year.
Any time you sell an investment at a loss, you can use that loss to offset capital gains. And if you’re left with an excess loss on your hands once your capital gains have been offset, that excess can offset up to $3,000 of your ordinary income, and anything beyond that can be carried to a future tax year. As such, if there’s an investment you were thinking of dumping before the COVID-19 crisis took hold, you might as well pull the trigger.
3. Boost your retirement plan contributions if you can
The more money you sock away in a traditional IRA or 401(k), the more of your income you shield from the IRS. Now to be clear, now’s not the time for everyone to ramp up retirement plan contributions. If your income has taken a hit due to COVID-19, or you have specific financial concerns that make padding your near-term savings crucial, then your IRA or 401(k) shouldn’t monopolize what income you have coming in. But if your paycheck has been holding steady, and you’re spending less than usual because you’re not commuting or venturing out much, then you have a real opportunity to not only brighten your retirement prospects, but also, lower your tax bill for 2020.
If you’re under 50, you can contribute up to $6,000 to an IRA this year, and up to $19,500 to a 401(k). If you’re 50 or older, these limits rise to $7,000 and $26,000, respectively. If you save in a Roth IRA or 401(k), you won’t get an immediate tax break on your contributions (though there are other benefits you’ll reap). But if you stick to a traditional retirement plan, any money you put in is money the IRS can’t tax you on.”