June 12, 2020

As part of the federal government’s tax relief measures during the COVID-19 pandemic, the IRS extended key deadlines for the 2019 tax year and for making 2020 estimated tax payments until July 15, 2020. If your 2019 personal return is still awaiting completion, you may have significant retroactive tax-planning flexibility.

Postponed Due Dates

The IRS pushed back deadlines for individual taxpayers from April 15 to July 15, for the following actions:

  • Paying any remaining 2019 personal federal income tax bill,
  • Filing your 2019 personal federal income tax return (Form 1040), and
  • Taking several actions that can affect what you’ll owe with that return, such as contributing to a tax-deferred traditional IRA or a health savings account (HSA) for 2019.

In other words, you can defer any personal federal income tax liability (including any self-employment tax bill) that’s still owed for your 2019 tax year until July 15. You can also postpone filing your 2019 personal federal income tax return until July 15.

These are automatic relief provisions. You don’t have to file anything with the IRS to take advantage, and you won’t owe any interest or penalty if you do.

However, if you don’t pay up by July 15, the federal government will start charging interest on the shortfall at a current annual rate of 5%, which is subject to change every quarter. You’ll also be charged a failure-to-pay penalty of 0.5% per month on the shortfall (up to a cumulative 25% of the shortfall). The interest charge and penalty go away as soon as you pay up.

Important: As this was written, the normal procedure must be followed to further extend the filing deadline for your 2019 personal federal income tax return to October 15. Your tax advisor can handle that by filing IRS Form 4868 to request an automatic extension to that date. This must be done by no later than July 15.

If you’ve put off filing your 2019 return, consider these three last-minute tax planning moves.

  1. Make a Deductible Traditional IRA Contribution for 2019

If you’ve not yet made a deductible traditional IRA contribution for your 2019 tax year, and you’re eligible, you can still do so between now and July 15. Then you can claim the resulting write-off on your 2019 return, assuming last year’s income wasn’t too high to qualify.

If your 2019 income wasn’t too high to qualify, you can potentially make a deductible contribution of up to $6,000 or up to $7,000 if you were age 50 or older as of December 31, 2019. If you’re married, your spouse can do the same.

But there are a few caveats to using this strategy. First, you must have enough 2019 earned income (from jobs, self-employment and taxable alimony received) to equal or exceed your IRA contribution for the year. If you’re married, either you or your spouse (or both) can be the source of the necessary earned income.

Second, deductible IRA contributions are phased out if last year’s income was too high and you and/or your spouse participated in a tax-favored retirement plan last year. Ask your tax pro if you’re affected by the phase-out rule.

  1. Make a Deductible HSA Contribution for 2019

If you had qualifying high-deductible health insurance coverage last year, you can still make a deductible HSA contribution for 2019, unless you’ve already done so. The IRS postponed the contribution deadline from the normal date of April 15 to July 15. For 2019, the maximum deductible HSA contribution is $3,500 for self-only coverage or $7,000 for family coverage (anything other than self-only coverage).

More specifically, if you’re eligible to make an HSA contribution for last year because you had qualifying high-deductible health coverage last year, you have until July 15 to establish an account and make a deductible contribution that can be claimed on your 2019 return.

Important: The write-off for HSA contributions is an above-the-line deduction. That means you can take the write-off even if you don’t itemize. Moreover, the HSA contribution privilege isn’t phased out based on your income level. Even billionaires can made deductible contributions if they have qualifying high-deductible health insurance coverage and meet the other eligibility requirements.

  1. Choose to Deduct State and Local Sales Taxes for 2019

You have options if you live in a jurisdiction with low or no personal income tax or if you owe little or no state and local income tax. You can potentially claim itemized deductions on last year’s return for either:

  • State and local general sales taxes, or
  • State and local income taxes.

This option is only relevant if your allowable itemized deductions for last year would exceed your allowable standard deduction for last year. In general, the standard deduction for 2019 is:

  • $24,400 for married joint-filing couples,
  • $12,200 for singles and those who use married filing separate status, and
  • $18,350 for heads of households.

In addition, under the Tax Cuts and Jobs Act (TCJA), you can’t deduct more than $10,000 for all categories of state and local taxes combined ($5,000 if you used married filing separate status).

If you can benefit from choosing the sales tax option, you can use an IRS-provided table — based on your income, family size, state of residence, and local sales tax jurisdiction — to calculate your allowable sales tax deduction. Alternatively, if you collected receipts from 2019 purchases, you can add up the actual sales tax amounts and deduct the total if that gives you a bigger write-off. Regardless of the method you use, your total deduction will be subject to the overall TCJA limitation of $10,000 ($5,000 if you used married filing separate status).

Important: If you use the IRS table, you can add on actual sales tax amounts from major purchases. Examples include motor vehicles (including motorcycles, off-road vehicles and RVs), boats, aircraft and home improvements. In other words, you can deduct actual sales taxes for these major purchases on top of the predetermined amount from the IRS table. Once again, however, your total deduction will be subject to the overall limitation of $10,000 ($5,000 if you used married filing separate status).

Ready, Set, File  

These are just a few last-minute tax saving ideas if you haven’t yet filed your 2019 personal tax return. If your personal return includes earnings from a so-called “pass-through” business — such as a sole proprietorship, partnership, limited liability company (LLC) or S corporation — you may qualify for several retroactive COVID-19 tax relief measures that will affect your 2019 personal tax situation. Contact your tax advisor for more information.

© 2020