Word to the Wise – February 2020

You NEED These Documents to File Your Taxes!

It’s easy to get inundated with documents during tax season. You can receive documents from many different organizations, including employers, financial institutions and others. Many documents are now also being sent via e-mail, which increases the likelihood it could get lost in your inbox.

As tax season is quickly approaching, here are some of the documents to be on the lookout for:

  • W-2s. While W-2s are the most widespread and well-known tax form, it can be easy to lose track of W-2s if you or your spouse have multiple jobs. Keep track of each employer to ensure you receive the forms in time.
  • 1099-INTs and 1099-DIVs. Most of us receive small interest or dividend payments throughout the year. These payments are reported on a Form 1099 and must be included on your Form 1040. Depending on the type of investments, there could be numerous 1099s to report this interest and dividend income. Make a list from last year’s tax return to help keep track of these 1099s as they arrive via mail or e-mail.
  • 1099-Rs. Form 1099-R is used when a distribution is made from a pension or retirement account. You could receive a 1099-R if your employer was part of a recent merger, and the company which was acquired rolled its retirement funds into the new company’s plan. You could also receive a 1099-R if you get a new job and you roll your existing retirement funds into your new company’s plan.
  • Form 1095. Different versions of Form 1095 are sent to you recapping your health insurance. While the penalty for not having proper health insurance is suspended for 2019, the form may still be important. So look for it and retain it with your other records.
  • Get Organized. You will also need any documents that confirm and support any deductions you plan to take. For instance, you may need documentation to claim deductions for day care expenses, educational expenses (form 1098-T), mortgage interest documentation (form 1098), proof of medical, dental and vision care, charitable contributions, business records, property taxes, state taxes and much more.

It is best to use last year’s tax return PLUS a tax organizer to ensure you have all the proper records needed to accurately prepare your tax return. The organizer is especially helpful as there are a list of questions to help you jog your memory to recall certain events that have taken place over the past year that might have a tax consequence. If in doubt, save the documentation, proof of payment and any receipts!

How to Take Advantage of the New Retirement Rules

The Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, was passed by Congress in late December 2019. Here are some of the features in the new legislation that will help you save more for retirement:

Money can continue to grow tax deferred. If you turn 70½ in 2020 or later, you can keep money in a tax-deferred IRA or 401(k) for another 18 months to help the account continue growing before starting to withdraw funds. This retirement benefit is now available thanks to the required minimum distribution age being raised from 70½ to 72.

Action: Review your retirement account distribution needs and use this extra time to help make your distributions more tax efficient. For example, if you have $10,000 before you hit the next highest tax bracket, consider pulling more out of your retirement account. Or use the extra time to consider converting some funds to a Roth IRA.

Contribute to a traditional IRA at any age. While taxpayers have always been able to contribute to a Roth IRA at any age, 70½ was the cut-off for making contributions to a traditional IRA. You can now contribute to a traditional IRA at any age provided you have earned income.

Action: This is a great opportunity for retirees working part time to consider building their retirement nest egg.

Certain part-time workers can now contribute to 401(k) plans. Most part-time workers have never been eligible to participate in an employer’s 401(k) plan. The law now mandates employers which maintain a 401(k) plan to offer one to employees to worked more than 1,000 hours in one year, or 500 hours over 3 consecutive years.

Action: If interested in participating, contact your employer to determine if and when this option might be added to your company’s retirement savings plan.

Use retirement funds to offset the costs of a new birth or adoption. Each parent can withdraw $5,000 out of their retirement account without the 10% penalty. The distribution, however, must still be reported as taxable income. The distribution can be repaid as a rollover contribution to an eligible defined contribution plan or IRA.

Action: If considering this alternative, make sure the withdrawal is within one year of the birth or adoption. Also retain records to prove the withdrawal is for a qualified event as how this is going to be administered is still up in the air.

Watch out for auto enrollment. The government thinks you should be saving more for retirement. So the new law allows a greater portion of your paycheck to be automatically transferred to an employer’s retirement plan. The maximum contribution that can now be automatically deferred into your employer’s 401(k) plan has increased from 10% to 15%.

Action: While saving more for retirement is a great idea, this automatic participation does not account for your particular situation. Be aware of this law and independently determine what you can afford to put towards retirement. Remember, you also need to build an emergency fund and pay your bills!