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Summer’s Tax Day - Income Tax Filing Tips for 2020 and Beyond

As we roll into summer, many retirees are thinking about getting some vitamin D and what family vacations look like during a global pandemic. Unfortunately, there is an important financial event this summer – taxes. 

Most of us know tax day as April 15th, but this year the Treasury announced some changes in response to COVID-19. Most significantly, the tax filing and payment deadlines have been extended to July 15, 2020. 

Now that the deadline is creeping up, these tips can help retirees prepare for income tax filing, this year and every year. 

What Does the 2020 Tax Extension Mean for You?

Before we talk about general tax preparation, a few quick notes about the tax deadline extensions: 

  • It applies to all individual returns, trusts, and corporations 
  • It’s automatic; taxpayers do not need to file any additional forms or call the IRS to qualify
  • The relief also includes estimated tax payments for tax year 2020 that are usually due on April 15, 2020
  • The state of Colorado has also extended the deadline for state income tax to July 15th

Preparation Is the Key To a Smooth Tax Return

Creating good tax habits now will benefit you as you head into retirement (or continue your retirement journey). If you’re already accustomed to saving important tax documents as they come and tracking expenses throughout the year - great! It’s amazing how much time you can save by organizing your information beforehand.

In a typical year, you should receive most of the documents you need by February. To avoid the last-minute mad dash, organize documents in the months leading up to tax day. Create a folder on your desktop and save them as you receive them.  

You’ll need to prepare detailed financial information in the following categories: 

  • Personal information - Social Security numbers and dates of birth for you, your spouse, and any dependents
  • Income information -  This includes W2s, 1099s, Social Security benefits, rental property or other real estate income, investment income, etcetera 
  • Adjustments to income - Payments like IRA contributions, energy credits, Medical Savings Account (MSA) contributions, moving expenses, alimony, and self-employed pension plans can potentially lower your tax bill - so don’t forget them
  • Itemized tax deductions and credits - Home mortgage payments, charitable contributions, and medical or dental expenses may also equal a tax credit
  • Taxes you've paid - Avoid overpaying by documenting taxes paid such as state and local, income, and property taxes
  • Other - If you’ve made quarterly estimated tax payments or have foreign bank accounts, you’ll need this information as well

It’s also helpful to track expenses throughout the year so you can deduct them at tax time. Deductible expenses may include out-of-pocket medical expenses, qualified business expenses, contributions to retirement plans, and mortgage payments. 

Your Tax Return is Filed, Now What?

Just when you thought it was over… 

When all is filed and done, most retirees want to take a deep breath, relax, and not think about taxes for another year. But a few steps right after filing will make things easier come next year (and could even save you some cash). 

  • Check your status - Your accountant should let you know as soon as your tax return is accepted. If your return is rejected, it likely means there are errors that you need to correct. 
  • Pay your tax bill on time -  If you owe money, pay on time to avoid penalties. For 2019 taxes, you need to pay or file an extension by July 15, 2020. 
  • Get paid - Alternatively, if you’re getting money back from the government, you can check your status online using the IRS’s Where’s My Refund tool. Setting up direct deposit will make getting your refund faster
  • Keep a copy - Store a copy of your completed tax return someplace safe, clearly labeled and easily accessible

Store Key Records Now to Avoid Headaches Later 

Make a habit of keeping records you’ll need for the future. It could result in tax savings later on, and it will definitely make your life easier if you’re audited.

Federal and State Income Tax Returns 

The IRS has three years to request an audit of your tax return. The limit doesn’t apply, however, if they think you never filed a return. So, we recommend holding on to a digital copy indefinitely. You also need to hold on to any documents related to your returns like receipts, bills, canceled checks, loan agreements, and W2s or 1099s. 

Documents Related to Your Home

Your personal residence is an important asset with major tax implications; keeping detailed and organized records about your home is key to minimizing your tax burden. Major documents related to your home which you should absolutely hold on to include: 

  • Initial loan settlement statement 
  • Proof of payment for any capital improvements
  • Expenses related to the purchase such as title fees, legal fees, charges for initial setup of utilities, survey fees and transfer tax

If you own additional property such as a vacation home or rental property or you have received an inheritance, keep everything for those too. 

Taxes are a major part of your overall retirement planning picture. You’ll still continue to pay taxes in retirement, so minimizing your tax burden is always a good idea. A fiduciary financial advisor will help you do that as well as help understand how your different types of income (investment income, retirement plan distributions, etc) affect the amount of tax you pay. 

Do you know how taxes play into your personal retirement plan? Do you have a game plan that includes personalized financial, personal, and retirement goals? Get the 2020 Essential Retirement Guide to help you prepare for a more successful retirement.

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