With 2020 throwing tax season and many American lives into chaos, the federal government passed the CARES Act to help address the economic crisis that we faced. In 2019, the SECURE Act was also passed to help Americans address the looming retirement savings crisis that elderly Americans faced. With these two pieces of legislation, your 2021 tax return will look different, and with the help of the Total Resource Financial team, we can help you make sense of yours before you file.
The CARES Act
At the onset of the COVID-19 pandemic and subsequent quarantine, countless Americans had their lives turned upside down with the loss of businesses, jobs, and steady income sources. To help offset the economic burden, the federal government passed the CARES Act and sent out relief checks to the sum of $1200 for single borrowers and $2400 for married borrowers, with an additional $500 for every child under the age of 17. At the end of the year, the government sent out another round of $600 relief checks to qualifying Americans. The thing about these relief checks is that they are not, in fact, "free money," as some people initially believed, but an extension of a special 2020 tax rebate credit that you will have to reconcile with on your next return.
Additionally, the CARES Act allowed people in certain situations, with guidance from the IRS, to borrow from their retirement plans. These special disbursements came from tax-advantaged retirement funds and allowed people to have an additional revenue stream in times of crisis. Over the next three years, account holders can pay the money back into their accounts and make other contributions if possible to help their savings recover.
The SECURE Act
Before 2019, many people faced a severe retirement crisis and did not have the funds necessary for a secure safety net after they retired. Whether it was a lack of access to retirement investment options or their employers didn't offer a robust retirement package, Americans were facing a difficult road ahead. With the SECURE Act's passage, small businesses had easier access to providing their employees 401K plans. The SECURE Act removed maximum age caps for contributions, enabling retirement benefits for long-term part-time employees, among various other benefits to make retirement planning more of a reality for people.
How To Be Proactive With Your 2021 Tax Plan
Figuring out how the respective CARES and SECURE Acts can impact your upcoming tax return is imperative. You can take the following steps to make your upcoming tax return as smooth and thorough as possible:
- Figure Out Your Tax Projections: With the available 2021 tax rates and the information from their 2020 tax return, people can create a reasonable forecast of what their 2021 taxes will look like.
- Know Your Limits: For this upcoming year, the limits for the amount of contributions people can make on their company 401K, 403b, and a majority of 457 plans remain at $19,500.
- Is a Roth IRA Conversion Right for You?: Roth IRAs can offer a slew of benefits to yourself and your heirs if appropriately handled. However, with the plan's complexities, we recommend an inheritance tax planning expert helps you determine if this avenue is the best course of action.
- Know the SECURE Act Implications: The SECURE Act raised the Required Minimum Distribution age from 70 ½ to 72 years old. The age limit on contributions for traditional IRAs was eliminated. A new 10-year rule was implemented that requires no spouse beneficiaries to take the full distribution of inherited IRAs, Roth IRAs, and qualified plans within 10 years of the initial account holder's death.
These are but some of how the CARES and SECURE Acts can have a noticeable impact on your 2021 tax filings. With the incoming changes, you'll want an experienced tax professional to guide you through the process and ensure you get the most out of your tax return. Contact Total Resource Financial to schedule your next appointment today!