Good to Know
Taxpayers may reduce their 2020 taxable income by tens of thousands of dollars by contributing to tax-deductible IRAs, 401(k)s, and other accounts by May 17, 2021.
Traditional Deductible IRA Contributions
Taxpayers who are unaware of this opportunity or miss the usual April 15, 2021, deadline may contribute to an IRA for 2020 by May 17, 2021, and, if they otherwise qualify, deduct the contribution on his or her 2020 income tax return.
Clients who file as married filing jointly can contribute and, if they otherwise qualify, deduct as much as $12,000 ($6,000 each) plus up to another $2,000 ($1,000 each) if age 50 or older. Taxpayers filing as single on their income tax return can contribute and deduct up to $6,000 plus another $1,000 if age 50 or older.
Single owner businesses may generally adopt a Solo 401(k) Plan as long as the only other full-time employee is the owner’s spouse. A participant can generally defer a specific amount of compensation paid or earned in 2020 and the business is also permitted to make a profit-sharing contribution as well.
A participant may generally defer the lesser of earned income or $19,500 ($26,000 if age 50 or older). The deadline for deferring earned income for 2020 was December 31, 2020. However, the business can make deductible profit-sharing contributions for 2020 as late as May 17, 2021.
Profit-sharing contributions per participant are generally limited to the lesser of a percentage of pretax income or $57,000 for 2020. Pretax income limits are 20% for flow-through businesses and 25% for C Corporations. Flow-through businesses include sole proprietorships, partnerships, Sub S Corporations, and LLCs electing flow-through income tax treatment.
Health Savings Account (HSA)
Contributions to an HSA for 2020 of up $7,100 (family account) or more may be allowed. Tax-deductible contributions for 2020 may be made by May 17, 2021, to the extent your client has not contributed the maximum.
Coverdell Educational Savings Accounts (CESA)
The maximum CESA contribution per qualifying student is $2,000. If your client has not taken advantage of this tax-deductible contribution for 2020, he or she has until May 17, 2021, to contribute.