Can I Take Tax Deductions After December 31st?
Tax Deductions Available After December 31
Tax Answers Advisor Transcript
Marcelino: Welcome to The Tax Answers Advisor. I am Marcelino Dodge. Our thought for today is, “death and taxes may be inevitable, but they should not be related” as stated by one JC Watts, Jr. Although I am certain some people probably feel that both death and taxes are related. And some may even feel there’s been death by taxes. Anyway, our shows to make sure that you definitely can see that these are not related, and so as we try to work to help you understand and save money on tax and in fact even achieve business and personal goals faster through our three-step process.
We want to help you also to understand last week if you didn’t get tune into last week’s show, we certainly invite you to go back discuss and just listen to it because we discussed a lot of information about the tax information that was a part of the most recent stimulus package. A couple points we’re going to hit here at the moment is for example, a big issue was PPP loans have been a big issue, and now as a result of the most recent legislation expenses paid by a PPP loan are now also deductible on the tax returns.
And also the fact that as you’re getting your PPP loan forgiven, you’re not going to be subject to tax on that income as well. So, that’s one of the many provisions so we invite you to go back and listen the last week’s, which was also talking about why you need to be careful on selecting your tax preparer. Some very good information, so please go back and listen to that show and there’s a lot of information that’ll help you to understand how that legislation really affects your tax wise, and even how you need to be selective, and why you need to be selective and you select a person to prepare your tax return. Looking for more information? Go to Cash Tracks Financial.
We also want to remind employers, if you’ve had employees or if you’ve had contractors working for you that you paid $600 or more to during 2020. There is a filling deadline you have that is February 1st to get the W-2s filed and also for those with that have those who need to get a 1099, there’s a 1099 miscellaneous that needs to go out and this year have a return after a couple decades is the 1099 NEC or non-employee compensation.
Once again, that needs those need to be out by February 1st. We also want to remind you that if you’re an employer, it’d be a good time right now if you haven’t already done so to make sure to verify employee names, address, social security numbers, all of that information so that you can get those out accurately to the individuals. Or if you’re the employee or the contractor for, and looking for a W-2 or a 1099 on a timely basis, it’s my recommendation that you make sure and contact that employer to be sure that they have the correct address for you so that you can get that information on a timely basis and email address would be excellent to make sure they have that right because many companies make their W-2s available online now. And you may still have access to an employee portal to go ahead and pull that down when they make those available.
So good to make sure your former employer has all the correct information. And especially, if you have moved because some people definitely move so, and you have a new address. So it’s vital that you get them the correct information so that all that can be filed and you can get your taxes filed in a very timely manner. As I mentioned earlier, we have our three-step process we work through with individuals and we do so with precautions in mind for all who are concerned with the current pandemic going on.
Yes, we have full operational in e-signatures and documents. We have web portals for electronic upload a documents, so you don’t even have to visit the office. And of course, as we reach out to various individuals throughout the country here and even throughout the world areas such as we’ve had listenership and we really appreciate that in not just in the United States but throughout the world areas such as China and Japan it’s been very exciting here now that we’re doing our fourteenth show.
How much of an International audience we’ve had, we really do appreciate that and thus we have availability to do business with individuals around the world to help them to be successful financially without even having to visit the office. The amazing technology with the internet of being able to sit down with you face to face virtually through an online meeting, and to then exchange documents through our electronic portal and our secure messaging center so that you can get the best possible service and be able to reach your financial goals.
Because we know this has been a tough year for everyone although some businesses did do well and some individuals did do well through the pandemic but of course, many individuals did not and are still struggling and we’ll be struggling for the next few months. And so, we’ve come up with our nice three-step process us to help all because there are a lot of solutions in this world and as we’re going to talk about some of them that may, that will help some is that they’re at there still some deductions even though December 31st 2020 has come and gone.
We’re at January 7th now on the day to this show, what we see though, is that there’s still some options you have either as an individual or a business. If you need to, to be able to take some deductions for 2020, we’re going to look at those a little bit because as part of our planning process to try to plan ahead so that we’re not always looking back, oh, what could I have done? Or what could I do or what can I still take? But let’s take in a year-round process. So we help you to meet your business goals, your financial goals, both individually and, and in a business sense so that you are able to put together a very defined strategy. We help you to do that.
We help you to reach your goals faster, we do a step-by-step action plan for you and with that as part of our activity that includes the taxes and accounting work that we do for you all in one nicely, neatly wrapped package and it’s all proactive. So that if another challenge comes along, we have you prepared for it because it includes of course, access to myself as and my team here so that we can help you walk through the whole process with a nice small monthly fee starting at $49 for personal services, and starting at $149 for a business bundle and to customize to the individual.
So, yes definitely look us up, it’s https://cashtracksfinancial.com. You can email at email@example.com. Of course, gives us a call as well, always welcome, 844-394-4287. So we’re going to go ahead and move into our topic of deductions that we can still take and we’re going to look at some individual deductions first that we can still take and still use even though we’re in 2021, we can have these apply to 2020.
And what I’m going to touch on here first, is the individual traditional IRA accounts or individual retirement accounts, contributions you can make and you can still make a 2020 contribution to a deductible IRA a Roth IRA as well. And let’s touch a little bit on those differences at your deductible or traditional IRA, is your IRA that you can take an actual deduction for on your income tax return as well as it continues to grow the interest or dividends or however the investments vehicle you have chosen.
Those gains on the on that account as they get credited to the account are all tax deferred, so that you are not paying taxes till you actually withdraw the funds from the account. Then there’s a course also the Roth IRA, which there’s, which are extremely popular in which another one of the types of accounts that we can help ones to establish as well. And the Roth IRA, is money that you have already paid tax on. And thus as it continues to grow, when you take that principle out under current law, you don’t pay tax on the money coming out.
Now, you got to keep it in the account for at least five years. And even the growth or the interest that you earn in that account, which had been tax deferred, under current law is still going to come out tax free. Now there’s some speculation, I don’t like to do speculation on this show, I like to just speak facts and what actual law is. So that’s we’re just gonna stick with where we are now.
And that is those distributions from a Roth IRA are tax free, as long as you meet the five-year rule and other present rules that are present with Roth IRA contributions, the limits on these contributions, and you can actually still make these contributions up to April 15th of 2021, and still have them apply to the year 2020. And the combined contribution limits, which is $6,000, if you’re under age 50. And what I mean by combined contribution is that you can actually have both an individual IRA and a Roth IRA, when I’d mentioned about combined contribution limit, what that entails means is that you can only put a total of 6000.
So for example, if you have an individual IRA, you can put 3000 into that. And you can put 3000 into a Roth IRA and the two together add up to 6000. So that’s what combined means is you can divide it up between a Roth and a traditional but, all you can add or put in total is 6000 between the two accounts. Now, the catch up provision, if you’re age 50 or older, is that you can contribute up to 7000. For couples, for married couples, it’s really nice if you have a spouse who does not work.
Now the spouse can also contribute to an IRA and be in, and be able to put into same thing up to 6000 for under 50 or age 50 year over older up to 7000. And this counts in because you have to have some type of taxable income to even contribute to an IRA, but the spouse IRA, they can use their income from the wage earner to be able to make the contribution or to qualify to do the contribution.
Now there are some phase outs if you have a retirement plan from your employer, but that’s based on filing status and income not going to get into detail on that but those do exist and that’s something that we can certainly help work out for you and help to understand as to what could be a good contribution for you. Because at certain levels especially, if you have retirement plan it would be more advantageous to make a Roth IRA contribution.
Now, one of the really nice laws that came out in the last year or so, is no age limit. It used to be a cutoff for when you could contribute to a traditional or tax deductible IRA, but now there’s no age limit. So, if you’re 70 or over you’re still having taxable compensation for the year, you can contribute to an IRA. That’s a wonderful provision for those who are still working. Now, as I mentioned of course, you got to have taxable compensation for the year which that basically means you need to have some type of wages or salary that you are earning.
Also, if you’re self-employed and you have income through like you’re a sole proprietorship, the net earnings from self-employment you can use those or account that helps you to calculate to be able to make your IRA contribution. For those who may have taxable alimony, that’s actually a qualifier to be able to make an IRA contribution, as well as for the military. The non-taxable combat pay that appears on their W-2s can also be used as a basis to make an IRA contribution.
Some wonderful information is that of course, you have until April 15th 2021 to make your contribution to your IRA. Now, when you do make the contribution, this is where it gets really tricky, is that if you’re making contribution in 2021 and you want it to apply to 2020, you have to be very very specific with the institution that you’re going to do the contribution with. You got to make sure if you’re going to your bank, or wherever you’re going, that you make it very clear this is a 2020 contribution.
And so as we set up IRAs here for individuals, we’re very specific on that. We make sure the documentation says, this is a 2020 contribution. So that as we submit it in our Financial Institution, our IRA custodian knows this is a 2020 and that’s very important. In the reporting to the IRS it was not reported correctly and you claim it, that can cause you issues down the road which is something you don’t want to have in which is something that we really work to make sure that you get the proper treatment there so that you get the proper deduction as well.
You may qualify by making that contribution for the retirement savings contribution credit which is a very nice credit can be as little as 10% of your contribution, can be a credit towards your tax. You can will use up to 2000 of it under current law but deductions, a deduction because you may have been able to already deduct the amount you put into the traditional IRA be at 6,000. If you’re under 50, or age 50 or older up to 7,000 you may have been able to already take that off as an adjustment to your income and then to get another perhaps $200 credit maybe more depending on income.
That’s like a double dip. I mean, it’s almost like $1,000 credit it can be in some cases or in spouses, it can be almost like a $2,000 deduction on your taxes just by making some contributions there. Now also, as we consider it or you can contribute to it if you’re self-employed, you don’t have to be self-employed but, if you’re self-employed you can make a contribution if you work for another employer with no retirement plan, you can also contribute to it.
Of course, if an employer has a retirement plan, you can also contribute to an IRA as well or Roth IRA and go deductible IRA or Roth IRA. So then we’ve covered up to making a deduction or contribution to an IRA which thus leaves us the question here. Where do I go to do an IRA, and what does my money invest into with an IRA? Well, what we’re going to do is we’re going to take a quick break here for just a couple minutes.
And when we return, we’re going to discuss about those investment options at a person can use when they contribute to an IRA. So, we’ll look forward to talking to you in a couple of minutes. This is Marcelino Dodge on The Tax Answers Advisor on the Voice America Business Channel.
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Are you wanting to grow wealth faster, save time and build a nest egg? Hire a tax pro who makes you money and does more than just file your tax return. Marcelino Dodge of Cash Tracks Financial identifies your key numbers, works year-round to improve your numbers, keeps you compliant and helps you achieve goals faster. Call Marcelino Dodge today, 719-336-8739 to schedule your free tax strategy review. Call 336-8739 or visit cashtrackfinancial.com.
Many people want to build wealth or grow their business faster, but do not know what specific numbers to look at that actually help build monthly cash flow. Hire a tax pro who makes you money and does more than just file your tax return. Marcelino Dodge of Cash Tracks Financial identifies your key numbers, works year-round to improve your numbers, keeps you compliant and helps you achieve goals faster. Schedule your free tax strategy review by calling 719-336-8739 or visit cashtracksfinancial.com.
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This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today, please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to firstname.lastname@example.org. Now back to The Tax Answers Advisor.
Marcelino: Welcome back to The Tax Answers Advisor, this is Marcelino Dodge. Before the break we were discussing about individual IRA deductions, and we’re going to pick it up here on what kind of investment options can you do with your individual IRA account. There are many options available and it can be very, very confusing. I visit with clients about this quite often there and of course, you got the choice, you can go banks, mutual funds, even life insurance companies, other financial institutions all offer various type of IRA investment options.
And we, here as well at Cash Tracks Financial have IRA investment options available as a part of our services, we work to explain them very clearly through mainly through like mutual funds is what we do. But we try to keep it as simple and easy as possible, easy to understand, because we just know it’s difficult and it can be. But there are options out there available to do that. And we try to really explain them as clearly as possible. And whenever you do put the IRA, is that custodial account that needs to be for the benefit of you as the participant.
And then of course, for your beneficiaries. And that is an area where is very important, when you look at your IRAs, it’s good to review those every year, which is what we do with our clients, when we sit down with them, go through our three-step intelligence solutions process is to just review that with a meteor because there may be adjustments. And as you look at your beneficiaries, maybe there’s just been changes, or maybe you’re ready to make a change or an update on those.
And so it’s important to do that. And that’s something that we do as part of our services. Now, just as a warning, here, I’ve heard some different options, different ideas come up. But in general, collectibles are cannot be used as an IRA investment. Now, there are some exceptions, like a US gold coins, or one ounce silver coins that are minted by the Treasury Department. Even certain types of bullions such as gold and silver can be used in an IRA account, but there are certain rules that apply.
And there’s certain custodians that do that type. So it’s really a challenge to be able to do that. But it can be done at once wanting to have some type of precious metals as a part of their IRA. So that covers individual deductions and what an individual can do to be able to take some deductions like that, still after the after the year, after December 31st of the year. And what is we can keep in mind, though, on an individual IRA, is if you don’t have one established yet, which some may or may not have considered it for whatever reason.
But even if you do not have an IRA established yet, or even open before the end of 2020, you can actually start a new deductible IRA or a Roth IRA, you can actually open up a new account right now, or any time between now and April 15th. And you can then be able to open up the account and still make your 2020 contribution. And as I mentioned earlier, if you’re putting in 6,000, or whatever the amount you can put in, it is just absolutely vital.
That whatever institution that you’re putting the IRA money into, that they market, and they know that that contribution is for 2020, because there’s reporting that goes to the IRS about IRA contributions. And unfortunately, many times financial institutions report it wrong. And that’s a person has to go back and instruct the bank, oh, wait a minute. This is not a 2021 contribution, this is a 2020 contribution.
And sometimes they may not find out till months later. So just make sure when you have your paperwork, that whoever you’re working with, and this will be taken care of if you work with us, that the individual you’re working with. And you have a point out, you make sure you’re very, very specific saying this is for 2020. That way, it is marked and they know and you have it in writing there that it is a 2020 contribution on the paperwork is just very, very simple to do.
But it’s one of those, it’s almost so simple, it gets mistaken. And it can be a big mistake. And certainly we don’t want you to have that happen. Which is why when we handle these, we’re very, very, very, very careful. And always make sure it goes through right the first time. And that’s on the individual side, the individual IRA. Now we’re going to talk on a business deduction that you can go ahead and still take, even though we’re past December 31st, and this is through what’s known as the Simplified Employee Pension, or abbreviated as the SEP IRA.
So yes, it is a type of IRA account, but it is a business IRA account that you can still do. And see once again, as we look through part of our process, our Intelligence Solutions management process is to help ones to avoid these last minute deductions, but to just have the plan set through the year so we know where we are at the year. We know what deductions we’ve made. Now, a simplified employee pension is a plan, it’s a written plan that you set up that an employer sets up.
And with that particular type of plan, you may make deductible contributions. If you’re a self-employed, or perhaps a sole proprietorship, you can make deductible contributions for yourself. If you have employees, you’re also making contributions on behalf of your employees. And so a number of business types can be eligible to set up a simplified employee pension. That would be your sole proprietors, it can be a partnership, or it can be a corporation and includes S-corporations as well.
All of these types of businesses can establish it. And what’s really nice, is that you can establish this for 2020, you can do it now. Because according to the law, the Simplified Employee Pension can be established by the due date of the tax return. So that means you have till if on flow through entities like a partnership, or an S-corp, you actually have till March 13th. If you have a C-corporation or sole-proprietorship, you have till April 15th.
What is also very nice about this is that you can also, if you extend the return, your date to set up the simplified employee pension is also included in that. So in essence, you can have till September 15th, to set up your SEP plan for 2020. And make the contributions. That’s a pretty nice little provision in there in the law, which is something I’m always happy to share with one individuals and hopefully, businesses that are needing such a deduction, they can get it because as we’re going to go through this, we’re going to see particularly for business types, there’s contributions that are fully deductible against business tax and areas also like self-employment tax contributions. When you make a contribution to a set plan, there’s a limit. And it’s 25% of the employee’s compensation. So just say, for example, you have an employee that makes $100,000 a year, you can actually make a contribution of up to $25,000, into a set plan for that employee, if you so choose.
Now there is a limit, the limits are up to 56,000 in a year. So just be aware, and that’s not to say many businesses can do that. But it’s possible for some extra because there were some business, it’s still had a good 2020. Many people struggled but, everybody’s a little different there. But we’re certainly see the value of this information. Now also, the rules within a simplified employee pension, do require that if you’re going to make a decision that you’re going to contribute, say, 10% of their salary to the SEP IRA, and the employees be half the amount that you do, you must do 10% for all your employees.
So you have two employees, and you got 10%, you decided you got to do the 10%, for all of them. If you have 50 employees, and you decided I’m going to do 10%, you got to give 10% to all 50. That’s just pretty much the way the rules are written. And thus we go by the rules, and we encourage ones all to do that. Now especial computation, if you’re self-employed, especially particularly a sole-proprietor, there’s some special computations you got to do in there to figure out exactly what your max is, but yet, it was still good at 25%.
And there’s some adjustment in there by the time you subtract some self, like one half of self-employment tax and so on. But it’s, it’s still a good deduction, you still get in there with as a self-employed person. Also, with the simplified employee pensions, we as you set one up, there are some requirements as far as eligible employees. One point we got to keep in mind with that, is that if you have employees that are at least 21 years of age, have worked with you at least three of the previous five years, and you have paid them at least $600 in 2020, then they aren’t an employee eligible to receive a contribution to their SEP IRA.
Now, of course, that could phase out a lot of people. Like for example, those under 21, or those who haven’t worked with you for at least three years. And when you set up the plan, in the forums, you actually designate these kind of restrictions in it, of how you want to do it because you can have it in anywhere from they’re eligible for the first date of employment to exactly what these maximum restrictions are saying they got to work for us at least for three years or they got to be at least 21 or making $600.
Usually, the $600 is admit pretty easily with most employees, so most commonly what I see is that the three years is the biggest limitation that employers put on. And the reason they do this and actually it’s a good idea, is that once you contribute the money to the IRA for the employee. That money is fully vested, basically, it is now the employees money. Once you put in that account, you can’t return it. So that’s why when you’re looking at this type of plan, it’s very important to make sure, who you’re contributing for and that you feel good about your employees and sometimes it’s you and you run a reward for the hard work that they’ve done well, you can definitely do it. But yet, keep in mind that you make this contribution forum, because you like your employees, and you want to help them, and you feel like they deserve a good, good benefit there, you make this contribution, it is theirs.
Is there money once it is account to do with, basically what they please. So, if you put in in the account six months later they decided they want to take it out well. Basically, they can do it. Now they’ll have all the tax consequences of that, they’ll have to pay tax on it and a tax penalty and so on, but they’ll still, it’s still all their money. Now if, if you have occasionally this circumstance can come up, where if you have a business that you’re operating like a sole-proprietorship business but you also work for an employer as well, that has like the 401 K plan.
You may have some limitations on what you can put into the SEP IRA and how much you can put into yours and certainly you want to keep those points in mind which is part of our planning process helps to determine these things. Why you want to contribute to your SEP but yet, you’re maximizing the amount you put into your 401 K. Well, you got to be able to just know that you may have a limit of how much you can put into your SEP IRA.
In fact, you’re probably going to have a limit, it’s going to be reduced by the amount you put into your 401 K. So it’s just good to keep that in mind that if you do have those. You can definitely, you can have that limitation and be aware that it’s there so it may affect some, and it may or may not affect you so but that’s where we come in and we have to make that determination to help you out in doing that.
So how do you set up a SEP IRA? Well, first of all you got to set up the plan you can contact a retirement Pro, like myself and what we do is we walk you through the process, we get you to the forms. We explain the documents the form, it’s a 5305 SEP, which basically again, helps to establish the plan, so that you then know exactly what you are going to have exactly what kind of limits, you’re going to have on the plan.
What kind of requirements, you’re going to have as far as employees are before employees are eligible to have on the plan, so that you can get it firmly established and ready to go now, because nice thing with the SEP IRA plan is that you are not required to make a contribution every year. I mean, you could do 10% one year. And then, businesses down the next year, like for example if someone has a set plan in place they’ve had one for years.
They’ve been able to keep all their employees in the year 2020, but because of the pandemic and other reasons, business just wasn’t very good. You’re not required to make a contribution to the SEP plan for the year. You are able to go ahead and basically skip the contribution for the year, or do a 0% basically, what it amounts to. So as we set up, set these things like this are explained to you, or should brought it, should be explained to you, as well as next as you set up the requirements before employees are eligible, that relates back to at least 21, work at least three years out of the previous five and make at least $600.
And then as you talk to retirement Pro. And then as we go over the information. Once again, we come back to just like in the traditional IRA. What are the investment options available? And this is oftentimes the part that I see when I work with people that can be very, very confusing, which is why when I work with individuals personally or work with businesses in doing any type of retirement plan or individuals on an IRA, I really tried to clearly explain the options available to them.
Because how many people really understand investment, sometimes some investment people don’t even understand investments. So, in selecting investment options it’s important to know and have your employees educated, because I don’t know how many times I have visited with individuals regarding their 401 K’s or other type of investment retirement plans that they have. They were just handed a bunch of papers from the representative or some human resource officer, and said go make some selections, and they just really did not have any assistance or any help or anything of that matter to really make an educated decision as to what’s important for them.
And that’s where as Cash Tracks Financial we’re different. When we work with them in business on their employment plan on their business employment plan, be it a simple IRA, a SEP IRA, like this or being you go to a 401 K. We really try to take the time to at least help individuals have some good understanding or some good basic understanding of exactly how the plan works.
What’s going to do for them? How it’s going to make the money? How does it make money for them? What does it do? How much they can contribute? Recommendations, so that they can have a comfortable amount that they want to contribute and then understand about their time horizon. Their risk with how much risk they want to take because there’s always the risk versus rate of return, kind of discussion that needs to happen to be able to help people to do this so as we set up and talk to people about business plans and their employees.
It’s important to have that time, so that when we go instead of help ones with a step like this, they have a good solid understanding of it, so that’s what we want to make sure and do. Now we’re going to go ahead and take a short break now and come back and talk a little bit more about now the deductions, we can take and when we can take the deductions on the SEP IRA. So let’s talk to you again in a couple of minutes. This is Marcelino Dodge, on The Tax Answers Advisor on the Voice America Business Channel.
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Are you wanting to grow wealth faster? Save time and build a nest egg? Hire a tax pro who makes you money and does more than just file your tax return. Marcelino Dodge of Cash Tracks Financial identifies your key numbers, works year-round, improve your numbers, keeps you compliant and helps you achieve goals faster. Call Marcelino Dodge today, 719-336-739 to schedule your free tax strategy review. Call 336-8739 or visit cashtracksfinancial.com.
Many people want to build wealth, or grow their business faster, but do not know what specific numbers to look at that actually helped build monthly cash flow. Hire a tax pro who makes you money, and does more than just file your tax return. Marcelino Dodge of Cash Tracks Financial identifies your key numbers, work year-round to improve your numbers, keeps you compliant and helps you achieve goals faster. Schedule your free tax strategy review by calling 719-336-8739 or visit cashtracksfinancial.com.
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When it comes to business, you’ll find the experts here, Voice America Business Network.
This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today, please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to email@example.com. Now, back to The Tax Answers Advisor.
Marcelino: Welcome back to The Tax Answers Advisor. I’ve been discussing about deductions we can take, even though it is 2021, deductions, we can still create and legally have for the tax year 2020. Just before the break, we’re discussing about business deductions in particular the Simplified Employee Pension, and easy to understand and easy to set up business retirement plan for both sole proprietors and businesses with employees that you can still set up, even today, and make a contribution for 2020 and still take the deduction. Yes, as I was discussing earlier, right before the break, there are a myriad of investment options that you can take when you set up a SEP IRA, and that’s our job here is to help you to navigate those waters. When you’re looking to set up a SEP IRA, and still take a 2020 deduction, make a good choice and be able to once again have the tax advantages for both yourself and your employees because the growth in the SEP IRA is tax deferred.
So yes, once again, as we mentioned, it’s very, very good deduction, a very good way to do it if you have some cash, and you need to still need some deductions for 2020. But yet, you can think we can sit and think oh wait a minute, it’s 2021. I’m putting the money in in 2021, but it’s really a 2020, a contribution for a SEP IRA, which as I had stressed before with the individual accounts. You have to make sure that whoever your custodian is, when you do a SEP IRA and you set that up, whoever that is, that you absolutely stress to them and make sure that they mark it as a 2020 contribution.
And what is very nice about that is the fact that it’s a 2020 contribution. And because as a calendar year taxpayer, which means your tax year ends on December 31st, is that you make those contributions, and to the SEP IRA for both yourself and your employees. It makes it deductible for 2020. Even though the funds went in in 2021, you can make those contributions, and still take the deduction on the 2020 tax return.
Just make sure that your financial institution does the reporting absolutely correctly, which is why once again when we do such plans with businesses, especially on this late have a date. Yeah, after the beginning of the year, like we are now we stress to the custodian, this is a 2020 contribution. And then of course, you can take it back on the tax return, which is a simply wonderful provision that the tax law allows and one that I love to share with ones, of how you can do this, and the flexibility of a SEP IRA is such a wonderful, wonderful tool for all involved.
Now as I mentioned, it is deductible for the year that you’re making the contribution. So for a sole-proprietor, you can make a contribution for both yourself and if you have employees, and this would be, as a sole-proprietor, whether you are a Schedule C-filer, and have your business on that, or if you’re on a Schedule F, and you have a farm operation that you’re doing and you have employees.
You can make a contribution for your employees, and that’s filed on either the C or the NC. What’s really nice as a sole-proprietor, is that you can also, of course, employ your spouse as one of your employees, and you can make a contribution for your spouse. And with that, that also reduces yourself, the amount of self-employment tax that will be paid. And you’re getting the deduction for your spouse as an employee, and also you’re getting the deduction for your spouse for the IRA contribution which for individuals that have a sole proprietorship, that their wife is working for them and this is where a beautiful deduction comes in, is because, and where I encourage businesses. Is that you, you can have your business there. You have a small payroll, you put your wife and your wife’s working in the business. You have your wife on the payroll, and there’s a few other deductions and few other benefits, you can have with your wife, or your spouse on the payroll.
You can have that contribution in there for her, and then be able to take and deduct that contribution off of your own self-employment tax as an expense to the business as a sole proprietor, that’s just once in a wonderful provision because you as the sole proprietor. Your contribution to the SEP, which is based on the net income of the business that’s actually claimed on the 1040, so that you, you do pay self-employment tax on your contribution but you still get a deduction for regular income tax so you’re still getting a deduction as a sole proprietor, so that’s a wonderful still a wonderful provision you get that says, you still pay some self-employment tax.
But with your wife, you don’t pay the self-employment tax on the contributions you make for your wife or a spouse. If you’re a partner, and you have a partnership. It works very similar with partnerships and the respect to sole-proprietorships and contributions for employees, and the partnership are made on form 1065 as an expense, Employee Benefit expense on form 1065 contributions made on behalf of partners to a SEP IRA.
Those are reported on this Schedule K1, and then handled on the individuals a tax return. So it’s a little bit different there with partnerships. Now, this is where it’s really simple Corporation. And I found it very useful and very nice when you have a corporation, and this also would include if you’re a partnership, or if you’re an LLC, that is taxed as a corporation. So, if you elect as a partnership which in most circumstances I actually recommend partnerships, or multi-personnel LLCs be taxed as an S-Corporations.
I’ve done a lot of that and that works, has worked out really good. But when they elect to be taxed as corporations and just corporations in general which are either a C-Corp or an S-Corp, when they make contributions to a SEP IRA, those contributions are deductible as employee benefit expenses. And that’s even true for shareholders or shareholder employees, officers of the corporation that get a W-2.
The deal is because the SEP is based on what’s on the W-2, you still got the percentage there so up to 25% and can be made for those who are on corporations, but it’s a full deduction on a corporate tax return, so that’s just very wonderful for those wanting to do a SEP. Now, again as I mentioned, it’s important that we look at all these things very closely, so that we’re not trying to do last minute adjustments like this.
And I try to plan ahead of course some businesses will, which is what we encourage you to do we have a year, we go through the year, we work on having your profits calculated for the year, keep track of the year. And if you’re wanting to do a Simplified Employee Pension, we can still do it up to April 15th or we can even go say the extended date of the two tax return which for entities, like your corporations, partnerships, that due date is, what can be extended at September 15th or for an individual sole proprietor, that can be extended up to September 15th.
I mean, October 15th. Excuse me for sole proprietors, that could be October 15th. So it can be a very good option to be able to take some deductions for the 2020 tax year. So where we’ve been going over today is just recognizing that just because 2020 is over, we have some deductions that we can still take, still use individually. Of course, we can take advantage of the traditional tax deductible IRA contributions.
Also our Roth IRA contributions. And what is interesting on individual IRA contribution is that, by means of our contribution say both for us personally, and then for a spouse. It can also end up helping you to qualify for the retirement contributions credit, because you may not have qualified it before, but by getting this deduction, you may end up qualifying for the retirement contributions credits so it’s a good point to keep in mind if you can do a contribution to an individual deductible IRA, and of course keep in mind, gotta have those deductions, those contributions in the account there by April 15th.
And once again, as I mentioned is that if you have not established an individual IRA account, before you can still set up a new IRA account, and still contribute to that account for 2020. And that’s a process that we can help you to complete, because as we look at through here, it’s a mire. It’s a swamp. Like a way it’s a swamp. We have to clean out that swamp for you and helping you to plan to do that, and to do excellently through that and same thing with, as we look at the business side, trying to set up like a Simplified Employee Pension.
This type of plan would be excellently deductible for you as a business, and also to contribute for your employees to help you offset some self-employment tax when you have it, with employees as well as provide a nice benefit to your employees, or if you’re a sole proprietor that has only one employee. It can be very handy for you to maximize contributions for your wife. This is where, as a couple, working together in a business, you can maximize some really nice retirement contributions and get a nice deduction off with your self-employment tax there.
We want to certainly appreciate these points, we’re going to talk about other business retirement plans on other shows, but these were the big ones we wanted to hit on because of the tax season coming up, and for you to be able to find a deduction if you need a deduction, these are an easy way to get a deduction by April 15th and still establish the plans, even if you have not established them yet. Now as I mentioned, we are here to help you to establish this and to work on this. And to be able to set up a plan so we’re not looking for these last minute things but actually set up, work through you throughout the year, helping if you have the defined strategy to achieve your goals faster, and for many of us having a good business retirement plan is part of our strategy, and we help to set that up so that you can get it going.
So we can really give you for a small monthly price. Get your specific situation addressed, and truly help you to succeed. You can always reach me, Marcelino Dodge at cashtracksfinancial.com, or email at firstname.lastname@example.org. Then of course, please call the office, it’s 844-394-4287. We are here to help you to succeed. To set up your business retirement plan and your individual retirement plan as well.
Also rollover so, if you’ve left an employer, I had have a 401 K holding out there, we can help out with that as well, you can always call us to discuss those more in detail as well and what options we have available. We’re going to next week. Because of going into tax season, we’re going to talk about some tax scams, also known as the “IRS Dirty Dozen.” Now, with tax season approaching, there’s a lot of tax scams.
There’s been a lot of warnings out there about a different scams, especially with this economic impact payments that’s been going out, we’re going to discuss those, we’re going to discuss a lot of other areas where people are just trying to take advantage of you and take your identity, and so on. So we’re going to give you some good information next week on how to avoid these, how to make sure you protect yourself as a tax payer?
So, please be sure to look in looking at that and we look forward to speaking to you again next week. Certainly appreciate and thank you for listening to today’s program. You can always listen to this, on demand, as this is Marcelino Dodge on The Tax Answers Advisor. Thank you, again on the Voice America Business Channel.
Thank you for listening to The Tax Answers Advisor with host, Marcelino Dodge. We’ll be back again next Thursday at 12 noon Eastern time, and 9am Pacific time, on The Voice America Business Channel. We’ll have more to share next week.
Cash Tracks Financial Inc.
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Lamar, CO 81052
Toll Free: (844) 394-4287
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Phone: (719) 336-8739
Toll-Free: (844) 394-4287
Fax: (719) 336-8799
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