If you’re like many women these days, you may be concerned that taxes could prevent you from saving enough for retirement. In a recent Equitable Financial study (the Survey), 32% of women said they were concerned about higher taxes in the future, and 54% said they were concerned taxes would reduce their ability to accumulate funds for retirement.* If your goal is to keep as much of your income as you can, consider the following tips to make the most of your situation and get a jump on your tax planning.
1. Consult with your financial professional
While the Survey found that women may be less likely to have a financial professional than men (18% vs. 36%), engaging the services of one can be a big help in solidifying a financial plan for the future, especially in light of other responsibilities you may be managing. They don’t have to make decisions for you, but can help you do the legwork prior to decision-making. Having a financial professional to lean on can also help you feel more confident in your financial situation. The Survey found those who had a financial professional were almost twice as likely to feel confident about their financial future (39% vs. 20%), and were significantly more confident in their ability to retire comfortably (35% vs. 22%) than those who didn’t have a financial professional.
2. Contribute pretax to reduce your taxable income
Over half the women surveyed reported being concerned about taxes reducing their ability to accumulate money for retirement. Of those, 48% were worried about COVID-19’s impact on their ability to retire.* One of the best ways to save for retirement — and reduce your current taxable income — is to contribute to a tax-deferred employer-sponsored retirement plan, such as a 401(k) or 403(b) plan. Your contributions go into the plan pretax, which means they reduce your taxable income dollar-for-dollar. There are also tax-advantaged retirement plan options for business owners.
3. Use your HSA to save pretax
An often-overlooked way to save for retirement is a contribution to a health savings account (HSA). If you have a high-deductible health insurance plan, you can open an HSA and contribute annually up to $3,600 if you have an individual plan, or up to $7,200 if you have a family plan.
Like a 401(k), that money goes into the HSA pretax, reducing your current taxable income. While you can pull the money out tax-free to pay for qualified medical expenses, you can also save it until you retire. After age 65, tax-free withdrawals are still available for qualified medical expenses. Post-65 withdrawals for reasons other than qualified medical expenses are penalty-free, but subject to ordinary income taxes, as applicable.
4. Consider other tax-deferred products
Tax-deferred financial products, like annuities, may be a consideration to discuss with your financial professional and tax advisor. Although the money you invest or use to purchase those products may be after-tax, any earnings you accumulate won’t be taxed until they’re withdrawn — typically when you retire. Tax-deferred annuities are long-term financial products designed for retirement purposes, and they have exclusions, limitations, and associated fees and charges. Early withdrawals from annuity contracts may be subject to surrender charges and, if taken prior to age 59½, a 10% federal income tax penalty.
5. Give to charity
In 2020, you’re allowed to give up to 100% of your earned income to charity without paying taxes on that money, if you itemize on your tax return. That amount will change in 2021, though any time you give to charity, that money reduces your current taxable income, thus reducing your taxes. Even people who do not itemize can take advantage of a $300 cash charitable deduction for 2020 only.
6. Pass money to loved ones while you’re alive
These days, we’re all concerned about our families and their safety. The Survey found that women were more stressed than men about keeping their family and themselves safe and healthy (42% of women vs. 28% of men). If you have loved ones who need financial assistance and you can afford to help, you can gift up to $15,000 per person annually without paying gift taxes. Gifts for medical expenses or tuition are unlimited. Of course, it’s critical that you consult with your own tax professional before proceeding.
7. If you own a business and took a PPP loan, understand how that affects your taxes
The Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES Act) was one of several pieces of legislation passed in 2020. It created and funded the Paycheck Protection Program (PPP) for small businesses. If you are a business owner and took a PPP loan, you may be able to get that loan forgiven, depending on how you used it. However, keep in mind that you can’t include the expenses you paid with the forgiven loan as a tax deduction. In other words, if you used the PPP loan money to pay for things like payroll, rent, mortgage interest and utility costs, those expenses will not reduce your taxable income. Again, work with your own tax professional accordingly.
8. If you lost your job, had hours cut back or got a new job, here’s what to expect
Any income you receive is taxable. That includes severance pay, accumulated sick or PTO time you’re paid for, or unemployment benefits if you lost your job. However, if you’ve had your hours cut back and aren’t eligible for unemployment, your taxable income could decline, and therefore you may pay less in taxes. The best way to figure out your tax situation is to add up your income — all of it. Then talk to your own qualified accountant and tax professional or compare your income to last year’s income to get an idea of where you might stand.
9. If you’re working from home or running a business from your home, here’s what you may be able to deduct
If you’re employed by a company and had to work at home due to COVID-19, unfortunately, you can’t take a tax deduction for your home office. However, if you run your own business from your home, you can deduct the portion of your home and utilities you use for your business.
10. If you went through a costly health crisis, you may be able to deduct medical costs
Not everyone will be able to deduct medical expenses. However, you may be able to take a deduction if your unreimbursed medical costs exceed 10% of your adjusted gross income. Speak to your own qualified tax professional.
11. If you took a Coronavirus-Related Distribution (CRD) from your 401(k), 403(b) or governmental 457(b) plan, or your IRA, here’s how it could affect your taxes
If you were negatively impacted by COVID-19 and met the CARES Act definition of a “qualified individual,” you may have been eligible to take up to $100,000 out of your 401(k), 403(b) or 457(b) plan, or IRA as a CRD. The amount of a CRD can be included in income either equally over 3 years or all in 2020. Either way, you’ll pay taxes on the amount you withdrew because it is considered income. However, if you pay it back within 3 years, you can file an amended tax return and get those taxes back. Note also that for CRDs, the typical 10% early withdrawal penalty for those under age 59½ is waived. Talk to your financial professional and to your own qualified tax professional if you have questions or need guidance.
The sooner you start planning, the better
With COVID-19 still affecting our lives, employment and businesses, you’re smart to talk to your financial professional as soon as possible to get a handle on what you need to do right away and start planning for the future you want. If you don’t have a financial professional, consider getting one now.
*Equitable Q3 Consumer Pulse Survey, October 2020.
Please be advised that this article is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.
This informational and educational content does not offer or constitute, and should not be relied upon as, financial, tax, accounting or legal advice. Your unique needs, goals and circumstances require and deserve the individualized attention of your own financial, tax, accounting and legal and other professionals. Equitable Financial Life Insurance Company and its affiliates do not provide tax, accounting, or legal advice or services.