COVID-19 has been battering the U.S. economy since domestic cases started multiplying back in March. Since then, unemployment has reached Depression-era levels, and countless small businesses are at risk of closing their doors permanently. But even though the country is operating in crisis mode, it still never hurts to put some thought into your taxes in the coming weeks. A few smart moves on your part could benefit you financially, thereby making a tough situation somewhat easier. Here are a few action items to consider.
1. File your 2019 taxes ASAP
Because the greater crisis is so overwhelming, you may not be ready to focus on taxes just yet. And thankfully, you technically don't have to. Back in March, the IRS announced that the deadline to submit 2019 returns would be pushed back from April 15, 2020 to July 15, 2020, buying Americans three extra months to check that oft-stressful task off their list.
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But just because you get until mid-July to submit your taxes doesn't mean waiting is the right thing. If you have all of your tax documents at your disposal, the sooner you submit your return, the sooner you'll get the refund you may be due. And if you're not owed a refund, the sooner you know how much tax you owe, the sooner you can come up with a plan for how you'll tackle that debt.
Incidentally, you may need to wait longer than usual this year to collect a tax refund. Because the IRS is unable to process paper returns due to COVID-19-related adjustments in operation and staff, anyone who files on paper is due for a long wait. But even electronically filed returns are seeing refund delays, so if you expect money back from the IRS, don't wait until July to ask for it.
2. Take losses strategically
Though the stock market has, as of this writing, recovered some of the COVID-19-related losses it took earlier in the year, a lot of portfolio values are still down. Selling investments in a panic is not a good idea, as doing means locking in losses. But if you have a specific investment in your portfolio you were thinking of getting rid of anyway, unloading it while it's down could help you reap some savings for the current tax year.
Any time you sell an investment at a loss, you can use that loss to offset capital gains. And if you're left with an excess loss on your hands once your capital gains have been offset, that excess can offset up to $3,000 of your ordinary income, and anything beyond that can be carried to a future tax year. As such, if there's an investment you were thinking of dumping before the COVID-19 crisis took hold, you might as well pull the trigger.
3. Boost your retirement plan contributions if you can
The more money you sock away in a traditional IRA or 401(k), the more of your income you shield from the IRS. Now to be clear, now's not the time for everyone to ramp up retirement plan contributions. If your income has taken a hit due to COVID-19, or you have specific financial concerns that make padding your near-term savings crucial, then your IRA or 401(k) shouldn't monopolize what income you have coming in. But if your paycheck has been holding steady, and you're spending less than usual because you're not commuting or venturing out much, then you have a real opportunity to not only brighten your retirement prospects, but also, lower your tax bill for 2020.
If you're under 50, you can contribute up to $6,000 to an IRA this year, and up to $19,500 to a 401(k). If you're 50 or older, these limits rise to $7,000 and $26,000, respectively. If you save in a Roth IRA or 401(k), you won't get an immediate tax break on your contributions (though there are other benefits you'll reap). But if you stick to a traditional retirement plan, any money you put in is money the IRS can't tax you on.
It's hard to focus on taxes when there's a pandemic upending your world. A few strategic moves, however, could work wonders for your finances at a time when that's so important.
