The COVID-19 pandemic has certainly done a number on the U.S. economy -- double-digit-percentage unemployment, damage to countless small businesses and the destruction of many of them, and a shaky stock market that plummeted more rapidly than ever in history just a few short months ago. Of course, that doesn't even begin to factor in the human toll -- more than 108,000 American lives lost, and far more people who recovered but were left with long-term damage to their health. And there's no clear end in sight yet for either the domestic epidemic or the economic downturn it has caused.
At this point, you may be looking around at all the uncertainty and thinking that this would be an excellent time to shore up your finances in case matters get worse. A few smart tax moves on your part could help you do just that.
1. Boost your HSA contributions
Not everyone qualifies to open a health savings account (HSA), but if you're covered by a high-deductible health insurance plan (defined this year as one that has a deductible of $1,400 or more for individual coverage, or $2,800 or more for family coverage), you may be eligible to participate in one. And since HSAs are funded with pre-tax dollars, contributing to them lowers your tax burden, thereby letting you reap significant savings.
For the current year, you can contribute up to $3,550 to an HSA as an individual, or up to $7,100 on behalf of a family. If you're 55 or older, you can make a $1,000 catch-up contribution as well, similar to the catch-up allowance offered with IRAs or 401(k)s.
One great thing about HSA funds is that they never expire; any money you don't use in one year can be carried forward indefinitely, and invested all the while, giving it the same opportunities for growth as your tax-advantaged retirement accounts. And unlike flexible spending accounts (FSAs), you can change your HSA contributions as you please; you don't have to commit to a single number ahead of your plan year and stick to it. And once you hit 65, any money you have in an HSA can be withdrawn tax-free and used for any purpose -- not just health care.
2. Contribute more to your FSA
If you're familiar with funding an FSA, you probably know that you can't change your mind about how much you're going to contribute once you make your election for your plan year. In other words, if you told your employer you wanted to contribute $1,500 for 2020, you're committed to that figure.
Or rather, you were committed. This year, there's an exception because of COVID-19: The IRS is allowing employers to let workers change their FSA contributions. This applies to both health FSAs, which have an annual contribution limit of $2,750, as well as dependent care FSAs, which let you put in up to $5,000 to cover child care costs.
If your medical costs have increased in the past few months, then it pays to put more money into your health FSA, since those funds go in on a pre-tax basis too. Also, you can now use FSA funds to pay for over-the-counter medications -- different from the rule prior to the COVID-19 outbreak. With more things on the eligible spending list, you may want more money in the account to buy them with.
Furthermore, your child-care spending needs may have increased -- if for example, the older family member who usually watches your children can't due to coronavirus-related safety concerns. Well, now you have the option to increase your dependent care FSA funding mid-year as well, provided your employer allows you to do so. (Not all will, but many are accommodating these changes because of the health crisis.)
3. Pump more money into your retirement plan
If you're investing your retirement savings through a traditional IRA or 401(k), you have a good opportunity to lower your tax burden by ramping up your contributions. The more money you allocate toward retirement, the less income the IRS can tax you on in the near term. Right now's an especially good time to increase the amount you're investing because many stocks, mutual funds, and ETFs can still be picked up at a relative discount. And if your employer is still offering a 401(k) match, increasing your contributions could let you snag it in full, if you weren't already.
Adopting tax-savvy strategies to boost your financial health is always a good idea -- but it's an even better one in times like these.