As a father to young children, I faced many challenges when I began working from home full-time this year, and some of them have been humorous. To prevent my 5-year-old daughter from unknowingly interrupting video calls, we implemented the “green light” system. If the indicator on the outside of my home office door is green, she and her baby brother are free to pop in for a quick ”hello” and hug as they wish. When the “red light” is on, she respects my time with clients on video calls.
But the real fun came when she started virtual kindergarten in August. My daughter informed me that she would now need the “red light” to make sure I don’t interrupt her video calls. My, how the tables have turned!
Working couples have faced multiple challenges during the COVID-19 pandemic. For those couples fortunate enough to keep their jobs, there are some financially lucrative opportunities to consider, especially when it comes to saving on taxes this year.
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Here are several ideas to consider that can have a major impact on your finances.
Increase Your Retirement Contributions
Many working couples have saved thousands of dollars by doing their jobs from home. They aren’t paying for parking, they are spending less on gas and possibly saving $100 or more each month on lunch by eating at home instead of at the restaurant near the office.
Before the old work routine returns, plow those savings back into your 401(k) retirement plan. The maximum amount for individual contributions in 2020 is $19,500 for those up to age 50, and $26,000 for people 50 and older.
Do the Same with Your Health Savings Account (HSA)
For 2020, couples under age 55 can contribute up to $7,100 in pretax dollars into these accounts, which pay for medical care, vision and dental care expenses and prescription drugs. In addition, the contributions are tax-deductible, qualified withdrawals are tax-free and interest earned on money in the account is tax-deferred. If you are over age 55 and contributing to an HSA, don’t forget to make your catch-up contribution of an extra $1,000.
Contribute to a 529 College Education Savings Plan
For couples with children, it’s important to contribute regularly to these plans. These accounts allow money to grow tax-free and will pay for tuition, books and other educational costs down the road. In addition, funds in these plans can also be used to pay up to $10,000 annually for tuition at private schools from kindergarten through grade 12. Several states also provide a state income tax deduction based on the amount of these contributions.
Don’t Contribute Too Much to Dependent Care
If you had lower child care expenses than you had expected this year because day care facilities were closed, you may want to adjust your withholding on your Flexible Spending Account for Dependent Care in the final months of the year. You don’t want to overfund these accounts, because FSA money is use-it-or-lose-it. You must use the funds by the end of the year, or you risk losing them.
Individuals can fund and spend up to $5,000 for these expenses in 2020, and up to $500 of unused funds can be rolled over into your account for 2021. Changing your contribution amounts or dis-enrolling from your FSA is usually not allowed mid-year, but an exception has been granted due to COVID-19. So, if it looks like you aren’t going to use up all your FSA funds by the end of the year, reduce your contributions in the final months of the year to avoid losing any money.
Advice for High-Earning Couples Who Saw Their Incomes Drop in 2020: Look at a Roth IRA
For working couples who will experience a drop in their 2020 incomes, there are still some possible opportunities for long-term savings. If you fall into this category, it’s possible your new lower income could now allow you to make a Roth IRA contribution. Couples who earn less than $206,000 of adjusted gross income can contribute to a Roth IRA. If you or your spouse lost a job or experienced a significant income drop, a Roth could be a good part of your long-term plan.
With a Roth IRA, there is no up-front tax break, but you don't have to pay tax on withdrawals in retirement. A married couple can contribute up to $6,000 each, and another $1,000 each if they are age 50 or older. As with a traditional IRA, Roth contributions can be made until April 15, 2021, for the 2020 tax year.
Two Final Tax Notes
Finally, here are two other potential one-time events that may affect your 2020 taxes. (For more tax consequences, read Working from Home: Can You Claim the Home Office Deduction or Write Off Other Business Expenses on Your 2020 Tax Return?)
- Side Hustle. For people who lost a job and are now self-employed, your income now likely comes from consulting work or other short-term projects that may only last a few months. If that’s the case, it’s likely taxes aren’t withheld by your employer. Make sure you plan ahead and set money aside for taxes that will be due on these wages.
- Charitable Deductions. Finally, even if you use the standard deduction when filing your returns, charitable deductions of $300 per tax return are allowed. If you have made a donation to a local food bank and plan to give more money before year’s end, make sure to keep your receipt so you can take this tax deduction.
Year-end tax planning is critical in any year, but maybe no more so than in this one. Working from home has given many couples the opportunity to save thousands of dollars and plow those back into savings plans that will pay off down the road. These opportunities may not come again soon, so don’t miss out.