By Laura Saunders 

The arrival of 2021, as welcome as it was, put a hard stop on most moves by Americans to lower their 2020 tax bills. The window for things like making charitable donations or taking capital losses to offset gains slammed shut on December 31.

But there are still a few things people can do now to cut last year's taxes. Several involve contributions to retirement accounts, with deadlines as late as Oct. 15. Another could reduce penalties for filers behind on last year's tax payments.

Of course, it isn't so clear when 2020 taxes will be due, which affects some of these deadlines. Internal Revenue Service Commissioner Charles Rettig has said he wants to stick with April 15, but some in Congress and professional groups such as the American Institute of CPAs are calling for a delay due to pandemic disruptions. For Texas and Oklahoma residents and business owners, the April date has already been pushed back to June 15 due to February's fierce storms.

Clarification will likely come soon. Whether the April due date is delayed or not, here are steps filers can still take to reduce 2020 bills to Uncle Sam.

Contribute to a Traditional IRA

Many taxpayers can contribute up to $6,000 to a traditional individual retirement account or a Roth IRA for 2020 -- but only a contribution to a traditional IRA will cut 2020 taxes. The maximum is $7,000 for people age 50 and older, and there's no age limit on who can contribute.

For now the deadline for making 2020 traditional and Roth IRA contributions is April 15 -- except for people in Texas and Oklahoma, where it's June 15. If the IRS delays the April deadline for more taxpayers, the IRA deadline will follow suit.

Contributions to traditional IRAs are tax-deductible up front, which is why they cut 2020 taxes, while withdrawals in retirement are typically taxable. The reverse is usually true for Roth IRAs: no upfront deduction, but withdrawals in retirement are typically tax-free. (Within both types of accounts, growth and income are tax-free.)

To contribute to either type of IRA, a taxpayer must have "earned" income -- as from wages, self-employment, or taxable alimony -- up to the amount of the contribution. So if a teenager earns $4,000 from a part-time job and $2,000 of investment income from day trading, he could put up to $4,000 into a traditional or Roth IRA -- not $6,000. (This young person may want to opt for a Roth IRA because total earnings are too small to trigger income tax.)

Married couples have advantages with IRAs. If one spouse has earned income but the other has little or none, a contribution can often be made to a traditional or Roth IRA for the low-earning spouse.

If you're considering this move, be aware of income limits that cap deductions for traditional IRAs. They apply if a single filer or either spouse of a married couple is covered by a retirement plan at work, such as a 401(k). To check, see Box 13 of the W-2 form.

For 2020, the deduction begins to phase out at $65,000 of adjusted gross income for most single filers and $104,000 for most joint filers if both partners are covered by retirement plans. But here's another boon for married couples: If only one spouse is covered by a retirement plan, the income-phase out for a traditional IRA deduction for the uncovered spouse begins far higher: $196,000.

While deductions are great, savers should consider whether to forgo the upfront tax write-off of a traditional IRA and opt for a Roth IRA because of its tax-free withdrawals.

Contribute to a SEP IRA or Solo 401(k)

Many taxpayers with self-employment income can make tax-deductible contributions to these plans. Often they have more generous contribution limits and deadlines than traditional IRAs or Roth IRAs.

With a Simplified Employee Pension IRA, or a SEP IRA, a taxpayer can still make a tax-deductible contribution for 2020 of up to $57,000. These accounts can be set up and funded until Sept. 15 or Oct. 15, depending on the type of entity, if the taxpayer has filed for a six-month extension to file the 2020 tax return, according to Ian Berger, an attorney specializing in this area.

A Solo 401(k) is more complex to set up but can bring greater benefits. For 2020, a business owner and spouse who both have earnings from the business can each make annual tax-deductible contributions up to $57,000, plus an additional $6,500 each if they're age 50 or older, as long as the business has no other employees.

The deadlines for setting up new Solo 401(k)s for 2020 in 2021 have been clouded by a recent law change. Mr. Berger thinks that unless part of the Solo 401(k) was set up in 2020, the additional contributions of $6,500 aren't allowed. But the remainder of the plan can be set up and funded as late as Sept. 15 or Oct. 15, depending on the entity, if the taxpayer has a six-month filing extension.

Contribute to a Health Savings Account

Taxpayers covered by approved high-deductible healthcare plans for 2020 have until April 15 to make tax-deductible contributions to Health Savings Accounts for 2020, or June 15 if they're in Texas or Oklahoma. If the IRS extends the tax-due date, this deadline will be extended too.

For HSAs covering one person, the 2020 deduction can be up to $3,550, plus $1,000 for those age 55 and older. For a family, the limit is $7,100, plus $1,000 if the HSA owner is 55 or older. There are no income limits.

Withdrawals from HSAs are tax free if used for a wide range of medical expenses that are broader than what insurance reimburses. (For a list, see IRS Publication 502.) Upon reaching age 65, an HSA owner can make penalty-free withdrawals for nonmedical expenses, although these payouts are taxable.

What if a worker with a company-funded HSA and high-deductible plan was laid off in 2020? Sarah Brenner, an attorney and HSA specialist, says the worker can likely take deductions for making remaining contributions to the HSA if he or she had high-deductible health coverage after leaving the job.

Make a Payment to Lower Tax Penalties

More people than usual could owe penalties for tax underpayments in 2020 due to unemployment benefits and other pandemic issues. This penalty is assessed daily based on current interest rates and recently came to about 3% annually.

Despite requests from tax professionals, the IRS hasn't said if it will provide relief from these penalties for 2020.

Taxpayers who can't file a return right now can make a payment of part or all of the overdue tax to stop the penalty or lessen it. There are multiple ways to pay, including IRS Direct Pay.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

March 05, 2021 05:44 ET (10:44 GMT)

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