Today, we’re going to be covering a wide variety of updates and hot topics.
As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situations –– a continued global pandemic, several significant natural disasters, new tax laws and political shifts.
Key tax considerations from recent tax legislation
Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season.
Here are some highlights in recent tax law changes to help you plan.
Economic impact payments (EIPs)
The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate credit. If you qualified, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return, and we can help you plan for any modification now.
If you received an EIP, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us figure any potential adjustment.
Child tax credit
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:
- Amount has increased for certain taxpayers
- Is fully refundable (meaning taxpayers can receive it even if they don’t owe the IRS)
- May be partially received in monthly payments
- Is applicable to children age 17 and younger
The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis. We’ll be here to help you navigate any questions to make sure you get the best benefit for your family.
Charitable contribution deductions
Individuals who do not itemize their deductions can take a charitable deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%). There are many tax planning strategies we can discuss with you in this area.
Required minimum distributions (RMDs)
RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.
Unemployment compensation
Another thing to note that’s different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021. We can help you plan for any potential impacts of this change.
When completing last year’s returns, some individuals received an unwelcome surprise in the form of reduced tax refunds or possibly payments due. Several factors may have caused this change, but often it was because individuals needed to adjust their payroll withholding deductions or pay estimated taxes.
Now is a good time to adjust withholding, if necessary. This will avoid unwelcome surprises as well as unwanted penalties for not paying enough in tax throughout the year. If withholding is adjusted in November/December, the total amount of withholding is assumed to be made ratably over the entire year. We can also help you calculate your tax projections to help determine if adjustments are needed to estimated taxes.
The individual rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
There was no change (except minor inflationary adjustments) to the rates for qualified dividends and long-term (held more than one year) capital gain rates. The rate you pay depends on your taxable income and filing status.
The 2021 standard deduction is now $12,550 for single and married filing separately filers, $18,800 for heads of households and $25,100 for joint filers and surviving spouses. These are small increases from last year.
The pandemic has changed how people work, and more people are permanently working from home (i.e., telework). Such remote working arrangements could potentially have tax implications that should be considered.
Virtual currency transactions are becoming more common.
Form 1040 question: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?”
There are many different types of virtual currencies, such as Bitcoin, Ethereum and non-fungible tokens (NFTs). The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally has tax impacts. We can help you understand those consequences.
The net investment income tax (NIIT) has been in effect since 2013.
The income thresholds for this tax – $200,000 for single or head of household taxpayers and $250,000 for married filing jointly taxpayers; these don’t adjust with inflation.
If you have income above these thresholds and have certain net investment income, you’ll be subject to this 3.8% tax on the lesser of net investment income or the excess of income over these thresholds.
Investment income subject to the tax include taxable interest/dividends from stocks and bonds, certificates of deposit and mutual funds and capital gains from the sale of these assets.
If rental income is treated as passive income, then it’s subject to this tax. Activities that meet the self-rental and real estate professional rules aren’t subject to NIIT.
The AMT exists to be sure everyone pays a “minimum” level of tax despite using various exclusions, deductions and credits to reduce their regular tax.
Many of the add-backs in computing AMT (e.g., state tax and miscellaneous itemized deductions) are limited or no longer deducted for regular tax purposes. Other adjustments do exist, such as for the exercise of incentive stock options and tax-exempt interest earned on certain private-activity muni bonds. Note that adjustments could come from Schedules K-1 received.
For tax year in 2021, the AMT exemption amount increased to $114,600 for married filing jointly taxpayers and to $73,600 for single individuals. The exemption phases out if adjusted gross income (AGI) exceeds $1,047,200 for married filing jointly taxpayers or $523,600 for single taxpayers. The exemption is indexed for inflation.
Items that trigger the AMT are sometimes controllable, so careful planning is a must if you’re subject to this tax.
For tax year 2021, 401(k) contribution limits are $19,500, with an additional $6,500 for taxpayers who are age 50 and over. Note: The limitation on deferrals for 401(k), 403(b) and most 457 plans is increased to $20,500 for 2022, up from $19,500 in 2021.
IRA contribution limits are $6,000 (with the catch-up contribution remaining at $1,000). Roth IRAs still have income limits on who can contribute to the accounts, but there’s a beneficial rule that allows taxpayers to convert a traditional IRA to a Roth IRA, which allows the funds to grow tax-free and be withdrawn tax-free.
Remember, if you choose to convert traditional IRA assets or roll a 401(k) into a Roth IRA, you’ll have to pay income taxes on the amount you converted that year.
We can help you maximize the use of tax-favorable retirement plan rules.
The American Taxpayer Relief Act (ATRA) simplified estate taxes for federal purposes, but that doesn’t mean you don’t need to do estate planning if your wealth falls below $11.7 million. Many states have much lower thresholds and proper planning can alleviate some of the burden.
If you’ve had any significant changes in your family such as a birth, marriage, divorce or death, it’s important to revisit your estate planning documents to make any necessary changes.
The American opportunity tax credit (AOTC) and lifetime learning credit are just that: credits, which are much more favorable than deductions. These provisions reduce the taxes you pay dollar for dollar. The AOTC is even refundable for some individuals, meaning you could receive up to $1,000 in a refund by using this credit. This credit is now a permanent tax break.
What are the income limits for AOTC?
- To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
- You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
- You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
What are the income limits for lifetime learning credit?
- For 2021, the amount of your credit is gradually reduced (phased out) if your MAGI is between $59,000 and $69,000 ($119,000 and $139,000 if you file a joint return).
One recent change is that Sec. 529 plans now allow for up to $10,000 in annual tax-free distributions per beneficiary (regardless of the number of contributing plans) for tuition at elementary and secondary schools, including religious or other private schools.
A recent addition: Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations.
Taxpayers who itemize can continue to deduct qualifying donations. Due to the increase to the standard deduction, it may no longer be beneficial for you to claim these deductions. However, there may be planning opportunities related to the timing and method of making contributions (and other deductions) so that you may receive a benefit.
These opportunities include bunching deductions in years to alternate itemized deductions/standard deduction and/or taking advantage of donor-advised funds (DAF).
Every year there are court cases where the IRS has denied an individual’s charitable contributions due to lack of required documentation, improper valuation or lack of an appraisal, if needed.
Be sure that the charity you’re considering is a qualified charity to receive tax-deductible contributions. The IRS has an online search tool, Exempt Organizations Select Check (www.irs.gov).
Consider the deduction value of clothing and household items. They should be in good used condition or better, and value should be the price a willing buyer would pay for them. Consider the value guides that are published by organizations such as Goodwill or the Salvation Army.
In order to claim a deduction for any donation of $250 or more, you must have a contemporaneous written acknowledgment from the charitable organization. Contemporaneous means you have it when you file the return. The acknowledgement is usually a letter from the charity on the charity’s letterhead that states the amount of the cash donation or, if non-cash, a description of the item and a statement of whether the organization provided anything to the donor such as a meal or DVD in exchange for the donation. If something was provided, its value must be stated. Some charities don’t provide proper records. Thus, it’s important to review letters from the charity and, if incomplete, follow up to get proper documentation.
Due to the pandemic, there were changes to due dates the past couple of years, however, these show typical common due dates.
Qualified retirement plans offer many tax benefits to both employers and employees and can be a valuable tool in retaining employees. With traditional plans, employers get a tax deduction for contributions, and employees may be allowed to make pre-tax contributions and defer taxes on income until distribution.
In Roth plans, employees don’t get tax deductions for contributions, but qualified distributions and withdrawals are tax-free. In addition, assets held in qualified plans generally are protected from creditors of both employees and employers. However, these plans are heavily regulated and include different contribution limits and matching requirements. Plans may also have nondiscrimination requirements and top-heavy rules, which require certain tax-filing obligations.
It’s also important to consider whether your business will grow to include more employees when you select your plan as some plans have limits on the number of participants.
A qualified small employer may take a general business credit of 50% of plan administration and retirement-related education of employees’ expenses for the first three plan years (greater of $500 or the lesser of $250 multiplied by number of highly compensated employees who are eligible OR $5,000 per year). (See https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit.)
Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season.
Here is a summary of the highlights in recent tax law changes to help you plan.
Employee retention credit (ERC)
The ERC encourages businesses to keep employees on their payroll during the pandemic. The ERC is a refundable payroll tax credit that may be claimed by eligible employers who pay qualified wages to qualifying employees. Changes were made with legislation to allow businesses to qualify for both Paycheck Protection Program (PPP) loans and the ERC. Contact us to see if you could benefit from these programs.
Note that the Infrastructure Investment and Jobs Act (November 2021) ends ERC early, making wages paid after Sept 30, 2021 ineligible for the credit (except for wages paid by an eligible recovery startup business).
Family and sick leave credits
The American Rescue Plan Act extended the family and sick leave credits to Sept. 30, 2021. These credits are intended to compensate employers and self-employed people for coronavirus-related paid sick and family and medical leave.
Small Business Administration (SBA) loans
Though the PPP ended on May 31, 2021, existing borrowers may be eligible for PPP loan forgiveness. Even though the PPP loan forgiveness is not taxable for federal purposes, there may be state implications. There are also other COVID-19 relief measures offered through the SBA. We can help you navigate the tax and financial complexities of these programs.
Business meals
There is a 100% deduction (rather than the prior 50%) for expenses paid for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022.
Whether or not you’re a business owner, there is no surefire way to prevent your identity from being stolen, even if you choose not to use online banking, shopping or data storage, your information is out there, as we know from news stories on breaches within credit bureaus and other entities. The best thing you can do as an individual is to learn how identity theft happens, take steps like these listed here and know what to do if it happens to you. The Federal Trade Commission has a very helpful website –– www.identitytheft.gov –– that walks you through what you need to do to report and recover from identity theft.
Business owners, do your best to protect your customer’s information to avoid potential loss of trust should your system be hacked. Only collect and retain the information you need and be sure you dispose of your customer’s data safely as well. Make sure that sensitive personal information is only available to those who need it and that employees are properly trained on the importance of their part in protecting customer information. Make sure you have a plan in place for protecting data and for steps to take in case of a breach.
See IRS Publication 4557, Safeguarding Taxpayer Data, for suggestions on how taxpayers can best protect their data.
https://www.irs.gov/pub/irs-pdf/p4557.pdf
With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, there remains uncertainty in how this will impact taxpayers. As legislation continues to evolve, and if it passes, we’ll contact you to discuss how changes impact your tax and financial plan.
So many things have tax consequences that we often don’t think about until it’s too late — changing jobs, having children, planning for retirement, exercising stock options, receiving a promotion with a nice raise, opting into an employer-provided retirement plan like a 401(k) plan, transitioning parents into long-term care — and many more.
Today, we touched on the major topics at a very high level, but with ever-changing tax laws and changes to your particular situation, it’s always a good idea to review how the tax laws affect you. That’s where we can help. It’s what we do year-round.
We can answer questions or provide an in-depth tax projection to help you anticipate how these new tax laws will affect your returns. So, don’t hesitate to reach out to us at help@advancedamericantax.com if you’d like to discuss something in more detail.
