With the year-end approaching, it is time to start thinking about strategies that may help lower your tax bill for not only 2021 but 2022 as well.
Planning is more challenging than usual this year due to the uncertainty surrounding pending legislation that could, among other things, increase top rates on both ordinary income and capital gain starting in 2022.
Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.
If proposed tax increases do pass, however, the highest income taxpayers may find that the opposite strategies produce better results. Pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.
Our firm has compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you, but you, or a family member, may benefit from many of them. We can narrow down specific actions when we meet to review your particular tax situation.
Please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:
Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. An example: a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years’ worth of charitable contributions this year. The COVID-related increase for 2021 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy.
These are just some of the year-end steps that can be taken to save taxes.
If you received an Economic Impact Payment in 2021 or received Advanced Child Tax Credit Payments, these amounts will be required to be reconciled on your 2021 Federal Income Tax Return.
With holidays rapidly approaching, we wish each of you safe travels and wonderful times with friends and family.
We are here to serve you and look forward to your call.
With year-end approaching, it is time to think about moves that may help lower your business’s taxes for 2021 and 2022.
2021 is more challenging than usual due to the uncertainty surrounding pending legislation that could increase corporate tax rates plus the top rates on both business owners’ ordinary income and capital gain starting in 2022.
Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value. If proposed tax increases do pass, however, the highest income businesses and owners may find that the opposite strategies produce better results: Pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.
We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you or your business, but you may benefit from many of them. We can determine specific actions when we meet to tailor a particular plan for your business, In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:
The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. Expensing eligible items acquired and placed in service in the last days of 2021, rather than at the beginning of 2022, can result in a full expensing deduction for 2021.
In our year- end planning, these are some of the steps that can be taken to save taxes.
Our firm looks forward to your call.
Here’s how a taxpayer’s custody situation may affect their advance child tax credit payments
COVID Tax Tip 2021-147, October 5, 2021
Parents who share custody of their children should be aware of how the advance child tax credit payments are distributed. It is important to remember that these are advance payments of a tax credit that taxpayers expect to claim on their 2021 tax return. Understanding how the payments work will parents to unenroll, if they choose, and possibly avoid a possible tax bill when they file next year.
Here are some of the most common questions about shared custody and the advance child tax credit payments.
Who receives 2021 advance child tax credit payments is based on the information on the taxpayer’s 2020 tax return, or their 2019 return if their 2020 tax return has not been processed. The parent who claimed the child tax credit on their 2020 return will receive the 2021 advance child tax credit payments.
Parents who will not be eligible to claim the child tax credit when they file their 2021 tax return should go to IRS.gov and unenroll to stop receiving monthly payments. They can do this by using the Child Tax Credit Update Portal. Receiving monthly payments now could mean they have to return those payments when they file their tax return next year. If their custody situation changes and they are entitled to the child tax credit for 2021, they can claim the full amount when they file their tax return next year.
Yes. Because the taxpayer claimed their child on their 2020 tax return, the IRS will automatically issue the advance payments to them. When they file their 2021 tax return, they may have to pay back the payments over the amount of the credit they’re entitled to claim. Some taxpayers may be excused from repaying some or all of the excess amount if they qualify for repayment protection. If a taxpayer won’t be claiming the child tax credit on their 2021 return, they should unenroll from receiving monthly payments using the Child Tax Credit Update Portal.
Yes. Taxpayers will be able to claim the full amount of the child tax credit on their 2021 tax return even if the other parent is receiving the advance child tax credit payments. The parent receiving the payments should unenroll, but their decision will not affect the other parent’s ability to claim the child tax credit.
Things people do during the summer that might affect their tax return next year
IRS Tax Tip 2021-102, July 15, 2021
It’s summertime and for many people, summertime means change. Whether it’s a life change or a typical summer event, it could affect incomes taxes. Here are a few summertime activities and tips on how taxpayers should consider them during filing season.
Getting married
Newlyweds should report any name change to the Social Security Administration. They should also report an address change to the United States Postal Service, their employers, and the IRS. This will help make sure they receive documents and other items they will need to file their taxes.
Sending kids to summer day camp
Unlike overnight camps, the cost of summer day camp may count towards the child and dependent care credit.
Working part-time
While summertime and part-time workers may not earn enough to owe federal income tax, they should remember to file a return. They’ll need to file early next year to get a refund for taxes withheld from their checks this year.
Gig economy work
Taxpayers may earn summer income by providing on-demand work, services or goods, often through a digital platform like an app or website. Examples include ride sharing, delivery services and other activities. Those who do are encouraged to visit the Gig Economy Tax Center at IRS.gov to learn more about how participating in the sharing economy can affect their taxes.
Normally, employees receive a Form W-2, Wage and Tax Statement, from their employer to account for the summer’s work. They’ll use this to prepare their tax return. They should receive the W-2 by January 31 next year. Employees will get a W-2 even if they no longer work for the summertime employer.
Summertime workers can avoid higher tax bills and lost benefits if they know their correct status. Employers will determine whether the people who work for them are employees or independent contractors PDF. Independent contractors aren’t subject to withholding, making them responsible for paying their own income taxes plus Social Security and Medicare taxes.
With the recently enacted American Rescue Plan, there were changes made to the child tax credit that may benefit many taxpayers, most notably:
The IRS will pay half the credit in the form of advance monthly payments beginning July 15 and ending Dec. 15. Taxpayers will then claim the other half when they file their 2021 income tax return.
How much will you receive?
The credit for children ages five and younger is up to $3,600 with up to $300 received in monthly payments. The credit for children ages 6 to 17 is up to $3,000 with up to $250 received in monthly payments.
How do you qualify?
The following criteria must be met to quality:
The credit begins to phase out above those thresholds. Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.
You won’t need to do anything to receive payments as the IRS will use information on file to start issuing payments.
IRS’s child tax credit update portal
The IRS has a child tax credit and update portal where you can update your information to reflect any recent changes to things like filing status or number of children. You can also opt out of the advance payments and check on payment status in the portal. If you file a joint return, both you and your spouse will need to opt out, otherwise a portion of the payment will still be issued. If you prefer not to opt out online, you can also call the IRS at 1-800-908-4184.
We’re here to help
If you have any questions or need help making decisions based on your specific situation, please contact our office today at 205-663-8686 or cris@essential-solutions.biz.
Thank you for trusting us with your tax preparation and planning needs.
If you’re one of the millions of Americans waiting patiently for your 2020 federal tax refund, I sympathize with you. This tax filing season has been one like never before and I am hearing from many of you wondering why you haven’t received your payment yet. There are several reasons for the delays, but I can assure you that your return was prepared with the utmost care and expertise, and it is likely part of the sizable IRS backlog of returns.
As of June 5, the IRS reported there are more than 18 million 2020 returns in its pipeline to be processed, and a few million others yet to be finalized from 2019. This past year has been extraordinary, the least of which being the COVID public health crisis and widespread unemployment. In addition, a series of stimulus payments from the federal government to help people navigate COVID financial woes was also managed by the IRS, and to ensure all eligible citizens received stimulus money, the IRS told Americans that everyone should file a tax return. Between more returns, unemployment amendments, issuing stimulus money and processing regular returns, the IRS has had its work cut out for it. Like many businesses during the pandemic, the IRS also had obstacles to overcome like switching its workforce from onsite to virtual and operating with a reduced staff.
If you have not received your refund 21 days after filing, it is likely that it is under further review. This happens more frequently when a return includes a recovery rebate credit, suspicion of identity theft or fraud, a claim for an earned income credit or other criteria that will ping a return for a manual review.
If you receive any correspondence from the IRS regarding your return, please contact me with a copy of the letter you received, and I can guide you through that. Unfortunately, due to the delays in processing, some notices are being sent by the IRS despite timely follow-up by you, or myself on your behalf. At this point, I am as powerless as you to speed up the IRS process, so patience is our best option right now.
I will keep you updated with all important news from the IRS that may apply to your situation. Thank you for your trust in me as your tax return professional and I look forward to serving you in the future.
Here Is How the Third Economic Impact Payment Is Different From Earlier Payments
The third Economic Impact Payment is different from the first and second payments in several ways.
The third Economic Impact Payment is an advance payment of the 2021 recovery rebate credit.
The two earlier payments are advance payments of the 2020 recovery rebate credit. Eligible people who didn’t get a first and second Economic Impact Payment or got less than the full amounts, may be eligible to claim the 2020 recovery rebate credit and must file a 2020 tax return even if they don’t usually file a tax return.
The third Economic Impact Payment will be larger for most eligible people.
Eligible individuals who filed a joint tax return will receive up to $2,800, and all other eligible individuals will receive up to $1,400. Those with qualifying dependents on their tax return will receive up to $1,400 per qualifying dependent.
More people qualify as dependents.
Unlike the first two payments, the third payment is not restricted to children under 17. Eligible families will get a payment for all qualifying dependents claimed on their return. This may include older relatives like college students, adults with disabilities, parents and grandparents.
Income phase-out amounts are different for the third payments.
Taxpayers will not receive a third payment if their Adjusted Gross Income exceeds:
This means that some people won’t be eligible for the third payment, even if they received first or second EIPs or are eligible for a 2020 recovery rebate credit.
Some people may be eligible for a Supplemental Payment.
The amount of the third payment is based on the taxpayer’s latest processed tax return from either 2020 or 2019. If the taxpayer’s 2020 return hasn’t been processed, the IRS used 2019 tax return information to calculate the third payment.
If the third payment is based on the 2019 return, and is less than the full amount, the taxpayer may qualify for a supplemental payment. After their 2020 return is processed, the IRS will automatically re-evaluate their eligibility using their 2020 information. If they’re entitled to a larger payment, the IRS will issue a supplemental payment for the additional amount.
Changes to earlier eligibility requirements.
For taxpayers who file jointly and only one individual has a valid SSN, the spouse with a valid SSN will receive up to a $1,400 third payment and up to $1,400 for each qualifying dependent claimed on their 2020 tax return. For taxpayers who don’t have a valid SSN, but have a qualifying dependent who has an SSN, they will only receive up to $1,400 for a qualifying dependent claimed on their return only if they meet all other eligibility and income requirements. If either spouse was an active member of the U.S. Armed Forces at any time during the taxable year, only one spouse needs to have a valid SSN for the couple to receive up to $2,800 for themselves, plus up to $1,400 for each qualifying dependent.
If married taxpayers filing jointly did not receive one or both of the first two Economic Impact Payments because one spouse didn’t have a Social Security number valid for employment, they may be eligible to claim a 2020 recovery rebate credit on their 2020 tax return for the spouse with the SSN valid for employment.
The recently passed American Rescue Plan Act has made substantial changes to issues concerning your business.
The following represents items that not only require your attention, but most importantly, your planning for these changes.
They include:
Payroll tax credits. The paid sick leave and family leave credits are extended to apply to wages paid through September 30, 2021 (instead of March 31, 2021).
There are also changes to these credits, including:
Self-employment sick and family leave credits. These credits, which are creditable against the income tax, have been extended to apply to eligible days through September 30, 2021 (instead of March 31, 2021). A major change is that both credits treat as reasons for eligible leave the obtaining of or recovering from Covid-19 immunization. And, for the family leave credit, reasons for eligible leave are expanded to include all qualifying reasons for taking sick leave.
Another major change is that in determining whether the 10-day per tax year limit for the sick leave credit is complied with, only days after December 31, 2021, are taken into account (thus restarting the count and often increasing the cumulative number of eligible days). And, a major change to the family leave credit is that the maximum number of eligible days per tax year is increased from 50 to 60, again with only days after March 31, 2021 taken into account (resetting the count and often increasing the cumulative number of eligible days).
Excess business losses. In a revenue raiser, the disallowance of excess business losses is extended to run through 2026 instead of 2025.
Deduction disallowance for over $1 million employee remuneration. In another revenue raiser, for tax years beginning after calendar year 2026, the $1 million annual cap on the deductibility of remuneration paid to certain categories of employees of publicly held corporations is expanded to include as a new category the five highest compensated employees not included in other categories.
Tax treatment of certain non-tax relief. ARPA provides favorable tax consequences for targeted Economic Injury Disaster Loan (EIDL) advances made by the SBA under the Economic Aid to Hard-hit Small Businesses, Non-Profits and Venues Act. The advances aren’t included in income and the income exclusion doesn’t result in deduction disallowances, denial of basis increases or reduction of other tax attributes. The same treatment applies to SBA Restaurant Revitalization Grants.
Pension plans. ARPA relaxes some funding standards and other IRC or ERISA rules for multiple employer pension plans. For single employer plans, IRC or ERISA rules are relaxed for amortizing funding shortfalls and the pension funding stabilization percentages are changed. Also changed are the special rules that apply to community newspaper plans.
Reporting by third party settlement organizations. ARPA tightens the de minimis exception to tax reporting by third party settlement organizations (TPSOs, e.g., PayPal) by excluding from reporting only transactions that don’t exceed $600 (and eliminating the 200-transaction threshold). ARPA also clarified that TPSO reporting obligations are limited to transactions involving goods and services.
Foreign tax. In a revenue raising provision, IRC section 864(f), which provided a one-time election under which, effectively, corporate groups could allocate some interest expense from foreign to domestic corporations and reduce the effect of limits on the foreign tax credit, is repealed. The repeal is retroactive to the election’s effective date (i.e., for tax years beginning after Dec. 31, 2020).
As these provisions may significantly affect your business, do not hesitate to call our office for an appointment to discuss.
The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11, 2021, is the latest major legislation that provides economic relief and stimulus, both tax and non-tax, during the Covid-19 pandemic.
As tax law is moving very quickly in 2021, we wanted to make you apprised of these changes.
Individuals
Recovery rebate credits (stimulus checks). ARPA provides a third round of nontaxable stimulus checks directly payable to individuals. The payments are structured as refundable tax credits against 2021 taxes but will paid in 2021 (not 2022).
The maximum payments are $1,400 per eligible individual ($2,800 for married joint filers) and $1,400 for each dependent (which, unlike the first two stimulus payments, includes older children and adult dependents). The payment phases out proportionally between $75,000 and $80,000 AGI for single filers, $112,500 and $120,000 for head of household filers, and $150,000 and $160,000 for married joint filers.
Rules for identification, for payments made notwithstanding no filing of 2019 and 2020 returns, and for limitations on offsets apply. Eligibility is based on information from 2020 income tax returns (or 2019 returns, if 2020 returns haven’t been filed when the advanced credit is initially issued). For households whose payment was based on 2019 income data, and who would be eligible to receive a larger payment based on 2020 data, IRS is directed to issue a supplementary payment.
Child tax credit. For 2021 (1) qualifying children include 17-year-olds, (2) the credit is increased to $3,000 per child ($3,600 for children under six years of age), but the increase is subject to modified AGI phase out rules (and the existing modified AGI phase out rules for eligibility for any credit at all continue to apply), (3) the credit is refundable, and (4) IRS will make periodic advance payments totaling 50% of its estimate of the credit in the last half of 2021.
Earned income tax credit (EITC). (1) For 2021 the credit is increased for taxpayers with no qualifying children and age restrictions for those taxpayers are relaxed; (2) after 2020 taxpayers that have a qualifying child but can’t meet the identification requirements for the qualifying child are nevertheless allowed the credit; (3) taxpayers may use the greater of their 2019 or 2021 earned income in calculating the credit for 2021; (4) after 2020, the amount of investment income that a taxpayer can have and still earn the credit is increased; and (5) after 2020 there is broadening of the existing exception to the credit’s joint filing requirement under which separated married people eligible to file jointly are allowed the credit even if they don’t file jointly.
Child and dependent care credit. For 2021 (1) the credit is refundable; (2) the amount of qualifying expenses taken into account for the credit is increased from $3,000 to $8,000 if there’s one qualifying care recipient and from $6,000 to $16,000 if there are two or more; (3) the maximum percentage of qualifying expenses for which credit is allowed is increased to 50% from 35%; and (4) phase-down rules, based on AGI, are changed.
The increased dependent care assistance program exclusion amount (see below) under Code Sec. 129 will also affect the child and dependent care credit, as the amount of expenses taken into account for the credit is reduced by the amount excludable from the taxpayer’s income under Code Sec. 129.
Dependent care assistance programs. For 2021, the amount excludible under a dependent care assistance program is increased to $10,500 (or $7,500 for a married taxpayer filing a separate return). Retroactive plan amendments are allowed to facilitate the increase.
Health care premium assistance credit. For 2021 and 2022, the credit will be available for a larger percentage of insurance premiums, and individuals whose income is greater than 400% of the poverty line will be eligible for (rather than barred from) the credit. For 2020, individuals who were provided advances of the credit under the Patient Protection and Affordable Care Act in excess of the credits to which they are entitled aren’t obligated to pay back the excess. And, notwithstanding any other rules, individuals who receive unemployment compensation during 2021 are eligible for the credit (and under rules that increase the amount of the credit).
Income exclusion for unemployment benefits. For 2020, taxpayers with modified AGI less than $150,000 can exclude from gross income $10,200 of their unemployment benefit. The exclusion is available to each spouse if a joint return is filed. For taxpayers who already filed 2020 returns and did not exclude unemployment benefits, IRS said that taxpayers shouldn’t file an amended return and that additional guidance will be provided.
Student loan forgiveness. Beginning in 2021 and continuing through 2025, the forgiveness of many types of loans for post-high school education won’t result in income inclusion for the forgiven amounts.
I’m available at your convenience to discuss in more detail any of the ARPA changes and how they apply to you.
Students and teenagers often get summer jobs. This is a great way to earn extra spending money or to save for later. The IRS offers a few tax tips for taxpayers with a summer job:
Visit IRS.gov for more about the tax rules for students.
IRS Summertime Tax Tip 2017-02, July 5, 2017