New for tax year 2021/tax season 2022:
The IRS just released on November 8th their tips for getting ready for the upcoming filing season. Now is the time to start and make a list of the tax documents you are expecting and use that list to cross off the items as you receive them. Also keep in mind if you receive certain documents electronically or by mail so you can be on the lookout for these items. You can use your prior year tax returns and records as a guide for what to expect. For small businesses, use this time to reconcile your books, follow up on any outstanding invoices and clean up any other loose ends. Because of the pandemic, the tax deadline has been extended for the past two tax seasons. Remember, Tax Day for 2021 Tax Returns is set to be April 18th.
Another way to get ready for the upcoming tax season is to check withholdings and look at last year’s refund or tax due from your 2020 tax return. If you owed a substantial amount with your prior year tax return you may want to adjust your withholding or make an estimated payment by January 15th to avoid any surprises at tax time. If you received a large refund, you may wish to decrease your withholding and have more money in your take home pay each month. Working closely with your accountant and keeping them up to date with any life changes can help you avoid any surprises come tax time.
New for tax season 2022 will be reconciling any advance child tax credit payments you may have received along with the third economic impact payments. If you received either of these payments, be on the lookout for mail from the IRS in January 2022 containing the information you will need. IRS Letter 6419 will report the total amount of advance Child Tax Credit payments disbursed to you during 2021. You’ll need these amounts to reconcile on your 2021 Tax Return. Remember, if you got more than you were eligible for you’ll have to pay some back and if you didn’t get enough, you’ll receive the additional amount with the filing of your 2021 tax return. If you are receiving these payments, it is important to note that the IRS recently (on November 8th) updated the Child Tax Credit Update Portal (CTC UP) to allow taxpayers to adjust their income if needed. If your income in 2021 differs greatly from 2020 you may want to use this portal to inform the IRS of any significant changes in income. Changes made on this portal may impact the remaining advance payments you receive. You should work with your accountant to determine if this is necessary. It may help prevent owing additional tax when you file your 2021 tax return. Taxpayers who received their third economic impact payment should look out for IRS Letter 6475. If you receive either of these letters make a back up copy incase you misplace the letters when it’s time to file your taxes.
Some additional new items for tax year 2021:
- For 2020 certain taxpayers were able to exclude up to $10,200 of their unemployment income on their 2020 tax return. For 2021 taxes, there is no such exclusion at this time. Taxpayers receiving unemployment compensation in 2021 should make sure they have appropriate federal and state (if applicable) withholding to avoid any surprises at tax time.
- Required minimum distributions (RMDs) from traditional IRAs, inherited IRAs and other employer sponsored plans are back. The CARES Act temporarily waived RMDs for tax year 2020. Be sure to work with your accountant if you have any questions as the SECURE Act made significant changes to these retirement plans and the age at which you need to start taking RMDs. A planning tip for taxpayers that do not need the distribution is to consider a qualified charitable distribution (QCD). This allows a taxpayer to directly transfer their RMD to a qualified charitable organization. The charity must be a 501(c)(3) organization. This allows a taxpayer to exclude the RMD (up to a limit) from their adjusted gross income and still counts towards your RMD requirement.
- Amounts paid for personal protective equipment (PPE) can qualify as medical expenses for tax year 2021. These expenses include hand sanitizer, masks, and other items used to prevent the spread of COVID-19. However, keep in mind that total medical expenses still need to exceed 7.5% of adjusted gross income to be deductible for individuals.
2021 Q4 planning:
With the uncertainty of tax reform in Washington, year-end planning has been difficult to say the least and will continue to be until there is more clarity around proposed changes. For now, it looks like individual income tax rate increases and capital gain rate increases are off the table. Therefore, consider delaying income to the next year if possible. If you have any business expenses that you can accelerate and pay before year-end, you should do so to offset your income. If an individual is on the borderline of itemizing their deductions or taking the standard deduction, consider making additional charitable contributions in this tax year to ensure you receive a benefit for these deductions. Next year you can make less charitable contributions and take the standard deduction. Individual taxpayers can once again for tax year 2021 take advantage of recent tax law changes related to charitable contributions. For those taxpayers that take the standard deduction, they can receive a deduction of up to $300 or $600 if married filing jointly for cash contributions to qualified charities. Individuals who itemize their deductions can deduct cash contributions to qualified charities up to 100% of their adjusted gross income. Now is a good time to total up your donations for the year and make any additional contributions before year-end.
To the surprise of many who have been following the proposed legislation changes, the latest addition to the House bill includes a provision to increase the limitation on the deduction for state and local taxes (SALT) from $10,000 to $80,000 for a limited number of years. If this passes, taxpayers should consider paying additional state and local taxes and real estate taxes to maximize this deduction. Look for any real estate taxes due that can be paid prior to December 31st or any projected 2021 fourth quarter estimated state taxes normally due January 18, 2022, and pay those by the end of the year.
Another tax planning tip for individuals is to check in with your investment advisor to look for any investment losses in your portfolios to recognize and offset any realized gains recognized during the year. Keep in mind that if individuals have net capital losses, they can only deduct up to $3,000 and the remainder carries forward. You can use that $3,000 loss to offset regular income which may be especially beneficial to a taxpayer with an unusual high-income year.
Check in on your retirement plans such as your 401(k), and if you have not already, consider maximizing your contributions up to the limit ($19,500 for 2021) before year end. Taxpayers should also consider Roth conversions before year-end. Proposed tax law changes in the House bill may make some high-income taxpayers ineligible to participate in Roth conversions in the future. Take advantage of the ability to do so now. Roth conversions allow taxpayers to convert funds in pre-tax retirement accounts (such as a 401(k) or traditional IRA) to an after-tax Roth IRA. You’ll have to pay tax on the amount converted but if you had a lower income year in 2021 now is the time to do so. This will enable those funds to appreciate and grow tax-free for the future.
As with any tax law changes, pay close attention to developments and enactment dates for how any changes will impact you and your business.