2021 Tax Filing Season Brings Challenges That Echo 2020
Year-end Planning Essential for Individuals and Businesses
For the second year in a row, year-end tax planning for 2021 involves unusual factors related to the COVID-19 pandemic as well as potential new tax legislation. As Yogi Berra famously said: it’s “Déjà vu all over again.” Taxpayers must consider a variety of factors impacting both individual and business tax planning and filing requirements. Now is the time to consider your current tax strategies and make any necessary adjustments to ensure they are still meeting your needs.
Following are several key factors for year-end tax planning for individuals and businesses. There are many other factors to consider, depending on your unique circumstances, so now is a good time to set up a meeting with your Adams Brown tax advisor.
Economic Impact Payments (EIPs)
The American Rescue Plan Act enacted in spring 2021 created a new round of economic impact payments for qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received the payments already. However, if the IRS owes you more, the additional amount will be claimed on your 2021 income tax return, and we can help you plan for any modification now. If you received an EIP as an advance payment, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment.
The “above-the-line” maximum $300 deduction that was enacted as part of the COVID-19 relief measures in 2020 has been expanded for the 2021 tax year, allowing married joint filers to deduct $600. This deduction is specifically for taxpayers who don’t itemize. Taxpayers who itemize may deduct charitable donations up to 100% of their adjusted gross income for the second year in a row, up from the normal 60%.
If you received unemployment benefits related to job loss during the pandemic, the benefits are taxable for the 2021 tax year. For the 2020 tax year, the first $10,200 of unemployment benefits was excluded from taxable income. You should receive a Form 1099 from the state stating the amount you received. Be sure to review the 1099 for accuracy
Advance Child Tax Credit
The American Rescue Plan Act increased the amount of the Child Tax Credit and expanded eligibility for the credit to families with children up to age 17. It also created a larger credit for families with children under age 6. Most notably, ARPA created an advance payment mechanism enabling qualifying families to receive early payments of their 2021 Child Tax Credit. If you have qualifying children in your household, you likely started receiving monthly payments in July against your 2021 Child Tax Credit. The advance payments should have amounted to 50% of the total credit you will qualify for, based on the number of qualifying children in your household when you filed your 2020 or 2019 federal tax returns. Remember, the payments were an advance on the Child Tax Credit you would qualify for on your 2021 tax return, so when you file that return next spring, you will receive only the second half of the credit. If your income exceeds the applicable thresholds, you may have to pay this money back come filing time. In January 2022, the IRS will send you Letter 6419 to provide the total amount of advance Child Tax Credit payments that were disbursed to you during 2021. Please keep this letter.
Classroom Expense Deductions
If you are an educator, you may deduct costs for COVID-19-related classroom expenses. This now includes masks, gloves and disinfectant.
Required Minimum Distributions From Retirement Plans
These RMDs, which kick in during the tax year in which a taxpayer turns 72, were suspended for 2020 due to the COVID-19 pandemic. They are back again for 2021, and there are tax penalties for not taking them. If you don’t need the money to live on, consider making a Qualified Charitable Contribution directly to a qualifying charity. This allows you to meet the RMD requirement by making a charitable contribution of up to $100,000. Since the money goes directly to a qualifying charity, you have no tax liability on the funds. If you haven’t taken your RMD yet, contact your retirement plan advisor. It’s also a good time to review your investments for opportunities.
To guard against identity theft, the IRS is offering taxpayers the ability to receive an Identity Protection Personal Identification Number (IPPIN), which is used in lieu of Social Security numbers to file income tax returns. If you are a confirmed victim of tax-related identity theft and your IRS account has been resolved, the IRS will automatically mail you a notice with your new IPPIN each year. If you want to obtain an IPPIN as a proactive identity theft protection measure, you may apply for one. Click here for more information.
The IRS considers virtual currency (such as Bitcoin) as property for U.S. federal income tax purposes. As such, any transactions in or transactions that use virtual currency are subject to the same general tax principles that apply to other property transactions. If you had virtual currency activity during the tax year, you may be subject to tax and may have additional reporting obligations.
To maximize the value of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans, we recommend you review your retirement plans annually. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for future healthcare costs. We can help you determine whether you’re on target to reach your retirement goals.
Employee Retention Tax Credit
Businesses that did not take advantage of the ERTC during qualifying quarters can still realize the benefits of this credit by filing amended Forms 941. We can help you with the calculations to determine whether you would benefit from taking the ERTC now.
If you own a pass-through entity and you have been adversely affected by the $10,000 cap on deductibility of state and local taxes (SALT) on your federal tax return, be aware that many states have enacted “SALT workaround” laws that allow pass-through business owners to deduct their SALT taxes on their business Schedule , bypassing the $10,000 cap. The election methods to opt into these workarounds vary by state, and the analysis in determining the benefit to you can be complex and should be reviewed with your tax advisor to tailor to your specific situation.
Cryptocurrency transactions have become more common, both as trading activity and as payment for goods and services. However, users must understand the tax consequences. The IRS generally treats cryptocurrency – such as Bitcoin – as property, not currency, and applies the same rules regarding fair market value when crypto is used in trades. Mining activities are treated differently than investing activities. Contact your Adams Brown advisor to discuss the tax implications of your cryptocurrency trading activities.
Now is the time to check off all the compliance boxes. Do you have W-9 forms for all 1099 vendors? Is your vehicle mileage tracking current? Are all addresses of responsible parties up to date? Is your record keeping current for all business expenses? Remember, business meals from restaurants are 100% deductible for a short period.
Do you have solid IT security and backup policies? What about a disaster plan? The COVID-19 pandemic has shown us that businesses with disaster plans generally survive crises, and many are in a better position to take advantage of opportunities a crisis may present. Have you reviewed your pricing policies recently? With inflation on the rise, a pricing review should be on your agenda. Do you have a succession plan in place? Do you know what your business is worth? When was the last time you had a comprehensive insurance evaluation? What about interest rates – is it time to refinance to free up some cash flow? Finally, take a look at investment options for any cash reserves.
Review for any state tax withholding exposure or other workplace rules for employees working remotely. At the same time, consider your current key employee retention strategies. It also may be time to look at your retirement plan for changes and employee notifications. Do you work with contractors who may require a change to employee status? This also is a good time to evaluate wages being paid to S Corporation shareholders to ensure they are “reasonable” within your market.
Fixed Asset Planning
Review your current year purchases and gather invoices. Consider year-end equipment purchases that may be needed. Review your capitalization policies. Review rental rates and rates paid for self-rentals.
Review projected tax rates and consider acceleration or deceleration of income or expenses. Consider potential tax savings from a cost segregation study or R&D tax credits.
To maximize the value of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans, we recommend you review your retirement plans at least annually. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for future healthcare costs. We can help you determine whether you’re on target to reach your retirement goals.
General Planning Items to Consider
- Let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business and significant expenditures (real estate purchases, college tuition payments, etc.).
- Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible.
- Make sure you’re planning for estate and gift tax purposes. There is an annual exclusion for gifts ($15,000 per recipient, $30,000 for married couples) to help save on potential future estate taxes. This amount increases in 2022 up to $16,000.
- Consider Section 529 plans to save for education; there can be income tax benefits to doing so, and we can help you with any questions.
- Now is the time to think about any necessary updates to insurance policies or beneficiary designations.
- Discuss tax consequences of converting traditional IRAs to Roth IRAs.
Looming Tax Legislation and IRS Issues
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.
A final word must be said about the IRS. Its current backlog is unprecedented, and now the service is amid its annual e-filing system shutdown to prepare for the next filing season. If you have an amended or late return to file, the only way to file between now and the end of January is to file a paper return. If you have filings coming up, contact your Adams Brown advisor to discuss the best way to proceed.
Putting it All Together
Year-end planning should not focus just on tax savings. It is a great opportunity to take stock of your personal finances and business operations as well. Your advisors at Adams Brown are prepared to help you reach your goals faster with a holistic approach. Contact your Adams Brown advisor for a year-end planning discussion.