The Tax Advantage January 2022
As the US crawls toward recovery, the tax laws continue to evolve. Although President Biden’s massive Build Back Better plan failed to pass in 2021, the American Rescue Plan and the Consolidated Appropriations Act did pass and will impact most taxpayers. Following are some of the most prevalent changes and what it could mean for you.
The deadlines for 2021 returns filed in 2022 are as follows:
January 31 – Businesses must provide W-2s and/or 1099-NECs to employees, other income recipients, and the IRS
February 28 – Businesses must provide 1099-MISCs to impacted parties
March 15 – Partnership (1065) and S-corporation (1120-S) returns due. Also the deadline to make an S-corp election
April 18 – Form 1040 deadline for individuals / Form 1120 deadline for regular corporations
September 15 – Extension deadline for Partnerships and S-corps
October 17 - Extension deadline for individual 1040s
A third (and likely final) round of economic stimulus payments began in March of last year, and continued through December 31. The $1,400 payment for each taxpayer and qualifying dependent went to single taxpayers making less than $75,000 and married taxpayers making less than $150,000 ($112,500 for those filing as head of household). The payments were based on your 2020 tax return if that was filed, otherwise it was based on 2019 income. If your income was too high to receive the full $1,400, you will get the balance if your 2021 income has dropped below the applicable thresholds. You will need to provide us with IRS Letter 6475 (mailed out to you in January 2022) so that we can properly prepare your tax return.
The Child Tax Credit increased for 2021, and some taxpayers received an advance on the credit. For tax year 2021 only, the credit increased from $2,000 per qualifying child to $3,000 for children ages 6 through 17 at the end of 2021, and to $3,600 for children ages 5 and under. The advance credit was generally half of the total credit, and will need to be reconciled when filing your tax return. The IRS will give you the total amount of the advance payments received on Letter 6419 mailed out in January.
Higher income taxpayers will not receive the increased credit. The credit begins to phase out with income over $75,000 for single filers, $150,000 for joint filers. The Credit for Other Dependents, which covers children over age 17 and other qualifying relatives, will remain at $500.
If you took a Covid-related distribution from your retirement plan in 2020, you were able to spread the tax out over three years. The second year is now upon us, and you wil pay one-third of that tax with your 2021 tax return. This will hit many taxpayers hard since you will have no withholding, unlike the first year when you received the distribution. If you want to reduce your tax, you can roll part or all of the money back into the plan within the three year period.
The child and dependent care credit was increased effective 2021 tax year. If you pay someone to take care of your child under age 13 (or others incapable of self-care) while you work, you can now receive a credit up to $4,000 for one child and $8,000 for two or more. The credit is also now refundable, which means you could get the credit even if you have no tax liability. Special rules apply if the care is provided in your home, and if your income is too high. The FSA limit for child care was also upped to $10,500.
Due to the rise in tax-related identity theft, the IRS recommends you apply for an identity-protection PIN on their website, https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin . The IP PIN is a six digit number assigned to you to prevent someone else from filing a fraudulent tax return using your social. The PIN is valid for one year only.
Taxpayers age 72 and older must take distributions, referred to as RMDs, from their IRAs and 401Ks by 12/31 of each year to avoid a hefty penalty. There are two exceptions - if you turned 72 in 2021, then you have until April 18, 2022 to take the RMD (which means you will have two RMDs for the year). Those who work past 72 can usually delay the RMD from their current employer’s 401K until they retire.
Use the Get Transcript tool at IRS.GOV if you need data from a lost tax return. You can immediately print a summary of key tax information. If you need a copy of the actual tax return, you must mail in Form 4506 and pay a $43 fee to the IRS. You can also set up a full online account to see what you owe, and to allow a tax professional to access your account. Users must go through security procedures to authenticate their identities.
If you itemize your deductions, and have enough medical expenses to exceed 7.5% of your income, you can also include the cost of COVID-19 personal protective equipment. Included are amounts paid for home tests, face masks, hand sanitizer and wipes. The PPE expenses are also able to be covered by health flexible spending arrangements and health savings accounts.
An ABLE account allows disabled individuals to make nondeductible contributions of up to $15,000 per year to help maintain their health, independence and quality of life. The earnings on the account are tax-free if used for housing, transportation, education, job training, health needs, etc. Earnings used for nonqualified purposes are taxed and hit with a 10% penalty. Lifetime payins are capped based on the state of residency, and account owners remain eligible for Medicaid and SSI benefits in most cases.
Businesses can now deduct 100% of qualifying meals in 2021 and 2022. The rules applies to only food and beverages purchased at a restaurant for takeout or dining in at the establishment. The taxpayer or an employee must be at the meal, and the cost can not be lavish or extravagant. Prepackaged food or beverages bought at a store or similar facility do not qualify for the 100% write-off. Strict guidelines and documentation requirements should be followed to take a deduction.
Scammers have upped their efforts during the pandemic, using fake phone calls, emails, and other social media. The criminals many times impersonate IRS employees and try to trick you into providing personal information. The first IRS contact with taxpayers is almost always through the mail. If you receive such a call, email, or other scam, do not give out any information to them or send money. Report the incident to the Treasury Inspector General at www.tigta.gov, and to your local police.
If you are the charitable type, donations made directly to a qualified charity from a traditional IRA can save taxes. Taxpayers over 70 ½ can transfer up to $100K yearly from IRAs directly to the charity. The qualified charitable distributions can count as RMDs, but they are not taxable. You don’t get a deduction on Schedule A, but the strategy can be beneficial due to the higher standard deduction.
1099-K reported rules are slated to change starting in 2022. Third-party payment networks such as Paypal, Airbnb, Ebay and Amazon, must send 1099-Ks to payees who were paid more than $600 in a year, regardless of the number of transactions. This means more taxpayers than ever will receive the 1099-K forms, and will need to use when filing their 1040 tax return.
Contribute towards a Roth IRA for your child or grandchild who has had some wage income for the year. You can contribute up to $6,000, but not more than the child’s earnings. Earnings grow tax-free inside the Roth, and you will be providing a nice nest egg for the child. Contributions can be pulled out any time tax free, earnings must be left in until age 59 ½ to avoid taxation and penalty.
Although the feds won’t penalize you for not having medical insurance, California will. The penalty for not having coverage for the entire year will be at least $800 per adult and $400 for dependents, unless you qualify for one of the limited exceptions. Many taxpayers receive full or partial subsidies by getting insurance through Covered California.
The sale of your primary home can be partially tax-free if you have owned and used the property as your principal residence for at least two out of the last five years before the sale. Individual taxpayers can exclude $250,000 of gain, while married filing joint can exclude up to $500,000. The gain is the difference between the net sales price (total sales price less commissions and other fees) and the basis (cost plus improvements). Any gain in excess of these amounts are taxed at capital gains rates. Losses from sales of primary home are not deductible, and there are different rules if you ever rented out or used the home for business purposes.
Beware of firms that promise to settle your IRS debts for pennies on the dollar. The IRS calls many of the firms that offer these types of tax debt relief plans “offer-in-compromise mills.” Many of them charge big upfront fees and churn out relief applications that most can’t even qualify for. If you are able to pay your tax debt, even a little each month, the IRS will rarely accept an offer-in-compromise.
The rules regarding inherited IRAs recently changed. If you inherit an IRA from your spouse, you are still able to treat the IRA as your own and stretch the distributions over your lifetime. However, most non-spouse inherited IRAs must be distributed within ten years. Beneficiaries who are chronically ill, disabled, minor children, or those not more than ten years younger than the deceased IRA owner can use the more generous spousal rules.
The IRS and the Justice Department are serious about undisclosed foreign accounts. They are devoting more time and money to get taxpayers to report foreign accounts when the value exceeds $10,000 at any time during the year. The penalties for not reporting are steep - $10,000 apiece for non-willful violations, $100,000 for willful violations. Foreign banks are forced to provide the names of U.S. account owners to the US government.
Non-compliance regarding virtual currency transactions is a growing concern to the IRS. More reporting requirements could be on the way for the virtual currency exchanges. Congress wants to treat digital currency trades the same as stock sales, requiring brokers to report the transactions. Businesses may soon be required to report crypto currency transactions the same as if it were cash.
Like many other businesses, the IRS has been negatively impacted by the pandemic. Along with the pandemic, the numerous law changes, new relief programs, years of budget cuts, and a shrunken workforce, have all caused a huge decline in service. There are still almost 8 million tax returns currently at the IRS that require processing, mostly amended and prior year returns. Getting through to the IRS by phone is rarely successful. Congress has tried to increase funding at the agency, but so far their efforts have largely failed. Callback technology could be coming to the IRS soon that would allow callers to leave a phone number for a call back, instead of waiting on hold.
The standard mileage rate for business driving is going up in 2022. The rate will increase to 58 ½ cents per mile, up 2 ½ cents from 2021. To audit-proof your tax return, you must keep a contemporaneous and detailed log of the miles driven. The new rate for medical mileage is 18 cents per mile, and the charitable driving rate remains at 14 cents.
Tax breaks for upper education continue to benefit many taxpayers. The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per student for each of the first four years of college. The AOTC phases out if your income is over $80,000 for single and head of household filers, $160,000 for married filing jointly. The Lifetime Learning Credit can benefit part time students and those that have exhausted the AOTC. Other educational tax breaks include 529 plans and student loan interest deductions.
Phone: (925)754-9299 or (925)685-2137