Article Highlights:

Maximize Education Tax Credits 
Employer Health Flexible Spending Accounts 
Maximize Health Savings Account Contributions 
Convert Traditional IRAs to Roth IRAs 
Don’t Forget Your 2021 Minimum Required Distributions 
Bunching Deductions 
Take Advantage of the Zero Capital Gains Rate 
Defer Deductions 
Increase IRA Distributions 
Defer Capital Gains by Investing in an Opportunity Zone Fund 
Sell Loser Stocks 
Take Steps to Avoid Underpayment Penalties 
Prepay State and Local Taxes 
Don’t Waste the 2021 Annual Gift Tax Exemption 
Not Needing to File May Be an Opportunity 
Utilize IRA-to-Charity Transfers 
Maximize Tax-Deductible Medical Expenses 
Make Business Purchases 
Divorced or Separated During the Year 
Disaster Loss Planning 
Increased Charitable Giving Opportunities 
Take Advantage of Energy Credits 

Taxes are like vehicles in that they sometimes need a periodic check-up to make sure they are performing as expected, and if ignored, can cost you money. That is true of taxes as well, especially for 2021, as the pandemic benefits begin to wane and President Biden’s tax proposals loom. The following is a list of potential tax strategies that you might benefit from. Every taxpayer’s situation is unique, and not all the tax strategies suggested here will apply to you. However, opportunities for tax planning are available for all income levels and a variety of tax circumstances, some of which may apply to your situation. But waiting too late in the year may not give you the time needed to take advantage of some of these strategies. Maximize Education Tax Credits – If you qualify for either the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC), check to see how much you have already paid for qualified tuition and related expenses during the year. If it is not the maximum allowed for computing the credits, you can prepay 2022 tuition if it is for an academic period beginning in the first three months of 2022 and use the expense for the 2021 credit. Employer Health Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. As a reminder, amounts paid after 2019 for over-the-counter medicine (whether or not prescribed) and menstrual care products are considered medical care and are considered a covered expense. The maximum contribution for 2021 is $2,750. Maximize Health Savings Account Contributions – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions, even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible, or nontaxable if made by your employer (within IRS-prescribed limits); earnings on the account are tax-deferred; and distributions are tax-free if made for qualifying medical expenses. Amounts paid after 2019 for over-the-counter medicine (whether or not prescribed) and menstrual care products are considered medical care and are considered a covered expense. However, only medical expenses you incur after you establish an HSA are eligible for tax-free distribution. It is possible for an HSA to become a supplemental retirement plan if the funds are left to accumulate. Convert Traditional IRAs to Roth IRAs – If your income is unusually low this year or even negative, you may wish to consider converting your traditional IRA to the more favorable Roth IRA which provides tax free accumulation, and the distributions are tax-free at retirement. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount. Don’t Forget Your 2021 Minimum Required Distributions – If you are age 72 or older, you must take required minimum distributions (RMDs) from your IRA, 401(k) plan, and other employer-sponsored retirement plans (but if you are still working, distributions from your current employer’s plan can be postponed in some circumstances). Failure to take a required withdrawal can result in a 50% penalty of the amount of the RMD not withdrawn. If you turned age 72 in 2021, you could delay the first required distribution to the first quarter of 2022, but if you do, you will have to take a double distribution in 2022, the one for 2021 and the 2022 RMD. One needs to carefully consider the tax impact of a double distribution in 2022 versus a distribution in both this year and next. Bunching Deductions – If your tax deductions normally fall short of needing to itemize and the standard deduction you are allowed is greater, or even if you can itemize but only marginally, you may benefit from adopting the “bunching” strategy. To be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. Take Advantage of the Zero Capital Gains Rate – There is a zero long-term capital gains rate for those taxpayers whose taxable income is below the 15% capital gains tax threshold. This may allow you to sell some appreciated securities that you have owned for more than a year and pay no or very little tax on the gain. Defer Deductions – When you itemize your deductions, you may claim only the deductions you paid during the tax year (the calendar year for most folks). If your projected taxable income is going to be negative and you are planning on itemizing your deductions, you might consider putting off some of those year-end deductible payments until after the first of the year and preserving the deductions for next year. Such payments might include house of worship tithing, year-end charitable giving, tax payments (but not those incurring late payment penalties), estimated state income tax payments, medical expenses, etc. Increase IRA Distributions – Depending upon your projected taxable income, you might consider taking an IRA distribution to add income for the year. For instance, if the projected taxable income is negative, you can take a withdrawal of up to the negative amount without incurring any income tax. Even if projected taxable income is not negative and your normal taxable income would put you in the 24% or higher bracket, you might want to take out just enough to be taxed at the 10% or even the 12% tax rates. Of course, those are retirement dollars; consider moving them into a regular financial account set aside for your retirement. Also be aware that distributions before age 59½ are subject to a 10% early withdrawal penalty. Defer Capital Gains by Investing in an Opportunity Zone Fund – A unique tax benefit is the ability to defer any capital gain into a qualified opportunity fund (QOF). QOFs are funds that invest in areas in need of development. If you have a capital gain from selling property to an unrelated party, you may elect to defer that gain by investing it into a QOF within 180 days of the sale or exchange. The gain won’t be recognized (i.e., you won’t be taxed on the gain) until your return for the earlier of the year of sale of the QOF or 2026. You can get up to 10% of the deferred gain forgiven entirely by holding the investment for the required time period, and you will pay no tax on any additional gain if the investment is held for 10 years. Sell Loser Stocks – Although the stock market has been performing well recently you still may have stocks that have declined in value. If you sell them before the end of the year you can use any losses to offset other gains for the year or produce a deductible loss. The net capital loss deductible on a tax return is limited to $3,000 ($1,500 if filing married separate) for the year, but any excess loss carries over to future years. You can repurchase stock in the same company for which you sold shares at a loss after 30 days have passed and avoid the wash sale rules. Take Steps to Avoid Underpayment Penalties – If you are going to owe taxes for 2021, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking a non-qualified distribution from a pension plan, which will be subject to a 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory rollover limit. Please consult this office to determine if you will be subject to underpayment penalties (there are exceptions) and, if so, the best strategy to avoid or minimize them. Prepay State and Local Taxes – You probably know that if you are not subject to the alternative minimum tax and you itemize your deductions, you are eligible to deduct both your property taxes and your state income tax. But did you know that you can increase the amount that you deduct on your 2021 tax return by prepaying some taxes? You can ask your employer to boost your state withholding by a reasonable amount or, if you are self-employed, pay your 4th-quarter state estimate due in January in December and increase your deduction. The same is true for your real estate taxes: if you pay your first 2022 installment in 2021, you can take it as part of your 2021 deduction. But be careful, the state and local tax deduction for any year is limited to a maximum of $10,000, so any amount more than $10,000 would be wasted as a tax deduction. Don’t Waste the 2021 Annual Gift Tax Exemption – Part of President Biden’s tax plan is to reduce the lifetime gift and estate tax exemption. Whether for that reason or you simply want to limit your estate’s exposure to inheritance taxes, you can give $15,000 each to an unlimited number of individuals in 2021, but you can’t carry over unused exclusions from one year to the next. Taxpayers and their spouses can use their gift tax exemptions together to give up to $30,000 per beneficiary. For example, if you are married, have four children and four grandchildren, you can remove $240,000 from your estate tax-free this year. The transfers also may save family income taxes when income-earning property is given to family members who are in the lower income tax brackets and are not subject to the kiddie tax. Not Needing to File May Be an Opportunity – If your income and tax situation is such that you do not need to file for 2021, don’t overlook the opportunity to bring in some additional income, to the extent it will be tax-free. For instance, if you have appreciated stock that you can sell without incurring any tax, consider selling it, or perhaps take a tax-free IRA distribution if you are 59½ or older or if younger and qualify for an exception to the “early withdrawal” penalty. Utilize IRA-to-Charity Transfers – If you are age 70½ or over, you can request that your IRA trustee directly transfer funds from your IRA to a charity. Although not deductible as an itemized charitable deduction, the distribution is not taxable. If you are age 72 or over when the IRA to charity direct transfer is made, the distribution can count towards your required minimum distribution for the year. This also reduces your AGI, which in some circumstances can reduce the amount of taxable Social Security income. There is no minimum charitable distribution, but the maximum amount per individual is limited to $100,000 per year. There are some complications if you are age 72 or older, have earned income and make a contribution to the IRA. Check with our office for the details. Maximize Tax-Deductible Medical Expenses – For example, if you have outstanding medical or dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of the AGI floor for deducting medical expenses, or if adding the payments would put you over the 7.5% threshold and you are itemizing your deductions. You can even use a credit card to pay the expenses, but you would only want to do so if the interest expenses you’d incur if you don’t pay off the card right away would be less than the tax savings. Make Business Purchases – You can reduce taxable income if you make last-minute business purchases such as for office equipment, tools, machinery, and vehicles and write them off using the 100% bonus depreciation or Sec. 179 expensing, provided you place the item(s) into business service by the end of the year. However, you must consider the impact that expensing the items will have on your taxable income and the Sec. 199A 20% pass-through deduction. It may be appropriate to contact this office in advance of any last-minute business acquisition. Divorced or Separated During the Year – A divorce or separation can have a significant impact on a couple’s tax filings. Filing joint or separate returns, who claims the children, the tax rules related to whether to take the standard deduction or itemize, how income and tax prepayments are allocated, and more are issues to be considered. Best to figure that all out in advance. Disaster Loss Planning – 2021 has had some significant declared disasters including Hurricane Ida and the wildfires in the West. Any losses incurred because of a federally declared disaster can be claimed on the current year’s tax return or, at the election of the taxpayer, on the prior year’s return (2020 for 2021 disasters), generally providing quicker access to a tax refund. However, care must be exercised to ensure a disaster loss is claimed on the return of the year that will provide the greatest benefit. In addition, after insurance reimbursement is accounted for, the result may not be as expected and should be determined before making the decision of which year to claim a loss. Increased Charitable Giving Opportunities – 2021 is the final year that the normal 60% of AGI limit on cash contributions has been increased to 100%, giving those with the means and the desire to increase their normal charitable contributions and deduct them as an itemized deduction. The normal 5-year carryover applies to any excess over 100% of AGI. Those who don’t itemize (currently about 90% of income tax return filers), are allowed to claim a deduction of up to $300 ($600 on a joint return) for cash charitable contributions made in 2021. Normally, only itemizers can deduct their charitable contributions. Take Advantage of Energy Credits – Two of the major green credits are the solar tax credit and the electric vehicle credit. The solar credit for 2021 is 26% of the cost of the installed solar system but the system must be complete and functional before year’s end to claim the credit in 2021. The credit is not refundable, and any excess has a limited carryover. The credit for electric vehicles must be determined from the IRS website since credit begins to phase out once 200,000 of the vehicle type by manufacturer has been sold. If you have obtained your medical insurance through a government marketplace, employing some of the strategies mentioned could impact the amount of your allowable premium tax credit. Residents of states that have an income tax will also need to consider the impact of some of these strategies on their state return. If you would like to discuss how these strategies and others not included in this article might provide you tax benefits based upon your tax circumstances, or would like to schedule a tax planning appointment, please give the office a call.

Article Highlights:

Credit Purpose 
Credit Amount 
Simplified Credit Calculation 
Failure to Take Advantage of the Credit 
Small Business Features 
Qualified Research Expenses 
Business Qualifications 

An obscure tax credit—generally referred to as the R&D (research and development) credit—was originally added to the tax code in 1981 as a two-year incentive for businesses and has been extended every year since, until it was recently made permanent. The purpose of the credit is an inducement and reward to get U.S. companies to increase their investment in research and development for new, improved, or technologically advanced products or trade processes, thus keeping the U.S. competitive with the rest of the world. Other applications of the credit may include improvement upon the functionality, reliability, performance, or quality of existing products or trade processes. The credit (IRC Sec 41) is generally 20% of the increase in research activities over a base amount and includes some very complicated calculations related to payments made to certain outside organizations and for energy research. The base amount is a fixed percentage of a taxpayer’s average annual gross receipts from a U.S. trade or business, net of returns, and allowances for the 4 tax years before the credit year. It can’t be less than 50% of the current year’s qualified research expenses. There is also a simplified credit calculation, which may be more suitable for a smaller business, that is equal to 14% (instead of 20%) of the excess of the qualified research expenses for the tax year over 50% of the average qualified research expenses for the three tax years preceding the tax year for which the credit is determined. Most of the complications involve larger businesses, while smaller businesses may fail to take advantage of the credit, not realizing those complications probably do not apply to them. Thus, many medium- to small-size businesses fail to claim the credit. The good news is that if your company qualifies for the credit and hasn’t utilized it, it can be claimed on an amended tax return for a prior year that is within the statute of limitations. The credit also includes two features that are favorable to small businesses ($50 million or less in gross receipts).

They may claim the credit against the alternative minimum tax (AMT) liability, and
The credit can be used by even smaller businesses ($5 million or less in gross receipts) against the employer’s part of the Social Security portion of the employer’s payroll tax (the FICA liability). 

To qualify for the credit, the research and development must be conducted on U.S. soil (including Puerto Rico and U.S. possessions) and generally includes qualified research expenses, defined by the tax code as: 

Qualified wages paid to or incurred by an employee. 
Supplies used in research and development other than: o Land and improvements to land and o Property that is subject to depreciation. 
Contract research expenses paid to a person other than an employee for qualified research. However, only 65% of these expenses qualify. 
Consortium expenses (research expenses paid to certain nonprofits engaged in scientific research) limited to 75% of the expense. 
Amounts paid to eligible small businesses, universities, and federal laboratories. 
Qualified energy research at 100% of the expense. 

To qualify for the credit, the taxpayer must show that the activities: 

Are intended to resolve technological uncertainty related to the capability or methodology for developing or improving the business component or the appropriate design of the business component. 
Rely on a hard science, such as engineering, computer, biological, or physical science. 
Are related to the development of a new or improved business component, defined as new or improved products, processes, internal use computer software, techniques, formulas, or inventions to be sold or used in the taxpayer’s trade or business, and 
Entirely constitute a process of experimentation involving testing and evaluation of alternatives to eliminate technological uncertainty.

The foregoing is a basic overview of the research credit, which can be quite simple for a smaller business but can become quite complicated for a larger business and those with more involved research and development expenses. Please contact this office for more details on how this credit may apply to your business.

An IRS letter sent to your mailbox may bring good news or bad news. It may just provide more information about your account, but it could also require a response on your part which you should not ignore or delay. If there are issues with your tax return, it is advised that you seek assistance from tax experts to avoid paying any unnecessary costs.
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Article Highlights:

COVID-19 and Tax-Return Processing Delays 
Congress Helped to Create the Backlog 
Taxpayer Advocate’s Assessment 
Backlog 

Before the COVID-19 pandemic, the IRS was getting refunds out swiftly and responded to calls and correspondence in a reasonable amount of time. However, COVID-19 brought about a perfect storm of delays, initially caused by employees having to stay home because lockdowns prevented processing centers from operating and workers from going to their offices. And in most instances, IRS employees could not work from home because of the secure nature of their tasks and the IRS’s computer system. Congress also heaped more work on the IRS by making the service responsible for distributing the economic recovery payments (stimulus payments), not just once but three times. Plus, Congress made retroactive tax changes, which required the IRS to modify already filed tax returns. Bottom line: it has been a rough couple of years for the IRS, and it is taking a long time for them to catch up. More recently, Congress mandated paying eligible taxpayers 50% of their child tax credit for 2021, estimated based on the 2020 return information, in six monthly installments from July through December, placing an additional burden on IRS resources. For those who hadn’t filed their 2020 return yet, the third economic recovery payment and the advance child tax credit payments were based on their 2019 tax return. But as people filed their 2020 returns, the IRS needed to recalculate the amounts of the payments so that taxpayers weren’t shorted. These do-overs take away time that otherwise could be spent working through the backlog of correspondence and amended returns for prior years and processing the 2020 returns being filed on extension. One of the IRS watchdogs, National Taxpayer Advocate Erin Collins, applauded the IRS in her mid-year report to Congress for processing most returns in a timely manner and issuing most of the economic recovery payments despite all of its added responsibilities. According to the advocate, the IRS did not have time to adjust its systems for the last-minute Dec. 27, 2020, legislation that made changes for the 2021 filing season. This required the IRS to manually verify the returns for which the taxpayer elected to use their 2019 earned income to claim the 2020 earned income tax credit or the additional child tax credit. Unlike prior years, the IRS had to deal with a large volume of returns requiring manual reviews. At the end of the 2021 tax season, the IRS had over 35 million individual and business returns backlogged. But the IRS is chipping away at the logjam. As of the end of July 2021, the backlog was down to 13.8 million returns. So, if you are caught up in the gridlock, not much can be done except to be patient. But there’s some good news – if the IRS owes you a refund that’s been delayed, they’ll likely pay you interest at the annual rate of 3%. There are not enough IRS employees to field all the calls about “Where is my refund?” or other issues, and anyone who does get through on the phone is lucky. Most spend hours on hold and never get through. We are not trying to make excuses for the IRS but just letting you know what the problems are and that it may be a bit longer for them to catch up. Let us know if we can help.

Article Highlights:

Filing Requirements 
Changing Filing Status 
Social Security Benefits 
Traditional IRA Deductibility 
Roth IRA Contribution Restrictions 
Higher Education Interest Deduction 
Itemized Deductions 
Medicare Premiums 
Child & Dependent Care Credit 
Earned Income Tax Credit (EITC) 
Premium Tax Credit (PTC) 
Tax Rates 
Other Limitations 

Married taxpayers have two options when filing their 1040 or 1040-SR tax returns. The first and most frequently used filing status is married filing joint (MFJ), where the incomes and allowable expenses of both spouses are combined and reported on one tax return. The joint status almost always results in the lowest overall tax. Spouses who file together are jointly liable for the tax, meaning either or both can be held responsible for paying the tax from the joint return. The second option is to file as married filing separately (MFS), with each spouse filing a return. Depending on whether the taxpayers are residents of a separate or community property state, these separate returns may include just the income and eligible expenses of each filer or a percentage of their combined income and expenses. Couples may choose the MFS option for a variety of reasons:

They want to avoid the joint and several liability for the tax. 
They have children from a prior marriage and want to keep finances separate. 
They only want to keep their taxes separate. 
The marriage is tenuous. 
The taxpayers are separated and don’t want to cooperate in filing a joint return. 
One spouse might get a larger refund by filing separately (the other will pay more). 
They think they can save money by filing separate returns, and a variety of other reasons. 

The fact of the matter is that Congress carefully writes the tax laws to eliminate tax breaks for those filing MFS and can make filing very complicated. Here are some of the issues related to separate filings. Filing Requirements – MFJ taxpayers generally do not need to file a return unless their joint income exceeds the standard deduction, $25,100 for 2021, but those filing MFS must file if they have just $5 of income. Changing Filing Status – Taxpayers cannot change their filing status from joint to separate after the unextended return due date, usually April 15. However, they can change from a separate to a joint return any time up to 3 years. Social Security Benefits – For joint filers, the income threshold where Social Security benefits become taxable is $32,000. For those filing separately, 85% of the benefits are taxable from the very first dollar of Social Security income. Traditional IRA Deductibility – An IRA contribution is not deductible for higher income taxpayers who are also active participants in qualified requirement plans. For joint filers with employer-sponsored plans, the IRA deductibility for 2021 begins to phase out when their joint income reaches $105,000 and is fully phased out at $125,000. But when filing MFS, the deductibility begins to phase out with the first dollar of income and is fully phased out when the AGI (adjusted gross income) reaches $10,000. Roth IRA Contribution Restrictions – The ability to contribute to a Roth IRA is limited for higher income taxpayers, and for joint filers, the 2021 allowable contribution phases out with AGIs between $198,000 and $208,000. However, for separate filers, the ability to contribute to a Roth IRA phases out for AGIs between $0 and $10,000. Higher Education Interest Deduction – Joint-return filers can deduct $2,500 per year of qualified student loan interest, but separate-return filers are not allowed any deduction. Itemized Deductions – Where one spouse filing MFS itemizes their deductions, the other spouse must do the same and cannot take the standard deduction. Medicare Premiums – The premiums for Medicare participants are substantially higher for individuals filing separate returns compared to those filing jointly. In addition, premiums are based on a taxpayer’s filing status 2 years prior. That means you won’t even notice the increase when the separate returns are filed. For example, if a couple filing jointly had an AGI of $180,000 in 2019, their monthly Medicare premiums in 2021 would be $207.90 per month each. On the other hand, if they had filed separate 2019 returns and each had an AGI of $90,000, their Medicare premiums in 2021 would be $475.20 per month each. Thus, each one’s premiums for the year would be $3,208 more in 2021 because they used the MFS status in 2019. Child & Dependent Care Credit – Separate filers cannot claim this credit unless they are legally separated. Earned Income Tax Credit (EITC) – Generally, MFS filers cannot claim the EITC unless one or both are qualified to claim the head of household (HH) filing status. That would generally mean they are separated and maintaining separate households. To qualify for HH, a married taxpayer must pay half the cost of maintaining a home for a dependent child for the last 6 months of the year. A married couple cannot reside together and one of them claim HH filing status. Thus, under most martial separation circumstances, one spouse would file MFS and one HH, and only the one filing HH could claim the EITC if otherwise qualified. Premium Tax Credit (PTC) – Although there are some infrequent exceptions, taxpayers filing as MFS won’t qualify for the PTC, which is the government supplement for the cost of health care insurance purchased through a government health marketplace for lower to middle-income taxpayers. Tax Rates – The tax rates for MFS are twice what they are for joint-filing taxpayers. Other Limitations – For MFS filers, most other tax deductions and limitations, such as the standard deduction, allowable capital losses, and rental loss limitations, are half of what they are for joint filers.If you anticipate filing married separate returns, please contact this office to see how that filing might impact the outcome of your tax liability.

October 12 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during September, you are required to report them to your employer on IRS Form 4070 no later than October 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.October 15 – Taxpayers with Foreign Financial InterestsIf you received an automatic 6-month extension of time to report your 2020 foreign financial accounts to the Department of the Treasury, this is the due date for Form FinCEN 114.October 15 – Individuals If you requested an automatic 6-month extension to file your income tax return for 2020, file Form 1040 and pay any tax, interest, and penalties due.October 15 –  SEP IRA & Keogh ContributionsLast day to contribute to a SEP or Keogh retirement plan for the calendar year 2020 if the tax return is on extension through October 15.