Taxes are a crucial part of closing a business. From federal and state taxes to employees’ payroll, there are a myriad of tax-related issues to consider. This video will help you check off the list of tax loose ends as you close your doors.

Article Highlights:

Tax Compliance 
Hard-to-Trace Income Sources 
Two-Tiered Compliance 
Bank Transaction Reporting Threshold 

Tax-compliance rates in the United States are based, in large part, on how taxpayers accrue income. Those who receive income that is reported by a third-party source, such as wage earners, exhibit near-perfect compliance rates on their salaries – since the payer of the income also reports that income as a deduction, such as the employer deducting wages as a business expense and reporting the wages on a W-2, a copy of which goes to the IRS. By contrast, taxpayers who accrue income in hard-to-trace ways exhibit much lower rates of compliance, as no third-party source reports the income to tax authorities. Instead, some of these taxpayers take advantage of the fact that certain income streams are hidden from the IRS, with no information that the IRS can use to detect noncompliance. Higher-income taxpayers disproportionately accrue less visible income streams. This tax-compliance divergence means that low- and middle-income taxpayers have higher compliance rates, while upper-income taxpayers likely have higher evasion rates. The Department of the Treasury estimates that the cost of tax evasion among the top 1 percent of taxpayers exceeds $160 billion a year. The Biden administration’s efforts to ferret out taxpayers who are not reporting all of their income – and thus are escaping taxation – originally included the idea to require all financial institutions – including banks, Wall Street brokerage firms, credit unions, and private lenders – to report consumers’ account transactions totaling $600 or more annually. This would be done by including two new boxes on the applicable annual 1099 form: one would report deposits into the account, and the other would report the withdrawals. This created a firestorm of opposition from the financial institutions whose job it would be to report consumers’ transactions, which claimed this would be an added burden and expose both consumers and businesses to possible data breaches and privacy intrusions. On the other hand, supporters argue that the financial institutions’ customers would not be exposed to any new privacy issues or obligations, yet the institutions would be providing the IRS with more information to track down tax cheats and help close the tax gap by an estimated $600 billion annually. On October 19, 2021, in the face of widespread opposition, the Biden administration has backed down and is now proposing raising the reporting threshold to $10,000 in annual transactions while exempting income from which federal taxes are automatically deducted, as well as federal benefits like unemployment and Social Security. Keep in mind that this reporting requirement is part of the proposed $3.2 trillion package (Build Back Better Act) being negotiated in Congress, and there is no assurance it will be included in the final bill. However, if it is, it would not be effective until December 2022.

Article Highlights:

How Cryptocurrency is Treated for Tax Purposes
Capital Asset
Who Keeps Track of Cryptocurrency Ownership and Transactions
How Many Cryptocurrencies Are There?
What Is Cryptocurrency Mining?
What Is a Cryptocurrency ‘Hard Fork’?
Why Is Cryptocurrency Appealing to Some?
How Is the Value of Cryptocurrency Determined?
Are Cryptocurrencies Good Investments?
Virtual Currency and 1031 Exchanges
First In – First Out (FIFO)
Foreign Currency Transactions
Foreign Bank and Financial Account (FBAR) Reporting
Payments To Employees
Payments To Independent Contractors
Backup Withholding
Charitable Donations of Cryptocurrency
IRS Compliance Campaign

If you have purchased, owned, sold, gifted, made purchases with, or used cryptocurrency in business transactions, there are certain tax issues you need to know about. Unfortunately, there are some unanswered questions and little specific guidance offered by the IRS other than in Notice 2014-21 and Revenue Ruling 2019-24. This article includes the guidance from the Notice as well as general tax principles that apply. One of the big issues of cryptocurrency is how it is treated for tax purposes. The IRS says that it is property, so that every time it is traded, sold, or used as money in a transaction, it is treated much the same way as a stock transaction would be, meaning the gain or loss over the amount of its original purchase cost must be determined and reported on the owner’s income tax return. That treatment applies for each transaction every time cryptocurrency is sold or used as money in a transaction, resulting in a major bookkeeping task for those that use cryptocurrency frequently.
Example A: Taxpayer buys Bitcoin (BTC) so he can make online purchases without the need for a credit card. He buys a partial BTC for $2,425 and later uses it to buy goods worth $2,500 (let’s say the partial BTC was trading at $2,500 at the time he purchased the goods). He has a $75 ($2,500 – $2,425) reportable capital gain. This is the same result that would have occurred if he had sold the BTC at the time of the purchase and used cash to purchase the goods. This example points to the complicated record-keeping requirement for tracking BTC’s basis. Since this transaction was personal in nature, no loss would be allowed if the value of BTC had been less than $2,425 at the time the goods were purchased. Of course, if the taxpayer in this example only sold a fraction of his Bitcoin – say enough to cover a $500 purchase – the gain would only be $15: $500/$2500 = .2 x 2425 = 485; 500 – 485 = 15.
On the bright side, for most individuals, cryptocurrency is generally treated as a capital asset, so any gain is a capital gain, and if the asset is held for more than a year, any gain will be taxed at the more favorable long-term capital gains rates. If the cryptocurrency is being held as an investment and the sale results in a loss, then the loss may be deductible. Capital losses first offset capital gains during the year, and if a loss remains, taxpayers are allowed a $3,000-per-year loss deduction against other income, with a carryover to the succeeding year(s) if the net loss exceeds $3,000. If you don’t understand how cryptocurrencies function here is a brief explanation.

Who Keeps Track of Cryptocurrency Ownership and Transactions? – Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system and provides seamless peer-to-peer transactions around the world. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Those who maintain these digital ledgers are referred to as miners.
How Many Cryptocurrencies Are There? – There are currently over 10,000 different cryptocurrencies traded publicly. The total value of all cryptocurrencies in mid-July 2021, was approximately $1.4 trillion. This was down from an April 2021 high of $2.2 trillion. This is evidence of the volatility of cryptocurrency.
What Is Cryptocurrency Mining? – Mining is the process by which new blocks of cryptocurrency are inserted into circulation and the way that new transactions are confirmed by the network. Mining is a critical component of the maintenance and development of the blockchain ledger and requires sophisticated hardware that solves extremely complex math problems. The computer that finds the solution to the problem is awarded the next block (files where data pertaining to the cryptocurrency network are permanently recorded) and the process begins again. Miners are rewarded for their efforts in cryptocurrency. For tax purposes the IRS in their guidance have determined that miners are operating a trade or business and the value of the cryptocurrency earned (determined in U.S. dollars at the time of the transaction) is included in the gross income of that business. The business’ profit is treated the same as it is for any other business – taxed as ordinary income and subject to self-employment tax.
Example – An individual mines one Bitcoin in 2020. On the day it was mined, the market price of a Bitcoin was $10,000. The miner has $10,000 of business income in 2020 subject to both income tax and self-employment tax. Going forward, the basis in that Bitcoin is $10,000. If the miner later sells it for $12,000, there is a taxable capital gain of $2,000 ($12,000 − $10,000).

What Is a Cryptocurrency ‘Hard Fork’? – You may have heard the term ‘hard fork’ associated with cryptocurrency and wonder what it means. A hard fork occurs when there is a split in a cryptocurrency’s blockchain. Bitcoin had a hard fork in its blockchain on August 1, 2017, dividing into two separate coins: Bitcoin and Bitcoin Cash. Each holder of a Bitcoin unit was entitled to one Bitcoin Cash unit. Similarly, Litecoin, the fifth-largest cryptocurrency, had a hard fork— Litecoin Cash—in February 2018. In October 2019 the IRS released cryptocurrency guidance (Revenue Ruling 2019-24) that explains that a taxpayer:
o Does not have gross income from a hard fork of the taxpayer’s cryptocurrency if the taxpayer does not receive units of a new cryptocurrency; and o Has ordinary income as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of the new cryptocurrency. (An airdrop is a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses.)
According to the IRS, taxpayers who received Bitcoin Cash as a result of the 8/1/2017 Bitcoin hard fork received ordinary income because the taxpayers had an ‘accession to wealth’. Further, the date of receipt and fair market value to be included in income was dependent on when the taxpayer obtained dominion and control over the Bitcoin Cash.
Why Is Cryptocurrency Appealing to Some? Cryptocurrencies appeal to their supporters for a variety of reasons.
o Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable. o Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation. o Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems. o Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money.

How Is the Value of Cryptocurrency Determined? Unlike corporate stocks whose values are based on current earnings and the potential for growth, cryptocurrency values are based on what a willing buyer is willing to pay a willing selling. Using Bitcoin as an example you can see the volatility associated with this most popular cryptocurrency.

Are Cryptocurrencies Good Investments? That depends upon whom you talk to. Some cryptocurrency investors have made substantial amounts with their investments while others have lost substantial amounts. Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments. Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone must pay more for the currency than you did. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation. Some notable voices in the investment community have advised would-be investors to steer clear of cryptocurrencies. Warren Buffett once compared Bitcoin to paper checks: ‘It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?”

Here is some guidance that applies to specific issues:

Virtual Currency and 1031 Exchanges – Many virtual currency investors believe they can exchange one type of virtual currency for another without any tax consequences. Unfortunately, that is not true. Beginning in 2018 Congress altered the rules related to exchanges, limiting them to real estate transactions. Thus, investors in virtual currency who trade one type of virtual currency for another will have to treat exchanges as a sale and purchase and are required to report their capital gain or loss for each exchange.
First In – First Out (FIFO) – When trading stocks investors who purchase various stock lots at different times and for different costs can choose which stocks they are selling for a specific transaction, giving them the ability to minimize their taxable gains. Brokerage firms generally have the capability to identify blocks of stock. This does not seem to be the case for cryptocurrencies and the IRS has not provided any guidance. Thus, it would seem cryptocurrencies would be traded FIFO.
Foreign Currency Transactions – Under currently applicable law, cryptocurrency is not treated as currency that could generate foreign currency gain or loss, for U.S. federal tax purposes.
Foreign Bank and Financial Account (FBAR) Reporting – Reporting certain foreign bank and financial accounts is required by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and the FBAR report is filed with that agency rather than the IRS. Through the filings for 2020, cryptocurrency transactions have not been required to be reported on the FBAR. However, in January 2021, FinCEN said that it intends to propose to amend the regulations implementing the Bank Secrecy Act regarding FBARs to include virtual currency as a type of reportable account. No further details have been announced so far. • Payments To Employees – When cryptocurrency is used as payment to an employee, the usual payroll withholding and reporting rules still apply and the employee must be issued a W-2. All amounts are reported in U.S. dollars.
Payments To Independent Contractors – If independent contractors are compensated with cryptocurrency more than the equivalent of U.S. $600 (as determined on the date of the payment), the payment must be reported to the government by filing form 1099-NEC. Payments, whether more than $600 or not, are includable in the independent contractor’s business income and profits are subject to both income tax and self-employment income tax.
Backup Withholding – There are situations when the payer is required to withhold on payments to individuals who are not paying their taxes. In these cases, the IRS will notify the payer that they must withhold from payments to certain individuals and remit the withholding to the IRS. When payments to these individuals is made in cryptocurrency, the equivalent U.S. dollar amount of cryptocurrency payment and withholding must be determined at the time the payment was made to the individual. The withholding must be determined and remitted to the IRS in U.S. dollars. The current backup withholding rate is 24 percent of the payment.
Charitable Donations of Cryptocurrency – Instead of selling the cryptocurrency and donating the after-tax proceeds, a taxpayer can donate it directly to a charity. If the virtual currency has been held longer than one year, this approach provides significant tax benefits:
o The tax deduction will be equal to the fair market value of the donated cryptocurrency (as determined by a qualified appraisal), and the donor will not pay tax on the gain. o This also results in a larger donation because, instead of paying capital gains taxes, the charity will receive the full value of the donation.

IRS Compliance Campaign – The IRS has been engaged in a virtual cryptocurrency compliance campaign to address tax noncompliance related to virtual currency use through outreach and examinations of taxpayers and plans to remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits and criminal investigations. Taxpayers who do not properly report the income tax consequences of virtual currency transactions are liable for the tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution. To further the IRS’ efforts to flush out taxpayers who may have cryptocurrency reporting requirements, a Yes/No question has been included on Form 1040 asking taxpayers whether they received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency during the tax year. When signing their return, a taxpayer attests under penalties of perjury to have a ‘true, correct and complete’ return. Taxpayers who answered the cryptocurrency question ‘no,’ and the IRS finds that they actually had reportable virtual currency transactions, could be subject to significant penalties.

If you have questions related to your involvement with cryptocurrency, please give this office a call.

Article Highlights

Filing status.
Adjusted gross income (AGI).
Taxable income.
Marginal tax rate.
Alternative minimum tax (AMT).
Tax Credits.
Underpayment of estimated tax penalty.

When discussing taxes, reading tax related articles or instructions one needs to understand the basic lingo and acronyms used by tax professionals and authors to be able to grasp what they are saying. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms.
Inflation Adjustments – The standard deductions, tax rates, amounts that can be contributed to retirement plans, virtually all amounts claimed as deductions and credits are annually adjusted for cost-of-living changes from the prior year or other base year as required by the tax code. Thus, when determining an amount, care should be taken to determine the year-specific amount. The numbers used in this article are for the year 2021.

Filing Status – Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you qualify for the more beneficial head of household status. A special status applies for some widows and widowers.Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:
o pay more than one half of the cost of maintaining his or her home, a household that was the principal place of abode for more than one half of the year of a qualifying child or certain dependent relatives, oro pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.
A married taxpayer may be considered unmarried for the purpose of qualifying for head of household status if the spouses were separated for at least the last six months of the year, provided the taxpayer wanting to qualify for the head of household status maintained a home for a dependent child for over half the year.Surviving spouse (also referred to as qualifying widow or widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The main benefit of this status is that the widow(er) can use the more favorable married joint tax rates rather than the head of household or single rates. In the year the spouse passed away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return, which would then also require the surviving spouse to use the married separate status for that year.If a taxpayer is married to a non-resident alien, the taxpayer has two options: file as married separate reporting only their income, deductions and credits or elect to file a joint return with the spouse including the world-wide income of both of them on a joint return.
Adjusted Gross Income (AGI) – AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before certain below-the-line deductions and the standard or itemized deductions). The most common adjustments are penalties paid for early withdrawal from a savings account, and deductions for contributing to a traditional IRA or self-employment retirement plan. Many tax benefits and allowances, such as credits, certain adjustments, and some deductions are limited by the amount of a taxpayer’s AGI.
Modified AGI (MAGI) – Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited.
Taxable Income – Taxable income is AGI less deductions (either standard or itemized). Your taxable income is what your regular tax is based upon using a tax rate schedule specific to your filing status. The IRS publishes tax tables that are based on the tax rate schedules and that simplify the tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999. The tables for 2021 have not been released yet, but those for 2020 can be found in the 1040 instructions beginning on page 66.
Marginal Tax Rate (Tax Bracket) – Not all of your income is taxed at the same rate. The amount equal to your standard or itemized deductions is not taxed at all. The next increment is taxed at 10%, then 12%, 22%, etc., until you reach the maximum tax rate, which is currently 37%. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 24% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $240 in federal tax ($1,000 x 24%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate for 2021 by using the table below.

TABLE #1 – Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:
Tax is:

Not Over
$19,900
–
–
–
10% of T.I.
–

Over
$19,900
but not over
81,050
$1,990
Plus 12% of excess over
$19,990

Over
$81,050
but not over
$172,750
$9,328
Plus 22% of excess over
$81,050

Over
$172,750
but not over
$329,850
$29,502
Plus 24% of excess over
$172,750

Over
$329,850
but not over
$418,850
$67,206
Plus 32% of excess over
$329,850

Over
$418,850
but not over
$628,300
$95,686
Plus 35% of excess over
$418,850

Over
$628,300
–
–
$168,993.50
Plus 35% of excess over
$628,300

TABLE #2 – Heads of Household

If Taxable Income Is:
Tax Is:

Not Over
$14,200
–
–
–
–
–

Over
$14,200
but not over
$54,200
$1,420
Plus 12% of excess over
$14,200

Over
$54,200
but not over
$86,350
$6,220
Plus 22% of excess over
$54,200

Over
$86,350
but not over
$164,900
$13,293
Plus 24% of excess over
$86,350

Over
$164,900
but not over
$209,400
$32,145
Plus 32% of excess over
$164,900

Over
$209,400
but not over
$523,600
$46,385
Plus 35% of excess over
$209,400

Over
$523,600
–
–
$156,355.00
Plus 37% of excess over
$523,600

TABLE #3 – Single

If Taxable Income Is:
Tax Is:

Not Over
$9,950
–
–
–
–
–

Over
$9,950
but not over
$40,525
$995
Plus 12% of excess over
$9,950

Over
$40,525
but not over
$86,375
$4,664
Plus 22% of excess over
$40,525

Over
$86,375
but not over
$164,925
14,751
Plus 24% of excess over
$86,375

Over
$164,925
but not over
$209,425
$33,603
Plus 32% of excess over
$164,925

Over
$209,425
but not over
$523,600
$47,843
Plus 35% of excess over
$209,425

Over
$523,600
–
–
$157,804.25
Plus 37% of excess over
$523,600

TABLE #4 – Married Individual Filing Separate

If Taxable Income Is:
Tax Is:

Not Over
$9,950
–
–
—
–
–

Over
$9,950
but not over
$40,525
$995
Plus 12% of excess over
$9,950

Over
$40,525
but not over
$86,375
$4,664
Plus 22% of excess over
$40,525

Over
$86,375
but not over
$164,925
$14,751
Plus 24% of excess over
$86,375

Over
$164,925
but not over
$209,425
$33,603
Plus 32% of excess over
$164,925

Over
$209,425
but not over
$314,150
$47,843
Plus 35% of excess over
$209,425

Over
$314,150
–
–
$84,496.75
Plus 37% of excess over
$314,150

Taxpayer & Dependent Exemptions – In the past, taxpayers were able to qualify for an exemption amount for the filer, spouse if filing jointly and each dependent, which was also subtracted from AGI to determine taxable income. However, beginning in 2018 and through 2025 the deduction for the exemption amounts has been suspended and replaced with a higher standard deduction and child tax credit.
Qualified Child – A qualified child is one who meets the following tests:
(1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;(2) Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;(3) Is younger than the taxpayer;(4) Did not provide over half of his or her own support for the tax year;(5) Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).

Dependents – Even though there’s currently no deduction for dependent exemptions, there are still some significant tax benefits for taxpayers who are able to claim a dependent. To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five of the following dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount an individual can make and still qualify as a dependent if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.
Qualified Child – A qualified child is one who meets the following tests:
(1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;(2) Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;(3) Is younger than the taxpayer;(4) Did not provide over half of his or her own support for the tax year;(5) Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).

Deductions – A taxpayer generally can choose to itemize deductions or use the standard deduction. The standard deductions is illustrated below.

Filing Status
Standard Deduction

Single
12,550

Head of Household
18,800

Married Filing Jointly
25,100

Married Filing Separately
12,550

The standard deduction is increased by multiples of $1,700 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,350. The extra standard deduction amount is not allowed for elderly or blind dependents. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction. The standard deduction of a dependent filing his or her own return will oftentimes be less than the single amount shown above.
For 2021 only, taxpayers claiming the standard deduction are also allowed to deduct from their AGI up to $300 ($600 for joint filers) of cash contributions made to qualified charitable organizations. Normally, charitable contributions are deductible only when itemizing the deductions described next.
Itemized deductions generally include:
(1) Medical expenses, limited to those that exceed 7.5% of your AGI.
(2) Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes, but limited to a total of $10,000 for the year.
(3) Interest on qualified home acquisition debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses).
(4) Charitable contributions, generally limited to 60% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI. For 2020 and 2021 the limit was increased to 100% of AGI for cash contributions.
(5) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.

Alternative Minimum Tax (AMT) – The AMT is another way of being taxed that has often taken taxpayers by surprise. Even though the AMT was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum amount of tax, it sometimes snares lower income taxpayers. Your tax must be computed by the regular method and also by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.
o The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.o Itemized deductions:
– Taxes are not allowed at all for the AMT.- Interest paid for loans to purchase non-conventional homes such as motor homes and boats is not allowed as an AMT deduction but is deductible for regular tax. For years 2018–2025, interest paid on home equity debt is also not allowed for either AMT regular tax purposes.
o Nontaxable interest from private activity bonds is tax free for regular tax purposes, but some is taxable for the AMT.o Statutory stock options (incentive stock options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.o Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers.

AMT EXEMPTIONS & PHASE OUT

Filing Status
Exemption Amount

Where Exemption Is Totally Phased Out

Married Filing Jointly
$114,600
$1,505,600

Married Filing Separate
$57,300
$752,800

Unmarried
$73,600
$818,000

AMT TAX RATES

AMT Taxable Income
Tax Rate

0 – $199,900 (1)
(1) 26%

Over $199,900 (1)
(1) 28%

(1) $99,950 for married taxpayers filing separately
Your tax will be whichever is the higher of the tax computed the regular way and by the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom-line tax and raise a question of possible AMT. Fortunately, due to tax reform that increased the AMT exemption amounts and the phaseout thresholds, fewer taxpayers are paying AMT. Tax Tip: If you were subject to the AMT in the prior year, you itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be taxable in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not included in the subsequent year’s income.

Tax Credits – Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are some commonly encountered credits that are based simply on the number or type of your dependents or your income. These and another popular credit are outlined below.
o Child Tax Credit – Thanks to the American Rescue Plan Act, the child tax credit for one year only (2021) has been increased to $3,000 for a child under age 18 ($3,600 if under age 6), up from $2,000 in 2020. Unlike other years, the credit is fully refundable and there is no requirement for the taxpayer to have earned income.The credit has two phaseouts for higher income taxpayers. Phaseout is $50 for each $1,000 of MAGI above the thresholds. The threshold phases out the increase in child credit for 2021 over $2,000 per child. The first phaseout threshold is $150,000 for married filing joint filers, $112,500 for those filing as head of household and $75,000 for others. The second phaseout applies to the $2,000 portion of the credit with thresholds of $400,000 for married filing taxpayers and $200,000 for others.Congress mandated that the IRS estimate this credit for taxpayers based upon their 2020 returns and pay half of the estimated credit in monthly installments beginning July 2021. Taxpayers will need to reconcile the advance payments with the actual credit determined when they complete their 2021 return; repayment of excess advance amounts may be required depending on AGI.o Dependent Credit – A nonrefundable credit is also available to taxpayers with a dependent who isn’t a qualifying child. The $500 dependent credit is not refundable and subject to the second phaseout discussed above for child tax credits.o Earned Income Credit – This is a refundable credit for a low-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $10,000 is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.

EIC PHASE-OUT RANGE

Number of Children
Joint Return
Others
Maximum Credit

None
$17,560 – $27,380
$11,610 – $21,430
$1,502

1
$25,470 – $48,108
$19,520 – $42,158
$3,618

2
$24,470 – $53,865
$19,520 – $47,915
$5,980

3
$25,470 – $57,414
$19,520 – $51,464
$6,728

o Residential Energy-Efficient Property Credit – This credit is generally for energy-producing systems that harness solar, wind, or geothermal energy, including solar-electric, solar water-heating, fuel-cell, small wind-energy, and geothermal heat-pump systems. These items currently qualify for a 26% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2022.The credit rate reduces to 22% in 2023 The credit expires after 2023.

Withholding and Estimated Taxes – Our ‘pay-as-you-go’ tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the ‘pay-as-you-go’ requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:1) 90% of the current year’s tax liability; or2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability.If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.

Please call if this office can be of assistance with your tax planning needs.

To get ready for your tax appointment, we use tax organizers to help us identify missing tax deductions and get you more organized before your appointment. We update the tax organizer annually to make sure you are compliant with the latest tax law changes.
The 2021 individual tax organizer is provided in three configurations to assist you in collecting relevant tax information needed to properly prepare your tax return. Access any of the three versions by double-clicking on the underlined title links below. The organizers can be downloaded to your computer where you can fill and save the information until you have completed collecting all of your information. After you have completed it, please forward the organizer (printed or digitally) to our office for immediate service. If you have an office appointment, you can print it out and bring it with you to the meeting. A word of caution: you can fill the organizers online and print them out. However, if you close the file, your data will not be saved unless the form is saved to your computer.
Once the completed organizer has been received, you will be contacted by phone, fax or e-mail with any questions, comments, or suggestions. If you e-mail our office advising us that you have sent your tax materials, we will notify you of their receipt.
2021 Basic Organizer – This organizer is suitable for clients that are not itemizing their deductions and DO NOT have rental property or self-employment expenses.2021 Basic Organizer plus Itemized Deductions – This organizer is suitable for clients that are itemizing their deductions and DO NOT have rental property or self-employment expenses.2021 Full Organizer –  This organizer includes the information included in the basic organizer, plus entries for itemized deductions, rental properties and self-employment expenses.2021 Business Organizer – Use this organizer for partnerships and incorporated business entities.2020 Prior Year Individual Organizer – If you are filing your 2020 return late, please use this organizer.

November 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during October, you are required to report them to your employer on IRS Form 4070 no later than November 10. 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.