Are you familiar with the tax treatment for cryptocurrency investments and transactions? Being knowledgeable can help you avoid tax blunders and problems with the IRS. Watch this video for a quick overview of the relationship between taxes and cryptocurrency.
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Article Highlights:

Taking Stock of Tax Strategies 
Education Tax Credits 
Converting a Traditional IRA to a Roth IRA 
Minimum Required Distributions 
Charitable Contributions 
Qualified Charitable Distributions 
Health Savings Accounts 
Prepaying State Taxes 
Paying Medical/Dental Bills 
Gifting 
Avoiding Underpayment Penalties

It seems hard to believe, but the holiday season is almost upon us, and that means that the 2021 tax preparation season will soon follow. With the end of the tax year just around the corner, tax-savvy individuals need to take some time from their busy schedules to review the tax benefit steps they’ve already taken and see what else they need to do. Now is the time to ensure that you’ve taken advantage of all of the tax-saving strategies available to you. There are a number of smart tax-advantaged moves available. Though you may not be eligible to utilize all of them, it’s a good idea to take a break from holiday shopping to make sure you’ve done all that you can to minimize your tax burden and get all of the write-offs and deductions possible. Here are ten of the most popular, most effective strategies available, including some important reminders that may save you from having to pay penalties: Make the Most of Education Tax Credits: Both the Lifetime Learning education credit and the American Opportunity Tax Credit allow qualified taxpayers to prepay 2022 tuition bills for an academic period that begins by the end of March 2022, including the tuition payments when figuring the 2021 credit. That means that if you are eligible to take the credit and you have not yet reached the 2021 maximum for qualified tuition and related expenses paid, you can bump up your credits by paying for early 2022 tuition before ringing in the New Year. This may not apply to you if you’ve been paying tuition expenses for the entire 2021 tax year, but if your student just started school this fall, it will probably provide you with some additional help. Convert a Traditional IRA to a Roth IRA: When a traditional IRA is converted to a Roth IRA, generally the amount converted is taxable in the conversion year. Taxpayers whose incomes have been very low in 2021 may be able to move the assets currently in their traditional IRA into a Roth IRA at a much lower tax rate than if they waited to make the conversion in a higher-income year. Avoid Required Minimum Distribution (RMD) Penalties: Once U.S. taxpayers reach the age of 72, they are required to take what is known as a “required minimum distribution” from their qualified retirement plan or IRA every year. If this is the first year that this rule applies to you and you haven’t withdrawn the required amount yet, there’s no need to panic – you don’t have to do so until sometime during the first quarter of next year. Of course, if you wait until 2022 to take your 2021 distribution, you’re going to end up having to take two distributions in one year – one for 2021 and one for 2022. For those who have fallen into this category before 2021, you only have until December 31st to take the required distribution if you want to avoid penalties. Charitable Deductions: Many people who itemize take advantage of the ability to take a deduction for their donations to their favorite charity or house of worship. Did you know that you can choose to pay all or part of your 2022 planned giving in 2021 in order to increase the amount you deduct in 2021? Though this may not be appealing to those who itemize every year, if you alternate between taking the standard deduction one year and itemizing the next, this can give you a big boost. For 2021 only, even if you use the standard deduction and don’t itemize your deductions, you will be eligible to claim a tax deduction of up to $300 ($600 if you file jointly with your spouse) for cash contributions you make to qualified charities during 2021. Cash includes payments by check and credit card. Donations to donor advised funds and private foundations aren’t eligible for this non-itemizer deduction. Charitable contributions are deductible in the year in which you make them. If you charge a donation to a credit card before the end of the year, it will count for 2021. This is true even if you don’t pay the credit card bill until 2022. In addition, a check will count for 2021 as long as you mail it in 2021. Qualified Charitable Distributions: Those who are age 70½ or older are allowed to transfer funds (up to $100,000) from their IRA to qualified charities without the transferred funds being taxable, provided the transfer is made directly by the IRA trustee to a qualified charitable organization other than a private foundation or a donor-advised fund. If you are required to make an IRA distribution (i.e., you are age 72 or older), you may have the distribution sent directly to a qualified charity, and this amount will count toward your RMD for the year. Although you won’t get a tax deduction for the transferred amount, this qualified charitable distribution (QCD) will be excluded from your income, with the result that you may get the additional benefit of cutting the amount of your Social Security benefits that are taxed. Also, since your adjusted gross income will be lower, tax credits and certain deductions that you claim with phase-outs or limitations based on AGI could also be favorably impacted. If you plan to make a QCD, be sure to let your IRA trustee or custodian know well in advance of December 31 so that they have time to complete the transfer to the charity. If you have contributed to your traditional IRA since turning 70½, new rules may limit the amount of the QCD that isn’t taxable, so it is a good idea to check with this office to see how your tax would be impacted. Optimize Your Contributions to Your Health Savings Account: Did you become eligible to make contributions into a Health Savings Account this year? If so, then you can make deductible contributions into that account up to the annual maximum amount, regardless of when you became eligible during the year. Prepay State Income and 2022 Property 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 state income (or sales) tax up to a maximum of $10,000. But did you know that in some cases, you can increase the amount that you deduct on your 2021 return by prepaying some of the taxes by December 31, 2021? You can ask your employer to boost the amount of your state withholding by a reasonable amount; or, if you are self-employed, pay your 4th-quarter state estimated tax installment in December (due in January) 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 mindful of the so-called SALT limit – the maximum deductible amount of state and local taxes of all types is $10,000. So, don’t electively prepay state taxes if you are at or above the $10,000 cap. Pay Outstanding Medical or Dental Bills: Taxpayers who itemize their deductions are able to deduct qualified medical and dental expenses that exceed 7.5% of their adjusted gross income. If you have reached that threshold or are close, then it may make sense for you to pay off any of those types of bills that are still outstanding rather than paying them over time. If you are near or above the limit, it may also make sense to look at what your medical and dental expenses will likely be for the next year and move those that you can into 2021 to increase the deduction. These expenses could include dental work or eyeglasses. An additional important issue: if you are thinking of doing this by paying using a credit card and you’re not going to pay the balance immediately, make sure that you’re not paying more in interest than you’re saving with the increased deduction. Remember the Annual Gift Tax Exemption: Though gifts to individuals are not tax deductible, each year, you are allowed to make gifts to individuals up to an annual maximum amount without incurring any gift tax or gift tax return filing requirement. For tax year 2021, you are able to give $15,000 each to as many people as you want without having to pay a gift tax. If this is something that you want to do, make sure that you do so by the end of the year, as you are not able to carry the $15,000 over into 2022. Such gifts need not be in cash, and the recipient need not be a relative. If you are married, you and your spouse can each give the same person up to $15,000 (for a total of $30,000) and still avoid having to file a gift tax return or pay any gift tax. Check the Payments You’ve Made to Date: If you think there’s a chance that the income taxes you’ve paid to date for 2021 are insufficient, it’s a good idea to increase your withholding in the time that’s left to make up for it. Underpaying taxes makes you vulnerable to an underpayment penalty that is assessed quarterly. The good news is that even if you have underpaid for any or all of the first three quarters of the year and will owe taxes when you file your 2021 return, you can make up for it by boosting your year-end withholding, since federal withholding is deemed paid ratably throughout the year. Plus, increased withholding and possible payment of estimated taxes can also reduce the fourth quarter underpayment penalty. Every taxpayer’s situation is unique, and the suggestions offered here may not apply to you. The best way to ensure that you are putting yourself into a tax-advantaged position is to seek advice from an experienced, qualified tax professional. Please contact this office if you need assistance.

Article Highlights:

Underpayment of Estimated Tax and Withholding Penalty 
Required Minimum Distribution Penalty 
Late-Filing Penalty 
Late-Payment Penalty 
Negligence Penalty 
Fraud Penalty 
Dishonored Check Penalty 
Missing ID Number Penalty 
Early Withdrawal Penalty 
Penalty for Failure to Report Tips 
Foreign Reporting 
Excessive Claim Penalty 
Accuracy-Related Penalty for Non-itemizers 
Frivolous Return Penalty 
Penalty for Failure to File Information Returns 

Most taxpayers don’t intentionally incur tax penalties, but many who are penalized are simply unaware of the penalties or the possible damage they can do to their wallets. As tax season approaches, let’s look at some of the more commonly encountered penalties and how they may be avoided. Underpayment of Estimated Taxes and Withholding Penalty – The United States’ income tax system is a pay-as-you-earn tax system, which means that taxpayers are required to pay their tax liability as they receive income during the year through withholding or by making estimated tax payments. Normally, estimated tax payments are made in four installments that are due by April 15, June 15, September 15, and January 15 of the subsequent year. If a taxpayer owes more than $1,000 when filing their return for the year, the IRS will assess the penalty for underpayment of estimated tax, which is currently 3% of the underpayment. “Safe harbor” payments can protect you from this penalty, which are payments of 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay 66-2/3% of their current liability or 100% of their prior year’s liability. The 100%/110% safe harbor works well when the taxpayer’s tax will be higher than that of the prior year. But when a taxpayer anticipates a large drop in income as compared to the prior year, there can be a huge impact on the necessity of estimated tax payments. The 100% and 110% of the prior year’s tax liability are most likely not viable safe harbor amounts for estimate tax in the lower-income year, and most taxpayers will want to pay 90% of the current year’s tax liability. Please contact this office to see if you need to make any payments and, if so, how much. Required Minimum Distribution (RMD) Penalty – To prevent an individual from investing in tax-deferred retirement plans, including traditional IRAs, but never withdrawing funds from the plans (which would mean the government wouldn’t ever collect taxes on the retirement funds), retirees must take an RMD each year after reaching the mandatory RMD age. The mandatory distribution age is currently 72. Failing to take the correct minimum distribution (also known as excess accumulation) results in a penalty of 50% of the difference between what should have been withdrawn and what was actually withdrawn. However, the IRS generally is very liberal about abating the penalty in most situations when corrective action is taken. Late-Filing Penalty – If a return is filed after the due date, including after extensions, a late-filing penalty of 4.5% per month (maximum 22.5%) will be applied. The normal due date for returns is April 15 of the subsequent year. Because of COVID-19, the original due date for 2020 returns was extended to May 17, 2021. Those who had not filed by that date could have requested a further extension to October 15, 2021. If you have not filed your 2019, 2020, or any earlier year’s return, you are encouraged to do so as soon as possible to minimize late-filing penalties. If a return is over 60 days late, the minimum penalty for failure to file is the lesser of $435 ($450 in 2022) or 100% of the tax shown on the return. While the obvious way to avoid a late-filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and no willful neglect. Late-Paying Penalty – If the tax owed on a return is paid after the unextended due date of the tax return (usually April 15 but is May 17 for 2020 returns filed in 2021), then the taxpayer will be subjected to a penalty of 1/2% per month (maximum 25%) of the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return; many fail to realize that the extension does not include an extension on paying. The only way to avoid or minimize this penalty is to have no or little balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension. Negligence – When underpayment is due to taxpayer negligence or when there are errors in tax valuations, a penalty of 20% of the tax underpayment will be charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions. Fraud – The fraud penalty is 75% of the tax unpaid due to fraud. Dishonored Check – The penalty for dishonored checks of over $1,250 is 2% of the check amount. If the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late-payment charges, but the penalty rate will be lower if you are on a payment plan. Missing ID Number – A $50 penalty for each missing number applies when a taxpayer doesn’t provide a required Social Security number (SSN) for themselves, a dependent, or another person on their tax return. It is also charged when the taxpayer doesn’t provide their SSN to another person or entity when required. Early Withdrawal Penalty – If a taxpayer is under age 59½ and withdraws assets (money or other property) from a qualified retirement plan, including traditional IRAs, the taxpayer must pay a 10% additional tax, commonly referred to as the early withdrawal penalty. This tax is 10% of the part of the distribution that the taxpayer was required to include in their gross income for the year of the distribution. A number of exceptions apply to this penalty. As part of COVID-19 relief, this penalty was waived on distributions of up to $100,000 from qualified retirement plans and traditional IRAs during 2020. Early withdrawals in 2021 and later years are subject to the penalty unless one of the several exceptions applies. Failure to Report Tips – A penalty will be charged if a taxpayer didn’t report tips to their employer. It equals 50% of the Social Security tax on the unreported tips. Reporting Foreign Accounts and Assets – There are numerous and substantial penalties for failures to report a variety of foreign accounts and assets, and some of the penalties are even draconian. Please contact this office if you have a foreign financial account, foreign trusts, ownership in a foreign corporation, received foreign gifts, and so on. Excessive Claim Penalty – If a claim for refund or credit for income tax is made for an excessive amount, the person making the claim is liable for a penalty equal to 20% of the excessive amount. The excessive amount is the amount by which one’s claim for any tax year exceeds the amount of the claim allowable for that tax year. The penalty doesn’t apply if it is shown that the claim for the excessive amount was made with reasonable cause. The penalty also does not apply if any portion of the excessive amount or credit is subject to an accuracy-related penalty. Accuracy-Related Penalty for Non-Itemizers – For 2021, taxpayers are allowed a deduction up to $300 ($600 on married joint returns) for cash contributions to qualified charitable organizations. Usually, only individuals who itemize their deductions can deduct donations to charities. As part of the accuracy-related penalty, a non-itemizing taxpayer who overstates their charitable donation can be penalized by 50% of the tax attributable to the overstatement, rather than the normal 20% penalty. Frivolous Return – In addition to any other penalties, the law imposes a $5,000 penalty for filing a frivolous return – one that does not contain information needed to establish the correct tax or that shows a substantially incorrect tax because the taxpayer takes a frivolous position or displays a desire to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs. Under limited circumstances, the IRS may reduce the penalty from $5,000 to $500. Failure to File Information Returns – A taxpayer who, without reasonable cause, fails to file a required information return in the manner the law specifies or by the proper deadline, fails to include all of the information required, or includes incorrect information will be subjected to a penalty of $280 for each return required to be filed during 2021 or 2022. The penalty will be reduced to $50 if the failure is corrected within 30 days of the due date and $110 if corrected by August 1. Please call if any of these penalties has been assessed against you, to see if it is possible to have them reduced or removed.

With more and more opportunities to work from home nowadays, a home office deduction seems like such a tempting tax benefit. But who can be qualified for this deduction and how is it calculated? Watch this video to learn more.
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Article Highlights:

Pay-as-You-Earn System 
Safe Harbor Payments 
Situations Triggering Underpayments 
True Safe Harbors 

Congress considers our tax system a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include:

Payroll withholding for employees; 
Pension withholding for retirees; and 
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. 

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This nondeductible interest penalty is higher than what might be earned from a bank. 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 an unqualified distribution from a pension plan, which will be subject to 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory rollover limit (but check with this office before using the latter strategy). Federal law and most states have so-called safe harbor rules, meaning if you comply with the rules, you won’t be penalized. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year. 
1. The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of your current year’s tax liability, you can escape a penalty. 2. The second safe harbor—and the one taxpayers rely on most often—is based on your tax in the immediately preceding tax year. If your current year’s payments equal or exceed 100% of the amount of your prior year’s tax, you can escape a penalty, regardless of the amount of tax you may owe when you file your current year’s return. If your prior year’s adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year’s tax to meet the safe harbor amount. 
Where taxpayers get into trouble is when their income goes up or their withholding goes down for the current year versus the prior year. Examples are having a substantial increase in income, such as when investments are cashed in, thereby increasing income but without any corresponding withholding or estimated payments. Another frequently encountered situation is when a taxpayer retires and their payroll income is replaced with pension and Social Security income without adequate withholding. Taxpayers who don’t recognize these types of situations often find themselves substantially underpaid and subject to the underpayment penalty when tax time comes around. The bottom line is that 100% (or 110% for upper-income taxpayers) of your prior year’s total tax is the only true safe harbor because it is based on the prior year’s tax (a known amount), whereas the 90% of the current year’s tax amount is a variable based on the income for the current year, and often that amount isn’t determined until it is too late to adjust the prepayment amounts. That being said, there are times when using the 100%/110% safe harbor method doesn’t make a lot of financial sense. For example, let’s say that in the prior year, you had a large one-time payment of income that boosted up your tax to $25,000, which is $10,000 more than you normally pay. You know that you won’t have that extra income in the current year. Rather than rely on the 100%/110% of prior tax safe harbor, where you’d be prepaying $10,000 more than your current year’s tax is likely to be, it may be appropriate to use the 90% current-year tax safe harbor, determined by making a projection of your current year tax, and as the year goes along, monitoring your income and the tax paid in to be sure you are on track to reach the 90% goal. Please contact this office promptly if you have a substantial increase in income so that withholding or estimated tax payments can be adjusted to avoid a penalty.

Article Highlights:

Standard Deductions
Itemized Deductions
Bunching Strategy
Medical Expenses
Taxes
Charitable Contributions

The changes in the 2017 Tax Cuts and Jobs Act (TCJA) included nearly doubling the standard deduction and placing limitations on or suspending certain itemized deductions, effective for tax years 2018 through 2025. The new standard deduction amounts for 2018 were

$12,000 for single individuals and married people filing separately (MFS),
$18,000 for heads of household, and
$24,000 for married taxpayers filing jointly (MFJ).

These amounts have been adjusted for inflation since then; for 2021, they are

$12,550 for single and MFS,
$18,800 for heads of household, and
$25,100 for MFJ.

If your deductions exceed the standard deduction amount for your filing status, you are allowed to itemize the following deductions:

Medical expenses, to the extent they exceed 7.5% of your adjusted gross income (AGI);
Taxes paid that year (for state or local income or sales tax as well as real property or personal property taxes), limited to $10,000;
Home mortgage interest;
Investment interest;
Charitable contributions;
Gambling losses, to the extent of your gambling winnings; and
Certain infrequently encountered miscellaneous “tier-1” deductions.

Bunching is an effective tax strategy to keep in mind as the end of the year approaches. If your itemized deductions typically are roughly equal to the standard deduction amount, you may be a good candidate for using the bunching strategy. In this technique, you take the standard deduction in one year and then itemize in the next. This is accomplished by planning the payment of your deductible expenses so that you maximize them in the years when you itemize deductions. Commonly bunched deductible expenses include medical expenses, taxes, and charitable contributions. If you think this strategy may benefit you for 2021, you may need to take action before the year is over. To clearly illustrate how bunching works, here are a few examples of deductible payments that generally provide enough flexibility to make this approach worthwhile:

Medical Expenses – Say that you contract with a dentist for your child’s braces. This dentist offers you the options of an up-front lump-sum payment or a payment plan. If you make the lump-sum payment, the entire cost will be credited in the year when you paid it, thereby dramatically increasing your medical expenses for that year. If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. If you do so, note that the interest on that payment is not deductible; you need to determine whether incurring the interest is worth the increased tax deduction. Another important issue related to medical deductions is that only the amount of medical expenses exceeding 7.5% of your AGI is actually deductible. If you have abnormally high income in the current year, you may wish to put off your medical expense payments until the following year (e.g., if 7.5% of the following year’s income will be less than 7.5% of this year’s income).
Taxes – Property taxes are generally billed annually at midyear; most locales allow these tax bills to be paid in semiannual or quarterly installments. Thus, you have the option of paying them all at once or in installments. This provides the opportunity to bunch the tax payments by paying only one semiannual installment (or two quarterly installments) in one year and pushing off the other semiannual (or two quarterly) installments until the next year. Doing so will allow you to deduct 1½ years of taxes in one year and half a year of taxes in the next. However, be cautious if you are thinking about making late property tax payments as a means of bunching. Late payment penalties are likely to wipe out any potential tax savings. If you reside in a state with a state income tax, any such tax that is paid or withheld during the year is deductible on federal taxes. For instance, if you are making quarterly estimated state tax payments, the fourth quarter estimated payment is generally due on January of the subsequent year. This allows you to either make that payment by December 31 (thus enabling you to deduct the payment on the current year’s return) or pay it in January before the due date (thus enabling you to use it as a deduction on next year’s return). Here is a word of caution about itemized tax deductions: Under the TCJA, a maximum of $10,000 in itemized tax deductions is allowed, so no benefit will be gained by prepaying taxes when the tax total you’ve paid is already $10,000 or more. In addition, taxes are not deductible at all under the alternative minimum tax, so individuals under that tax scheme generally derive no benefits from itemized deductions.
Charitable Contributions – Charitable contributions are a nice fit for bunching because they are entirely at the taxpayer’s discretion. For example, if you normally tithe to your church, you can make your normal contributions throughout the year but then prepay the entire subsequent year’s tithe in a lump sum in December of the current year. If you do this for all contributions that you generally make to qualified organizations, you can double up on your contributions for one year and have no charitable deductions for the next year. Normally, charities are very active in their solicitations during the holiday season, which lets you make forward-looking contributions at the end of the current year, or you can simply wait a short time and make them after the end of the year. Charitable deductions do have a limit, but it is high for most types of contributions: 60% of AGI, or 30% of AGI for contributions of capital gain property deducted at fair market value. There are other seldom-encountered limitations as well. For 2021, itemizers can elect to suspend the 60%-of-AGI limitation for most cash contributions, including those paid by check and credit card. If the election is made, the taxpayer’s other contributions are figured first up to the 60, 50, 30, or 20% of AGI limitation; then, cash contributions are allowed above those limits up to 100% of AGI. A 5-year carryover applies to any excess over 100% of AGI. If no election is made, regular AGI limits will apply. If you are claiming the standard deduction instead of itemizing in 2021, note that you will be allowed a deduction of up to $300 ($600 on a joint return) for cash contributions you made to qualified charities. (Donor-advised funds and private foundations aren’t eligible for this non-itemizer deduction.)

If you have questions about bunching your deductions, or if you wish to do some in-depth strategizing about how this technique could benefit you, please call for an appointment.