Month: July 2021

Plan Now to Lower Your 2021 Tax Bill

Now is the time to begin tax planning for your 2021 return. Here are some ideas:

Contribute to retirement accounts. Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can save between now and December 31. If you are able, consider investing in an IRA or increasing your contributions to your employer-provided retirement plans. Remember, you can reduce your 2021 taxable income by as much as $19,500 by contributing to a retirement account such as a 401(k). If you’re age 50 or older, you can reduce your taxable income by up to $26,000!

Contribute directly to a charity. Even if you don’t have enough qualified expenses in order to itemize your deductions, you can still donate to your favorite charity and cut your tax bill. For 2021, you can reduce your taxable income by up to $300 if you’re single and $600 if you’re married by donating to your favorite charity.

Consider a donor-advised fund. With a 2021 standard deduction of $12,550 if you’re single and $25,100 if you’re married, you may not be able to claim your charitable donations as a tax deduction if the total of your annual donations is below these dollar amounts. As an alternative, consider donating multiple years-worth of contributions to a donor-advised fund if you have the available cash so you can exceed the standard deduction this year. Then make your cash contributions from the donor-advised fund to your favorite charities over the next three years.

Increase daycare expenses. If you or your spouse work and have children in daycare, or have an adult that you care for, consider using a daycare so you and a spouse can both work. This might allow you to take advantage of a larger tax break available in 2021. If you have one qualifying dependent, you can spend up to $8,000 in daycare expenses while cutting your tax bill by $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 in daycare expenses while cutting your tax bill by $8,000. To receive the full tax credit, your adjusted gross income must not exceed $125,000.

Contribute to an FSA or an HSA. Flexible spending accounts (FSA) and health savings accounts (HSA) allow you to pay medical and dental expenses with pre-tax dollars and reduce your tax liability. If you have an FSA, you can contribute up to $2,750 in 2021, and unspent funds in an FSA can now be rolled from 2021 to 2022. If you have an HSA, you can contribute up to $3,600 if you’re single and $7,200 if you’re married.

If you have questions about any of these tips, or if you need help with tax planning for 2021, please contact our office so we can help.

Advance Child Credit Payments Update

The American Rescue plan signed in March, 2021 requires the IRS to pay out one half of enhanced Child Tax Credits (CTC) to eligible taxpayers beginning this month. If you or someone you know have children, here’s what you need to know:

Current status

IRS web-sites. The IRS has created two web sites to help administer this program – one to help ensure you will get your Child Tax Credit if you are a non-filer, and another to opt out of the monthly payments. Both can be accessed on the IRS website at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

The monthly payments are automatic. Beginning mid-July you will begin receiving payments for one half of your projected 2021 Child Tax Credit if all of the following is true:

  • You filed a 2019 or 2020 tax return and claimed the credit or you gave information in 2020 to receive the Economic Impact Payment using the IRS non-filer tool.
  • The IRS thinks you are eligible.
  • You did not opt-out of the early payments.

Opting-out

Although most people who receive the CTC advance payments should accept and make use of them, there are some good reasons why some might want to opt of of the advance payments.

If you do not qualify for the credit. The IRS is using past tax returns to estimate who should get advance payments of this credit. Since they are using past data, they might sometimes be wrong. If your 2021 income is too high, you may need to pay back the advance payments when you file your tax return.

If you need the large credit. If you use this credit to balance out your year-end tax bill, you may find yourself owing money at the end of the year.

If your circumstances change. If your tax life changes, advance payments of the credit will complicate things. For example, if you are in the middle of a separation or divorce, the advanced payments could become a source of conflict.

Action to take

Look for notices. The IRS is sending out notices in the mail to those they think should receive the Advance Child Tax Credit payments. If you have not received one, the IRS may not think you should receive payments. But don’t worry, if you are owed the credit you will receive it when you file your tax 2021 tax return, even if you don’t receive advance payments.

Opt-out, if needed. If you do not want to receive the early Child Tax Credit payments, use the opt-out portal immediately to opt-out of the payments.

Keep track of payments. You will need to know how much you receive in advanced payments when you file your tax return next year. Do not assume the IRS is going to accurately keep track of this for you.

Tell your friends. Finally, remember that the Child Tax Credit is now a fully refundable credit. So if you know of anyone that does not pay income tax and has children, tell them. The new Child Tax Credit might help them make ends meet.

2020 Unemployment Compensation Refunds Are On Their Way

The American Rescue Plan Act of 2021 (ARPA) retroactively excluded up to $10,200 in unemployment compensation per taxpayer paid in 2020. Since this new law was signed after some tax returns had already been filed, some people who received unemployment compensation in 2020 paid too much tax and were due a refund. After the law was signed, the IRS quickly clarified that no action needed to be taken to claim these refunds. Any adjustments that were necessary would be handled automatically by the IRS.

So far, the IRS has identified 13 million taxpayers that may be eligible for some adjustment to their tax bill due to this issue. Some will receive refunds, which will be issued periodically through the summer, and some will have the overpayment applied to taxes due or other debts. For some there will be no change.

The IRS started issuing some refunds in early June, sending out more than 2.8 million refunds in the first week of June to those who were entitled to them, and then issued the next set of refunds in mid-June. The review of returns and processing corrections will continue during the summer as the IRS continues to review the simplest returns and then turns to more complex returns.

Affected taxpayers will receive letters from the IRS, generally within 30 days of the adjustment, informing them of what kind of adjustment was made (such as refund, payment of IRS debt payment or payment offset for other authorized debts) and the amount of the adjustment.

If you have questions about whether you are entitled to an adjustment to your tax due to this issue, or if you are confused by a letter that you received from the IRS, please contact our office so we can help.

Copyright © 2021 | Powered by Relanet

Terms of Service