Child Tax Credit Changes

We all are still seeing the looming effects of Covid19 pandemic on our economy. Some help is on the way through the avenue of the advance child tax credit payments authorized by the American Rescue Plan Act. The Act made some important changes to the child tax credit:

• it increased the maximum credit allowed from $2000 to $3,600 for children ages 5 and under at the end of 2021 and $3,000 for children ages 6 through 17 at the end of 2021.

• the credit will now be fully refundable, which means, you can get the amount of credit as a refund even if you do not owe any income taxes.

Child Tax Credit Advance Payments Starting July 15th

One other change that came about is that now you don’t have to wait until 2021 tax filing to claim some of the child tax credit available to you. Half of it is now available in form of advance monthly payments. The IRS will start making these payments on July 15^th 2021.

But there are some requirements to qualify for these advances. To see if you are eligible, please click here.

Unenrollment

You do not have to do anything to enroll in this monthly payment, however if do not wish to receive the advance child tax credit payments, you need to opt out. Some of the reasons for wanting to opt out of the advance child tax credit payments, can be:

• you expect to owe taxes on your 2021 tax return,
• you want to save the credit amount for some considerable expenses you foresee for next year,
• maybe due to a divorce, you expect to have a lower number of dependents.

The unenrolling is a one time action. You do not have to unenroll for each month, neither can you reenroll back to receive the advance payments. It is an individual action, hence you and your spouse, if filing jointly, both have an independent right to decide and enroll or unenroll individually. If your spouse unenrolls and you do not, you will get half of the joint payment you were supposed to receive with your spouse.

You can find more information about the advance child tax credit payments on the IRS website.

If you need help with your taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

When your C corporation has a profitable year, do you take more salary or pay yourself a year-end bonus? Since you are pivotal to your company’s success, paying yourself more in the good years only makes sense. Increasing or decreasing your compensation from year to year based on company performance can also help manage your company’s cash flow — and the amount of income taxes it has to pay.

Tax Impact

A C corporation may deduct compensation as a business expense if it is reasonable in amount. Distributing profits as salaries and bonuses can help minimize taxable corporate income, although you and other recipients will be taxed individually on the compensation you receive.

You may decide that paying additional compensation is preferable to paying out profits as dividends. Unlike compensation, dividends are not deductible. Result: The government taxes corporate profits twice — once at the corporate level and again to the shareholders who receive the dividends.

A Word of Caution

If the amount of compensation paid to you and other shareholder-employees is deemed to be unreasonable, the IRS could challenge your company’s deduction for the expense . The IRS may reclassify the “excessive” amounts as nondeductible dividends.

To potentially reduce the chances of problems with the IRS, consider these strategies:

• Divide the profits and pay out a portion as bonuses. Leave enough money in the company to generate some amount of taxable income.
• When setting bonuses, avoid using ownership percentages to determine the amounts shareholders will receive. This method suggests the payment of dividends.
• Adopt and follow a formal compensation plan for executives that includes bonus payments based on meeting specified financial goals.
• Earmark a portion of company profits for dividends. Individual shareholders will generally pay federal income tax on qualified dividends at a maximum rate of 20%. This rate is significantly lower than the maximum rate on compensation and other ordinary income.
  If the corporation pays dividends be aware of the requirement to file forms 1099-DIV.

Give us a call or schedule an appointment to see how we can help you.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Every year brings some degree of change regarding filing income taxes. While 2020 taxes are a done deal, it’s never too early to begin thinking about the next tax year. To help you be prepared for next year’s filing, here are some of the ways 2021 income taxes will be different.

Standard Deduction Increase

Standard deductions reduce the amount of your income that is subject to federal tax. Most taxpayers do not have enough deductions to itemize, so they take the standard deduction. Annual adjustments for inflation cause the standard deduction to increase slightly each tax year. For 2021 income taxes, here are the standard deductions and the amount of the increase from the prior year.

• Married filing jointly $25,100, up $300
• Single and married filing separately $12,550, up $150
• Head of household $18,800, up $150

While itemizing is more work, if your itemized deductions exceed the standard deduction allowance for your tax filing category, itemizing makes sense.

Higher Tax Brackets

You already know the more money you earn, the more you pay in taxes. How much you earn, your income, along with your filing status, determines your tax bracket. There are seven tax brackets with the top tax rate being 37 percent for taxable income over $518,400. Brackets are adjusted annually to account for inflation. For 2021 income taxes, tax bracket thresholds were increased by about 1 percent over 2020 levels.

Capital gains

When you sell an investment like real estate, stocks, or bonds, for more than you paid, the net profit you make is taxed as either short- or long-term capital gains. If you held your investment for less than one year, you pay short-term capital gains. For investments held more than one year and one day, the capital gains tax on the profit you made is long-term. Short-term capital gains are taxed like regular income. However, long-term capital gains are taxed at different rates (0 – 20 percent) depending on taxable income and marital status.

For example, if you’re single and your income is below $40,400 in 2021, you fall into the 0 percent capital gains tax bracket. However, if you’re single and earn between $40,401 and $445,850, you move into the 15 percent bracket. Above that, it’s the 20 percent bracket for you.

The 0 percent bracket is approximately double for married couples ($80,800), but above that, brackets are close to the single filer brackets (15 percent up to $501,600 and 20 percent above that).

Individual Tax Credits

Tax credits lower your overall tax bill. There are quite a few credits to consider, but the most popular ones are the earned income tax credit, the saver’s tax credit, and the lifetime learning tax credit.

Earned income credit is for low- and middle-income taxpayers and is based on income, filing status, and number of children, although taxpayers without children can qualify. For 2021 income taxes, the earned income credit ranges are up very slightly over 2020 and range from $543 to $6,728. Some criteria for the credit are having at least $1 of earned income, investment income must be $3,650 or less. Other stipulations apply, so check with your tax preparer to see if you qualify.

Saver’s credit is also designed for low- and middle-income taxpayers and is to encourage retirement contributions. Taxpayer adjusted gross income (AGI) must be less than $33,000 in 2021 (up slightly from $32,500 in 2020) to qualify for the credit for single or married filing separately. Married filing jointly AGI must be less than $66,000 in 2021 (up from $65,000 in 2020).

Lifetime learning credit is for taxpayers who incur education expenses during the year. There was little change in this credit for 2021 income taxes. Married filing jointly income limits increased $1,000 (from $118,000 to $119,000 for full credit and from $138,000 to $139,000 for partial credit). Other filing statuses will see no change for 2021.

Alternative Minimum Tax

The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly. This is a change from 2020 when the exemption amount was $72,900 and $113,400 for married couples filing jointly.

Fringe Benefits, Medical Savings Accounts, and Estates

Most employee fringe benefits allowances for 2021 will continue at their 2020 levels; however, changes occur in health savings account (HSA) contributions, which increase by $50 for single and $100 for families from 2020.

The maximum out-of-pocket amounts for high-deductible health plans (HDHP) increases by $100 for single and $200 for families.

The federal estate tax targets the amount of wealth you can pass along when you die. It is no concern unless your estate is worth more than $11.7 million when you die. That figure is up from $11.58 million in 2020.

Retirement Plans

Contributions for 401(k) plans will not change from 2020 top off amount of $19,500 with a $6,500 catch-up contribution allowed for individuals 50 or older. Maximum contributions from all sources (employer and employee) rise by $1,000.

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Of course, these are an overview of changes for the 2021 tax year. You can find out more information on the IRS website www.irs.gov.

If you need help with your tax return preparation, give us a call or schedule an appointment online.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Retirement planning is very important. Some of the changes brought by the SECURE Act, such as the changes related to the IRA required minimum distribution (RMD) requirements and the repeal of the maximum age limit for IRA contributions can help you plan better.

No Age Limit for IRA Contributions

Previously, with a traditional IRA the maximum age limit up to which you could contribute was 70.5 years. After this age you could not contribute anymore. Instead you had to take a minimum distribution from your retirement account.

But now, the SECURE Act brought some very favorable change. There is no maximum age limit anymore. You can contribute toward your or your spouse’s Traditional IRA as long as you have sufficient taxable compensation to support your contribution amount and you meet all the other IRA contributions rules.

It is important to note that taxable compensation does not include things such as interest and dividends from investments, pensions, Social Security benefits, unemployment benefits, alimony, and child support. These aren’t considered earned income for IRA contribution purposes.

RMD Required When You Reach 72

In addition, the SECURE Act increased the age limit for the RMD from 70.5 to 72. The RMD generally must begin by April 1 of the calendar year following the calendar year in which you reach age 72. This rule comes into effect for distributions required to be made after December 31, 2019.

These changes are sure to help your retirement fund build bigger and grow longer. You can find more information about the contribution and RMD requirements on the IRS website. If you need help with your tax return preparation or tax planning strategies, gives us a call or schedule an appointment online.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Section 529 plans give opportunities for families to save for the rising cost of college tuition fees. Education costs have been consistently increasing over the years. Federal financial aid is shifting from student grants to providing access to student loans. And this in turn leads to increased financial strain on students and their parents.

SECURE Act Expending 529 Plan Benefits

The good news is that the SECURE Act expanded benefits of 529 plans. It now allows principal and interest of the student loan repayments as eligible qualified expenses of 529 plans.

Limitations For the 529 Plans Qualified Expenses

But there are some limitations:

• payments of principal or interest on any qualified education loan of the beneficiary, or beneficiary’s sibling, are allowed. but only up to a cumulative maximum of $10,000 per beneficiary and sibling,
• payments made from any tax-free 529 plan earnings do not qualify as qualified expenses
• reduce qualified expenses, including student loan payments by any tax-free assistance such as scholarships and fellowships, grants, amounts used to calculate an education credit and other similar items.
  
  

To find out more about the college savings plans and other tax benefits for education, click here.

The 529 plans are a great tax planning tool. If you’d like to find out more how you can save for your kids’ future or need help with your taxes give us a call or schedule an appointment online.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

With Covid-19 crisis still looming over us, not just the physical health but the financial health of many is also in jeopardy. It is an ideal environment for those with ill intent to rob you of your sensitive information and/or your money under the guise of receiving the economic impact payment (EIP).

New Text Scam

IRS warns of a new text scam created by thieves to trick you in disclosing bank account information under the guise of receiving the $1200 economic impact payment. Neither the IRS nor any state agency will text you asking for bank information so that an EIP deposit can be made.

These thieves are trying to trick people with a text message that states “You have received a direct deposit of $1200 from Covid-19 Treasury Fund. Further action is required to accept this payment into your account”. The text includes a link to a fake phishing web address which appears as if coming from a reliable source.

Report the Scam to the IRS

If you happen to get such a scam text message, please take a screen shot of the text message and email it to IRS at phishing@irs.gov along with some additional information like:

• Number that received the text message
• Number that appeared on caller ID as received
• Date/Time/Time zone you received the message.

Remember IRS or states do not send unsolicited texts or emails.
The IRS and states do not threaten people with jail or lawsuits over the phone. The IRS or states do not demand tax payments on gift cards.

IP PIN

One additional layer of protection against tax identity theft is to voluntarily apply for an Identity Protection PIN (IP PIN).

The IRS allots you an IP PIN only after you pass a rigorous identity verification process validating your identity. This IP PIN is valid for one year and hence you must obtained it each year. To get an IP PIN you can use the online tool ‘Get IP PIN’ available on IRS website starting January 2021. Alternatively you can also file a paper application for IP PIN.

Don’t forget to keep the IP PIN you get in a safe location until its time to prepare your tax return.

If you need help with your tax return preparation, give us a call or schedule an appointment online.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.