2021 Tax Letter
As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situation –– a continued global pandemic, several significant natural disasters, new tax laws and political shifts. Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last- minute steps that could save you money.
This year has brought many challenges to our office as well. We ask that you work with us and gather your tax information as early as possible so there are no delays in filing for the 2021 season. We ask that all tax return information be in our office by April 1st so that we can timely finalize your returns.
Key tax considerations from recent tax legislation
Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below is a summary of the highlights in recent tax law changes to help you plan.
Economic impact payments (EIPs)
The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return and we can help you plan for any modification now.
Child tax credit
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit: Amount has increased for certain taxpayers. The credit is fully refundable. (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS) The credit may be partially received in monthly payments. The credit is applicable to children age 17 and younger. The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis. We’ll be here to help you navigate any questions to make sure you get the best benefit for your family.
Charitable contribution deductions
Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%). There are many tax planning strategies we can discuss with you in this area.
Required minimum distributions (RMDs)
RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.
Another thing to note that's different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021. We can help you plan for any potential impacts of this change.
Fraudulent activity remains a significant threat
Our firm takes data security seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you - Receive a notice or letter from the IRS regarding a tax return, tax bill or income that doesn’t apply to you, get an unsolicited email or another form of communication asking for your bank account number, other financial details or personal information, receive a robocall insisting you must call back and settle your tax bill.
Make sure you’re taking steps to keep your personal financial information safe. Let us know if you have questions or concerns about how to go about this.
Additional tax and retirement planning considerations
We recommend you review your retirement situation at least annually. That includes making the most of tax- advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future. We can help you determine whether you’re on target to reach your retirement goals.
Here are a few more tax and financial planning items to discuss with us:
Let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business and significant expenditures (real estate purchases, college tuition payments, etc.).
Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible.
Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($15,000 per donee, $30,000 for married couples) to help save on potential future estate taxes.
Consider Sec. 529 plans to help save for education; there can be income tax benefits to do so, and we can help you with any questions.
Consider any updates needed to insurance policies or beneficiary designations.
Discuss tax consequences of converting traditional IRAs to Roth IRAs.
Let’s review withholding and estimated tax payments and assess any liquidity needs.
Year-end planning equals fewer surprises
There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position.
Whether it’s working toward retirement or getting answers to your tax and financial planning questions, we’re here for you. Please contact our office today at 251-2196 to set up your year-end review. As always, planning ahead can help you minimize your tax bill and position you for greater success.
Tonya & Stephanie