Glenn Carlson, E.A.
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Tax News

Important 2022 Tax Dates

January 17: 4th quarter estimated tax payment for 2021 due.
January 31: W2s and 1099s due to employees/contractors.
February 15: Brokerage and financial documents due to account holders (hahaha).
March 15: Calendar year partnership and S corporation returns due.
April 15: Individual and C corporation tax returns due.
April 15: 1st quarter estimated taxes due.
June 15: 2nd quarter estimated taxes due.
September 15: 3rd quarter estimated taxes due
October 17: Individual returns on extension due.
January 17, 2023: 4th quarter estimated taxes for 2021 due.

Important Tax Changes

As we kick off the new year and tax filing season, the "Build Back Better Act" is dormant, at best, and therefore little changed tax-wise for 2021 filing. Several highly discussed proposals, such as raising the maximum tax rate, and raising or eliminating the long-term capital gains rate (including retroactivity), as well as the elimination of the backdoor Roth and megaRoth conversions, are all gone, and with a mid-term election looming, unlikely to return in 2022.

Here are some of the tax changes associated with the on-going COVID relief bills and the "infrastructure" bill that did pass:

Tax Rates, Income and Deductions: A 5% surcharge tax on individuals, trusts, and estates with reported income of more than $10 million, with an additional 3% surtax on earnings over $25 million.

Standard deductions for 2021 are $12,550 for single filers, $25,100 married filers, and $18,800 for head of household filers.

Taxpayers using the standard deduction for 2021 can deduct up to $300 for charitable cash contributions ($600 on jointly filed returns). Donations must be made by cash, check or credit card.

The deduction for mortgage insurance premiums has been retroactively restored (income limits permitting).

The deduction for medical expenses has been restored to a lower 7.5% threshold.

The credit for installing an electric car charger has been restored. Energy efficient windows and doors are again eligible for a $500 tax credit (that's a max lifetime credit; if claimed in the past it cannot be taken again). The solar panel energy credit for 2021 is 26% of cost of panels and installation.

Children & Dependents: The maximum pre-tax dependent care FSA contribution is increased from $5,000 to $10,500 for 2021 only (if the plan allows mid-year changes). For those not participating in such a plan, or their plan does not allow changes, the Child & Dependent Care Expenses (Form 2441) maximum allowed expenses have been increased from $3,000 to $4,000 for one child and from $6,000 to $8,000 for two or more children. These are the expenses paid for pre-K childcare, Kindergarten, or after-school and summer activities for children until their 13th birthday. The amount of the deductible DCB tax credit is a multiplier based on income. These increases reset to their prior levels for 2022.

The Child Tax Credit has been expanded with an additional non-refundable $1,600 for children ages 1-5 ($3,600 total) and $1,000 for ages 6-17 ($3,000 total). The expanded credit portion phases out at $75,000 for singles, and $150,000 for joint filers. Half of the credit will be paid out over six monthly installments starting July 2021 by direct bank deposit, check, or debit card. The baseline $2,000 credit is still available for higher earners (phasing out at $200,000 single and $400,000 joint). Again, eligibility for payments and amount determined to be paid was based on income levels as reported in 2020 and will be reconciled with actual income reported on the 2021 return. To assist taxpayers reconcile payments the IRS will issue Letter 4619 reporting amounts of advance payments. If you received any payments look for this letter in January 2022. The expanded credit has not been extended for 2022.

You may now withdraw up to $10,000 from a 529 plan during your lifetime to repay student loans of an account beneficiary (or their siblings) without tax or penalty. Additionally, a 529 may now be used tax-free to pay for an approved apprenticeship program.

Those rare children with high interest, dividends or capital gain income are once again retroactively taxed at their parent’s tax rates instead of the potentially higher trust tax rates.

COVID-19 Stimulus Checks: The third round of Economic Impact Payments issued to qualifying taxpayers in early 2021 ($1,400 per taxpayer and $1,400 per dependent) were advanced payments of a tax credit and are not considered taxable income. Eligibility for these payments was based on income levels as reported in the prior year (final eligibility and amount of the credit is determined by actual income reported on the 2021 return).

Retirement/Estate Planning: Beginning in 2020 the starting age for required IRA distributions was raised to 72. Required Minimum Distributions were waived for 2020 but must have been taken in 2021 to avoid penalties.

IRAs inherited from people other than your spouse must now be distributed within 10 years of death. This does not affect IRAs inherited before 2020.

Stipends and fellowships are now considered income for IRA contributions.

Up to $5,000 may be withdrawn from a retirement plan without penalty for up to one year after birth or adoption of a child.

Penalty-free hardship withdrawals of up to $100,000 were allowed in 2020 for persons affected by COVID-19 with a three-year payback.

401K Salary deferral rises to $20,500 ($26,500 for ages 50+). Regular IRA contributions remain at $6,000 ($7,000 for 50+). Gift tax exclusion remains at $15,000 per donee to any single individual.

Business & Self Employed: Business meals with clients and during travel are 100% deductible in 2021. The standard business mile rate is 56 cents.

Maximum 401K/SoloK salary deferral rises $1,000 to $20,500 (with $6,000 catch-up unchanged). Maximum compensation/net income for SEP calculations increases to $61,000.

Changes to R&D cost recovery set to take effect this year -- that such costs must be amortized over 5 years -- has been delayed to 2026. R&D costs can be expensed in the year incurred.

Noted for 2022: If you receive over $600 from entities such as Paypal, Venmo, eBay, Airbnb, Etsy, etc. you will receive a 1099. The IRS (surprise!) believes taxpayers are possibly not reporting taxable income derived from economic activities using these services.

IRS Identity Protection PIN: The IRS is encouraging taxpayers to apply for a PIN to reduce risk of identity theft and prevent anyone from filing a fradulent tax return under your name/SSN. The easiest way to apply is to use this IRS link. A new PIN is needed each calendar year and is good only for returns filed in that year (i.e. cannot get one mid-year for next year's filing). So if you are interested, my recommendation is to get your PIN in mid-January. You have to set-up an IRS online account and verify your identity first; this can be done at any time. Of course I need your PIN to enter for efiling! More information available on IRS Publication 5367.

2021 Tax Forms: Well the "postcard" tax return promised in 2016 was of course never going to happen, but for 2021 the 1040 postcard and half-page Schedules 1, 2 and 3 will consist of a full 8 pages. The truly wonk can see the drafts here. I have no clients who competed in Tokyo this summer but I'm glad Schedule 1 (additional income) now has its own dedicated line for reporting the taxable value of Olympic medals! [Yes the US taxes our athletes on the value of the medals they've won ($37,500 gold, $22,500 silver, $15,000 bronze) but only if their total income exceeds $1 million.)

Cryptocurrencies -- The IRS' Latest Obsession

Over the last couple years, the IRS has ramped up its enforcement of compliance with crypto/virtual/digital currencies (Bitcoin, Dogecoin, Litecoin, Ethereum, Dash, etc etc etc). The IRS (again surprise!) believes most taxpayers who own these currencies fail to report their taxable transactions. Beginning with the 2020 tax return, all taxpayers were required to affirmatively declare if they had engaged in any virtual currency transactions during the year. Intentionally failing to report taxable income can have severe consequences. Be sure to provide us with all information concerning your digital currency transactions during the year.

Your Annual Tax Journey

As the "road map" below highlights, preparing a tax return is just the first step in what can be a long process once it hits the IRS.

Tax Payer Road Map

Who Pays Income Taxes Anyway?

The top 25% of all taxpayer earners paid 87% of all income taxes collected in 2018; they also earned 69% of all the reported money
(to be in top 25% your 2018 adjusted gross income exceeded $87,044)
The top 10% of all taxpayers paid 71.4% of all income taxes collected
($151,935 puts you in the top 10)
The top 5% of all taxpayers paid 60.3% of all income taxes collected
(top 5% means rich, right? Well, $217,913 put you in such rarified air)
The top 1% of all taxpayers paid 40.1% of all income taxes
(the oft maligned 1%ers, with income of $540,009+ are obviously doing okay)
Taxpayers reporting AGI under $87,044 in 2018 paid 13% of all income taxes collected, and those reporting under $43,614 (nearly half of all tax returns filed) paid 2.9%
(taxfoundation.org) latest IRS compiled data is from 2018

So, who pays the fairest share?

Click here to see where your tax burden falls. (links to kiplinger.com)

California Here I Come ... or go?

There's a lot of talk of the exodus from our increasingly crowded, expensive, drought-ridden, charred, sky-high taxes of a State. But does the data bear that out? Or is the ingress of the young and tech-savvy still on the ascendent?

According to the annual study by United Van Lines, California is 44th on the list of inbound migration for 2020. Inbound movers accounted for 41.3% of California moves vs. 58.7% in the outbound direction. This 17.4% spread is a sharp increase from prior years, an indication that more people are indeed leaving California than ever before. Why? Outbound movers list the following reasons: Job (30.6%), family (30.4)%, retirement (22.8%), health/lifestyle (18.8%). Outbound migration seems to skew older (55.1% are over age 55). A glance at the map below likely indicates most outbound Californians are still trekking to Idaho (#1), Oregon (#3), and Arizona (#5). South Dakota (#4) seems to attract in the midwest while back East it's South Carolina (#2) over North Carolina (#6) and interestingly over "no-tax" states like Tennessee (#7) and Florida (#9).

Still California remains golden to an interesting demographic: 45.7% inbound are under age 45, with an annual income over $100,000 (76.5%), and quite likely making a job-related move (59.4%).

Donating to Charity on the California Tax Return

If you look at Page 4 of the California Form 540, the entire page is dedicated to a list of approved charities you can donate to via the tax return. Donations made will reduce your overpayment/refund and the Franchise Tax Board will remit the donation to the Fund immediately. It is quick and easy and, if you itemize, tax deductible on your next year's Federal and California return (i.e. contributions made on your 2020 tax return filed in 2021 are deductible on your 2021 tax return filed in 2022). Keep in mind the donation is irreversible; it cannot be revoked or amended once the return is filed, even if later changes to the return are made.

Here is a list of the Form 540 charities and the amounts donated to them in 2020 through taxpayer returns:

Alzheimers Disease Fund – $639,000
Breast Cancer Research Fund – $516,000
Cancer Research Fund – $561,000
California Firefighters Memorial Fund – $304,000
California Peace Officers Memorial Fund – $175,000
California Sea Otter Fund – $353,000
California Senior Advocacy Fund – $124,000
Emergency Food for Families Fund – $851,000
Keep Arts in School Fund – $355,000
Native Wildlife Rehabilitation Fund – $319,000
Protect Our Coasts and Oceans – $418,000
Prevention of Animal Homelessness and Cruelty Fund – $353,000
Rape Kit Backlog Fund – $529,000
Rare and Endangered Species Fund – $546,000
Schools Not Prisons – $300,000
School Supplies for Homeless Children Fund – $747,000
State Parks Protection Fund – $594,000
Suicide Prevention Fund – $275,000

Who's Preparing Your Taxes?

Do you realize that in 47 states there is no oversight, minimum or continuing education standards, nor any proof of competency required of anyone charging to prepare tax returns (the "paid preparer"). My prior hair stylist had to demonstrate more competency in order to be licensed than tax preparers in most states, and her mistakes grew back!

Of course, for those of you who engage the services of an enrolled agent, this has never been an issue. EAs have already passed an extremely comprehensive three part examination on the tax code and regulations, ethics, tax calculations and application for individuals, businesses and any other entity with a filing requirement. Furthermore, we must complete no less than 72 hours of ongoing education every three years (90 hours for NAEA/CSEA members). The IRS recognizes "Enrolled Agent" as the only designation with proven expertise in ALL areas of taxation.

Fighting An IRS Audit: You're On The Clock

There's nothing worse than seeing a letter in the mail box from the IRS. Actually there is something worse — doing nothing. One very important thing you should be aware of: When the IRS sends out a notice to you, the clock is ticking. Failure to respond escalates matters and, eventually, it's like not showing up in court ... BAM! Guilty! You have rights to dispute IRS claims, but they must be used within very specific timeframe's. Here's a LINK to an old but great article discussing the IRS timeline for its notices and collections processes (none of this has really changed in the last decade). Remember: Anything from the IRS in the mailbox means call your enrolled agent today.