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 stash away between now and December 31. So, consider investing in an IRA or increase 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. 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 and/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 is because there is a larger tax break 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. Interested in paying medical and dental expenses with pre-tax dollars? Then read on…If you have a flexible spending account (FSA), you can contribute up to $2,750 in 2021. This allows you to pay for medical expenses in pre-tax dollars! Even better, unspent funds in an FSA can now be rolled from 2021 to 2022. And if you have a health savings account (HSA), you can contribute up to $3,600 if you’re single and $7,200 if you’re married. So, add up all your contributions to your FSA or HSA so far in 2021 and see how much more you can contribute between now and December 31.
The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS has been working to implement the changes for 2018. Here are the latest answers to some of the most common questions about the tax overhaul:
Is home equity interest still deductible? The short answer is: Not unless you’ve used the money to buy, build or substantially improve your home.
Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.
The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on “acquisition indebtedness,” meaning a loan used to buy, build or substantially improve a residence. If you took out a home equity loan pre-2018 and used it for any other purpose, interest on it is no longer deductible.
I’m a small business owner. How do I use the new 20 percent qualified business expense deduction? Short answer: It’s complicated and you should get help.
Certain small businesses structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).
The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated differently.
The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.
What are the new rules about dependents and caregiving? There are a few things that have changed regarding dependents and caregiving:
Deductions. Standard deductions are nearly doubled to $12,000 for single filers and $24,000 for married joint filers. The code still says dependents can claim a standard deduction limited to the greater of $1,050 or earned income plus $350.
Kiddie Tax. Unearned income of children under age 19 (or 24 for full-time students) above a threshold of $2,100 is now taxed at a special rate for estates and trusts, rather than the parents’ top tax rate.
Family credit. If you have dependents who aren’t children under age 17 (and thus eligible for the Child Tax Credit), you can now claim $500 for each dependent member of your household for whom you provide more than half of their financial support.
Medical expenses. You can deduct medical expenses higher than 7.5 percent of your adjusted gross income as an itemized deduction. You can claim this for medical expenses you pay for a relative even if they aren’t a dependent (i.e. they live outside your household) as long as you provide more than half of their financial support.
The goal for every taxpayer is to have their return filed quickly and without error. Here’s the first half of a handy list of items that are often overlooked and can cause all sorts of delays.
Review your tax return and return your signed eFile forms – Your tax returns can’t be filed until you have reviewed them and returned the signed eFile forms to your preparer. The sooner you do this, the sooner you’re filed.
Having proof of health insurance – You should receive a Form 1095 confirming you have health insurance. However, if your employer is one of those that received approval to send a delayed form, you still need to provide your preparer with proof of insurance before filing.
Missing W-2 and/or 1099 – One missing income form and the next thing you know, you’re paying to file an amended. Using last year’s tax return, or a tax organizer provided by your preparer, make sure all prior W-2’s and 1099’s are received and provided to your tax preparer.
Incorrect information on a W-2 or 1099 – Always double-check your forms to make sure the information is accurate – one wrong spelling of a name or one digit off on your SSN and the filing process comes to a screeching halt. Make sure 1099 income is in the correct box. Are you receiving rents and receive a 1099-MISC with the amount in the Non-Employee Compensation box? Then you face a choice – either try to get the form corrected or delay filing your tax return.
Missing or invalid Social Security Number – This one is sort of a given – if you don’t have a valid SSN, there will be no tax filing.
Dependent already claimed – Share joint custody of a child? Or, did your college student think they could file claiming themselves? Your return cannot be filed if there is a conflict in this area. Make sure it’s clear who gets to claim the dependents in your life.
Look for the second part of this article next week!
For millions of working parents, the summer comes with the added challenge of finding care for their out-of-school children. With summer underway, you probably now have the childcare summer gap covered. There is a good chance this care is eligible for the Child & Dependent Care Credit.
Qualifications for the credit
To take advantage of this tax savings opportunity you must meet the following qualifications:
- You have: one or more dependent children under the age of 13
- You have: earned income (wages, salary, tips, or business income)
- You have: qualified day care expenses
- You are: financially supporting and maintain a home for your dependent child
What you should know
Taxpayers that use daycare to bridge the summer gap could be eligible for a tax credit if they qualify and organize now. To receive the credit:
- The care must be provided so you can work – The care can also qualify if you are looking for work.
- The care does not have to be at a facility – This means day camps, daycare, and nanny care qualify. However, overnight camps or summer school costs do not qualify.
- If married, both spouses need to work – There is some leeway if one spouse is a full-time student or is disabled.
- You need to keep records – You need to have receipts for the care expense and you will have to report the caregiver’s tax information (name, address, and tax ID/Social Security number) to receive the credit.
- The care payment needs to qualify – You may not pay a dependent or your spouse to care for your children. But beyond this, who you pay is flexible.