With inflation hitting many and their ability to support families, the holidays may be the time to say a special “thank you” to those who help keep us and our families, homes and businesses on track, who keep our homes clean, help us stay fit, and help us in other ways to get through each day throughout the year. With that in mind, we updated our suggested gifts and tips for 2022 on our sister website.
Gift giving etiquette may not always be obvious when considering gifts for people outside of your friends and family, so be mindful of the message you send. Giving should show appreciation and respect. Sometimes a smile, a note or a kind word can really make someone’s day.
Checking your income tax planning now is a good idea – tax planning can be done year-round. As with any planning, acting while you can have an impact is best. Tax laws may change before the end of 2022, e.g. Secure Act 2.0 may be adopted, but it’s still wise to know where you stand now.
The IRS seems to have a similar thought about tax planning as they created a website with tools and resources at Steps to Take Now to Get a Jump on Your Taxes – if you check it out, let us know what you think.
First question: did you get a tax refund, or did you owe?
Refunds
Some people enjoy seeing a big refund, but as you may have heard, you are giving the government an interest-free loan with your money. If you want to save, there are better ways, like an auto-debit to an IRA or to a savings account.
Not sure what happened to your refund? There is a updated IRS tool for “where’s my refund” that now goes back three years at “Where’s My Refund?”
The tool confirms receipt of your tax return, shows if the refund has been approved and indicates when it will be or has been sent. If three weeks pass without receiving the refund, then you may want to contact the IRS.
Owed taxes
If you owed a significant amount for 2021, the IRS has another tool that helps make sure you have enough withheld for 2022 at Tax Withholding Estimator. This way you can avoid penalties and interest for under withholding.
If you do not get clear answers using the estimator tool, try comparing your 2022 paystub to your 2021 tax return, review the IRS guidance at Publication 505, or contact us for help.
Second question: what happens if you act now?
Marginal vs. average tax rate
Knowing the rate at which additional net income will be taxed helps you make decisions such as the one in the next section, whether to convert an IRA to a Roth IRA or not.
The marginal rate is your tax bracket, the rate at which the last portion of your income is taxed. Any additional income would be taxed at this rate. Your average tax rate is the percentage of income taxes to total taxable income. You can have a low average rate but hit a high marginal rate, which may mean that taking more income into the current year would be costly.
Time to convert to a Roth IRA?
The decision to convert a traditional IRA to a Roth IRA depends on several factors. One is the rate of tax you pay now compared to the rate you expect to pay in retirement. If your rate will be the same at retirement as now, then there are many reasons to convert, such as no required minimum distributions at retirement for a Roth IRA. If your tax rate at retirement will be significantly less than currently, then converting now would be less tax efficient.
Last question: how with this affect the rest of your finance?
Coordinate with investing and estate planning
Make sure any changes take for tax reasons do not foul your investment or estate planning. For more on estate planning, see estate planning checkup post.
Summary
As you review your 2022 tax planning, check your 2021 returns for ideas on what to adjust, consider the impact of future tax rate increases and act when the impact on other planning also makes sense.
The holidays are a great time to say “thanks” and show appreciation for those who help us keep our families, homes and businesses on track, keep our homes clean, help us stay fit, and help us in other ways to get through each day throughout the year. With that in mind, we updated our suggested gifts and tips for 2021 on our sister website.
Gift giving etiquette may not always be obvious when considering gifts for people outside of your friends and family, so be mindful of the message you send. Giving should show appreciation and respect. Sometimes a smile or kind word can really make someone’s day.
Many of the expected tax law changes have not materialized, but legislation remains in flux. This means we plan year-end moves while we continue to monitor new legislation. It is safe to bet that income tax rates will rise over the next several years. This may mean putting year-end tax planning on its head, where you increase taxable income for 2021. The goal is to lessen income ultimately taxed in future years. However, you may not want to delay taking deductions until 2022 (so planning not completely on its head?) For the standard approach, see our 2020 year-end post.
Roth Conversion – One way to increase income now, avoiding future income, is to convert part of an IRA to a Roth IRA, converting from taxable to non-taxable distributions in the future. Decide on the amount to convert by projecting the impact of the conversion on your marginal tax rate. Converting to a Roth also saves you from required minimum distributions, RMDs, in future years (but non-spouse beneficiaries still face the 10-year limit from the SECURE Act on IRA distributions).
Back-Door Roth – Along with converting, the “back-door Roth” is still available, at least for 2021, so you can put more retirement funds aside with no tax on future distributions. That is, for those who cannot contribute to a Roth due to income limits, they can contribute to a non-deductible IRA and then convert that IRA to a Roth IRA. If you have other IRAs, that may affect the amount that is taxed, so review this carefully first to see if it still makes sense.
More income – Other ways to increase income for 2021 include billing more for your S Corp., LLC or partnership in 2021, exercising stock options, and selling ESPP shares.
Capital gains – You probably do not want to accelerate capital gains, as those should still be tax at a lower rate in future years.
On to other considerations: first, SALT deductions
The limit on state and local taxes, or SALT, may increase from $10,000 to $80,000. Also, a number of states have created pass-through entity elections so that the S Corp., LLC or partnership pays the tax and deducts against the income of the shareholder/member/partner. This way, their net federal taxable income is reduced, and they get a credit for the payment on their personal tax returns.
The SALT changes may affect your itemized deduction strategy if you are bunching.
Check the details
Declare Crypto – If you had any crypto currency transactions during the year, selling, buying or receiving, be sure to declare on your federal 1040 filing.
Unemployment tax – Remember, unemployment benefits are fully taxable for 2021, so be sure you withheld taxes or paid estimates.
Charities – If you cannot itemize, you still get up to $300 as an above the line charitable deduction, and up to $600 for a married couple.
Child credits – There are changes in the credits for children and dependent care. Let us know if you have questions on the benefits and strategies for maximizing.
Kiddie tax – The so-called kiddie tax has been restored to pre-TCJA terms, so you may want to review filings for the last two years.
Address change – You will want to file form 8822B to indicate the change of address if your corporation, LLC or partnership moves. On that form, you can also change the responsible party so that the IRS knows whom to contact – this is quite important if you sell your business!
IT PIN – If you are concerned about identity theft, consider obtaining an IT PIN as discussed in our post on IRS scams.
Flex and retirement accounts – Check to see if you have any flex account balances that expire; contribute the maximum to your qualified plans; and setup a new qualified plan if you have a new business.
Before you finish, check withholdings and estimates paid
Especially if you increase income in 2021, review your total paid to the IRS and state via withholdings and estimates make sure that you meet the safe harbor rules. If not, you could owe interest for under-withholding.
IRS disaster relief
Have you received a penalty notice from the IRS? The Pandemic was declared a federal disaster. This means it may provide an exemption to the penalties if you can show that you suffered from the Pandemic.
And remember your estate plan review
While you review your taxes, review your estate plan as well. The federal gift and estate tax credit is close to $12 million for 2021, but that may change in 2022. So, if you have excess wealth, you may want to gift while you can, especially if you want to use certain trusts, like a GRAT or QPRT, that may no longer be permitted in future years. For more on estate planning updates, see our estate planning checkup post.
Update: the annual exclusion for gifts rises from $15,000 per person, per year to $16,000 next year.
If you do review your estate plan documents, also review beneficiary designations and asset ownership to make sure everything is current and flows correctly.
Summary
As you review your 2021-2022 tax planning, consider the impact of future tax rate increases: will bringing future income into 2021 avoid taxes on future income? Then follow through on the details.
Let us know if you have any questions.
Good luck and best wishes for happy and healthy holidays!
These days, nearly all of us get calls, e-mails and text messages trying to gain access to our finances. You have probably seen or heard of the call “from Amazon” about a new iPhone order, the call “from Social Security” indicating that your number has been suspended, which requires your immediate action with someone on the phone, the e-mail with a “voicemail message” attached for you to click on to hear, and the e-mail with an “invoice” for you to approve. There are many more forms and styles, and more keep coming.
This post focuses on the calls purporting to be from the IRS, and the purpose of this post is to help make you more wary so you do not fall victim to any of these scams.
The IRS recently posted its dirty dozen for 2021, a list of scams that focuses on Pandemic-related scams, like unemployment claims, but also fake charities, urgently seeking donations, and offer in compromise scams, claiming to have ways to reduce your taxes owed. There are other scams that target elderly or people for whom English is a second language. And some scams offer to file conservation easements and improper business credit claims for you.
Calls “from the IRS”
The call insisting that you owe the IRS and need to pay is a scan that has been around for some time. The IRS website, and the recorded message when you are on hold contacting the IRS, says:
The IRS won’t initiate contact by phone, email, text or social media asking for Social Security numbers or other personal or financial information.
The IRS generally first contacts people by mail – not by phone – about unpaid taxes.
The IRS may attempt to reach individuals by telephone but will not insist on payment using an iTunes card, gift card, prepaid debit card, money order or wire transfer.
The IRS will never request personal or financial information by e-mail, text or social media.
Furthermore, the IRS will ask you to confirm your identity before discussing any tax matters with you.
Protect your tax filings
To help insure that no one can file under your social security number, the IRS suggests obtaining an ID PIN for filing your tax returns. The PIN is now available to all taxpayers; you include it when you file your tax returns so that the IRS can verify that it is you filing. This prevents others from filing bogus refund claims under your social security number.
You can also include your driver’s license when filing, so the IRS and state revenue departments can verify that it is you filing, not an imposter.
Be Vigilant
To protect your finances, you need to be vigilant. Before you answer the phone, what does the caller ID say? Is it a legit company or “unknown”? Before you respond to an e-mail, does the address look like a real customer service company site or something random? Is the grammar or content in the call or message off? If it seems off, it probably is.
Usually, you can find safe and easy ways to confirm the information in question by placing your own call or logging onto the related website online, rather than responding directly.
The IRS recommends setting up multi-factor identification to access your financial information. The IRS suggests more steps here:
Using anti-virus software and set it for automatic updates. Anti-virus software scans existing files and drives on computers – and mobile phones – to protect from malware.
Using a firewall to shield digital devices from external attacks.
Using backup software/services to protect data. Making a copy of files can be crucial, especially if the user becomes a victim of a ransomware attack.
Using drive encryption to secure computer locations where sensitive files are stored. Encryption makes data on the files unreadable to unauthorized users.
Creating and securing Virtual Private Networks. A VPN provides a secure, encrypted tunnel to transmit data between a remote user via the Internet and the company network. Search for “Best VPNs” to find a legitimate vendor; major technology sites often provide lists of top services.
Conclusion
If something smells “phishy,” it probably is. So be cautious, even suspicious of interaction asking for personal and financial information. Set up two-factor verification and an IRS PIN. And let me know if you have questions or concerns. I will try to help.
