Tax planning while laws are still changing – turn it on its head?

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. 
  • 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!

How not to fall for Phishy IRS calls and other Scams

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.

CARES Act, Stimulus checks, and other tax law updates

Keeping in touch during these challenging times …

2019 due dates (tax season is not quite over yet)

The IRS extended all of the following deadlines to July 15th:

  • 2019 return or extension filing;
  • Payment of 2019 taxes due;
  • Q1 2020 estimate payment; and
  • Q2 2020 estimate payment.

Most states have followed the same delayed dates (but not all).  Let me know if you have a question on payment and filing. 

So “tax season” will be over soon, yea!

Stimulus checks and other changes

Many people are asking about their stimulus checks and expanded unemployment benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  The Act also has other provisions including tax credits for self-employed affected by Covid-19, student loan payment delays, and relief on mortgage payments and rent.

Of the many posts regarding the stimulus checks and benefits, student loans and 401(k) distributions, here is a good summary from the NY Times

If you want to check on the status of your stimulus check, here is the IRS website to find the status or apply for your stimulus check.  If you expect a check that has not arrived, check out the links in this Huffington Post article

And if you received a check for a deceased relative (over 1 million were sent!), you need to return it to the Treasury, sorry. 

Small businesses

CARES Act includes benefits for small businesses: Payroll Protection Program loans; payroll deposit delays; and tax credits.  The SBA funds for the PPP ran out initially, but Congress added more funding. 

The key is to file so that the loan is forgiven, so that the funds become a grant.  The forgiven loan is not treated as income.  

If you need more information on these programs, let me know. 

2020 tax law changes

The required minimum distributions or RMDs are suspended for 2020.  This way, you do not need to sell funds at a low to withdraw and may even be able to redeposit funds that you already withdrew. 

The CARES Act waives the 10% penalty for early withdrawals from qualified plans for up to $100,000 for coronavirus-related circumstances. The distribution is taxed over three years. And, if the funds withdrawn are repaid to the plan within 3 years, that is treated as a tax-free roll over.  The act also allows loan from the plan up to the lesser of the vested balance and $100,000. 

For 2020, there is an above-the-line charitable donation deduction up to $300.  This should help charities that are responding to those impacted helping them raise money now.

More Scams and Hackers

Be wary of messages asking for personal information because scams are on the rise.  And be careful working from home, as there are more hacker attempts to gain access via the home connections to companies. 

If you want help dealing with any, let me know.

Personal impact

Being cooped up is challenging, even if it is the best way to stay healthy.  Make sure you practice self-care so you can handle this! 

I hope you and your loved ones are all managing this as well as you can.

If you want to just talk, I would be glad to set up a time, just let me know! 

Thank you, and be well

Steven

Brace for the Holidays! Have a plan

As Halloween passes, we know that the season of over-buying and over-eating is approaching, so it’s time to prepare.  You want to enjoy being with friends and family without having the hangover of overspending, or worse, going into debt to finance all the fun. 

Make the gift giving fit with your cash management

Over-buying does not make you happier and usually makes the recipient uncomfortable.  Also, over-spending is likely to make achieving your long-term goals more difficult, which can add to the depression some feel at this time of year.

For gifts, “it’s the thought that counts” rings true.  Most recipients appreciate being remembered for who they are and what they do.  Think back to what you enjoyed most in past holidays and let that guide you.  This can help you stick to your values as you think through the entire process and devise your holiday shopping plan.  The time spent together may be far more important and rewarding than unnecessary giving.

Have a plan

Technology and social media can make shopping easier, but they also make it easier to overspend and end up with credit card debt from funding your gift giving.  

Part of the reason is that many such purchases are spontaneous.  People often regret these unplanned purchases.  Over 70% of people in one survey exceeded their budget and over half bought items not on their list.  This can make the new year bleak (More than 3 in 4 Americans are stressed about going into debt over the holidays — and technology’s not helping ) Counter this by creating a realistic budget, lookout for sales, review your budget to make sure you are on track. 

Budget – If you determine what you can reasonably spend and allocate that to people for whom you want to buy gifts, or give holiday tips, then you have a spending plan that should get you through.  When devising your plan, go back to your financial goals to remind yourself why staying on track is so important.  Include time for present wrapping to avoid time pressure that encourages splurge buying.  Also, you may want to have small gifts on hand for unexpected guests.  You can use budget apps, such as NerdWallet, to create a budget.  When you do, stick to it! 

If the people for whom you are shopping have wish lists, follow them for ideas.  And leave items in your shopping cart overnight to take a second look and avoid regretting a splurge purchase.  Ask “does the person really want or need this?,” especially if you are shopping for yourself!  (It may be wise to avoid, or at least substantially limit, any buying for yourself.) 

Be Wary of Black Friday, Cyber Monday and other retailer tricks

If you do your homework, you can determine if waiting in line or buying on line will be best.  As stated above, create a budget and stick to it.   

Be on the lookout for retailer other tricks like flash sales, loyalty cards, incentives to return for more purchases, misleading refund policies.  Similarly, procrastinating can lead to splurge buying ruled by emotions such as the need to please everyone and get the shopping done.

Avoid scams

With the pressure of the holidays to address all the gift giving, parties and thank yous, stay vigilant for scams.  These can come in the form of bogus IRS and social security calls, credit card offers, computer software deals and fake invoices.  There are many phishing sites you can use to check out whether the offers are legit

Review our Holiday Tipping Guide

As for tipping, see our post Guidelines for Holiday Tips and Gift.

Remember, if you’re unable to tip or give a gift, a thoughtful thank you note will acknowledge those people who are important to you.  You can even make a donation in their name. 

Brace for over-eating and possibly even depression

This blog is does not profess to have any expertise in psychology.  Nonetheless, we have all heard how holidays can be disappointing if not depressing from some.  The Hallmark gatherings promised on TV or social media rarely happen in real life. 

If the holidays are depressing, consider volunteering somewhere, such as a soup kitchen, or getting out for some serious exercise.  Both can lift your mood as well as either help others or improve your health.  Allow time to rest and recover!  And try a warm drink, tea not bourbon, or a warm bath. 

Take care of yourself – it’s hard to help anyone else if you are not in good shape yourself.  But if you are really experiencing holiday depression, speaking to people can help, be that family, friends or professionals.

We wish you all the best for financially sound, and fun, holidays!  And let us know if we can help you plan.

Update on how to stay safe after the many data breaches

If someone manages to steal your social security number, they often try to file a tax return claiming refunds. To prevent this, you either have to file before them or obtain an identity PIN from the IRS on the IRS.gov website.

Here is the link for the ID PIN, and here is the IRS explanation:

An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent the misuse of their Social Security number on fraudulent federal income tax returns. Call the IRS at 800-908-4490 for specialized assistance,

Please see our prior post, How to stay safe after the Equifax data breach, to learn more about credit freezes and other protections. And let me know if we can help!