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Residential Energy Tax Credits Extended

If you didn’t get all your home improvements done in 2020, and you think you missed out on some valuable residential energy tax credits, you’re in luck. Some renewable energy tax credits were extended. Others are still available at a lower rate. Even better, some tax credits were retroactively extended back to 2018. That could mean money back on your 2018, 2019, 2020, and, in some cases, your 2021 income tax liability.

Energy tax credits are an incentive for homeowners and builders to make energy-efficient improvements or upgrades that use less energy and protect the environment. For example, ENERGY STAR certified products are independently certified to use up to 30% less energy. Less energy use means a lower energy bill. It could also mean your lowering your taxes.

Here are six tips about Residential Energy Tax Credits:

  • Renewable energy tax credits are 22% of the cost for solar energy systems, fuel cells, small wind turbines, and geothermal heat pumps that are placed in service during 2021. Tax credit limits depend on the credit amount and your tax situation.
  • Residential Energy Property Tax Credits have been retroactively extended for qualified improvements from December 31, 2017, through December 31, 2021. These credits are generally 10% of the cost, up to $500, or a specific amount from $50-$300, depending on the improvement.
  • Improvements that qualify for the Residential Energy Property Tax Credit include qualified heat pumps, central air, boilers, furnaces, water heaters, circulating fans, and biomass stoves.
  • Qualified energy efficiency improvements that also qualify for a residential energy credit include energy-efficient insulation, metal and asphalt roofing, windows, doors, and skylights. The credit does not include the installation cost.
  • Energy credits apply to your newly-constructed or existing home that is used as your primary residence or your secondary home. These credits do not apply to rental properties.
  • You can take advantage of retroactively-extended energy tax credits by amending your federal income tax return up to three years after the original filing deadline (e.g., April 15, 2021, for a 2017 income tax return originally due April 15, 2018).

Home improvements that save on your energy costs could also lower your tax liability. Not only could 2020 improvements qualify for a tax credit, some of the qualified home improvements you made in the last three years could lower your prior-year tax liability, too. Want to know more? Check out the ENERGY STAR website https://www.energystar.gov/about/federal_tax_credits.

Final Worker Classification Rules

Lawsuits about worker classification weren’t front-page news before Uber and Lyft started fighting traditional interpretations of the law by treating workers as independent contractors. What used to be boring hiring details are big headlines about big-name court cases fighting over whether workers are employees or independent contractors. And, as you can imagine, worker classification issues have gotten bigger as the gig economy has exploded.

Uber, Lyft, and other businesses that provide apps for gig workers fought and won legal battles to classify those workers as independent contractors, not employees. Using the independent contractor classification saves businesses money in employer payroll taxes and other employee-related expenses. Workers classified as independent contractors assume more responsibility and cost, like paying self-employment taxes and making quarterly tax payments.

Recent court rulings about worker classification have created some confusion among employers. The U.S. Department of Labor (DOL) stepped in to help businesses and workers comply with applicable tax law. DOL recently issued a final rule that takes effect on March 8, 2021, to clarify the standards for determining whether a worker should be considered an employee or an independent contractor.

Three aspects of the final DOL rules that businesses and workers should know:

  • An “economic reality” test is used to determine whether a worker is an independent contractor or is “economically dependent on an employer for work” (i.e., an employee). The rule defines two “core factors” to help businesses determine whether a worker is economically dependent on someone else’s business or is in business for her- or himself.
  • The first of the two core factors isn’t just one thing; it relates to a series of conditions. These include the degree of control of the employer over the work, the amount of skill required to perform the work, and the degree of permanence of the working relationship. For example, an independent contractor is free from the control and direction of the hirer, is sufficiently skilled to work autonomously, and is providing services that are temporary or intermittent.
  • The second core factor relates to whether the work being performed is integrated with or separate from the overall business. An independent contractor performs work that is outside the usual course of the hiring entity’s business, either a specialized skill or temporary need for additional resources.

Worker classification issues have gotten bigger, along with the expansion of the gig economy. Determining whether a worker is considered an independent contractor or an employee can be complicated, which is why DOL issued clarifying rules. Worker classification decisions assign responsibilities and costs to the employer or the worker, so it’s important to get it right.

Need more information? The IRS addresses worker classification at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.

2021 Tax Filing Starts February 12

Tax filing season officially starts for individuals on Friday, February 12th, when the IRS begins accepting and processing 2020 income tax returns. Ordinarily, tax filing starts in the third week of January. However, with all the last-minute tax changes in 2020, including a second round of Economic Impact Payments, the IRS needed extra time to update its systems.  

The IRS has already started begun accepting business returns and individual returns from taxpayers who are eligible to use IRS Free File partners (https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free). The IRS anticipates that nine out of ten taxpayers will receive their refund within 21 days of filing electronically if there are no issues with the tax return.

The IRS has five tips to avoid having issues with your return:

  • There is no extension of the April 15 tax filing deadline. If you need more time to file, you can extend filing until October 15, by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. But remember, it’s an extension of time to file, not to pay. Pay any taxes due with the extension request, no later than April 15.
  • Taxpayers are urged to file returns electronically as soon as they have the 2020 tax documentation that they need. Filing early is a good idea for several reasons. First, processing volumes are lower at the IRS and state tax agencies, resulting in faster refunds. Filing early also gets ahead of potential scammers filing a fraudulent tax return with a valid tax ID. 
  • Returns involving the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) need additional processing time to help the IRS stop fraudulent refunds and claims from being issued to identity thieves. By law, refunds for EITC and ACTC taxpayers cannot be issued before mid-February. Because the IRS isn’t processing returns until February 12, their refunds should start arriving in the first week of March.
  • Electronic tax refunds and payments are the safest and fastest method for financial transactions with federal and state tax agencies. Your tax preparer can usually set them up using authorized tax software. Tax agency websites include links for payments via bank account or credit card. However, these sites don’t have a refund option.
  • Advance stimulus payments, a.k.a. Economic Impact Payments, do not reduce a taxpayer’s refund or payment due for 2020. Eligible taxpayers who received less than the maximum stimulus payment amount could claim the Recovery Rebate Credit and increase her or his 2020 federal income tax refund. Anyone who received the maximum amount does not need to include any information about the payment when filing.

The IRS begins accepting and processing 2020 income tax returns on February 12, about three weeks later than usual because of last-minute tax law changes passed in December. Taxpayers who want a smooth tax filing experience should follow these five IRS tips.

IRS Expands Identity Theft Protection Program

Identity theft has existed for almost as long we we’ve had identities. Back in the Old Days, identity theft involved paper and the U.S. mail. The Internet and other online tools made identity theft faster and more wide-spread. Several year ago, when scammers hit taxpayers hard by stealing their IDs and filing fraudulent tax returns, the IRS reacted by starting an Identity Protection Program. Taxpayers who report an identity theft issue are issued an Identity Protection Personal Identification Number (IP-PIN) for filing her or his federal tax return.

With identity theft getting worse all the time, the IRS is rolling out a voluntary nation-wide IP-PIN Program for taxpayers to get identity theft protection before falling victim to an identity thief. After several years of piloting the program in different parts of the country to make sure it works as intended, the IRS is expanding the program nation-wide effective now.

How does the IP-PIN Program work? Here are six things you need to know:

  • The (IP PIN) is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information.
  • Once issued by the IRS, the taxpayer’s tax account is locked, and the IP PIN serves as the key to opening that account. Electronically-filed federal income tax returns that do not contain the correct IP PIN will be rejected. A paper return must be filed. That return will go through additional scrutiny for fraud.
  • An IP PIN is valid for one specific calendar year. A new IP PIN must be obtained for each filing season.
  • This is a voluntary program. Taxpayers who want IRS assistance with identity theft protection must pass a rigorous identity verification process. Spouses and dependents are eligible for an IP PIN if she or he can also pass the identity verification process.
  • Current tax-related identity theft victims who have been receiving IP PINs via mail will experience no change.
  • There is no opt-out option. The IRS is working on it for 2022. Taxpayers who cannot provide an IP PIN or obtain a replacement can’t unlock her or his tax account and must file the return in paper form. Any refund will take several weeks to process.

The IRS IP-PIN Program is one option taxpayers can use to protect her or his identity from theft and fraudulent tax filings. For taxpayers that do want to use the program, the IRS offers more information and instructions here – https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.

Don’t Miss Out on an EITC Refund

The Earned Income Tax Credit (EITC) was enacted back in the mid-1970s to assist low- and moderate-income workers. The EITC gives a financial boost to hard working people who can really use it. EITC can lower a working taxpayer’s tax liability, and even result in a refund that is bigger than the amount of federal taxes withheld. 

A tax credit like EITC is even better than a tax deduction. A credit is a dollar-for-dollar tax liability reduction, not a reduction of taxable income. For a worker in the 22% marginal tax bracket, a deduction means 22 cents less in tax where a credit means $1 less in taxes. Even better, the EITC is a refundable credit, meaning that the refund can be even more than the amount of income tax that was withheld or paid for the year.

Despite how large a financial boost it is, the IRS estimates that about 20% of eligible working taxpayers do not claim the EITC. Why? Because they don’t know about it.

Five important for workers to know about EITC:

  • To qualify for the EITC, the worker and everyone reported on her or his income tax return must have a valid Social Security number (SSN).
  • For 2020, workers may choose to use her or his 2019 earned income to figure the 2020 EITC if the 2019 earned income is more than the 2020 earned income. This opportunity to get a higher EITC is part of the Taxpayer Certainty and Disaster Relief Act of 2020. 
  • To qualify for the EITC, a worker must file a federal income tax return using the married filing jointly, head of household, single, or qualifying widow or widower. A worker cannot claim the EITC when using the married filing separately filing status.
  • Workers without a qualifying child are eligible for EITC by meeting the income rules, living in the U.S. for more than one-half of the year, not being claimed as a qualifying child on anyone else’s tax return, and being between the ages of 25 and 65 at the end of the tax year (usually Dec. 31).
  • Claiming the EITC could delay receiving a federal refund because of extra security checks performed by the IRS. 

The IRS wants hard working people who deserve a financial boost to know about EITC. The EITC can lower a working taxpayer’s tax liability to below zero, meaning that she or he could get a refund that is bigger than the amount of federal taxes withheld from her or his paycheck. Knowing about EITC can make a big difference in a person’s life.

Want to know more? Check out the details on the IRS website at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc.

Finding a Tax Pro

Finding the right tax professional to “fix” your taxes is a lot like finding the right plumber or to fix your kitchen sink. There are many to choose from, but it’s a challenge to make sure you find someone who is knowledgeable, experienced, and dependable. With a tax pro, you also want someone with whom you feel comfortable confiding your financial details.

So, how do you find that elusive experienced and dependable confidant to prepare and file your income tax returns? Well, you can ask friends, hit the Internet, or head to the local tax preparation office. That can get you a few tax pros to interview. Yes, interview. Plan to interview two or three recommended tax pros to feel confident that she or he is qualified and that you feel comfortable interacting with her or him.

These three interview questions are a “must” for finding the right tax pro:

  • How Do You Keep Up with Tax Law Changes?

Tax laws are constantly changing. Some changes are major, as we saw three years ago with the 2017 Tax Cuts and Jobs Act. It’s important to work with a tax preparer who keeps up with all those changes, so you don’t have to. A qualified tax preparer will describe attending conferences, webinars, or other methods to stay current.

  • What Experience and Credentials Do You Have?

Tax preparation is an unregulated industry where anyone can participate, so asking about years of experience, training and education is essential. Preparers with professional credentials, such as a CPA or Enrolled Agent (EA), are required to complete annual continuing education requirements and follow ethical and professional standards. 

  • How Do You Communicate with your Clients?

Does the tax preparer meet regularly with clients? Is she or he available to you if a tax-related question or issue comes up? Make sure you feel comfortable with the tax preparer’s style, manner, and process. If not, keep looking. You’ll be sharing a lot of personal information so you must be comfortable.

Plan to interview two or three tax pros referred by friends or online reviews to find a tax professional who is knowledgeable, experienced, and with whom you feel comfortable confiding your financial details. Need help getting started? The IRS has a website for you with tips and tools – https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

Form 1099 Tax Filing Deadline

It’s barely the middle of January and the first tax filing deadline is already upon us at the end of this month. Businesses, nonprofits, and other entities may make payments that must be reported on IRS Form 1099. In general, Form 1099 must be completed and filed for each person to whom $600 or more was paid during the year for rents, non-employee income payments, prizes and awards, and other payments defined by the IRS at https://www.irs.gov/forms-pubs/about-form-1099-misc

Here are four tips to meet the Form 1099 Tax Filing Deadline:

  • Payments are reported on either Form 1099-MISC (miscellaneous), or on the new Form 1099-NEC (non-employee compensation) that was implemented beginning with the 2020 tax year. Which form to use depends on the type of payment recipient. For more information about Forms 1099-MISC and 1099-NEC and their instructions, go to IRS.gov/Form1099MISC or IRS.gov/Form1099NEC.
  • The due date for filing Form 1099 1099-MISC and 1099-NEC is January 31st for the calendar year ending December 31st. The former 30-day automated extended filing deadline was eliminated in 2016.
  • Form 1099 reporting does not apply to personal payments, only payments made as part of a business, nonprofit, trusts of qualified pension or profit-sharing plans of employers. One exception to this is payments of legal fees to attorneys. 
  • Some payments do not have to be reported on Form 1099, although they may be taxable to the recipient. For example, in general, payments to a C or S corporation, payments of rent to real estate agents or property managers, and business travel allowances paid to employees are not reportable on Form 1099. 

If you make payments as part of your business, nonprofit, trusts of qualified pension or profit-sharing plans of employers, your first tax filing deadline for 2021 could be coming up. Use these four tips to see if payments that you made in 2020 need to be reported to the IRS by January 31st. Need more details? The IRS has them for you at https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return

New IRS Standard Mileage Rates for 2021

Last week, I filled my Honda’s gas tank for the first time since July. My situation might be extreme, but overall car usage has been down since the beginning of the pandemic in March 2020. No matter how much or how little you use your personal vehicle, you could qualify for a tax deduction if you drive for business, charitable, medical, or moving purposes. How much you can deduct and how you report the expense depends on your situation. 

Every year, the IRS issues the new standard mileage rates based on the average actual cost per mile to operate a vehicle. The average cost per mile is calculated to include fuel, maintenance, insurance, and depreciation. The IRS recently issued the new standard mileage rates for 2021. 

Beginning on January 1, 2021, the standard mileage rates were either reduced due to lower fuel prices or stayed the same due to statutory constraints. Here are the details:

  • 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020
  • 16 cents per mile driven for medical purposes, down 1 cent from 2020
  • 14 cents per mile driven in service of charitable organizations, set by statute, and remaining unchanged from prior years
  • 16 cents per mile driven by members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station, down 1 cent from 2020

Even at the lower rates, the standard mileage can really add up. You also have the option of calculating the actual costs of using your vehicle instead of using the standard mileage rates. Qualified deductible vehicle expenses can total the greater of actual expenses or a standard rate. 

Most people choose to use the standard rate because it’s easier and usually results in a larger deduction amount. Both expense deduction options are based on the number of miles driven during the calendar year. You must track your mileage by usage type for each vehicle no matter which method you use.

Taking vehicle deductions for qualified business, charitable, medical, or moving purposes involves a lot of tracking, but the effort can be worth it. There are apps you can put on your phone to help. Once you get your mile tracking process down, you’ll see that those deductions can add up and reduce the bottom line on your tax bill.