Not Ready to File by May 17?

For the second year in a row, the income tax filing deadline is delayed. This year, the filing due date for the IRS and most states is May 17th instead of the “normal” April 15th. Despite the delay, the tax deadline can sneak up on you. If you’re in a panic because you haven’t started gathering your tax documents, you can probably relax. 

You can request a tax filing extension to postpone from May 17th to October 15th. You don’t need to provide a reason for needing the extension, but it does take a little time to get it done right and avoid possible underpayment penalties.

Three tips for getting an income tax filing extension:

  1. You Must Apply

Individuals can request a tax filing extension by filing IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, online at the IRS website, via approved tax software, or in paper form. It must be sent or postmarked no later than midnight on the original due date. The extension is automatically approved if a refund is expected or if the estimated amount due is paid with the extension request.

  1. Pay Amounts Due

Use the IRS Form 4868 instructions at https://www.irs.gov/pub/irs-pdf/f4868.pdf to estimate your 2020 income tax liability. Compare your estimated taxes to your tax withholding or quarterly estimated payments and enter the numbers on the extension request. If you owe more in taxes than you’ve paid in, the balance due must be paid with the extension request. Failure to pay the amount due results in an underpayment penalty and interest accrued daily on the unpaid balance.

  1. Check Your State

Each state has its own set of rules and processes for its residents to request an income tax filing extension. As mentioned above, most states followed the IRS and delayed their 2020 tax filing deadline, but some did not match the IRS’ May 17th deadline. Check your state’s tax department website for deadline updates and links to information about requesting an extension of time to file for 2020.

Rushing at the last minute is stressful and causes mistakes, especially with an already stressful activity like filing your income tax returns. Get more time to file your 2020 federal income tax return by requesting a tax filing extension. Go to the IRS website at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return for details and help estimating any taxes you owe with the extension request.

Enhanced Child Tax Credit for 2021

Tax rule changes in recently-passed Congressional bills in response to the pandemic are head-spinning. Overall, these changes provide targeted financial support and tax relief for people who have suffered financial hardship because of COVID-19. The IRS just came out with guidance on one of these changes, an enhanced Child Tax Credit. Temporary changes to the Child Tax Credit are intended to provide relief to taxpayers with eligible dependent children and bridge the financial gap until the American economy recovers.

The enhanced Child Tax Credit is part of the $1.9 trillion American Rescue Plan that President Joe Biden signed into law in March 2021. Formally called Child Tax Credit Improvements for 2021, families need to know about its valuable provisions:

  • Child Tax Credit increases are in effect for 2021 only.
  • The Child Tax Credit is increased from $2,000 to $3,000 per eligible child, for children who are age 6 and older.
  • For children under the age of 6, the Child Tax Credit is increased to $3,600 per eligible child.
  • The age for qualifying children has also been increased from children under age 17 to children under age 18. This change allows more children to be considered eligible for the Child Tax Credit.
  • The Child Tax Credit is fully refundable, meaning that eligible taxpayers could receive a tax refund that exceeds her or his tax federal withholding.
  • Income limitations for the Child Tax Credit remain at $200,000 for single taxpayers and $400,000 for married filing joint. The income limitation for the Additional Child Tax Credit is phased out by $50 for every $1,000 of modified adjusted gross income more than the threshold (e.g., $150,000 married filing joint).
  • Advance payments of one-half of the eligible Child Tax Credit will be issued in equal periodic payments from July to December 2021. Any eligible Child Tax Credit not paid in advance will be received when the taxpayer files her or his 2021 income tax return.

Guidance on the new tax rules for the enhanced Child Tax Credit is fresh off the presses. The IRS plans to post more information on its website (www.irs.gov), along with a portal for taxpayers to change personal information that may impact the amount of the advance payments, like the birth of a child or a change in which separated or divorced parent claims the child as an eligible dependent. 

These enhancements to the Child Tax Credit for 2021 are temporary. Knowing the valuable rule changes can help to bridge the financial gap for many American families.

Business Meal Deduction Update

Legislation recently passed by Congress for COVID-19 relief contains some tax rule changes that are intended to encourage taxpayer spending. One change that took effect January 1, 2021, temporarily increases the business deduction for meals from 50% to 100% until the end of 2022.  The deduction increase could provide business owners the incentive to enjoy a not-from-home meal while conducting business activities.

As usual, the temporary rules are not simple. The IRS guidance recently announced the details and definitions needed by taxpayers to follow the rules while also doubling their business meal deductions: 

  1. The temporary rules apply to any expense paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.
  1. The term “restaurant” means a retail business that “prepares and sells food or beverages for immediate consumption.” The food or beverages can be consumed on the restaurant’s premises, carried out, or delivered. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, like a grocery store or a vending machine.
  1. An employer may not treat an on-site eating facility as a restaurant under the temporary rules, either employer-operated or operated by a third party.

Those temporary rules are in addition to all the other rules that aren’t changing for 2021 and 2022, including:

  1. Business owners also need to be present for the meal and be engaged in conducting business activities. Alternatively, the business owner must be represented by an individual who is connected to the business, such as an employee or contractor.
  1. Meals cannot be lavish or extravagant under the circumstances. 
  1. As always, a documented record must be kept of the date, amount, business purpose and attendees at the meal.

Not simple at all. But it could be worth your time to learn about the temporary rules for deducting business meal expenses. It could double your business meal deduction! Need more details? The IRS has it for you here – https://www.irs.gov/pub/irs-drop/n-21-25.pdf.

Another IRS Impersonation Scam

Impersonating the IRS is a favorite way for scammers to intimidate their victims. Who isn’t afraid of the IRS? It’s gotten even worse recently with all those tempting Economic Impact Payments and other COVID-19 funding just waiting to be stolen. Email phishing scams allow criminals to hit thousands of potential victims in seconds, and then sit back and watch how much money they can reel in.

At the end of March, the IRS warned about another IRS impersonation scam that targets educational institutions, including students and staff who have “.edu” email addresses. The scam emails display the IRS logo and use various subject lines to get potential victims’ attention, such as “Tax Refund Payment” or “Recalculation of your tax refund payment.” 

The phishing emails ask people to click a link and submit a form to claim their refund. Who wouldn’t want a refund, right? The problem is, the link asks for all kinds of personal information, like:

  • Social Security number
  • First Name
  • Last Name
  • Date of Birth
  • Prior Year Annual Gross Income (AGI)
  • Driver’s License Number
  • Current Address
  • City
  • State/U.S. Territory
  • ZIP Code/Postal Code
  • Electronic Filing PIN

The IRS would never ask for personal information. So, what should you do with a scam email?

  • Do Not Open or Click

Resist temptation to open or reply to any suspicious email, no matter how enticing. And don’t even think about clicking on a link in a suspicious email!

  • Report to Authorities and Delete

Report phishing emails to the Federal Trade Commission at www.ftc.gov/complaint and to the Anti-Phishing Working Group at [email protected]. Forward tax-related emails to the IRS at [email protected]. After reporting, delete the original email.  

Need more protection and detection help? The IRS has it for you here – https://www.irs.gov/businesses/small-businesses-self-employed/tax-scams-how-to-report-them and the Federal Trade Commission has more for you here – https://reportfraud.ftc.gov/#/?pid=A.

RMD Rule Reminder

Keeping up with tax rule changes was never easy. But the flurry of tax changes in response to the COVID-19 pandemic has been absolutely head-spinning. A few of those changes impact the rules for required minimum distributions (RMDs) from retirement accounts. RMD rules are how the IRS prevents taxpayers from avoiding tax payments on retirement funds that were invested pre-tax, or before any taxes were paid on the income used for the retirement investment.

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (aka “Secure Act”) was signed into law. The Secure Act changed IRA distributions and contributions in three big ways:

  • Required Minimum Distribution (RMD) Age Increase

Under prior tax law, RMDs had to begin no later than April 1 following the year in which a person turned age 70½. For taxpayers who were not already age 70½ by December 31, 2019, the age to start taking RMDs is extended to 72. Distributions don’t have to be postponed to 72; it’s just an option. What’s better – waiting or not – depends on individual circumstances.

  • Contribution Age Restrictions Repealed 

Before the Secure Act, workers over age 70½ were not eligible to make contributions to an IRA. That contribution age limit has been eliminated. Yea! Slight damper on that celebration, though – the same rules about who can and cannot deduct a traditional IRA contribution apply, regardless of age. 

  • Inherited IRA “Stretch Distributions” Eliminated for Non-Spouses

Traditional IRAs that are inherited by someone other than the owner’s spouse can no longer be distributed over the life of the beneficiary. Distributions now must be taken within a ten-year period after inheritance. This new rule eliminates the options for non-spouse beneficiaries to use inherited traditional IRAs as part of his or her own retirement planning.

So, what does this mean for 2021 RMDs?

  • Individuals who reached 70½ in 2019 or earlier and were not required to take an RMD for 2020 are required to take an RMD for 2021 by December 31, 2021. 
  • Individuals who did not reach age 70½ in 2019 will reach age 72 in 2021 will have their first RMD due by April 1, 2022, and their second RMD due by December 31, 2022. 
  • To avoid having both amounts included in their income for the same year, the taxpayer can make the first withdrawal by December 31, 2021, instead of waiting until April 1, 2022. After the first year, all RMDs must be made by December 31.

Tax rules are always changing. Keeping up is always challenging. For help to meet the challenge, checkout the IRS website – HTTPS://WWW.IRS.GOV/NEWSROOM/TAX-TIME-GUIDE-IRS-REMINDS-TAXPAYERS-OF-RECENT-CHANGES-TO-RETIREMENT-PLANS.

Expanded Educator Deduction for COVID-19 Safety

The educator deduction for out-of-pocket classroom expenses started as a temporary tax law provision in 2002. Primary and secondary schoolteachers could deduct up to $250 of the unreimbursed cost of books, supplies, computer equipment, and supplementary materials used in the classroom. In 2015, the deduction was made permanent. In 2016, the deduction was expanded to cover professional development expenses and was indexed for inflation.

Even with indexing for inflation and before the pandemic, $250+ a year did not put much of a dent in teacher spending. COVID-19 safety needs have made classroom expenses spike, just like other work environments. In June 2020, AdoptAClassroom.org surveyed U.S. educators to ask about classroom expenses during distance learning. It was not shocking to learn that teachers spent an average of $745 for classroom supplies in the 2019-20 school year. Almost half of the responding teachers reported spending more because of distance learning. 

The COVID-related Tax Relief Act of 2020 expanded the educator deduction further to help teachers afford the challenges of distance learning and returning to the classroom. Here’s what you need to know about the expanded educator deduction:

  • Who is Eligible for the Deduction?

You’re an eligible educator if, for the tax year you’re a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours during the school year. Services must be performed in a school that provides elementary or secondary education as determined under state law.

  • What Safety Items Qualify?

COVID-19 protective items include, but are not limited to face masks, disinfectant, hand soap and sanitizer, disposable gloves, physical barriers like clear plexiglass, air purifiers, and other items recommended the Centers for Disease Control and Prevention for the prevention of the spread of COVID-19.

  • When Can Safety Items be Included?

Qualified expenses include the amounts that you pay or incur after March 12, 2020, for personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of coronavirus. The deduction is for expenses paid or incurred during 2020 are deductible on your 2020 federal tax return.

Still not sure if you or someone that you know is eligible for the expanded educator deduction for COVID-19 safety items? Read more details at https://www.irs.gov/taxtopics/tc458.

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.