Advanced Child Tax Credit Starts July 15th

The Advance Child Tax Credit, part of the $1.9 trillion American Rescue Plan, starts on July 15th .
Eligible families will receive monthly payments of up to $300 per qualifying child from July
through the end of 2021 to help them bridge the financial gap caused by the COVID-19
pandemic. Advance Child Tax Credit payments are based on tax credits that would ordinarily be
received next year when income tax returns are filed for 2021.

Taxpayers who filed a tax return for 2019 or 2020 should receive their first Advance Child Tax
Credit payment on or around July 15th . Taxpayers who provided bank information with their filed
federal income tax return should see the payment direct deposited into their bank account. If the
IRS does not have bank information on file, the taxpayer will receive the payment in a check mailed to the address it has on file.

What about people whose income for 2019 and 2020 wasn’t high enough to have to file an income tax return? The IRS established an online Non-filer Sign-up tool to help them register for the monthly Advance Child Tax Credit payments by providing required information about
themselves, their qualifying children aged 18 and under, and their bank information so the IRS
can deposit the payments into their checking or savings account.
Eligible families need to know these facts about the Advance Child Tax Credit:

  1. The Child Tax Credit increase and Advance Payments are in effect for 2021 only, unless
    extended by new law.
  2. The Child Tax Credit is increased from $2,000 to $3,000 per eligible child, for children
    who are age 6 and older, and to $3,600 per eligible child for children under the age of 6.
  3. The age for qualifying children is increased from children under age 17 to children under
    age 18, thereby increasing the number of eligible children.
  4. The Child Tax Credit is fully refundable, meaning that eligible taxpayers could receive a
    tax refund that exceeds her or his tax federal withholding.
  5. Income limitations for the Child Tax Credit remain at $200,000 for single taxpayers and
    $400,000 for married filing joint. The Additional Child Tax Credit is phased out by $50
    for every $1,000 of modified adjusted gross income above the threshold.
  6. Any eligible Child Tax Credit not paid in advance from July to December 2021 will be
    received after the taxpayer files her or his 2021 federal income tax return.
    The Advance Child Tax Credit gives eligible families up to $300 a month per qualifying
    child through the end of 2021 to help them bridge the financial gap caused by COVID-19.
    Want to know more? The IRS recently posted FAQs at https://www.irs.gov/credits-
    deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-d-calculation-
    of-advance-child-tax-credit-payments.

Are Social Security Benefits Taxable?

Most workers have heard about Social Security their entire lives and laughed, “Ha! I’ll never see those benefits!” Then, suddenly, those workers are approaching retirement age and thinking about when that “free money” is going to start. But is it free money? Sure, it’s free, in the sense that you don’t need to work to get it. However, a portion of those Social Security benefits could cost you because they are taxable.

If Social Security is going to be your only income in 2021, your benefits will probably not be taxable. If you receive income other than Social Security, such as wages, interest, dividends, capital gains, or net business income, you must do a few calculations to determine whether any of your Social Security benefits are subject to federal tax.

Here’s a quick way to find out if a portion of your Social Security benefits are taxable:

  1. Determine the total Social Security benefits that you will receive in 2021.
  1. Multiply the total benefits by 50%.
  1. Add the 50% of your Social Security benefits received during 2021to all your other income received in 2021, including tax-exempt interest. 
  1. If you’re married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits, even if your spouse didn’t receive any Social Security benefits.
  1. Compare the total from #3 to the Base Amount for your tax filing status:
  • $25,000 – For single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2021
  • $32,000 – For married filing jointly
  • $0 – For couples married filing separately and lived with your spouse at any time during 2021
  1. If the total from #3 is higher than the Base Amount, a portion of the Social Security benefits above the Base Amount is taxable, up to 85% of the benefits. The higher your income, the higher the percentage of Social Security benefits subject to federal tax.

If you are approaching retirement age and thinking about your “free money” from Social Security, you need to check on whether it really is free. A portion of those Social Security benefits could be subject to federal tax, depending on your other income and your Base Amount.

Have questions? The IRS has answers for you at https://www.irs.gov/faqs/social-security-income.

Act Now and Reduce Tax Stress Later

Rejoice! The 2020 tax filing season is finally over! That is, unless you needed more time to file and requested an extension after reading my May 5th blog post (https://buff.ly/3t0X73l). Between all the changes from the COVID-19 relief packages and deadline delays, this tax filing season was another wild ride for taxpayers and their preparers. 

Well, how did it go for you? Stressful? Expensive surprises? Not knowing what to expect makes an already stressful situation – doing your taxes – even worse.  Here are a few actions to take now that will reduce your tax stress later:

  • Do a “Paycheck Checkup” 

Did you owe a lot when you filed for 2020, or did you get a big refund, aka an interest-free loan to the government? An IRS Paycheck Checkup can help to make sure you don’t get an expensive surprise when you file your 2021. Use this online tool to see if you need to change your withholdings https://www.irs.gov/paycheck-checkup. Have investment other non-wage income? Check on whether you need to make quarterly estimated tax payments here https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

  • Make Tax Payments Electronically

Using any of the IRS electronic payment options puts you in control of paying your tax bill. You determine the payment date and receive an immediate confirmation from the IRS. It’s easy, secure, and much quicker than mailing in a check or money order. Go to IRS.gov/payments to see all the free electronic payment options: online, by phone or from a mobile device using the latest encryption technology. Check with your state for online payment options.

  • Contribution Deduction for Nonitemizers

Even if you don’t itemize and take the standard deduction, you may be eligible to take a charitable deduction for cash contributions up to $300 made to qualifying charities in 2021. Eligible contributions must be made via cash, check or credit card. Use the IRS Interactive Tax Assistant tool – Can I Deduct My Charitable Contributions? – for answers about cash donations.

  • Tax Credit Eligibility

You could qualify for credits like the Child Tax Credit and Child and Dependent Care Credit. You might be able to claim the Credit for Other Dependents if a dependent is not your child. If you pay qualifying higher education costs for yourself, your spouse, or a dependent, you may be eligible for education tax credits or deductions. Taxpayers earning $57,414 or less can check if they qualify with the EITC Assistant, available in both English and Spanish.

Now, immediately after filing your 2020 tax returns, is the perfect time to act and reduce tax stress next filing season. Whether you prepare your own taxes or use a tax preparer, the more you know in advance, the less stressful that your tax return filing experience will be for 2021.

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.

About the Home Office Deduction

Tax clients ask me all the time about taking a home office deduction. That topic has come up even more often since COVID-19 has so many people working at home. However, everyone with an office at home isn’t eligible for a home office deduction, even if she or he owns a business. Lots of rules apply. It can be pretty confusing. 

So, let’s “un-confuse” the topic:

  1. Who is eligible for a home office deduction?

Only individuals who own a business are eligible for the deduction. Yes, some employees used to be eligible under special circumstances, but those rules changed at the end of 2017. Now, only business owners who use space in her or his home exclusively and regularly to substantially conduct business operations can consider taking a home office deduction. No non-business activity can be conducted in a home office. That means no personal items in the home office, even clothes in the closet.

  1. What home expenses can be deducted?

Deductible home office expenses are either direct or indirect, based on the expense type and business percentage of the home used for business. The most common method used to calculate the business percentage is dividing the square footage used exclusively for business by total square footage. Shared spaces, like hallways, cannot be included in office space.  

  • Direct Expenses: Expenses that benefit only the home area that is exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.
  • Indirect Expenses: Expenses for keeping up and running the entire home, such as the mortgage interest, real estate taxes, insurance, utilities, and general repairs are deductible based on the business use percentage, described above.

Expenses to maintain the non-living home space, such as lawn care, are not deductible. For business owners who don’t want to hassle with tracking all the various home office expenses, the IRS has a Simplified Option that allows a standard deduction of $5 per square foot, limited to 300 square feet.  

Eligibility for a home office deduction is determined by a lot of rules that can be confusing. We address the basics here, but there’s more to it. Details and examples are on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction.

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.

Taxes for Married Couples in Businesses

Married couples who also operate a business together live a complex life. Commingling personal and business, experiencing 100% togetherness, is tough enough. Throwing taxes into the mix could be the straw that breaks the proverbial camel’s back and busts that togetherness apart. But it doesn’t have to be that way.

By default, according to the IRS, two or more individuals in business together without incorporating operate as a partnership. Partnerships are a complicated way to operate from a tax perspective. Partnerships file a separate income tax return, and each partner receives a Form K-1 to report for her or his pro-rata share of income and expenses, used to prepare the partner’s individual income tax return. Partners must also track the basis of partnership interest and any loans to or from the partnership, which impacts how distributions are taxed.

Married couples can get an exception to all those partnership complexities, if each spouse is an owner and materially participates in operating a business that is not formed as a Limited Liability Company (LLC). Instead of a partnership, spouses can elect to treat the business as a joint venture. The joint venture election breaks down to four simple steps:

  • Make the Qualified Joint Venture Election by filing a joint individual tax return. Spouses must consider profits and losses based on spouse’s interest and level of material participation in the business. Once the election is made, if the spouses receive an IRS notice asking for a partnership tax return, they should call or write to the IRS advising them of the qualified joint venture election.
  • Divide Profit and Loss between Spouses by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s level of material participation in the joint venture. The percentage allocation should be consistent for all items and reflect the relative percentage of participation. Allocations should be documented and updated for any changes in participation.
  • File Two Separate Business Schedules on the spouses’ individual income tax return. Each business schedule (i.e., IRS Schedule C or Schedule F) should be prepared with each spouse’s allocated share of income and expenses. The net profit or loss for the business schedules for each spouse is combined and reported on Form 1040, Schedule 1, Line 3. Net combined profit or loss is included in overall total income.
  • Report Net Profit as Self-Employment Income so each spouse’s earning from self-employment are credited and the applicable self-employment taxes are paid. Spouses who elect qualified joint venture status are treated as sole proprietors for federal tax purposes. A separate Schedule SE to report self-employment tax must be filed for each spouse to accurately report the net self-employment income.

Need more details about simplifying tax complexities when you are running a business as a married couple? The IRS has it for you here – https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorporated-businesses.

Beware of Scams During Tax Season

Scam artists prey on their victims all year long, but scam activity seems to spike during tax season. It must be “prime time” to snare victims because they are more abundant – everyone is preparing and filing their returns to meet the April 15 deadline. Scammers can’t resist all those opportunities to fool or intimidate taxpayers who are in the middle of an unpleasant task that makes them nervous and vulnerable, especially online.

Since 2014, the IRS has announced its “Dirty Dozen” top tax scams. The top twelve for 2020 include five scams that are more likely to occur during tax season, targeting taxpayers with malicious intent to steal their refunds, bank account number, or personal information. Here are alerts to watch out for on the five tax-related scams highlighted by the IRS:

  • Phishing: Taxpayers should be alert to potential fake emails looking to steal personal information. Don’t click on links claiming to be from the IRS, or any other sender you’re not expecting or that you do not know. Be wary of emails with embedded links or invitations to see or learn more − they may be nothing more than scams to steal personal information.
  • Unscrupulous Return Preparers: Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season. They commit fraud, harming innocent taxpayers, or talk taxpayers into doing illegal things, like inflating deductions. These scammers may also have taxpayers deposit refunds into tax preparer accounts.
  • Offer in Compromise Mills: Misleading tax debt resolution companies can exaggerate the chance to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC) for a hefty fee. Later, the taxpayer learns that she or he is not one of the small number of individuals who are qualified to even apply for an OIC, after the fee is paid and it’s too late.
  • Fake Charities: Criminals frequently exploit natural disasters and other times of crisis by setting up fake charities to steal from well-intentioned people trying to help in times of need. Unfortunately, this is nothing new. The current COVID-19 pandemic and recent winter storms in Texas are examples where scammers take advantage of your compassion.
  • EIP or Refund Theft: Refund fraud and theft remain a pervasive threat. In this past year, criminals also turned their attention to stealing Economic Impact Payments (EIP) as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Scammers often defraud taxpayers by promising payments more quickly but divert the payments instead.

Don’t get caught up in one of these top tax scams while you are busy filing your 2020 income tax returns. To learn more about these scams and how to protect yourself, check out the IRS website at https://www.irs.gov/newsroom/irs-unveils-dirty-dozen-list-of-tax-scams-for-2020-americans-urged-to-be-vigilant-to-these-threats-during-the-pandemic-and-its-aftermath