In a time where many Americans have been coping with the overwhelming anxiety surrounded by the COVID-19 pandemic, adding year-end tax planning to the mix can seem downright unfair. While the below items only begin to scratch the surface of the 2021-2022 tax picture, it will hopefully serve as a checklist of items to keep in mind as we approach the New Year.
Charitable Deductions – For the 2020 tax year, a new above-the-line deduction was allowed for up to $300 of charitable cash contributions, even if you claimed the standard deduction on your tax return. The deduction has been extended through 2021, and increased to a $600 limit on a married filing joint (MFJ) return (still $300 for single and married separate filers). In 2020, a cash contribution made by an individual to a qualifying public charity was generally limited to 60% of the individual’s adjusted gross income (AGI) with excess contributions being carried forward up to five tax years. The AGI limit for cash contributions made to qualified charities has been increased to 100% through 2021.
Required Minimum Distributions (RMD) – Seniors were allowed to skip their RMD in 2020 without penalty. However, there is no waiver for the RMD in 2021. Anyone at least 72 years old by the end of 2021 must take an RMD to avoid the 50% penalty (if you turned 72 during 2021, you have until April 2022 to take your first RMD). Taxpayers at least 70 1/2 years old should consider making qualified charitable distributions (QCD) of up to $100,000 per year directly from a non-Roth IRA to a qualified charity to reduce AGI. QCDs count toward RMDs. We suggest that you review your federal and state tax withholdings that are set up with your financial institution. If you have historically not had taxes withheld from your distribution, you may want to consider having taxes withheld or making additional estimated payments by January 15, 2022 depending on your 2021 estimated taxable income. We are prepared to assist you with your year-end tax planning.
Child Tax Credit (CTC) – For eligible taxpayers in 2021, the CTC was increased and became fully refundable. Previously, taxpayers could only claim $2,000 per child under 17, and the credit was reduced as AGI went over $200,000 ($400,000 for MFJ). Only $1,400 of the credit was refundable. The American Rescue Plan Act (ARPA) increased the credit to $3,000 per child and $3,600 per child under 6. The credit is now fully refundable for all children 17 and under. The enhanced credit under ARPA phases out for those with AGI over $75,000 ($150,000 MFJ), and for taxpayers over those limits, the old CTC of $2,000 per child applies. The ARPA also called for 50% of the credit to be paid in advance for the expected 2021 CTC, based on 2020 income tax filings. These payments are spread evenly from July through December 2021. When providing your 2021 tax information, please confirm the amount of your advanced CTC.
Recovery Rebate Credit (3rd Stimulus Payment) – Earlier in 2021, the federal government issued the third round of stimulus checks for up to $1,400 ($2,800 MFJ) plus $1,400 for each qualifying dependent. When filing your 2021 return, you will need to provide the amount of your third stimulus check to determine how much of the recovery rebate is available. Similar to your 2020 return, a “true-up” calculation will be done with your 2021 return if you were eligible for more than you actually received.
Social Security Tax – Self-employed individuals and household employers who deferred half of their Social Security taxes for the 2020 year must repay half by December 31, 2021. The remainder is due by December 31, 2022. The repayment should be made with a separate tax payment and noted that is for “deferred Social Security tax” to be correctly applied. The Social Security Administration has also recently announced that the wage base for computing Social Security tax will increase to $147,000 for 2022 (up from $142,800 in 2021). Wages and self-employment income above this threshold are not subject to Social Security tax.
Cryptocurrency Transactions – The evolution of virtual currency continues on a daily basis, and the IRS is continuing to monitor these virtual assets. As virtual currency grows in popularity, the IRS is expanding its examination of these assets and transactions. If investing in these virtual assets is something you are involved in, the emphasis continues to be on record-keeping to ensure you are meeting any reporting requirements.
If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.
