Learn what you need to know (and do) to reduce your taxes and make your net worth grow…
In the current economy many consumers and taxpayers are trying to find ways to reduce or eliminate various taxes–when and where possible.
It is important that you have an understanding of what taxes may apply to you and your family (a comprehensive overview) so that you can know all areas of your taxes that may possibly need to be addressed in a more effective way.
Although taxes can be a broad and overwhelming concern for many, it can also be presented in a manner and style that can be readily understood and applied by you in a practical manner–and in a manner that could be more beneficial to you and your family at the various stages in your life. In this discussion TheWealthIncreaser.com will focus on a number of tax concerns that many (those who earn $400,000 or less) face and could possibly be addressed from a more beneficial angle.
If you make over $400,000, that is a good problem (ok, it’s not really a problem) to have, just keep in mind that there may be other tax options available that can help you reduce your taxes in ways that may not be covered in this discussion.
When it comes to effective tax management, you don’t have to be a tax expert, however it is important that you know what areas of taxes that you need to address as well as areas where you can make improvements so that you can take the right action that can benefit you and your family for this tax year and throughout your lifetime.
Keep in mind that this discussion on taxes will be longer than most that you will encounter on the web, however your understanding of the content on this page can get you off to a solid understanding or enhance your current understanding of your taxes and help position you and your family for a lifetime of wealth building success.
Let’s take a look at areas of taxation that you may need to address now (or in the near future) and further explore ways that you can reduce your taxes in the coming years so that you can live a more bountiful life–and one without financial strife.
After-Tax Income versus Before Tax-Income
We start this discussion on reducing your taxes by presenting why you MUST understand the difference and importance of distinguishing between after-tax income and before tax-income so that you can truly build wealth more efficiently.
Your after-tax income is often used for daily living and to fund IRA ROTH accounts and IRA traditional accounts and other investment accounts that are outside of your retirement accounts. In the case of a ROTH IRA, you would receive tax free distributions in the future (based on certain conditions) and in the case of a traditional IRA you could possibly deduct the contributions (up to a limit and based on certain conditions) when you file your federal taxes.
Your other after-tax income could be used for daily living and if you had discretionary income after the payment of your monthly bills, you could use that income to build wealth more efficiently.
Your before-tax income is often used for funding retirement accounts such as 401k, 403b, Thrift Savings Plans, health care accounts, health savings accounts, flexible spending accounts and the like–and those contributions have the effect of lowering your taxable income that would be stated on your w-2–thus lowering your overall taxes at the federal level and possibly state level as well.
Business Income & Deductions
If there is a connection between any income that you receive and your business if you had one, the income is business income. A connection exists if it is clear that the payment of income would not have been made if you did not have the business.
The business income and deductions that follow are discussed from the vantage point of a schedule C, sole proprietor, and would be filed on your personal income taxes.
Other forms of business formation also exist and could be more beneficial to you from a tax, liability and financial point of view. However, they are beyond the scope of this discussion on tax reduction strategies, but it is important that you know that they are available and may suit your needs better if you are–or desire to become a business owner.
By utilizing the schedule C, you qualify for the QBI pass-through credit where you can reduce your taxable income from the business by 20 percent, and if you have losses in your early years, you can use those losses to offset your personal income–thus reducing your personal taxes whether you have income or a loss on a qualified business!
Income from work that you perform on the side (in addition to your regular job) could be business income.
It includes amounts that you would receive that were properly shown on Forms 1099-MISC, including amounts reported as non-employee compensation in box 7 of the form, amounts received from customers or clients in the course of doing business and other income that was created as a result of the business.
Regardless of the amount of time you spend in a self-employed activity, you must file a tax return if your gross income is at least as much as the filing threshold for your filing status and age.
In addition, you must also file Form 1040 Schedule SE, Self-Employment Tax, if:
- Net earnings from self-employment, excluding church employee income, were $400 or more; or
- The taxpayer had church employee income of $108.28 or more.
Business expenses are the costs of operating your business. These expenses are costs that you don’t have to capitalize or include in the cost of goods sold but can deduct in the current year.
If you are involved in a partnership, S-corporation, or C-corporation, your income may also be taxable, however that is beyond the scope of this discussion on taxes.
Business Deductions
Your unadjusted basis immediately after acquisition (UBIA) of qualified property held by your trade or business is taken into account in determining the § 199A deduction (Qualified Business Income deduction).
Income earned as an employee or through a C Corporation, however, is ineligible for the deduction.
Furthermore, eligibility for the pass-through deduction authorized by the Tax Cuts and Jobs Act does “not” require that you itemize tax deductions.
However, the pass-through deduction is not available for Specified Service Trade or Business (SSTB ) if the taxpayer’s taxable income is equal to or greater than the applicable threshold amount plus $100,000 in the case of a taxpayer filing a joint tax return or the applicable threshold amount plus $50,000 for all other taxpayers.
In laymen’s term, if you are a SSTB and exceed a certain income level you cannot take the 20% income exclusion.
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Home Office Deduction (you have 2 ways to calculate)
- Simplified method
When calculating the home-office deduction using the simplified method, the deduction is equal to the area of your home used for a qualified business use (not exceeding 300 square feet) multiplied by the prescribed rate.
The current prescribed rate is $5, but the Internal Revenue Service and the Treasury Department may update the prescribed rate at any time. Therefore, the maximum deduction as of 2021 tax year would be 300 * $5 = $1,500.
If you elected to use the simplified method of determining your home-office deduction, neither depreciation nor any actual expenses other than those not related to use of the home, may be deducted. If you had business expenses not related to the use of your home such as office expenses, computer purchases etcetera, they would continue to be deductible!
2. Actual expense method
When using the actual expense method for figuring the home-office deduction, you or your tax professional must determine:
- The nature of the expense, i.e., whether the expense is – A direct expense–An indirect expense, or–An unrelated expense; and
- The percentage of the home used for business purposes.
Expenses that are deductible by all homeowners, whether or not the home is used for business purposes, include the following:
- Real estate taxes, within prescribed limits
- Deductible mortgage interest; and
- Casualty losses from a federally declared disaster
If you qualify for the home-office deduction, these amounts should be multiplied by the percentage of your home used for business purposes to figure your total deduction for business use of the home.
The home-office deduction is not unlimited!
If you use the actual expense method for claiming a home-office deduction, the deduction of otherwise nondeductible expenses—expenses such as insurance, utilities and depreciation allocable to the business—is limited to the taxpayer’s gross income from the business use of the home minus the sum of the following:
1. The business portion of expenses that you could deduct even if you did not use the home for business purposes.
Those expenses include eligible mortgage interest, real estate taxes (not exceeding prescribed limits), and net qualified disaster losses allowable as itemized deductions on Schedule A (Form 1040); and
2. The business expenses that relate to the business activity carried on in the home but not to the home itself.
Those expenses include the costs of business telephone, supplies, and equipment depreciation. If you are a self-employed taxpayer, you should not include the deductible one-half of self-employment tax in the business expenses that must be subtracted from gross income.
If you used the actual expense method to figure your home-office deduction in a previous year and you had an expense carryover because the deduction was limited in that year, no portion of the carried-over amount may be deducted in any year in which you used the simplified method.
In such a case, you would continue to carry over the disallowed amount to the next year in which you used actual expenses to figure your home-office deduction.
If you have expenses such as mortgage interest, real estate taxes and casualty losses—such expenses must be treated as personal expenses when using the simplified method of determining the home-office deduction.
Business Meals
The Consolidated Appropriations Act, 2021 provides for temporarily increased deductions for business meals.
Pursuant to the Act, businesses are permitted a 100% tax deduction for business meals—up from the current 50%—if the food or beverages are provided by a restaurant. The increased business meal deduction is available for 2021 and 2022.
179 Expense Deduction
The dollar limitation on the value of property that may be expensed (written off or deducted in the current tax year) in the year in which it is placed in service is $1,050,000 for the 2021 tax year.
- The phaseout threshold for your ability to expense eligible property is $2,620,000 (2021).
The definition of Code Section 179 property is “expanded” to include – Depreciable tangible personal property used principally to furnish lodging, such as:
- Other equipment for use in the living quarters
- Certain improvements to nonresidential real property, including
- Heating, ventilation and air-conditioning property
- Fire protection and alarm systems, and
It is important to note that improvements will not qualify if they are attributable to other than the building’s interior.
Therefore, improvements attributable to:
- The internal structural framework of the building; or
- An escalator or elevator–do not qualify for immediate expensing
Depreciation:
The 100% expensing permitted under the TCJA declines by 20% each year for qualified property purchased and placed in service after December 31, 2022. Accordingly, the bonus depreciation deduction is reduced.
The bonus depreciation under the TCJA ends after 2026!
The additional “bonus” first-year depreciation deduction does not apply to a passenger car placed in service by you if you:
• Did not use the passenger automobile during 2020 more than 50% for business purposes.;
• Elected out of the additional first-year depreciation deduction for the class of property including passenger automobiles
• Acquired the passenger automobile used and the acquisition of it failed to meet the acquisition requirements of section 168(k)(2)(e)(ii); or
• Acquired the passenger automobile before September 28, 2017, and placed it in service after 2019.
Luxury Passenger Car Depreciation Caps
The depreciation caps for a luxury passenger car placed in service in 2021 are:
- $10,200 for the first year without bonus depreciation
- $18,200 for the first year with bonus depreciation
- $16,400 for the second year
- $9,800 for the third year
- $5,860 for the fourth through the sixth year
A “luxury vehicle” is a four-wheeled vehicle regardless the cost of the vehicle, used mostly on public roads, and which has an unloaded gross weight of no more than 6,000 pounds. It includes vehicles not normally considered “luxury” vehicles on the basis of their price.
The term “listed property,” as used in the tax law, is personal property used in a business which can also be used for personal purposes but no longer includes computers, peripherals and cell phones.
Because listed property can have application for both personal and business uses, the IRS wants to ensure that you are using the property for business, therefore you must have sufficient evidence to prove the property’s use in the business and the amount/date of the expense.
Thus, property considered listed property is subject to increased documentation and scrutiny so keep good records to prove your deduction.
Under prior tax law, listed property included:
• Passenger automobiles
• Other property used as a means of transportation
• Any property generally used for purposes of entertainment, recreation or amusement and
• Computers and related peripheral equipment (taken off list)
Cancelled Debt
Cancelled debt is generally taxable and if you anticipate having your debt cancelled be sure you know the tax ramifications upfront. Cancelled mortgage debt continues to receive favorable tax (excluded from taxation) treatment as of the 2021 tax year. If, at this time cancelled mortgage debt applies to you, the stars in the sky are much brighter going into tax year 2022.
Capital Gains
If the transaction involves personal use property, in contrast to property held for investment, any gain realized by you upon the sale of the property is a capital gain; however, “any loss” that results from the sale of personal use property cannot be deducted!
Most assets owned by you for personal purposes, pleasure or investment are referred to as “capital assets,” and the sale or exchange of a capital asset may result in a capital gain or loss!
If the sale or trade of investment property results in a gain or loss, such gain or loss is generally a capital gain or loss!
Capital losses can be used to offset capital gains (up to $3,000 per year) and unused losses can be carried forward!
Capital gains and losses are reported on Schedule D, Capital Gains and Losses, attached to your IRS Form 1040 or Form 1040-NR. However, before completing Schedule D, one or more IRS Forms 8949, Sales and Other Dispositions of Capital Assets, normally need to be completed and attached to the IRS Form 1040 or 1040-NR along with Schedule D.
If all Forms 1099-B received by you show that basis was reported to the IRS and no correction or adjustment is required, you may not need to file Form 8949; instead, the totals may be entered directly on Schedule D, lines 1a or 8a, as appropriate (discussed above).
You need to file as many Forms 8949 as required to report all transactions!
Schedule D provides a summary of the transactions reported on IRS Form 8949 in addition to certain other information. Thus, if an IRS Form 8949 is completed for you, each of the columns (d), (e) and (h) should be totaled and the totals for all Forms 8949 should be shown in Schedule D on the following lines:
- 1a, 1b, 2 and 3 for short-term capital gains and losses; and
- 8a, 8b, 9 and 10 for long-term capital gains and losses.
In addition, any distribution of net realized long-term capital gains from a mutual fund should be shown on line 13. Distributions of net realized short-term capital gains are shown on Form 1099-DIV issued by the mutual fund as ordinary dividends. Schedule D should then be completed. If the amount shown on Schedule D, line 16 is a loss, the smaller of the following should be entered on Form 1040 or Form 1040-NR,” Capital gain or (loss)”
Be aware of the 3.8% additional tax on capital gains if you are a high-income earner such as single filers who make more than $200,000 and married couples who make more than $250,000, as well as certain estates and trusts.
The net investment income tax (NIIT) is a 3.8% tax on investment income such as capital gains, dividends, and rental property income.
Child and Dependent Care Credit
You may be eligible for a dependent care credit if you pay to have care for your children or other qualifying dependent.
Deductions
Standard Deduction
Taxpayers who are ineligible to take the standard deduction are the following:
- Taxpayers whose filing status is “married filing separately” and whose spouse itemizes deductions
- Taxpayers who are filing a tax return for a short tax year due to a change in their annual accounting period; and
- Taxpayers who were nonresident aliens or dual-status aliens during the year
Standard Deduction Amounts for 2021 are:
- $25,100 for married couples whose filing status is “married filing jointly” and surviving spouses;
- $12,550 for singles and married couples whose filing status is “married filing separately”; and
- $18,800 for taxpayers whose filing status is “head of household.”
A taxpayer who can be claimed as a dependent is generally limited to a smaller deduction, regardless of whether the individual is actually claimed as a dependent. For 2021 returns, the standard deduction for a dependent is:
- The dependent’s earned income from work for the year plus $350 (but not more than the standard deduction amount, generally $12,550).
A taxpayer who can be claimed as a dependent is generally limited to a smaller standard deduction, regardless of whether the individual is actually claimed as a dependent.
The additional standard deduction for a blind taxpayer—a taxpayer whose vision is 20/200 or poorer with glasses/contact lenses or whose field of vision is 20 degrees or less—and for a taxpayer who is age 65 or older at the end of the year is:
- $1,350 for married individuals; and
- $1,700 for singles and heads of household.
For example, a 65-year-old single blind taxpayer would add $3,400 to his or her usual standard deduction: $1,700 for being age 65 plus $1,700 for being blind. (Therefore, his or her standard deduction would normally be $15,950 ($12,550 + $3,400 = $15,950).
Standard deductions and other deductions have the effect of lowering your taxable income and thus increasing your tax refund or decreasing the amount of taxes that you owe, and the reduction amount is dependent on your tax bracket.
A tax credit–on the other hand–if you are eligible is dollar for dollar and is generally more valuable than a deduction.
ITEMIZED DEDUCTIONS
7.5% AGI limit for medical expense deductions
The medical deduction limit is 7.5% for 2021 tax year. Be sure to keep adequate records for your medical premiums, out of pocket medical costs including hearing, eye and dental services as well as your mileage to and from medical providers if you plan to itemize when you file your taxes.
You are limited in the deduction amount meaning if your AGI is $100,000 for the year–you deduct amounts over $7,500 that you paid toward medical expenses.
Charitable Deduction
Charitable contributions made by you with payroll deductions, checks, cash and donations of goods and clothing are all deductible.
It is not unusual to forget about or overlook your charitable contributions, therefore from this day forward you want to establish a reliable record keeping system–as your charitable contributions can often add up over the course of a year and provide additional deductions so that you can reduce your taxes.
You generally need to itemize to claim a deduction, and since the 2017 tax reform nearly doubled the standard deduction, many people who once itemized, now choose not to itemize.
However, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, allows taxpayers who don’t itemize to deduct cash donations of up to $300 ($600 if MFJ) made before Dec. 31, 2020.
The maximum amount of charitable contribution a taxpayer is permitted to deduct in any year may be limited by the taxpayer’s contribution base—in most cases the contribution base is an amount equal to the taxpayer’s adjusted gross income— and further limited depending on the type of property contributed.
However, any charitable contribution exceeding the applicable tax deduction limit may be carried over to the following five years.
The TCJA increased the limit on your deductible charitable cash contributions from 50% under prior tax law to 60% of the taxpayer’s contribution base for qualified organizations to which the 50% limit normally applies.
The increased limitation for cash contributions applies to contributions made in any taxable year beginning after December 31, 2017 and before January 1, 2026. The CARES Act temporarily suspends some of the limitations imposed by the Internal Revenue Code with respect to certain individual taxpayer cash contributions.
In general, qualified contributions are disregarded in applying IRC section 170 as it pertains to percentage limits and carryovers of excess contributions.
The TCJA eliminates the exception to a contemporaneous written acknowledgment of a donor’s gift, effective for gifts made after December 31, 2016. (Note: The effective date of the elimination of the exception to a contemporaneous written acknowledgment is retroactive to gifts made on and after 2016).
Record Keeping and Documentation of Deductions
The IRS advises that the length of time that you should keep a document, including the documentation of deductions, depends on the action, expense, or event which the document records.
As a general rule, you must keep records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out–roughly 3 years from filing or three years from the tax year filing deadline excluding extensions.
The period of limitations is the period of time in which you can amend your tax return in order to claim a credit or refund, or the time that the IRS can assess additional tax.
As mentioned earlier, as a result of the CARES Act (and extended by The Taxpayerypayer Relief Act of 2021) provision, a non-itemizing taxpayer can now take an above the-line deduction of up to $300 ($600 for married couples) for charitable cash contributions made in taxable years beginning in 2020.
A deduction that is “above the line” reduces AGI and can help lower your taxes and can be taken even if you don’t itemize deductions.
State and Local Tax Deduction
State and local taxes paid by an itemizing taxpayer have generally been a deductible item on the taxpayer’s federal income tax return without limit. The TCJA limits the federal income tax deduction for state and local taxes to $10,000 ($5,000 for married taxpayers filing separately) beginning in 2018.
Property taxes and sales taxes cannot exceed $10,000 when itemizing on schedule A.
Home Mortgage Interest, Home Equity Loans and Indebtedness Refinancing
The tax treatment of refinanced existing mortgage debt is treated, for purposes of the applicable dollar limits, as incurred on the date the original indebtedness was incurred, but only to the extent the amount of the indebtedness resulting from the refinancing does not exceed the amount of the refinanced indebtedness.
Mortgage Interest deduction limit reduced from 1 million to $750,000 as a result of the Tax Cuts & Jobs Act of 2017.
Sales and real estate tax deduction capped at $10,000.
Itemized deduction for mortgage insurance premiums and exclusion from income” of qualified principal residence when debt cancellation, occurs continues for the 2021 tax year.
Mortgage Insurance Premiums Deduction when mortgage lenders require the additional security of having its loan secured not only by the home but also by an insurer–is still on the IRS books.
Qualified mortgage insurance premiums that are tax-deductible—include mortgage insurance provided by:
• The Department of Veterans Affairs (commonly known as a “funding fee” or “VA funding fee”)
• The Federal Housing Administration (commonly known as “Mortgage Insurance Premium or MIP“)
- The Rural Housing Service (or successor organizations); and
- Private Mortgage Insurance (commonly known as PMI)
Except in the case of mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service, qualified mortgage insurance premiums may be prepaid by the taxpayer.
In such a case, premiums allocable to periods after the close of the tax year must be allocated over the shorter of:
- The stated term of the mortgage; or
- 84 months beginning with the month the insurance was obtained. Premiums are treated as paid in the year to which they are allocated. If the mortgage is satisfied before its term, no deduction is allowed for the unamortized prepaid mortgage insurance premiums.
Mortgage Cancellation Debt
The Consolidated Appropriations Act, 2021 also extended the exclusion from income of certain qualified principal residence indebtedness. Under the five-year tax extender, a taxpayer may exclude income arising from discharge of qualified principal residence indebtedness provided one of the following applies:
- The debt was discharged before 2026; or
- The debt was discharged after 2020, and the discharge is subject to an arrangement entered into and evidenced in writing before January 1, 2026. Properly reporting qualified principal residence indebtedness discharge requires preparation of IRS Form 982 and its attachment to the taxpayer’s federal income tax return.
Points paid in association with a home mortgage may also be eligible for deduction or amortization over the life of the mortgage loan.
Unreimbursed Employee Expenses
Unreimbursed Employee Expenses are no longer deductible as part of reforms under the Tax Cuts & Jobs Act of 2017.
Dependent Credit
If you have dependent care expenses, you may be eligible for a credit. The amount of your credit is based on the type and age of the dependent and is based on the expenses you pay and your earned income for the year.
Depreciation
Unless the taxpayer elects to use ADS or is required by law to use ADS, a taxpayer must use GDS.
The straight-line method of depreciation is used for a taxpayer electing to use ADS, and such a taxpayer must make the election in the first-year residential rental property and nonresidential real property is placed in service; once made, the taxpayer cannot revoke the election.
If you have business and/or rental property, it is important that you know that you can use depreciation to help lower or reduce your tax burden. In many cases it is important that you bifurcate your depreciation in order to maximize your deduction and tax savings.
Earned Income Credit or EIC
You may be eligible for the Earned Income Credit of varying amounts based on your earned income and number of dependents.
Education Deductions/Credits
529
ABLE
Coverdell
The education savings bond program
IRA when used for educational purposes may avoid the early withdrawal penalty
Education Credits
American Opportunity Credit or AOC–first 4 years of higher education—max $2,500
Lifetime Learning Credit or LLC–max $2,000
Tuition & Fees–Tuition and Fees Deduction Eliminated
Educational credits for those who qualify can help lower the amount of taxes that are owed or increase the amount of your refund.
Student loan interest that you pay may also be deductible on your tax return!
Energy & Other Credits
The Credit for Nonbusiness Energy Property was Extended
If you replaced windows and doors in 2021 or had energy improvements to your HVAC, water heater and possibly other energy related purchases you may be eligible for a tax credit, therefore be sure to inform your tax professional at tax time and organize your receipts of purchase at this time if you did repairs or improvements to your home.
Estimated Tax Payments
Estimated tax payments are generally due in four installments.
Although an installment may be due on the following business day if the normal due date falls on a weekend or legal holiday, the estimated tax payment due dates are April 15, June 15, September 15 and January 15.
You would generally be required to pay estimated taxes if you had a qualified business, you were an employee and you did not have adequate withholding, you are an employee and you have a sideline business and you file as self-employed, and you expect or have income after all of your deductions from your business.
Estimated income taxes may be paid using any of the following methods:
- Crediting an over-payment of tax on the previous year’s tax return to the current year’s estimated tax
- Payment of the estimated tax by direct transfer from the taxpayer’s bank account using the Electronic Federal Tax Payment System (EFTPS), making payment by use of a credit or debit card, by using a pay-by-phone system, or via the Internet; or
- Remitting a payment using a check or money order along with a payment voucher Form 1040-ES
Individuals wishing to take advantage of the cash payment option should visit the IRS.gov payments page, select the cash option in the “Other Ways You Can Pay” section of the web page and follow the instructions:
- Taxpayers will receive an email from ACI Payments, Inc. (acipayonline.com) confirming their information
- Once the IRS has verified the information, the Cash Processing Company sends the taxpayer an email with a link to the payment code and instructions
- Individuals may print the payment code provided or send it to their smart phone
- The retail store listed in the Cash Processing Company’s email provides a receipt after accepting the cash. The receipt is confirmation of the taxpayer’s payment and should be kept for the taxpayer’s records. The payment usually posts to the taxpayer’s account within two business days
- Payment frequency and amount limits and fees apply
Taxpayers who are due a tax refund also have several choices with respect to its receipt!
The options available to a taxpayer owed a refund include that the refund:
- Be applied to the taxpayer’s estimated tax for the following year
- Be deposited to a prepaid debit card
- Be deposited into two or three accounts at a bank or other financial institution (such as a mutual fund, brokerage firm, or credit union) in the United States; (See Limit on Direct Deposit Refunds below)
- Be deposited directly to a traditional, Roth or SEP IRA; or
- Be sent to him or her in a check. If the taxpayer is due an income tax refund but has not paid certain amounts owed, the refund may be used to pay any past-due amounts. Thus, a tax refund may be used to pay:
- Past-due federal income taxes
- Federal debts, such as student loans
- Child and spousal support payments; and
- State unemployment compensation debt
Taxpayer’s who are owed a refund can even have the refund credited to a TreasuryDirect® online account in order to buy U.S. Treasury marketable securities or savings bonds!
Recovery rebate payments will not be reduced to pay past-due taxes under a payment agreement with the IRS or to pay other state or federal debts. In general, creditors cannot get access to the money for reduction or offset and direct payment to themselves.
The CARES Act only allows offsets to cover past due child support payment!
Tax return preparers are prohibited from negotiating client refund checks or accepting such payments in an account owned or controlled by the preparer.
No direct deposits of tax refunds should be requested to an account not in the taxpayer’s name.
For taxpayers who use the calendar year, the due date for filing the federal income tax return is generally April 15th of the year following the end of the calendar year for which the tax return is being filed, although 2021 tax return due date is delayed until Monday, April 18, 2022, because of Good Friday falling on April 15th.
The federal income tax returns for taxpayers who use a fiscal year, i.e., a year ending on the last day of any month except December, are due by the 15th day of the fourth month after the close of the taxpayer’s fiscal year.
For example, the federal income tax return of a taxpayer whose fiscal year ends on June 30th is due on the following October 15th. A taxpayer’s failure to file a timely income tax return may subject the taxpayer to a failure-to-file penalty and interest.
The federal income tax return of a decedent, i.e., a taxpayer who died during the year, must be filed by the decedent’s representative. The return is due by the 15th day of the fourth month after the end of the decedent’s normal tax year.
Even if you obtain an extension of the time to file, any tax due must generally be paid by the regular due date.
Failure to pay any tax due by the regular date will result in the imposition of interest and possible penalties on the unpaid amount from the date due until the date actually paid.
A taxpayer who is unable to file a federal income tax return by the normal due date may be able to get an automatic six-month extension of the time to file. The automatic extension may be obtained by:
• Using IRS e-file; or
• Filing a paper form.
The AMTI exemption amount is reduced (but not below zero) by 25 percent of the amount by which the taxpayer’s alternative minimum taxable income exceeds:
• $1,047,200 for taxpayers whose filing status is “married filing jointly” or “qualifying widow(er)”
• $523,600 for taxpayers whose filing status is “single,” “head of household,” “married filing separately” and
• $85,650 for trusts and estates.
Health Savings Account
Health FSA’s enable workers to contribute before-tax amounts to an account that may then be accessed tax-free to pay various out-of-pocket health-related expenses. Although annual caps on the amount that can be contributed to a health FSA are generally imposed by employers—usually as a way to limit their risk of pre-funding—no limit was previously imposed by the federal government.
That changed for years 2013 and later and the limit for 2021 is $2,750.
Although the tax penalty for a taxpayer’s failure to maintain health coverage has been reduced to zero, individuals who meet specified income, coverage, and other criteria are eligible to receive a refundable tax credit to enable them to purchase a qualified health plan.
Since the tax credit is a refundable tax credit, the taxpayer may receive the credit even though he or she has no income tax liability.
ARPA, § 9661, significantly expands the subsidies provided under the ACA in two ways:
1. By increasing the level of subsidy to those taxpayers who currently qualify for a subsidy; and
2. By including taxpayers who, solely because their income, would not qualify for a subsidy under the law prior to passage of ARPA.
Under ARPA, for tax years 2021 and 2022:
- A taxpayer can claim a tax deduction for contributions made to the HSA even if he or she does not itemize deductions.
- Contributions made to the HSA by the taxpayer’s employer, including contributions made through a cafeteria plan, may be excluded from the taxpayer’s gross income.
- The earnings on amounts contributed to the HSA are tax deferred.
- Distributions from an HSA to pay qualified medical expenses are entirely tax free.
- A taxpayer’s contributions and earnings, if any, remain in the HSA from year to year until the taxpayer uses them.
- An HSA is non-forfeitable and portable, so that it remains with the account holder if he or she changes employers or leaves the work force; and
- Distributions from an HSA for other than qualified medical expenses—if taken after the account holder reaches age 65, becomes disabled, or dies—are taxable but not subject to tax penalties. 1.1.9.2 HSA Eligibility
An individual eligible to establish an HSA is one who meets the following requirements.
The individual:
- Is covered under a high deductible health plan (HDHP) on the first day of the month
- Has no other health coverage except for certain specified coverages
- Is not enrolled in Medicare; and
- Cannot be claimed as a dependent on another person’s tax return for the year.
If a taxpayer meets these eligibility requirements, he or she is an HSA-eligible individual even if the taxpayer’s spouse has non-HDHP coverage, provided the spouse’s coverage does not cover the taxpayer.
High Deductible Health Plan Requirement
For 2021, the IRS defines a high deductible health plan as any plan with a “deductible” of at least $1,400 for an individual or $2,800 for a family.
An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and co-insurance) can’t be more than $7,000 for an individual or $14,000 for a family.
A taxpayer who is an HSA account holder must file Form 8889, Health Savings Accounts (HSAs), and attach it to Form 1040 or Form 1040-NR if: 26
- The taxpayer or employer made contributions to the taxpayer’s HSA during the year
- The taxpayer files a joint return and his or her spouse or spouse’s employer made contributions to the spouse’s HSA during the year; or
- The taxpayer (or spouse, if filing jointly) acquired an interest in an HSA because of the death of the account holder
When HSA contributions not exceeding the maximum permitted are made by an individual account holder, they are deducted by the individual from his or her income for purposes of determining the account holder’s adjusted gross income.
Hobby Income
A hobby, for tax purposes, is an activity not engaged in for profit or income. Any income from a hobby is reported on Form 1040 as “Other income.” However, because of the loss of the miscellaneous itemized deductions as a result of passage of the Tax Cuts and Jobs Act, hobby expenses not exceeding hobby income—at least through 2025—are no longer deductible.
Long Term Care
Qualified long term care premiums and benefits;
Long Term Care premiums may be tax deductible and the tax-deductibility of qualified long-term care insurance premiums can be itemized and deducted on schedule A. For individuals deemed to be chronically-ill, there are tax-exemption of long-term care insurance benefits within certain limits.
Those limits generally change yearly.
In order for long term care benefits to receive favorable tax treatment, the individual on whose behalf they are paid must meet the “chronically-ill” definition included in HIPAA.
A chronically-ill individual is defined as an insured individual who has been certified by a licensed health care practitioner within the previous 12 months as an individual who:
- Is unable, for at least 90 days, to perform at least two activities of daily living (ADLs) without substantial assistance from another individual, due to loss of functional capacity; or
- Requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Tax-qualified long term care insurance policy premiums are included in the definition of “medical care” and are, therefore, eligible for income tax deduction within certain limits!
In short, tax-qualified long term care insurance policy premiums are 100% tax-deductible for self-employed taxpayers to the extent they don’t exceed the dollar limits or the self-employed individual’s net earnings.
The amount of any long-term care insurance premium that may be included in medical care expenses is limited by certain dollar maximums that are indexed for inflation and which change as the insured’s attained age changes.
There are dollar limitations applicable to tax-qualified long term care premiums in 2020 and 2021!
So, if the benefit does not exceed the per diem limitation, all benefits are tax-free even though the benefits exceed the actual costs incurred.
Similarly, if the benefit does not exceed the actual costs incurred, all benefits are tax free even though the benefits exceed the per diem limit.
Luxury Tax
In 1991, Congress enacted a 10% federal luxury tax on the first sales price of a number of items that sold for more than a specific amount:
- Furs and jewelry that sold for $10,000 or more
- Vehicles that sold for $30,000 or more
- Boats that cost more than $100,000
- Aircraft with price tags of more than $250,000
The Omnibus Budget Reconciliation Act repealed this tax in 1993, and it was phased out by 2003.
The federal government doesn’t collect a sales tax, only states do, and they would normally impose a luxury tax at this time (tax year 2021), therefore if you plan on making a major purchase of a luxury nature–check with your state taxing authority in advance if you have concerns about paying additional taxes.
A luxury tax is a sales or transfer tax imposed only on specific goods. The products taxed are considered non-essential or are affordable only to the wealthiest consumers. The mansion tax and sin taxes both fall into the category of luxury taxes.
The luxury tax may be charged as a percentage of the purchase price, or as a percentage of the amount above a specified level. For example, a luxury tax might be imposed on real estate transactions above $1 million, or car purchases over $70,000.
Luxury taxes generally fall into two categories:
- So-called “sin taxes” are imposed on products like cigarettes and liquor and are paid by every buyer, regardless of income. Anyone who objects can just stop buying it. In imposing the tax, the government is both discouraging the use of these products and raising revenue from those who keep buying them.
- Taxes on items that can be purchased only by the wealthiest consumers, who presumably can afford to pay the premium.
Luxury taxes generally do not apply to the entire price of the vehicle, rather the tax typically only applies to the difference between the total cost of the car and the tax threshold amount.
RECOVERY REBATE CREDIT
If you are one who received the recovery rebate credit, you probably want to know the tax implications of receiving the recovery rebates and advance credit payments that began in July of 2021 to eligible recipients.
Recovery rebates, authorized by the CARES Act and Taxpayer Relief Act of 2020 (TRA 2020), were issued in 2020. And, in 2021, recovery rebates were authorized under the American Rescue Plan Act (ARPA).
As a tax credit, the recovery rebate is nontaxable and is not counted as income with respect to determining a taxpayer’s eligibility for income-based programs such as Medicaid or Health insurance Marketplace subsidies.
Recovery Rebates – The American Rescue Plan Act (ARPA) provides tax-free, refundable, recovery rebate tax credits in 2021 of up to $1,400 for each eligible individual ($2,800 for married taxpayers filing jointly), plus $1,400 for each dependent, as defined in IRC § 152, including qualifying relatives and college students.
Retirement Account Contributions
Retirement account contributions are a top tax-reduction tool, as they serve two major purposes.
Your contributions to traditional 401(k), 403b, Thrift Savings Plan and IRA accounts (among others) can be deducted from your taxable income and, as a result, reduce the amount of federal tax you owe.
These funds also grow tax-free until retirement. If you start early, saving money in these accounts can help secure your retirement!
Even if you haven’t executed your plan by the end of the year, you may still have time as you can set up and contribute to your IRA up until April 18, 2022 and still deduct on your 2021 taxes if you are eligible..
The retirement savings contribution tax credit—typically referred to as the saver’s credit—is a nonrefundable credit that is limited to the “applicable percentage” of your eligible retirement savings contributions.
The credit is determined by your adjusted gross income and tax filing status.
The saver’s credit cannot exceed $1,000 per taxpayer!
The retirement savings contribution tax credit, if any, for for those who are eligible does not affect the tax treatment to which the contribution would normally be subject.
For example, if your contribution to a traditional individual retirement account made you eligible for the credit, you would still normally be able to take a tax deduction for the IRA contribution.
In other words, retirement savings contributions made by you would not offset other tax advantages for which you are eligible! Yes, if you qualify–you can DOUBLE-DIP–so to speak!
Despite the number of plans to which the taxpayer makes contributions and the amount of those contributions, the total saver’s credit will not exceed $1,000 per taxpayer for the year.
Standard Mileage Rate versus Actual Expense rate for Automobiles
The standard mileage rates enable a taxpayer using a vehicle for specified purposes to deduct vehicle expenses on a per-mile basis rather than deducting actual car expenses that are incurred during the year.
The rates vary, depending on the purpose of the transportation.
Accordingly, the standard mileage rates differ from one another depending on whether the vehicle is used for:
- Obtaining medical care or moving
Rather than using the optional standard mileage rates, however, you may choose to take a deduction based on the actual costs of using the vehicle.
The 2021 alternative standard mileage rate applicable to eligible business use of a vehicle is 56¢ per mile, down from 57.5¢ in 2020.
In order for such expenses to be deductible, they must have been:
- Paid or incurred during the tax year
- Use for the purpose of carrying on the taxpayer’s trade or business; and
- Traveling between workplaces
- To meet with a business customer
- To attend a business meeting located away from the taxpayer’s regular workplace; or
- From the taxpayer’s home to a temporary place of work
In addition to using the standard mileage rate, you may also deduct any business-related parking fees and tolls paid while engaging in deductible business travel.
However, parking fees paid by you to park your vehicle at the usual place of business are considered commuting expenses and are not deductible.
The standard mileage rate applicable to your use of a personal vehicle for charitable purposes is based on statute and is 14¢ per mile. You may also deduct parking fees and tolls regardless of whether the actual expenses or standard mileage rate is used.
In addition, you may also deduct medical and dental expenses to the extent they exceed the applicable percentage of your adjusted gross income (AGI).
The vehicle expenses may be included as medical and dental expenses are the amounts paid for transportation by you to obtain medical care for yourself, your spouse, or a dependent. You may also include as medical and dental expenses those transportation costs incurred!
If you use a personal vehicle for such medical reasons you are permitted to include the out-of-pocket vehicle expenses incurred—the expenses for gas and oil, for example—or deduct medical travel expenses at the standard medical mileage rate.
For 2021, the standard medical mileage rate is 16¢ per mile, down 1¢ from 2020.
You may also deduct any parking fees or tolls, regardless of whether actual expense or the standard mileage rate is used!
Synopsis 2021 Mileage Rates:
Business–56¢ per mile
Charitable–14¢ per mile
Medical & Moving–16¢ per mile
Taxable Compensation
In addition to wages and salaries, there are other types of compensation received by a taxpayer that may or may not be taxable and they include the following:
- Advance commissions and other earnings
- Allowances and reimbursements
- Differential wage payments
- Government cost-of-living allowances
- Non-qualified deferred compensation plans
- Notes received for services
- Social Security and Medicare taxes paid by the taxpayer’s employer; and
- Stock appreciation rights
Retirement income includes income derived from a range of sources, both private and public.
Although some retirement income is excludable, in whole or part, from income, most retirement income is taxable as ordinary income in the year received.
It is important that you realize that distributions received from the following are often taxable in whole or part at the federal and state level, however there may be credits or exclusions that are available:
The U.S. tax code provides for a substantial number of tax credits, generally designed to meet various societal objectives.
Tax Credits are categorized as:
- Refundable tax credits that are treated as having been withheld from the taxpayer’s income and payable to the taxpayer regardless of income tax liability; and
- Nonrefundable tax credits that are payable to the taxpayer only to the extent of any income tax liability.
Among the most frequently claimed tax credits are:
- 1. Child tax credit
- 2. Credit for other dependents
- 3. Child and dependent care tax credit
- 4. Education tax credit
- 5. Earned income tax credit.
Lifetime Learning Credit–unlimited number of years—max $2,000
Virtual Currency–is now taxed
If you have financial interests abroad with financial accounts–those interests must be disclosed. Virtual currency must also be reported as it too is now fair game for taxation by the IRS.
AMT–The Alternative Minimum Tax is still in effect!
Keep in mind that a number of other Affordable Care Act provisions, including the refundable tax credits to assist taxpayers in purchasing qualified health plans, small business health insurance premium tax credit, and large employer shared responsibility requirement went into effect in 2021.
An in-depth discussion of these topics are beyond the scope of this discussion, however it is important that you realize that they exist.
W-4 Adjustment
Information previously provided by the taxpayer to his or her employer on Form W-4 may change during the year.
Although you can submit a new W-4 at any time, you are required to provide the employer with a new Form W-4 within 10 days following any change that would affect withholding.
If events during the current year will “decrease” the number of withholding allowances for the following year, you must provide the employer with a new Form W-4 by December 1 of the current year. If the event affecting the number of allowances occurs in December of the current year, a new Form W-4 must be submitted within 10 days following the event.
W-2–Issued by your employer and used to file your federal and state and possibly local taxes in the U.S.
W-9–Form that requests taxpayer information for tax reporting purposes–normally social security number or Tax ID number
1099 series–number of uses but most common is for non-employee compensation and retirement income reporting
1096–For those who issue 1099-MISC non-employee compensation the total amount paid on 1099’s that are issued to all non-employees are grouped on this form
Mandatory withholding when you win the lottery, take early retirement withdrawals and penalties for early withdrawal must be a part of your consciousness. Borrowing against your 401k could also have tax and financial consequences as well.
There may also be mandatory withdrawals on certain retirement accounts once you reach age 72.
As a taxpayer you can use the free estimator, found at www.irs.gov/W4App, if you:
- Expect to work only part of the year
- Have dividend or capital gain income, or are subject to additional taxes, such as Additional Medicare Tax
- Have self-employment income; or
- Prefer the most accurate withholding for multiple job situations
You may claim an “exemption from income tax withholding” if both the following situations apply:
1. You had a right to a refund of all federal income tax withheld because of having no tax liability in the current year; and
2. You expect a refund of all federal income tax withheld in the next year because of having no income tax liability.
The IRS can impose interest and penalties against you for being under withheld, and you could also be subject to a penalty of $500 if both the following apply:
- You made statements or claimed withholding allowances on Form W-4 that reduced the amount of tax withheld; and
- You had no reasonable basis for those statements or allowances at the time Form W-4 was prepared.
If you don’t pay enough tax, either through withholding or by paying estimated tax (or a combination of both), he or she may be subject to a penalty.
A criminal penalty may also apply for willfully supplying false or fraudulent information on the form or for willfully failing to supply information that would increase the amount withheld.
The penalty upon conviction can be a fine of up to $1,000 or imprisonment for up to one year, or both.
Conclusion
It is important that you use your best judgment and the use of professionals where appropriate to make the best possible moves as it relates to reducing or eliminating the various taxes that have been discussed above.
Successfully navigating the tax maize and building wealth is not as difficult as you think if you have the right view, and you are willing to do what you need to do–and you work alongside your tax professional in a helpful manner.
The time to learn about taxes and how they affect you and your family is at the earliest time possible in your “life stage” so that you can make the right or best decisions in a proactive manner!
Key Takeaways on Taxes
Below you will find a number of topics that you can run through your mind at this time to find areas of taxation that you can address at this time or in your future to help reduce or eliminate your tax liability. They have all been presented above, however they are presented again so that you can have a quick reference point on what you can do to reduce your taxes.
By reviewing the following topics in a careful, critical and accurate manner, you may be able to improve your tax and wealth building position immediately–or at a later date!
Open a Health Savings Account
If you have an eligible high-deductible medical plan, contribute to a health savings account.
Contributions to these accounts offer an immediate tax deduction, grow tax-deferred and can be withdrawn tax-free for qualified medical expenses. Any balance left at the end of the year can roll over indefinitely, similar to the assets in a retirement account.
Use Your Side Job to Claim Business Deductions
Self-employed individuals (full time or part time) are eligible for scores of tax deductions. That means your freelance projects or side gig as a ride-share driver, starving artist and other areas of interest to you–could land you considerable tax savings if you approach the activity from a business perspective.
A few of the business deductions available include business-related vehicle mileage, shipping, advertising, website fees, percentage of home internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies, phone, computer and basically any reasonable expenses incurred to run your business.
If you pay for your own health, dental or long-term care insurance, those premiums may be deductible too.
Just be sure to maintain proper records, as many people lose their deductions due to their lack of preparedness by not keeping proper records.
Tax deductions are often disallowed because taxpayers don’t keep the right documentation, so it is important that you keep receipts, mileage logs or other records that you can produce in the event of an audit.
Claim a Home Office Deduction
To qualify for the deduction, the space must be used regularly and exclusively for business purposes.
For instance, if an extra bedroom is used exclusively as a home office and it constitutes one-fifth of your home or apartment’s living space, you can deduct one-fifth of mortgage/rent payment and utility fees. Keep in mind there may be recapture provisions that could cause you to owe taxes at the time you sell your home in the future.
Write Off Business Travel Expenses, Even if You are on Vacation
Did you know that you can possibly combine a vacation with a business trip, and you could reduce vacation costs by deducting the percent of the expenses spent for business purposes?
This could include airfare and part of your hotel bill, proportionate to the time spent on business activities. Talk to your tax professional about how you can make this calculation according to IRS guidelines.
Don’t Forget to Deduct Half of Your Self-Employment Taxes
The IRS assesses a 15.3% Federal Insurance Contributions Act tax (FICA) on all earnings to pay for the Social Security and Medicare programs.
While employers split the cost with their workers, self-employed individuals are responsible for paying the entire amount themselves. To compensate for the extra expense, the government will let you deduct 50% of the amount paid from your income taxes. This is an above the line deduction, therefore you don’t have to itemize to claim this tax deduction.
Get a Credit for Higher Education
Since it’s a credit, that amount is deducted from whatever tax you might owe the government. If it exceeds the amount of taxes you owe, up to $1,000 may be refundable to you.
Meanwhile, the Lifetime Learning Credit is great for adults boosting their education and training and those pursuing post graduate study. This credit is worth up to $2,000 per year and helps pay for college and educational expenses that improve your job skills.
Utilize Rental Property for Tax Benefit
You can use rental property to shelter your taxes and help to possibly reduce your taxes if done properly. By properly deducting the various expenses related to the rental you can in many cases reduce your tax bill on an annual basis for years.
Keep in mind there may be recapture provisions that could cause you to owe taxes at the time you sell your rental property in the future.
See if You Qualify for an Earned Income Tax Credit or Saver’s Credit
Even if you aren’t required to pay federal income taxes, you could get a refund from the government.
The earned income tax credit (EITC) is a refundable tax credit of up to $6,660 for tax year 2020 and is usually adjusted annually.
The EITC is calculated with a formula that takes into consideration income and family size and the income limits for the credit range from $15,820 for single taxpayers with no children to $56,844 for married couples filing jointly who have three or more children.
If you contribute toward your retirement savings and meet income eligibility you may qualify for a “savers credit” that is based on your income threshold and the amount you contribute toward your retirement savings.
Itemize State Sales Tax
Taxpayers who itemize their deductions can include either their state income tax or state sales tax on their Schedule A form.
The state sales tax break is a great option if you live in a state without income taxes!
You can use a table provided by the IRS to easily claim the sales tax deduction, however if you had a major purchase during the year such as a car, boat or Recreational Vehicle–be sure to add that sales tax.
The federal tax deduction for state and local taxes is capped at $10,000 from all sources as a result of the Tax Cuts & Jobs Act of 2017.
Deduct Private Mortgage Insurance Premiums
If you have less than 20% equity in your home, chances are you pay private mortgage insurance or MIP if you have an FHA loan. This coverage is required by lenders as a way to protect them in the event you stop making payments.
Until 2017, taxpayers could deduct the cost of private mortgage insurance on their itemized deductions.
While the Tax Cuts and Jobs Act eliminated the deduction, it was reinstated at the end of 2019 and is available for the 2020 and 2021 tax years. It was made retroactive for 2018 as well. Therefore, you could amend your 2018 tax return to claim PMI–if it made good financial sense to do so.
Whenever you amend an older return, you generally put yourself at greater IRS scrutiny of the filed return–so use caution.
Make Charitable Donations
Charitable contributions made with payroll deductions, checks, cash and donations of goods and clothing are all deductible.
These deductions add up and are often overlooked by many taxpayers.
You generally need to itemize to claim a deduction, and since the 2017 tax reform nearly doubled the standard deduction, many people choose not to itemize.
However, if you do, it could be more beneficial to you and your family.
As a result of the CARES Act (the Coronavirus Aid, Relief, and Economic Security Act), those who don’t itemize can deduct cash donations of up to $300 ($600 if MFJ) made before Dec. 31, 2020–and 2021.
Adjust Your Basis for Capital Gains Tax
When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends.
That increases the cost basis and reduces your capital gain when you sell the investment.
If you sell your house, you may end up paying capital gains tax as well, particularly if your property’s value has risen significantly–over $250,000 if single and $500,000 if married filing jointly and you meet the criteria for exclusion from taxation.
You can reduce or eliminate the amount you owe if you’ve made home renovations or improvements, therefore keep adequate records.
Avoid Capital Gains Tax by Donating Stock
Another way to avoid capital gains is by using stocks to make charitable gifts. You can also offset your capital gains against your losses up to a limit.
Utilize the Social Security Taxable Earnings Limit to Your Advantage
The Social Security taxable earnings limit;
Social Security taxes are comprised of two components:
1) OASDI (Old Age, Survivors and Disability Income) and
2) HI (Health Insurance) taxes. OASDI is a tax imposed on a worker’s wages up to the applicable Social Security taxable earnings limit
That limit is $142,800 in 2021 and generally increases annually. The employee tax rate for the OASDI part of Social Security is 6.2%. HI, the second component of Social Security taxes, is a tax of 1.45% imposed on all taxpayer wages— no earnings limit applies, in other words—to fund Medicare Part A.
The taxability of Social Security benefits received by a taxpayer depends on the recipient’s total income. Social Security benefits may be entirely tax-free or partially taxable depending upon whether the total of:
- Half the net Social Security benefits received during the year by the taxpayer (total benefits received during the year less any Social Security benefits repaid during the year); plus
- All other income received by the taxpayer (including tax-exempt interest)
Set Up an IRA or Contribute to Your Retirement Plan
Individual retirement arrangements (IRAs), qualified plans and annuity contracts enjoy certain tax benefits, including tax deferral, while funds are being accumulated within the plans.
Although there are some exceptions, distributions from these tax-favored plans are generally taxable as ordinary income.
An individual retirement account (IRA) is a personal retirement savings plan, funded by an annuity or a trust, provides for tax-deferral of earnings and may permit either tax-deductible contributions or tax-free qualified distributions!
Individual Retirement Accounts are fundamentally of two types:
- Traditional IRAs that may permit tax-deductible contributions and generally taxable distributions, and
- Roth IRAs whose contributions are not deductible but whose qualified distributions are entirely tax-free.
Yearly contribution limits for 2021 are $6,000 plus $1,000 catch up provision if you are age 50 or more.
A taxpayer who is “not an active participant” in an employer-sponsored qualified plan may deduct a traditional IRA contribution he or she is eligible to make–regardless of income.
Traditional IRA distributions of after-tax contributions are received tax-free as a return of basis on a pro-rata basis, and the remainder of the distribution is taxable.
Although, tax penalties generally apply to IRA distributions before age 59½, there are certain premature distributions to which the 10 percent penalty tax doesn’t apply.
Those distributions include distributions:
- Made at the taxpayer’s death
- Attributable to the taxpayer’s disability
- Made for medical care to the extent allowable as a medical expense deduction
- Made for the payment of health insurance premiums by unemployed taxpayers
- Made to pay qualified higher education expenses for the taxpayer, his or her spouse, child or grandchild
- Considered “first-time home buyer distributions” up to a lifetime maximum of $10,000
- That are part of a series of substantially equal periodic payments made for the life of the taxpayer or the joint lives of the taxpayer and his or her beneficiary; or
- That are qualified birth or adoption distributions not exceeding $5,000.
The Internal Revenue Code requires that minimum distributions from a traditional IRA begin no later than the owner’s age 72. The law permits the individual to delay taking these first required minimum distributions (RMD) until April 1st of the year following the year in which he or she turns age 72.
The date on which RMDs must commence is known as the “required beginning date.”
Lifetime distributions never need to be taken from a Roth IRA.
A “qualified” distribution from a Roth IRA is one that is made no earlier than the fifth year following the year for which the owner made his or her first Roth IRA contribution and:
- The taxpayer is age 59½ or older
The distribution is a qualified first-time home buyer distribution
- The taxpayer is disabled; or
- The distribution is made to a beneficiary on or after the taxpayer’s death
There is an additional tax advantage on distributions that Roth IRA owners enjoy, even when the distribution isn’t a qualified distribution: a non-qualified distribution—one that fails to meet the requirements to be a qualified distribution—from a Roth IRA receives FIFO tax treatment under which all contributions are deemed to be distributed tax free before any earnings are distributed.
It was noted earlier that a premature distribution—one made prior to the owner’s age 59½—from a traditional IRA would result in a 10 percent tax penalty. The 10 percent premature distribution tax penalty is based on the amount that must be reported as a taxable distribution.
The same is true of a Roth IRA and just as in the case of a Traditional IRA, the penalty for a distribution of earnings before age 59½ from a Roth IRA is waived if the distribution is:
- Attributable to the IRA owner’s death or disability
- Made for medical care to the extent allowable as a medical expense deduction
- Made by unemployed taxpayers for the payment of health insurance premiums
- Used to pay qualified educational expenses
- A qualified first-time home buyer distribution
ROTH required minimum distributions must be made following the owner’s death!
Trustee-to-trustee transfers from one IRA to another IRA are not subject to the one per-year limit and, thus, may be made at any time, however you may have termination and other fees–depending on the trustee.
Know the Standard Mileage rates for the 2021 Tax Year
Business 56 cents per mile
Charitable 14 cents per mile
Medical 16 cents per mile
Use Stepped-Up Basis when Applicable
Upon death many assets may receive favorable stepped-up basis in valuation–thus lowering your or your heir’s taxes.
Understand your state, local, sales and other taxes, state Income taxes, state business taxes etcetera
If you live in the United States, you will normally have a variety of taxes (or a variation of taxes that go by other names) at the state and local level.
State ad valorem taxes, state transfer taxes and stamps, property taxes at the local and state level, hotel and special use tax, rental car taxes and the like are not uncommon as states try to ensure a steady flow of income to provide and pay for various state and local functions.
Whether state income taxes, sales tax, property taxes, transfer taxes and other fees that are in effect taxation, it is important that you are aware of those taxes, and you do your best to avoid or reduce them.
There could be “income exclusions” on your state taxes if you qualify, homestead and other exemptions may be available to help you reduce your property taxes, you may be able to avoid sales tax by making your major purchases during “tax holidays” if your state offers them.
Use your imagination and the tax codes to find ways to reduce taxes wherever they may exist at the state, local and federal level.
Below you will find a number of taxes in the state of Georgia.
They are provided so that you can get a feel of state and possibly local taxes–however always keep in mind each state and country will have their own unique set of taxing authorities and collection practices.
GA TAVT https://eservices.drives.ga.gov/_/
https://dor.georgia.gov/title-ad-valorem-tax-tavt-faq
How is fair market value determined for a USED motor vehicle?
A used motor vehicle is any motor vehicle, which has been the subject of a sale at retail to the general public.
For a used motor vehicle, the fair market value is the value identified in the state motor vehicle assessment manual. This value is calculated by averaging the current wholesale and retail values of the motor vehicle pursuant to O.C.G.A. § 48-5-442. Accordingly, the fair market value for a used motor vehicle for purposes of TAVT will generally be the same as the value that was used in the old annual ad valorem tax system.
A reduction is made for the trade-in when the sale was made by a dealer, but not when the sale was made by a private individual.
Where do I apply for my title and pay TAVT?
- The application for title and TAVT payment must be submitted to the county in which the buyer resides. The TAVT must be paid at the time of initial title application.
- If you purchase your vehicle at a dealership, the dealer must accept the application for title and TAVT payment on your behalf and deliver the title application and TAVT payment to the County Tag Office where the buyer resides.
What sales are subject to sales tax in Georgia?
In general, Georgia imposes tax on the retail sales price of tangible personal property and certain services. While most services are exempt from tax, Georgia does tax the sale of accommodations, in-state transportation of individuals (e.g., taxis, limos), sales of admissions, and charges for participation in games and amusement activities. O.C.G.A. §§ 48-8-2(31), 48-8-30(f)(1).
In addition, Georgia imposes tax on charges by the seller that are necessary to complete the sale of taxable property. O.C.G.A. § 48-8-2(34)(A). For example, if a seller charges $20 for a shirt and $5 to deliver the shirt, sales tax is imposed on $25 ($20 for the shirt plus $5 for delivery).
If a provider of a nontaxable service makes sales of tangible personal property, the service provider must collect and remit sales tax as appropriate. Service providers are, in most instances, end users and liable for sales or use tax on all tangible personal property used by them to provide their service. O.C.G.A. § 48-8-63.
What is use tax?
Use tax is tax imposed on non-exempt items brought into Georgia. “Use tax” is also a term commonly used to refer to the tax imposed on taxable goods and services that were not taxed at the point of sale.
Tax imposed on non-exempt items brought into Georgia
Use tax is imposed upon the first instance of use, consumption, distribution, or storage in Georgia of non-exempt tangible personal property purchased at retail outside of Georgia. (Note that property brought into Georgia as a result of a change of domicile is generally exempt as long as the property is not brought into Georgia for use in a trade, business, or profession. O.C.G.A. § 48-8-3(19).)
Property used longer than six months outside of Georgia prior to its first use inside Georgia is taxed at the state and local sales tax rate on the lesser of the purchase price or the fair market value of the property. O.C.G.A. §§ 48-8-30(c)(2), 48-8-82(a), 48-8-102(b)(1), 48-8-109.3(b), 48-8-110.1(c), 48-8-201(b), 48-8-241(d), 48-8-269(a).
Generally, the applicable local sales tax rate is the rate imposed in the county where the buyer receives the goods. O.C.G.A. § 48-8-77. A taxpayer’s use tax liability will be reduced by like taxes previously paid in another state. O.C.G.A. §§ 48-8-30(c)(3), 48-8-30(e), 48-8-42(a).
Example: A contractor buys a bulldozer in another state and pays state sales tax but no local sales tax. The following week the contractor transports the bulldozer into Georgia and performs a job in Hall County.
The contractor now owes Georgia state use tax on the purchase price of the bulldozer at a rate of 4%. His Georgia state use tax liability will be reduced by the sales tax previously paid in the other state. In addition, he owes Hall County use tax on the purchase price of the bulldozer at the Hall County sales tax rate.
Tax imposed on non-exempt items and taxable services that were not taxed at the point of sale
If a taxpayer purchases taxable goods or services in Georgia without the payment of tax, the taxpayer must accrue and remit the tax. O.C.G.A. § 48-8-30(g).
Example: A retailer buys light bulbs tax free under terms of resale to sell in her store. She takes the light bulbs out of inventory to light up the store. She now owes sales tax on the price for which she purchased the bulbs. The sales tax in this case is commonly referred to as “use tax” because it is not paid at the point of sale, but accrued at the time of use.
Example: Joe purchases a bicycle online. The seller does not charge sales tax. The bicycle is delivered to Joe in Georgia. Joe now owes “use tax” on the bicycle’s sales price.
$1.00 per tire disposal fee
Charges made for delivery, transportation, freight, or shipping and handling are part of the sales price and subject to sales tax in the same manner as the underlying sale. Thus, if a taxable item is sold, and the seller makes a separate charge for delivery, transportation, freight, or shipping and handling, the separate charge is taxable. O.C.G.A. §§ 48-8-2(34). Charges for delivery that are not associated with the sale of taxable property are not taxable.
Is property tax on leased personal property subject to sales tax?
The question of whether a tax should be included in the sales price (and therefore subject to sales tax) depends on whether the legal incidence of the tax falls on the seller or the purchaser. If the legal incidence of the tax falls on the seller, the tax is included in the sales price, like any other portion of the price designed to recoup the seller’s expenses. O.C.G.A. § 48-8-2(34).
Therefore, if a tax on personal property that is held for lease is imposed on the seller/lessor and the seller/lessor requires the customer/lessee to pay this amount, such amount must be included in the sales price and is subject to sales and use tax.
Itemized charges made for repair labor or installation labor are not subject to sales tax. O.C.G.A. §§ 48-8-2(34)(B)(iv), 48-8-3(23).
Mandatory gratuities associated with a taxable sale are subject to sales tax. Voluntary gratuities are not taxable. O.C.G.A. § 48-8-2(34)(A), Ga. Comp. R. & Regs. r. 560-12-2-.115.
Are restocking fees subject to sales tax?
At times, when a customer returns an item, the seller requires the customer to pay a restocking fee, thus resulting in only part of the original sale price being refunded to the customer.
Because sales tax can only be refunded to the extent the original sales price was refunded, when a restocking fee is charged, tax can only be refunded on the amount of the sales price refunded to the customer. Therefore, amounts designated as “restocking fees” are subject to sales tax because such amounts are refund reductions.
Retail sales of newspapers, magazines, periodicals, etc. are subject to Georgia sales and use tax. O.C.G.A. § 48-8-30(b). Publications sold by subscription are subject to sales tax based on the subscription price. Ga. Comp. R. & Regs. r. 560-12-2-.77.
Newspapers are often sold for a single amount, with sales tax included in this amount (i.e., the stated price of the newspaper includes the taxable sales price of the paper and the sales tax).
Aircraft and watercraft sales are taxable in the same manner as the sale of any other tangible personal property. Tax is due at the rate of the jurisdiction where the buyer takes delivery. O.C.G.A. §§ 48-8-30, 48-8-77.
Does Georgia have an exemption for aircraft or watercraft purchased in this state when the aircraft or watercraft will be immediately removed from this state?
The sale of aircraft and watercraft in Georgia is subject to the tax even when the aircraft or watercraft sold will be immediately removed from this state.
However, there is a specific exemption for aircraft, watercraft, motor vehicles, and other transportation equipment manufactured or assembled in this state when
1. sold by the manufacturer or assembler for use exclusively outside this state and
2. possession is taken from the manufacturer or assembler by the purchaser within this state for the sole purpose of removing the property from this state under its own power when the equipment does not lend itself more reasonably to removal by other means. O.C.G.A. § 48-8-3.
Can the sale of an aircraft or watercraft be excluded from the tax when the transaction meets the requirements of a casual sale?
Yes. The sale of aircraft or watercraft is not subject to sales tax when the sales transaction meets the requirements of a casual sale. Ga. Comp. R. & Regs. r. 560-12-1-.07.
Are sales and use tax due on motor vehicles?
If the vehicle is subject to Title Ad Valorem Tax (TAVT), no sales and use tax is due on the vehicle. When applying for a Georgia title and license plate for a vehicle that was not subject to TAVT and purchased from an out-of-state or country dealer or an out-of-state business or a Georgia business, Georgia sales tax must be paid at the time of registration or proof submitted that the sales tax has already been paid.
If the selling dealer used an incorrect sales tax rate to calculate the amount of Georgia sales tax due, then any additional sales tax due must be paid at the time of registration or proof of payment submitted.
A Georgia title and license plate will not be issued until any Georgia sales tax due is paid. The amount of sales tax due is based on the vehicle’s purchase price or the vehicle’s fair market value if a sales invoice is not submitted.
See the sales tax rate in your county as the published sales tax rates for counties include the State of Georgia’s sales tax rate.
Please visit the webpage When & Where to Register Your Vehicle for more information about the vehicle registration process. For additional information regarding sales tax, please contact the Department of Revenue’s Regional office serving your county.
Use Caution when Choosing your Tax Professional
Tax return preparers are held to a high standard of conduct in their preparation of clients’ income tax returns.
To prevent filing returns with stolen identities, tax preparers should ask taxpayers not known to them to provide two forms of identification—preferably forms of identification containing the individual’s picture–that include the taxpayer’s name and current address. In addition, tax return preparers must confirm the identities and Social Security numbers of taxpayers, spouses and dependents.
The Federal Trade Commission (FTC) is the lead federal agency for identity theft, and the agency recommends the following steps for an identity theft victim:
1. Report the identity theft to the FTC at www.identitytheft.gov.
2. Contact one of the major credit bureaus to place a fraud alert on the victim’s records.
The contact information for the credit bureaus is as follows:
www.Equifax.com 800-525-6285
www.Experian.com 888-397-3742 and,
www.TransUnion.com 800-680-7289.
3. Be sure to close any financial or credit accounts that were opened fraudulently.
Additional suggested steps may be found on the FTC Website.
Be sure your tax professional understands the importance of meeting their obligations with respect to safeguarding your data and be sure that you too do all you can to safeguard your own data!
Be aware of how your tax professional handles the following:
- Administrative activities
- Information systems security
- Computer systems security
- Certifying information systems for use; and
Due diligence is the care and attention to detail appropriate to the subject to which it refers.
Thus, due diligence with respect to the preparation and safeguarding of your taxes is the care and attention to detail required of each tax professional in their preparation of your tax return.
In the end when it comes to reducing your taxes, remember that the tax laws “are what they are” however there are actions that you can take to reduce or lessen the tax burden that you and your family now face or could potentially face by getting “out in front” of your taxes and tax planning so that you can achieve more throughout your lifetime.
Doing a comprehensive review of your tax position or potential tax position is not a walk in the park–but it is worth it for those who desire true wealth building success.
All the best….
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