"Excerpt from news article WDVM at:  https://www.localdvm.com/news/maryland/its-time-to-file-taxes-but-officials-want-people-to-be-prepared-before-they-start-filing/

"Tax officials said people should not wait to file their taxes because it could delay their return. The IRS will send people a summary of their stimulus checks to use while filling for taxes this year. For people who filed dependent – they will receive a different letter about their child income tax credit. 

Christian Emtcheu is the President and CEO of C & A Financial Services CPA Offices in Western Maryland. He wants people to know that it is important for you to report the right amount of child income tax credit."

Click the link to read more: https://www.localdvm.com/news/maryland/its-time-to-file-taxes-but-officials-want-people-to-be-prepared-before-they-start-filing/

January 3 - Payment of Employer Share of Social Security Tax from 2020 -
If you are an employer that deferred paying the employer share of social security tax or the railroad retirement tax equivalent in 2020, pay 50% of the deferred amount of the employer share of social security tax by January 3, 2022. The remaining 50% of the deferred amount of the employer share of social security tax is due by January 3, 2023. Any payments or deposits made before January 3, 2022, are first applied against the payment due by January 3, 2023.
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January 3 - Payment of the Deferred Employee Share of Social Security Tax from 2020 - 
If are an employer that deferred withholding and payment of the employee share of social security tax or the railroad retirement tax equivalent on certain employee wages and compensation between September 1, 2020, and December 31, 2020, you should have withheld and paid those taxes ratably from wages paid to the employee between January 1, 2021, and December 31, 2021. The employer is liable to pay the deferred taxes to the IRS and must do so before January 3, 2022.
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January 18  - Employer’s Monthly Deposit Due - 
If you are an employer and the monthly deposit rules apply, January 18 is the due date for you to make your deposit of Social Security, Medicare, and withheld income tax for December 2021. This is also the due date for the nonpayroll withholding deposit for December 2021 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.

January 18 - Farmers and Fishermen -
Pay your estimated tax for 2021 using Form 1040-ES. You have until April 18 (April 19 if you live in Maine or Massachusetts) to file your 2021 income tax return (Form 1040 or Form 1040-SR). If you don't pay your estimated tax by January 18, you must file your 2021 return and pay any tax due by March 1, 2022, to avoid an estimated tax penalty.

January 31 - 1099-NECs Due to Service Providers & the IRS -
If you are a business or rental property owner and paid $600 or more to individuals (other than employees) as nonemployee compensation during 2021, you are required to provide Form 1099-NEC to those workers by January 31. “Nonemployee compensation” can mean payments for services performed for your business or rental by an individual who is not your employee, commissions, professional fees and materials, prizes and awards for services provided, fish purchases for cash, and payments for an oil and gas working interest. To avoid a penalty, copies of the 1099-NECs also need to be sent to the IRS by January 31, 2022. The 1099-NECs must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. A business or individual who is required to file 250 or more information returns (i.e., 1099s and W-2s among others) must file those forms electronically. Please call this office for preparation assistance.

January 31 - Form 1098 and Other 1099s Due to Recipients -
Form 1098 (Mortgage Interest Statement) and Forms 1099, including 1099-NEC (see above) are due to recipients by January 31. The IRS’ copy, other than for 1099-NECs, is not due until February 28, 2022, or March 31, 2022, if electronically filed. These 1099s may be reporting the following types of income:

• Dividends and other corporate distributions
• Interest
• Rent
• Royalties
• Payments of Indian gaming profits to tribal members
• Profit-sharing distributions
• Retirement plan distributions
• Original issue discount
• Prizes and awards
• Medical and health care payments
• Debt cancellation (treated as payment to debtor)

January 31 - Employers - W-2s Due to All Employees & the Government -
EMPLOYEE’S COPY: All employers need to give copies of the W-2 form for 2021 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting. GOVERNMENT’S COPY: W-2 Copy A and Transmittal Form W-3, whether filed electronically or by paper, are due January 31 to the Social Security Administration.

January 31 - File Form 941 and Deposit Any Undeposited Tax -
File Form 941 for the fourth quarter of 2021. Deposit any undeposited Social Security, Medicare, and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.

January 31 - File Form 943 -
All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2021. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 - W-2G Due from Payers of Gambling Winnings -
If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2021.

January 31 - File Form 940 - Federal Unemployment Tax -
File Form 940 (or 940-EZ) for2021. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 - File Form 945 -
File Form 945 to report income tax withheld for 2021 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit or pay any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.

 January 3 - Time to Call For Your Tax Appointment -
January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you to do so before the calendar becomes too crowded.

January 10 - Report Tips to Employer -
If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.

January 18 - Individual Estimated Tax Payment Due -
It’s time to make your fourth quarter estimated tax installment payment for the 2021 tax year.

January 31 - Individuals Who Must Make Estimated Tax Payments -
If you didn't pay your last installment of estimated tax by January 18, you may choose (but aren't required) to file your income tax return (Form 1040 or Form 1040-SR) for 2021 by January 31. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of the last installment. If you can't file and pay your tax by January 31, file and pay your tax by April 18 (April 19 if you live in Maine or Massachusetts).

Married taxpayers have two options when filing their 1040 or 1040-SR tax returns. The first and most frequently used filing status is married filing joint (MFJ), where the incomes and allowable expenses of both spouses are combined and reported on one tax return. The joint status almost always results in the lowest overall tax. Spouses who file together are jointly liable for the tax, meaning either or both can be held responsible for paying the tax from the joint return.
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The second option is to file as married filing separately (MFS), with each spouse filing a return. Depending on whether the taxpayers are residents of a separate or community property state, these separate returns may include just the income and eligible expenses of each filer or a percentage of their combined income and expenses. Couples may choose the MFS option for a variety of reasons:

• They want to avoid the joint and several liability for the tax.
• They have children from a prior marriage and want to keep finances separate.
• They only want to keep their taxes separate.
• The marriage is tenuous.
• The taxpayers are separated and don’t want to cooperate in filing a joint return.
• One spouse might get a larger refund by filing separately (the other will pay more).
• They think they can save money by filing separate returns, and a variety of other reasons.

The fact of the matter is that Congress carefully writes the tax laws to eliminate tax breaks for those filing MFS and can make filing very complicated. Here are some of the issues related to separate filings.

Filing Requirements – MFJ taxpayers generally do not need to file a return unless their joint income exceeds the standard deduction, $25,100 for 2021, but those filing MFS must file if they have just $5 of income.

Changing Filing Status – Taxpayers cannot change their filing status from joint to separate after the unextended return due date, usually April 15. However, they can change from a separate to a joint return any time up to 3 years.

Social Security Benefits – For joint filers, the income threshold where Social Security benefits become taxable is $32,000. For those filing separately, 85% of the benefits are taxable from the very first dollar of Social Security income.

Traditional IRA Deductibility – An IRA contribution is not deductible for higher income taxpayers who are also active participants in qualified requirement plans. For joint filers with employer-sponsored plans, the IRA deductibility for 2021 begins to phase out when their joint income reaches $105,000 and is fully phased out at $125,000. But when filing MFS, the deductibility begins to phase out with the first dollar of income and is fully phased out when the AGI (adjusted gross income) reaches $10,000.

Roth IRA Contribution Restrictions – The ability to contribute to a Roth IRA is limited for higher income taxpayers, and for joint filers, the 2021 allowable contribution phases out with AGIs between $198,000 and $208,000. However, for separate filers, the ability to contribute to a Roth IRA phases out for AGIs between $0 and $10,000.

Higher Education Interest Deduction – Joint-return filers can deduct $2,500 per year of qualified student loan interest, but separate-return filers are not allowed any deduction.

Itemized Deductions – Where one spouse filing MFS itemizes their deductions, the other spouse must do the same and cannot take the standard deduction.

Medicare Premiums – The premiums for Medicare participants are substantially higher for individuals filing separate returns compared to those filing jointly. In addition, premiums are based on a taxpayer’s filing status 2 years prior. That means you won’t even notice the increase when the separate returns are filed. For example, if a couple filing jointly had an AGI of $180,000 in 2019, their monthly Medicare premiums in 2021 would be $207.90 per month each. On the other hand, if they had filed separate 2019 returns and each had an AGI of $90,000, their Medicare premiums in 2021 would be $475.20 per month each. Thus, each one’s premiums for the year would be $3,208 more in 2021 because they used the MFS status in 2019.   

Child & Dependent Care Credit – Separate filers cannot claim this credit unless they are legally separated.

Earned Income Tax Credit (EITC) – Generally, MFS filers cannot claim the EITC unless one or both are qualified to claim the head of household (HH) filing status. That would generally mean they are separated and maintaining separate households. To qualify for HH, a married taxpayer must pay half the cost of maintaining a home for a dependent child for the last 6 months of the year. A married couple cannot reside together and one of them claim HH filing status. Thus, under most martial separation circumstances, one spouse would file MFS and one HH, and only the one filing HH could claim the EITC if otherwise qualified.

Premium Tax Credit (PTC) – Although there are some infrequent exceptions, taxpayers filing as MFS won’t qualify for the PTC, which is the government supplement for the cost of health care insurance purchased through a government health marketplace for lower to middle-income taxpayers. 

Tax Rates – The tax rates for MFS are twice what they are for joint-filing taxpayers.
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Other Limitations – For MFS filers, most other tax deductions and limitations, such as the standard deduction, allowable capital losses, and rental loss limitations, are half of what they are for joint filers.
If you anticipate filing married separate returns, please contact this office to see how that filing might impact the outcome of your tax liability. 

In September of 2021, the Congressional Budget Office announced a proposal to increase funding for the Internal Revenue Service by as much as $80 billion over the next ten years. The argument is that doing so would ultimately increase the revenue the organization is able to generate by as much as $200 billion over the next decade.
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A significant portion of the new money — to the tune of about $60 billion — is aimed at empowering enforcement actions in particular. All told, that means by 2031, the IRS will double the number of people working for it and will have a 90% higher budget than they do right now.

This, of course, has led people to wonder — does that mean that more people than ever are about to get audited?

Obviously, the situation is a lot more nuanced than people on both sides of the aisle are giving it credit for. Therefore, understanding what this means and what implications it may have requires you to keep a few key things in mind.
The Current Situation With the IRS: What You Need To KnowWhile it's difficult to say exactly what the future might hold, some Republicans believe that the plan would indeed increase the rate at which people are audited. House Minority Leader Kevin McCarthy, for example, cited research saying that the funding would lead to an increase of 1.2 million additional audits each year compared to those that are taking place right now. More than that, he claimed that roughly 50% of them would target homes making under $75,000 per year.

Others are not quite as pessimistic about the situation. According to a report filed in September from the CBO, it's estimated that the new funding won't necessarily lead to a "major increase" in audits in the strictest sense of the term. It's just that the IRS has been understaffed and underfunded for so long that they haven't been able to operate at their "normal" level of activity.

Therefore, the increase in the budget — and the new employees that it will bring with it — will simply allow audit levels to rise to where they were roughly 10 years ago. It's an increase over recent memory, yes — but historically, that isn't necessarily the case.

Despite all this, the United States Treasury has stated several times that its goal is for audit rates to not increase for households that make under $400,000 per year. Again, it's difficult to know exactly what the future will bring with it — which is why this is one situation that many will be paying attention to moving forward.
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If you'd like to find out more information about whether the IRS's new budget increase will impact the audit rate, or if you'd just like to discuss your own needs with someone in a bit more detail, please feel free to contact our office today.

Article Highlights:
 

• IRS Compliance Campaign
• New Reporting Requirement for Crypto Exchanges
• Form W-9
• Form 1099-B
• Cryptocurrency as Property
• Digital Assets Definition
• Transfer Reporting
• Cash Transaction Reporting
• 1040 Crypto Question

Over the last 3 years, the Internal Revenue Service has been engaged in a virtual currency compliance campaign to address tax noncompliance related to cryptocurrency use. The IRS’ efforts have included outreach to taxpayers through education, audits of taxpayers’ returns and even criminal investigations.
Soon the IRS will have another arrow in its quiver. Thanks to a requirement included by Congress in the Infrastructure Investment and Jobs Act (IIJA) of 2021, signed into law November 15, 2021, cryptocurrency exchanges will be subject to information reporting requirements similar to those that stockbrokers have to follow when a taxpayer sells stock or other securities. These new rules are meant to generally apply to digital asset transactions starting in 2023, so the first reporting forms related to cryptocurrency transactions will be issued to the IRS and crypto investors in January 2024. We will notify you if this anticipated timeline is advanced.

Form W-9 – As crypto exchanges gear up for the new reporting requirement, and if they don’t have a record of their users’ taxpayer identification numbers (usually a Social Security number), they will contact their users for the information, likely using IRS Form W-9, Request for Taxpayer Identification Number and Certification. If the taxpayer doesn’t complete and return the W-9 to the requestor, the taxpayer may be subject to back-up withholding, which means the exchange would have to withhold 24% of future transactions and submit the withheld tax to the IRS.

Form 1099-B – At this time it’s not known if the IRS will modify Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, currently most commonly used by brokers to report stock sales, for reporting crypto transactions, or if a new form will be created.
As with the information on the 1099-B that brokers report, the IRS will then use the reported crypto transaction details – sales proceeds, acquisition and sale dates, tax basis for the sale, and character of the gain or loss – to match to the information reported on the taxpayer’s tax return. Those who don’t report, or don’t properly report, their cryptocurrency transactions will be liable for the tax, penalties, and interest. In some cases, taxpayers could be subject to criminal prosecution.

Crypto is Treated as Property – Although cryptocurrency may seem like money, according to the IRS it is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. So, it is necessary to report the disposition of cryptocurrency when it is sold for cash, used to buy something or traded for another cryptocurrency. But just transferring the currency from an on-line wallet to an exchange, or vice versa, is not a disposition.
The character of the gain or loss from the transaction generally depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. Generally, a taxpayer realizes capital gain or loss on the sale or exchange of cryptocurrency that is held as a capital asset. On the other hand, a taxpayer generally realizes ordinary gain or loss on the sale or exchange of cryptocurrency that he or she does not hold as a capital asset. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.

Digital Assets – The IIJA defines a digital asset as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. Furthermore, the IRS can modify this definition. As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Transfer Reporting - Based on the IIJA change, the definition of brokers who will need to furnish Forms 1099-B (or whatever new form the IRS might design) includes businesses, referred to as crypto exchanges, that are responsible for providing any transfer services for the transfer of digital assets on a taxpayer’s behalf. So, any platform on which a taxpayer can buy and sell cryptocurrency will be required to report digital asset transactions, both to the taxpayer and the IRS.

Of course, not every transfer transaction is a sale or exchange. An example would be transferring cryptocurrency from a wallet at Crypto Exchange #1 to the taxpayer’s wallet in Crypto Exchange #2. In this case, Crypto Exchange #1 will be required to provide relevant digital asset information to Crypto Exchange #2. Such a transaction is not a reportable sale or exchange, and similar to when a taxpayer switches stock brokers, the prior exchange must provide the new exchange with the basis, and purchase dates, just as a stock broker must when the brokerage firms are changed.

Cash Transaction Reporting for Businesses - Currently when a business receives $10,000 or more in cash in a transaction, the business is required to report the transaction on IRS Form 8300, including the ID of the person from whom the cash was received. Under the IIJA rules, businesses will be required to treat digital assets like cash for purposes of this reporting requirement. The $10,000 may occur in a single transaction, or a series of related transactions. Transactions between a buyer, or agent of the buyer, and a seller that occur within a 24-hour period are related transactions.
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1040 Crypto Question – Starting with the 2020 tax return, the IRS asks a question on the return that requires a yes or no answer. The draft of the 2021 Form 1040 shows the following question will be posed: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Once the IIJA crypto reporting requirement is effective, the IRS will know if the taxpayer’s response to the question is correct. Taxpayers should consider that when signing their Form 1040, they are attesting under penalties of perjury to filing a true, correct and complete return. A response contrary to the 1099-B reporting information could lead to unwanted interaction with the IRS.
If you have questions about reporting cryptocurrency transactions, please don’t hesitate to contact this office for assistance.

Article Highlights:

• Head of household filing status
• Earned income tax credit
• Child tax credit
• Child care credit for certain working grandparents
• Grandchild education credits
• Medical and dental expenses

 
More and more individuals who thought their child-rearing days were over are now raising their grandchildren. It is estimated that 6.5 million children in the United States currently live with at least one grandparent, accounting for approximately 9% of all children nationally and more than half of those not living with their parents.  

Another study found that the number of grandchildren living with their grandparents has increased 50% over the past ten years. Grandparents in this challenging situation should be aware that a variety of tax breaks may be available to ease the financial burden of becoming primary caregivers for grandchildren. These include:

• Head of household filing status - An unmarried grandparent may be eligible to use the head of household filing status. This filing status generally is more favorable than the single filing status. To qualify, the grandparent must maintain a household that is the principal place of abode for the grandchild for more than half the year. Generally, the grandchild must not be self-supporting and must be under the age of 19 (24 if a full-time student) at the close of the tax year or permanently and totally disabled.

• Earned income credit – A grandparent who is working and has a grandchild who is a qualifying child living with him or her may be able to take the earned income tax credit (EITC), even if the grandparent is 65 years of age or older. Generally, to be a qualified child for EITC purposes, the grandchild must meet the same requirements as to be a dependent but without the requirement that the child didn't provide more than half of their own support.

To qualify for EITC for 2021 on account of a grandchild or grandchildren, a taxpayer's adjusted gross income (AGI) must be less than: $51,464 ($57,414 for married filing jointly) if he or she has three or more qualifying children; $47,915 ($53,865 for married filing jointly) if he or she has two qualifying children; and $42,158 $48,108 for married filing jointly) if he or she has one qualifying child. There's no EITC if the taxpayer files as married filing separately, isn't a U.S. citizen or resident alien all year, files Form 2555 or Form 2555-EZ (relating to foreign earned income), doesn't have earned income, or has more than $10,000 of investment income for 2021 ($3,650 for 2020).

• Child tax credit - A grandparent who is raising a grandchild may qualify for a $2,000 child tax credit and, under certain specific circumstances, up to $1,400 of the credit may be refundable.

To qualify, the grandchild must be under the age of 17, a U.S. citizen or resident alien, and the grandchild must be the grandparent’s dependent. The credit is reduced for higher-income taxpayers.
Note: For 2021 only, as part of the COVID relief, the child tax credit was increased to $3,000 for children under the age of 18 ($3,600 for children under age 6) and the credit is fully refundable. 

• Credit for grandchild care expenses – A grandparent may also qualify for the child and dependent care credit if the grandparent pays someone to care for a dependent grandchild under the age of 13 or a grandchild who is physically or mentally not able to care for himself or herself, and the grandparent works or looks for work and has the same principal place of abode as the grandchild for more than half the tax year.

The credit is 35% of employment-related expenses for taxpayers with an AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but never below 20%. The maximum amount of employment-related expenses that may be used to compute the credit is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. These maximums must be reduced, dollar-for-dollar, by the total amount excludable from gross income through an employer’s dependent care assistance program.

• For 2021 only, as part of the COVID relief, the maximum amount of expenses that can be used to compute the credit is increased to $8,000 for one qualified individual and $16,000 for two or more qualified individuals, and the credit percentage is a full 50% the expenses before high-income phaseout and is fully refundable.   

• Grandchild education expenses - There are a number of tax breaks that may be available to a grandparent who pays his or her dependent grandchild's education costs. These include:
  • Education credits - An individual taxpayer may claim an income tax credit of up to $2,500 for the American Opportunity tax credit (AOTC) and the Lifetime Learning credit (up to $2,000) for higher education expenses of their dependent grandchild at accredited post-secondary educational institutions. The AOTC is available for qualified expenses of the first four years of undergraduate education. The Lifetime Learning credit is available for qualified expenses of any post-high school education at "eligible educational institutions." Both credits can't be claimed in the same tax year for any one student’s expenses, and they phase out for higher-income taxpayers.
  • Deduction for interest on qualified education loans – Grandparents may qualify to claim an above-the-line deduction for up to $2,500 of interest paid on a qualified higher education loan for any debt they incurred solely to pay qualified higher education expenses for a dependent grandchild, who is at least a half-time student. The deduction phases out for higher-income taxpayers.

These education tax benefits only apply to a grandparent who claims the grandchild as a dependent. Many generous grandparents pay these types of expenses for a non-dependent grandchild, but unfortunately, they get no tax breaks for doing so.

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• Medical and dental expenses – A grandparent who itemizes deductions can deduct certain unreimbursed medical and dental expenses paid for a dependent grandchild during the year. The grandchild’s medical expenses are combined with the grandparent’s medical deductions and are allowed to the extent that the total exceeds 7.5% of the grandparent’s adjusted gross income for the year.

The foregoing is an overview of the tax benefits available to grandparents. Not all limits and requirements were covered in complete detail. Please contact this office to determine if you qualify for one or more of them. 

Article Highlights:
 

• Underpayment of Estimated Tax and Withholding Penalty
• Required Minimum Distribution Penalty
• Late-Filing Penalty
• Late-Payment Penalty
• Negligence Penalty
• Fraud Penalty
• Dishonored Check Penalty
• Missing ID Number Penalty
• Early Withdrawal Penalty
• Penalty for Failure to Report Tips
• Foreign Reporting
• Excessive Claim Penalty
• Accuracy-Related Penalty for Non-itemizers
• Frivolous Return Penalty
• Penalty for Failure to File Information Returns

Most taxpayers don’t intentionally incur tax penalties, but many who are penalized are simply unaware of the penalties or the possible damage they can do to their wallets. As tax season approaches, let’s look at some of the more commonly encountered penalties and how they may be avoided.

Underpayment of Estimated Taxes and Withholding Penalty – The United States’ income tax system is a pay-as-you-earn tax system, which means that taxpayers are required to pay their tax liability as they receive income during the year through withholding or by making estimated tax payments. Normally, estimated tax payments are made in four installments that are due by April 15, June 15, September 15, and January 15 of the subsequent year. If a taxpayer owes more than $1,000 when filing their return for the year, the IRS will assess the penalty for underpayment of estimated tax, which is currently 3% of the underpayment. “Safe harbor” payments can protect you from this penalty, which are payments of 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay 66-2/3% of their current liability or 100% of their prior year’s liability.
The 100%/110% safe harbor works well when the taxpayer’s tax will be higher than that of the prior year. But when a taxpayer anticipates a large drop in income as compared to the prior year, there can be a huge impact on the necessity of estimated tax payments. The 100% and 110% of the prior year’s tax liability are most likely not viable safe harbor amounts for estimate tax in the lower-income year, and most taxpayers will want to pay 90% of the current year’s tax liability. Please contact this office to see if you need to make any payments and, if so, how much.

Required Minimum Distribution (RMD) Penalty – To prevent an individual from investing in tax-deferred retirement plans, including traditional IRAs, but never withdrawing funds from the plans (which would mean the government wouldn’t ever collect taxes on the retirement funds), retirees must take an RMD each year after reaching the mandatory RMD age. The mandatory distribution age is currently 72. Failing to take the correct minimum distribution (also known as excess accumulation) results in a penalty of 50% of the difference between what should have been withdrawn and what was actually withdrawn. However, the IRS generally is very liberal about abating the penalty in most situations when corrective action is taken.

Late-Filing Penalty – If a return is filed after the due date, including after extensions, a late-filing penalty of 4.5% per month (maximum 22.5%) will be applied. The normal due date for returns is April 15 of the subsequent year. Because of COVID-19, the original due date for 2020 returns was extended to May 17, 2021. Those who had not filed by that date could have requested a further extension to October 15, 2021. If you have not filed your 2019, 2020, or any earlier year’s return, you are encouraged to do so as soon as possible to minimize late-filing penalties.
If a return is over 60 days late, the minimum penalty for failure to file is the lesser of $435 ($450 in 2022) or 100% of the tax shown on the return. While the obvious way to avoid a late-filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and no willful neglect.

Late-Paying Penalty – If the tax owed on a return is paid after the unextended due date of the tax return (usually April 15 but is May 17 for 2020 returns filed in 2021), then the taxpayer will be subjected to a penalty of 1/2% per month (maximum 25%) of the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return; many fail to realize that the extension does not include an extension on paying. The only way to avoid or minimize this penalty is to have no or little balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension.

Negligence – When underpayment is due to taxpayer negligence or when there are errors in tax valuations, a penalty of 20% of the tax underpayment will be charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions.

Fraud – The fraud penalty is 75% of the tax unpaid due to fraud.

Dishonored Check – The penalty for dishonored checks of over $1,250 is 2% of the check amount. If the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late-payment charges, but the penalty rate will be lower if you are on a payment plan.

Missing ID Number – A $50 penalty for each missing number applies when a taxpayer doesn’t provide a required Social Security number (SSN) for themselves, a dependent, or another person on their tax return. It is also charged when the taxpayer doesn’t provide their SSN to another person or entity when required.

Early Withdrawal Penalty – If a taxpayer is under age 59½ and withdraws assets (money or other property) from a qualified retirement plan, including traditional IRAs, the taxpayer must pay a 10% additional tax, commonly referred to as the early withdrawal penalty. This tax is 10% of the part of the distribution that the taxpayer was required to include in their gross income for the year of the distribution. A number of exceptions apply to this penalty.
As part of COVID-19 relief, this penalty was waived on distributions of up to $100,000 from qualified retirement plans and traditional IRAs during 2020. Early withdrawals in 2021 and later years are subject to the penalty unless one of the several exceptions applies.

Failure to Report Tips – A penalty will be charged if a taxpayer didn’t report tips to their employer. It equals 50% of the Social Security tax on the unreported tips.

Reporting Foreign Accounts and Assets – There are numerous and substantial penalties for failures to report a variety of foreign accounts and assets, and some of the penalties are even draconian. Please contact this office if you have a foreign financial account, foreign trusts, ownership in a foreign corporation, received foreign gifts, and so on.

Excessive Claim Penalty – If a claim for refund or credit for income tax is made for an excessive amount, the person making the claim is liable for a penalty equal to 20% of the excessive amount. The excessive amount is the amount by which one’s claim for any tax year exceeds the amount of the claim allowable for that tax year.
The penalty doesn’t apply if it is shown that the claim for the excessive amount was made with reasonable cause. The penalty also does not apply if any portion of the excessive amount or credit is subject to an accuracy-related penalty.
 
Accuracy-Related Penalty for Non-Itemizers – For 2021, taxpayers are allowed a deduction up to $300 ($600 on married joint returns) for cash contributions to qualified charitable organizations. Usually, only individuals who itemize their deductions can deduct donations to charities. As part of the accuracy-related penalty, a non-itemizing taxpayer who overstates their charitable donation can be penalized by 50% of the tax attributable to the overstatement, rather than the normal 20% penalty.
 
Frivolous Return – In addition to any other penalties, the law imposes a $5,000 penalty for filing a frivolous return – one that does not contain information needed to establish the correct tax or that shows a substantially incorrect tax because the taxpayer takes a frivolous position or displays a desire to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs. Under limited circumstances, the IRS may reduce the penalty from $5,000 to $500.
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Failure to File Information Returns – A taxpayer who, without reasonable cause, fails to file a required information return in the manner the law specifies or by the proper deadline, fails to include all of the information required, or includes incorrect information will be subjected to a penalty of $280 for each return required to be filed during 2021 or 2022. The penalty will be reduced to $50 if the failure is corrected within 30 days of the due date and $110 if corrected by August 1.
Please call if any of these penalties has been assessed against you, to see if it is possible to have them reduced or removed. 

During the holidays, many charities solicit gifts of money or property. This article includes tips for documenting your charitable gifts so that you can claim a deduction on your tax return.  

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Cash Donations – To claim a charitable deduction, you normally must itemize your deductions. However, for 2021, non-itemizers filing a joint return can deduct up to $600 of cash contributions below-the-line. The limit is $300 for other filing statuses. Donations to donor-advised funds and private foundations aren’t eligible for this below-the-line deduction. Below-the-line means that the deduction is claimed after determining your adjusted gross income (AGI) and as part of the calculation of taxable income.

Example: Mr. Claus, age 45, is unmarried and files using the single filing status. He has W-2 wages of $50,000 and contributed $1,000 to his traditional IRA during 2021. He is not itemizing his deductions, and his 2021 standard deduction is $12,550. Mr. Claus made a donation of $200 by check to the Humane Society on October 1, 2021. This was the only charitable contribution he made during the year. His AGI will be $49,000 ($50,000 – $1,000). His taxable income, which is the amount on which his tax is computed, will be $36,250 ($49,000 − $200 − $12,550).
There are documentation requirements when claiming a charitable contribution deduction, and of course, only contributions to qualified charities are deductible. Of course, we all know that the Red Cross, Salvation Army, and Cancer Society are legitimate, qualified charities, but what about small or local charities? Use the IRS Select Check tool to make sure a charity is qualified. However, you can always deduct gifts to churches, synagogues, temples, mosques, and government agencies – even if the Select Check tool does not list them in its database.
The documentation requirements differ for cash versus non-cash contributions. A donor may not claim a deduction for a cash, check, or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the charity’s name, the date of the contribution, and the contribution amount. In addition, if the contribution is $250 or more, the donor must also get an acknowledgment from the charity for each deductible donation.
If contributions are made via payroll deductions, then a pay stub, a Form W-2, or other verifying document should be maintained as verification of the gift. It must show the total amount withheld for charity. In addition, be sure to retain the pledge card showing the charity’s name.

Non-cash Contributions – Non-cash contributions are also deductible but only if you are itemizing your deductions (i.e., using Form 1040 Schedule A). Generally, contributions of this type must be in good condition, and they can include food, art, jewelry, clothing, furniture, furnishings, electronics, appliances, and linens. Items of minimal value (such as underwear and socks) generally are not deductible. The deductible amount is the fair-market value of the items at the time of the donation, and as with cash donations, if the value is $250 or more, you need to save an acknowledgment from the charity for each deductible donation. Be aware: the door hangers left by many charities after they pick up a donation do not meet the acknowledgement criteria; in one court case, taxpayers were denied their charitable deduction because their acknowledgement consisted only of door hangers. When a non-cash contribution is worth $500 or more, the IRS requires Form 8283 to be included with the return, and when the donation is $5,000 or more, a certified appraisal of the item(s) donated is generally required.

Vehicle Donations – Special rules also apply to donations of used vehicles when the claimed deduction exceeds $500. The deductible amount is based upon the charity’s use of the vehicle, and a Form 8283 is required. A charity accepting used vehicles as donations is required to provide a Form 1098-C (or an equivalent) to properly document the donation.

Leave Donations – Extended for 2021, as a form of disaster relief, the IRS provides special relief in which employees can donate their unused paid vacation, sick leave, and personal leave time to disaster relief efforts, including by COVID-related charities.
If the employer is participating, employees can donate any unused and paid vacation time, sick leave, and personal leave. The employer will convert the donation to cash and donate it to charitable organizations providing disaster relief. The cash payment will not be treated as wages to the employee, and the employer can deduct the amount donated as a business expense. Both the employee and the employer will avoid payroll taxes on the donation.
Because the income isn’t taxable to the employee, the employee will not be allowed to claim the donation as a charitable deduction on their own tax return. Even so, excluding income is often worth more as tax savings than a potential tax deduction would be, especially if the employee generally claims the standard deduction or the employee is subject to AGI-based limitations.

Other Qualifying Donations –Special rules also exist for purchasing capital assets for a charity, charitable organization–related travel, personal vehicle use, entertainment, and placement of students in a home. Please call for information related to these issues.

AGI Limitations – Charitable donations are also limited by a taxpayer’s AGI. For instance, most charitable contributions are limited to 60% of an individual’s AGI, while contributions of capital gain property deducted at fair market value are limited to 30% of AGI. There are other seldom encountered limitations as well.
For 2021, itemizers can elect to suspend the 60%-of-AGI limitation for cash contributions. If the election is made, the taxpayer’s other contributions are figured first up to the 60%, 50%, 30%, or 20% of AGI limitation, and then cash contributions are allowed above those limits, up to 100% of AGI. The normal 5-year carryover applies to any excess over 100% of AGI. If no election is made, regular AGI limits will apply.
Charitable contributions are deductible in the year when you make them. If you charge a gift to a credit card before the end of the year, it will count for 2021. This is true even if you don’t pay the credit card bill until 2022. In addition, a check will count for 2021 as long as you mail it in 2021.
The penalty for overstating a charitable contribution is generally 20% of the portion of tax underpayment that resulted from the overstatement. However, that penalty has been increased to 50% for non-itemizers.
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Finally – Each year at this time, the IRS publishes its list of the “dirty dozen” tax scams. Among the dirty dozen are groups that masquerade as charitable organizations to attract donations from unsuspecting contributors. Before you write a check, be aware that fraudsters are out there soliciting on behalf of bogus charities and that some so-called charities aren’t entirely honest about how they use contributions.
If you have questions or concerns about your 2021 charitable donations or about the documentation required to claim deductions for them, please call this office.
 

Disabled individuals, as well as parents of disabled children, may qualify for a number of tax credits and other tax benefits. Listed below are several tax credits and other benefits that are available if you or someone listed on your federal tax return is disabled. ​

Increased Standard Deduction – Since a change in the law more than 35 years ago, taxpayers (or spouses when filing a joint return) who are legally blind have been eligible for a standard deduction add-on. Thus, for 2021, if a taxpayer is filing jointly with a blind spouse, they are able to add an additional $1,350 to their standard deduction of $25,100; if both spouses are blind, the add-on doubles to $2,700. For other filing statuses, the additional amount is $1,700. While being age 65 or older isn’t a disability, it should be noted that there is an “elderly” add-on to the standard deduction of $1,350 or $1,700, depending on filing status. These add-ons apply only to the taxpayer and spouse, not to dependents.
Exclusions from Gross Income – Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income (i.e., they are not taxable). Amounts received for Social Security disability are treated the same as regular Social Security benefits, which means that up to 85% of the benefits could be taxable, depending on the amount of the recipient’s (and spouse’s, if filing jointly) other income.
Impairment-Related Work Expenses – Individuals with a physical or mental disability may deduct impairment-related expenses paid to allow them to work.
·        Employees – Although the 2017 tax reform eliminated most miscellaneous itemized deductions, it retained the deduction for employees who have a physical or mental disability limiting their employment. As a result, they can still deduct the expenses necessary for them to work as an itemized deduction.
·        Self-employed – For those who are self-employed, impairment-related expenses are deductible on Schedule C or F.
Impairment-related work expenses are ordinary, necessary business expenses for attendant care services at the individual’s place of work as well as other expenses in the workplace that are necessary for the individual to be able to work. An example is when a blind taxpayer pays someone to read work-related documents to the taxpayer.
Financially Disabled – Under normal circumstances, one must file a claim for a tax refund within 3 years of the unextended due date of the tax return. For example, for a 2018 tax return, the due date was April 15, 2019, which is when the 3-year clock started running. Thus, the IRS will not issue refunds for an amended 2018 or a late-filed original 2018 return submitted to the IRS after April 15, 2022. However, if a taxpayer is “financially disabled,” the time period for claiming a refund is suspended for the period during which the individual is financially disabled.
What does being financially disabled mean? An individual is financially disabled if they are unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.
For a joint income tax return, only one spouse has to be financially disabled for the time period to be suspended. However, financial disability does not apply during any period when the individual’s spouse or any other person is authorized to act on the individual’s behalf in financial matters.
Earned Income Tax Credit (EITC) – The EITC is available to disabled taxpayers and the parents of a child with a disability, even when the child’s age would normally prevent the child from being a qualifying child. To be eligible for the credit, the taxpayer must receive earned income, which generally means wages or self-employment income. However, if an individual has retired on disability, taxable benefits received under their employer’s disability retirement plan are considered earned income until the individual reaches a minimum retirement age. If the disability benefits received are nontaxable, as would be the case if the disabled individual paid the premiums for the disability insurance policy from which the benefits come, then the benefits are not considered earned income. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children may qualify for the EITC.
If a taxpayer’s child is disabled, the qualifying child’s age limitation for the EITC is waived.
The EITC has no effect on certain public benefits. Any refund received because of the EITC will not be considered income when determining whether a taxpayer is eligible for benefit programs such as Supplemental Security Income and Medicaid.
Child or Dependent Care Credit – Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse may be entitled to claim this credit. For children, this credit is usually limited to the care expenses paid only until age 13, but there is no age limit if the child is unable to care for themselves.
Special Medical Deductions When Claiming Itemized Deductions – In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents. They include:
·        Impairment-Related Expenses – Amounts paid for special equipment or improvements installed in the home may be included as medical expenses deductible as part of itemized deductions, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may only be partly included as a medical expense. §  Learning Disability – Tuition paid to a special school for a child with severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses eligible for the medical deduction when itemizing deductions. A doctor must recommend that the child attend the school. Fees for the child’s tutoring recommended by a doctor and given by a teacher who is specially trained and qualified to work with children who have severe learning disabilities might also be included.
·        Drug Addiction – Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts, including the cost of the dependent’s meals and lodging, are included as medical expenses for itemized deduction purposes.
·        Other Medical Expenses – Here are some other medical expenses that apply to individuals with disabilities:  
o   Cost of Braille books and magazines that exceeds the price of regular printed editions.
o   Cost of a wheelchair used mainly for the relief of sickness or disability, not just to provide transportation to and from work, including the cost of operating and maintaining the wheelchair.
o   Cost and care of a guide dog or other animal aiding a person with a physical disability.
o   Cost of artificial limbs and hearing aids.
Exclusion of Qualified Medicaid Waiver Payments – Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income if they meet certain requirements to be considered foster care payments. Even so, the nontaxable income may qualify as earned income for purposes of the care provider claiming the earned income tax credit. Qualified foster care payments are amounts paid under a state’s foster care program (or political subdivision of a state or a qualified foster care placement agency). For more information, please call.
ABLE Accounts – Qualified ABLE programs provide a way for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life.
Federal law authorizes states to establish and operate ABLE programs. Under these programs, an ABLE account may be set up for any eligible state resident – someone who became severely disabled before turning 26 – who would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec. 529 plans. The main purpose of ABLE accounts is to shelter assets from the means testing required by government benefit programs.
Individuals can contribute to ABLE accounts, subject to per-account gift tax limitations (maximum $16,000 for 2022, up from $15,000, which it has been for several years). For years 2018 through 2025, working individuals who are beneficiaries of ABLE accounts are allowed to contribute limited additional amounts to their ABLE accounts, and these contributions can be eligible for the nonrefundable saver’s credit.
Distributions to the disabled individual are tax-free if the funds are used for qualified expenses of the disabled individual.

For more information on these benefits available to disabled taxpayers or dependents, please give this office a call.Increased Standard Deduction – Since a change in the law more than 35 years ago, taxpayers (or spouses when filing a joint return) who are legally blind have been eligible for a standard deduction add-on. Thus, for 2021, if a taxpayer is filing jointly with a blind spouse, they are able to add an additional $1,350 to their standard deduction of $25,100; if both spouses are blind, the add-on doubles to $2,700. For other filing statuses, the additional amount is $1,700. While being age 65 or older isn’t a disability, it should be noted that there is an “elderly” add-on to the standard deduction of $1,350 or $1,700, depending on filing status. These add-ons apply only to the taxpayer and spouse, not to dependents.

Exclusions from Gross Income – Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income (i.e., they are not taxable). Amounts received for Social Security disability are treated the same as regular Social Security benefits, which means that up to 85% of the benefits could be taxable, depending on the amount of the recipient’s (and spouse’s, if filing jointly) other income.

Impairment-Related Work Expenses – Individuals with a physical or mental disability may deduct impairment-related expenses paid to allow them to work.

• Employees – Although the 2017 tax reform eliminated most miscellaneous itemized deductions, it retained the deduction for employees who have a physical or mental disability limiting their employment. As a result, they can still deduct the expenses necessary for them to work as an itemized deduction.
• Self-employed – For those who are self-employed, impairment-related expenses are deductible on Schedule C or F.

Impairment-related work expenses are ordinary, necessary business expenses for attendant care services at the individual’s place of work as well as other expenses in the workplace that are necessary for the individual to be able to work. An example is when a blind taxpayer pays someone to read work-related documents to the taxpayer.

Financially Disabled – Under normal circumstances, one must file a claim for a tax refund within 3 years of the unextended due date of the tax return. For example, for a 2018 tax return, the due date was April 15, 2019, which is when the 3-year clock started running. Thus, the IRS will not issue refunds for an amended 2018 or a late-filed original 2018 return submitted to the IRS after April 15, 2022. However, if a taxpayer is “financially disabled,” the time period for claiming a refund is suspended for the period during which the individual is financially disabled.
What does being financially disabled mean? An individual is financially disabled if they are unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.
For a joint income tax return, only one spouse has to be financially disabled for the time period to be suspended. However, financial disability does not apply during any period when the individual’s spouse or any other person is authorized to act on the individual’s behalf in financial matters.

Earned Income Tax Credit (EITC) – The EITC is available to disabled taxpayers and the parents of a child with a disability, even when the child’s age would normally prevent the child from being a qualifying child. To be eligible for the credit, the taxpayer must receive earned income, which generally means wages or self-employment income. However, if an individual has retired on disability, taxable benefits received under their employer’s disability retirement plan are considered earned income until the individual reaches a minimum retirement age. If the disability benefits received are nontaxable, as would be the case if the disabled individual paid the premiums for the disability insurance policy from which the benefits come, then the benefits are not considered earned income. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children may qualify for the EITC.
If a taxpayer’s child is disabled, the qualifying child’s age limitation for the EITC is waived.
The EITC has no effect on certain public benefits. Any refund received because of the EITC will not be considered income when determining whether a taxpayer is eligible for benefit programs such as Supplemental Security Income and Medicaid.

Child or Dependent Care Credit – Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse may be entitled to claim this credit. For children, this credit is usually limited to the care expenses paid only until age 13, but there is no age limit if the child is unable to care for themselves.

Special Medical Deductions When Claiming Itemized Deductions – In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents. They include:
·        Impairment-Related Expenses – Amounts paid for special equipment or improvements installed in the home may be included as medical expenses deductible as part of itemized deductions, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may only be partly included as a medical expense.

• Learning Disability – Tuition paid to a special school for a child with severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses eligible for the medical deduction when itemizing deductions. A doctor must recommend that the child attend the school. Fees for the child’s tutoring recommended by a doctor and given by a teacher who is specially trained and qualified to work with children who have severe learning disabilities might also be included.

• Drug Addiction – Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts, including the cost of the dependent’s meals and lodging, are included as medical expenses for itemized deduction purposes.


• Other Medical Expenses – Here are some other medical expenses that apply to individuals with disabilities:  
  • Cost of Braille books and magazines that exceeds the price of regular printed editions.
  • Cost of a wheelchair used mainly for the relief of sickness or disability, not just to provide transportation to and from work, including the cost of operating and maintaining the wheelchair.
  • Cost and care of a guide dog or other animal aiding a person with a physical disability.
  • Cost of artificial limbs and hearing aids.
  
  

Exclusion of Qualified Medicaid Waiver Payments – Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income if they meet certain requirements to be considered foster care payments. Even so, the nontaxable income may qualify as earned income for purposes of the care provider claiming the earned income tax credit. Qualified foster care payments are amounts paid under a state’s foster care program (or political subdivision of a state or a qualified foster care placement agency). For more information, please call.
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ABLE Accounts – Qualified ABLE programs provide a way for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life.
Federal law authorizes states to establish and operate ABLE programs. Under these programs, an ABLE account may be set up for any eligible state resident – someone who became severely disabled before turning 26 – who would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec. 529 plans. The main purpose of ABLE accounts is to shelter assets from the means testing required by government benefit programs.
Individuals can contribute to ABLE accounts, subject to per-account gift tax limitations (maximum $16,000 for 2022, up from $15,000, which it has been for several years). For years 2018 through 2025, working individuals who are beneficiaries of ABLE accounts are allowed to contribute limited additional amounts to their ABLE accounts, and these contributions can be eligible for the nonrefundable saver’s credit.
Distributions to the disabled individual are tax-free if the funds are used for qualified expenses of the disabled individual.
For more information on these benefits available to disabled taxpayers or dependents, please give this office a call.