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Deduct Cash Charitable Donations for 2021 while taking the Standard Deduction

For the 2021 tax year, taxpayers are able to deduct up to $300 of cash charitable donations ($600 if married filing jointly) even when taking the standard deduction.

Prior to 2020, taxpayers were only able to deduct charitable donations if they itemized their deductions. As a result of the increased standard deduction amounts, fewer taxpayers benefit from itemizing their deductions and are less incentivized to contribute to charities. To help incentivize taxpayers, even while taking the standard deduction you’re able to deduct a limited amount of cash charitable donations for the 2020 and 2021 tax years.

Cash charitable donations include donations via cash, check, credit card, or electronic payment methods to qualified charities.

Additional Reading: IRS Newsroom Release

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

2021 Child and Dependent Care Credit

Part of the Coronavirus tax relief for the 2021 tax year includes changes to the federal Child & Dependent Care tax credit.

Generally, this credit allows taxpayers with children under 13 years of age to reduce their tax liability for expenses they incur for the cost of care for their children that allow the taxpayers to work. Qualifying expenses do NOT include private school for children in grades K through 12.

Here is a list of major changes to the Child & Dependent Care Credit for the 2021 tax year:

-Eligible expenses for care are increased from $3,000 for one child ($6,000 for two or more children) to $8,000 for one child ($16,000 for two or more children).

-The credit is refundable, meaning that if your federal income tax liability is reduced to zero, the credit can create an overpayment on your tax return that can be refunded to you.

-There are income limits on receiving the credit. The amount of the credit is reduced for a taxpayer with adjusted gross income between $125,000 and $438,000. If your AGI is above $438,000, you’re not eligible to reach the credit.

Additional details on the 2021 Child & Dependent Care Credit are available on the IRS’ FAQ page here: https://www.irs.gov/newsroom/child-and-dependent-care-credit-faqs

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

Launch of my Own Accounting Firm

After over 10 years of working as an employee, I am excited to announce the launch of my own accounting firm. I have advised hundreds of new business owners over the years and I’m looking forward to taking the leap myself. If you or someone you know could benefit from my services in the areas of income tax filings, tax minimization, bookkeeping, payroll, and business consulting, don’t hesitate to give me a call at 301-857-1725.

Estimated Tax Payments

Taxpayers are required to make estimated tax payments to avoid owing penalties for underpayment of taxes. Uncle Sam and states want taxpayers to pay in taxes throughout the year on their incomes and enforce compliance of making estimated tax payments by imposing penalties for underpaying taxes throughout the year. This post provides helpful information for taxpayers to minimize underpayment penalties.

Business Owners

New business owners are often surprised to learn that they are required to make quarterly estimated tax payments to avoid penalties. A major difference between being employed and being self-employed is no one withholds income tax from your income when you are self-employed. In fact, your income for the year is TBD until the end of the year, as you could incur additional expenses in your business between now and year-end that would reduce your income. However, this does not mean you won’t owe penalties for underpaying your taxes.

If you have a loss from your business you may not owe any penalties. You’re only required to make estimated tax payments when you owe taxes (generally meaning have taxable income).

Estimated tax payments are also required for self-employment taxes (Social Security and Medicare taxes) due on net income from businesses. Self-employment taxes are included with your federal tax liability and are included in estimated tax payments. No separate reporting is required for self-employment taxes when it comes to estimated tax payments. Simply combine the amount of your payment.

Employees, Retirees, & Other Taxpayers

Underpayment penalties don’t just apply to business owners, they apply to all taxpayers. It’s easy to overlook penalties included in your tax liability. IRS letters and tax returns are difficult for most taxpayers to understand. I had a client that wrote a check for over $5k of federal underpayment penalties for a single year (before becoming my office’s client) tell me they have never owed underpayment penalties, I later came across the check in their business’ QuickBooks file and brought it to their attention.

Safe Harbor

Taxpayers can avoid owing penalties by making the minimum requirements payments needed pay in a percentage of their prior year tax liability during the current year. Single taxpayers that had less than $75k of taxable income in the prior year (and joint taxpayers that had less than $150k of taxable income in the prior year) can meet safe harbor by paying 100% of their prior year tax liability during the current year. Taxpayers with taxable incomes above these thresholds are required to pay 110% of their prior year tax liability to reach safe harbor.

For example, if your filing status is single and your 2019 taxable income was $70k, you can avoid owing penalties for underpayment of estimated taxes by paying in 100% of your 2019 tax liability throughout 2020. Any additional tax is due with your 2020 tax return by April 15, 2021.

Safe harbor offers a guide taxpayers can use to avoid owing penalties for underpayment of estimated taxes. Additionally, taxpayers that expect to have significantly more income in the current year can benefit from the time value of money by holding on to any additional required tax due until the due date of their tax return (before extensions).

90% Rule

If you pay 90% of your total tax liability during the current year (by the required due dates), you will not owe penalties for underpayment of estimated taxes. The remaining tax is due with your return by April 15th.

Federal Income Tax Withheld

By default, federal income tax withheld (including tax withheld on wages and retirement plan distributions) is assumed to be withheld evenly throughout the year. Taxpayers can use this to their advantage by recognizing a shortfall of withholding or income tax payments and increasing federal income tax withheld from their income by year-end to compensate for the lack of withholding and estimated tax payments earlier in the year.

Annualized Installment Method

By default, your income is assumed to be earned evenly throughout the year, however; if a large portion of your income is earned later in the year, you may benefit from electing to use the annualized installment method by reporting how much income is earned in each quarter in order to minimize penalties.

Due Dates:

April 15th – for income earned between January and March

June 15th – for income earned between April and May

September 15th – for income earned between June and August

January 15th – for income earned between September and December (of the prior year)

How to Make Estimated Tax Payments

The IRS allows you to schedule estimated tax payments directly on their website. The IRS offers a payment feature called IRS Direct Pay that allows individual taxpayers to schedule electronic tax payments from their bank accounts. An added benefit is you receive a payment confirmation as proof of payment.

Here are instructions on making 2020 personal estimated tax payments using IRS Direct Pay:

Go to https://www.irs.gov/payments/direct-pay and click “Make a Payment.” On the next page, select “Estimated Tax” as the “Reason for Payment”, select “1040ES” as the form to apply the payment to, and “2020” as the “Tax Period for Payment.” On the next page, it will ask questions to verify who you are in order to apply the payment to your account correctly. You can select “2018” or “2019” as the prior tax year to verify information from.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

Business Use of a Vehicle

Business owners have a number of options available to deduct costs of a vehicle used in their business. Here, I provide an overview of tax incentives currently in place and options available to deduct the cost of a vehicle.

Tax Incentives for Large Trucks & SUVs

Currently, there are tax incentives in place for trucks & SUVs that have a gross vehicle weight of 6k pounds or more. Typically, you have to deduct the cost of a vehicle over 6 years, however, vehicles that meet the gross weight requirements qualify to be deducted in full, to the extent the vehicle is used for business based on mileage, in the first year the vehicle is used in the business. The vehicle must be used greater than 50% for business use to qualify for this treatment.

The tax incentives for trucks & SUVs that meet the gross weight requirements are available even if you chose to finance a vehicle with a loan over several years. This allows business owners to get upfront tax savings while paying for the full cost of the vehicle over a number of years. Leased vehicles do not qualify for the upfront tax deduction.

Deducting Vehicle Expenses

There are two methods to deduct the cost of a vehicle: taking actual expenses or using the standard mileage rate. For 2020, the standard mileage rate is 57.5 cents per business mile. For new vehicles that meet the gross weight requirements, it is generally best to use actual expenses since you are able to receive an upfront deduction for the cost of the vehicle. In addition to the cost of the vehicle, actual expenses include gas, insurance, and repairs.

Commuting Miles

It is important to note that business miles do not include driving to/from home and your usual place of business, such as an office. These miles are considered commuting miles and should not be included in business miles.

Business Miles

Examples of business miles include driving from one business location to another, driving from home to run an errand for your business, meet with clients outside of your office, and attend networking events.

Mileage Log

You are required to keep a log of your business miles in order to deduct the business use of your vehicle whether you take the standard mileage rate or actual expenses. The easiest solution is to use a mileage tracking app on your phone. Some apps are able to sense when you have traveled somewhere using sensors built into your phone to prompt you to indicate whether a trip was for business.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

2020 Retirement Plan Relief – COVID-19

The CARES Act included several changes to retirement plan contributions, loans, and withdrawals to provide relief to taxpayers as a result of COVID-19. Below is an overview some of the major changes. Please view the linked IRS pages for additional details.

No Age Limit on IRA Contributions

There are no longer age limits on contributing to IRA accounts. From the IRS’ website, “For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs.” For 2019, taxpayers 70 ½ years of age and older could not contribute to a traditional IRA. There was no age limit on Roth IRA contributions for 2019. For now, this appears to be a permanent change that will apply to later tax years as well.

RMDs (withdrawals) NOT required for 2020

For the 2020 tax year, taxpayers are not required to take required minimum distributions (RMDs) from IRA, 401k, and other defined benefit plans. According to a June 23, 2020 IRS News Release, “The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020.”

Relief for taxpayers that need Withdrawals or Loans from Retirement Plans

The remaining topics below apply to qualified individuals meeting certain criteria spelled out in this IRS News Release, simplified here to be taxpayers with family members either diagnosed with COVID-19 or had work hours or income reduced as a result of COVID-19.

  • Avoid the 10% Early Withdrawal Penalty on Distributions: Qualified taxpayers can avoid the 10% early withdrawal penalty. Otherwise, taxpayers that withdraw funds from retirement plans before turning 59 ½ years old face a 10% early withdrawal penalty in addition to the amount withdrawn being taxable income.
  • Spread Tax on COVID-19 Related Withdrawals Over 3 Years: Qualified taxpayers have the option to include the taxable income from COVID-19 related withdrawals over 3 years (one-third each year) rather than paying taxes on the full amount of the loan in the first year.
  • Loans from Workplace Retirement Plans: The IRS’ News Release says, “Individuals eligible to take coronavirus-related withdrawals may also, until September 22, 2020, be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. […] For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.”

Are taxpayers able to take Loans from an IRA?

No. The IRS’ News Release reiterates “Loans are not available from an IRA.” Individuals are able to make 60 day rollovers of funds withdrawn from an IRA. It is possible the IRS may extend the 60 rollover window or otherwise allow taxpayers to re-contribute the amount withdrawn to their IRA account, but without further guidance from the IRS, it may not be worthwhile to withdraw amounts from your IRA.

Discuss this Information with your Tax & Finance Professionals

Please note: the information on this website is intended to provide general advice to start the discussion with your tax and finance professionals. The information on this website may not apply to your specific situation. Only a experienced professional with the details of your specific situation can advise you on making the best decision. Contact your tax and finance professionals to discuss the information on this site to make an informed decision.