We are just over a week from the end of the year. While most are concerned about the upcoming holidays, we are deep into getting ready for the upcoming tax season. There are not many tax changes, but a few that we want to highlight. It is key to have the information you have received and/or will be receiving in the mail that you need for taxes.
In addition to the documents you usually receive, you need to be on the lookout for:
1 – As you may remember, many received a stimulus payment in March 2020. We will need documentation as to how much you received. It should have been $1,400 per person. IRS sent letters out several months after the deposits were received – that letter is your documentation. If your funds were directly deposited into your bank account, the bank statement reflecting the amount received is sufficient documentation. You can also create an online account at IRS.gov and obtain your information from the IRS website.
Note – when filing 2020 tax returns, those that did not claim the correct amount of the stimulus rebate in many cases saw their refunds delayed by weeks or months. It is crucial that you accurately provide the stimulus rebate amount you received.
2 – Charitable Contributions: For 2021, there is an above-the-line tax deduction for contributions, meaning you can take it even if you take the standard deduction. For single or head of household, the amount is $300. For married filing joint, the amount is $600.
The contributions for this deduction are required to be in cash or a cash equivalent. This deduction is not for goods or stock donations. You will need a receipt, a canceled check, or a payroll stub showing a payroll deduction for the amount that you want to claim as a deduction.
Any amount over the $300/$600 limit can only be claimed if you itemize on your taxes. As an itemized deduction, you would also be able to take a deduction for goods or stock donations. You must have charitable contributions, property and school taxes, and mortgage interest exceeding the standard deduction amount to itemize. For single, the standard deduction is $12,400, and for MFJ, the standard deduction is $24,800.
3 – The child tax credit: Many of you have been receiving a $250 or $300 monthly payment per child. These payments were eligible to start being received in July and right now will end with the December payment. The IRS will be sending you a letter in January reporting the child tax payments you received. We will need to get that letter as part of your tax information to reconcile how much additional credit you are eligible to receive.
The total credit you are eligible for is either $3000 or $3600 per child, depending on the child’s age. The intent was to get 50% of the tax credit amount over the last 6 months and the balance you will be eligible for as part of your tax return. Without knowing how much you received up-front, we cannot determine how much you are now eligible to receive as part of your tax return. Make sure that you keep that letter when you receive it so we can know how much you received.
If you did not get the advanced credit amounts, you will be eligible to receive the total amount as part of your tax refund. If you received credit amounts and are not eligible because you are not claiming dependents this year, you will be required to pay those amounts back if you do not fall within certain income limits.
As of this writing, the Build Back Better Bill did not pass. This bill would have extended the monthly payments for the child tax credit for another few years. The December 15th payment was the last payment scheduled for this time.
4 – Student loan interest: For almost two years, student loan payments have been deferred. If you have been electing to make payments, make sure that you go to your website and obtain the interest you paid for 2021. If cash flow is good, you might consider making a payment before December 31st to get a deduction for 2021 potentially. The institution must receive the payment no later than December 31st to count as a 2021 deduction. It might be a great Christmas present to make a loan payment for your child to allow them to get the tax deduction.
It was just announced that the deferral period has been extended until May 31st. If your cash flow is good, you can still make occasional voluntary payments to reduce future payments.
5 – HSA accounts: Do you have a health savings account (HSA), or are you eligible for one? If your employer contributes to the account, this is already reflected as part of your W2. The maximum that can be contributed to an HSA, depending on your age and the type of plan, is $7,000. If you elect to fund the difference between your employer’s contribution and the maximum, you can take this as a deduction on your taxes, even if you take the standard deduction.
Unlike flexible spending accounts (FSA), HSAs are not a use-it-or-lose-it policy. If you do not have medical expenses in the current year, the funds can stay in the account until you need the funds in the future years. The earnings on the account grow tax-free, and there is no taxation when distributions occur if the proceeds are used for medical expenses.
If you took funds out of your HSA and receive Form 1099 during January reflecting those distributions, we will need documentation showing that the distributions were spent on medical expenses.
If you have medical expenses that you paid out-of-pocket this year, consider this tax savings move. Today, or sometime before December 31st, put the dollar amount of those out-of-pocket expenses into your HSA account, up to the eligible amount. You can then take a distribution out of that HSA account to reimburse you for expenses you paid earlier in the year.
What you have effectively done is make your medical expenses tax-deductible. We will claim a deduction for the $2,000, $3,500, or $5,000 you put into the HSA. You can leave the funds in the account to grow or immediately reimburse yourself for expenses paid earlier in 2021. If you are in the 22% federal tax bracket, plus NYS taxes, you will save $520 in taxes on a $2,000 HSA contribution.
There are other miscellaneous deductions and tax credits that continue for 2021. Most of these have not changed since we prepared your 2020 tax return. The education credits or deductions are still available depending on income. The child and dependent care benefit continues with slightly higher amounts available for the credit. The tax credit available for solar and geothermal energy use has been extended for another year.
Unfortunately, the SALT limitation continues. It was cut from the Infrastructure Bill before the bill passed. We are still limited to taking a maximum deduction of $10,000 for property and school taxes and state income taxes. This leaves many unable to itemize and to pay significantly higher taxes.
IRS is still catching up from being closed in 2020 for the pandemic. They are also short-staffed. Wait times when calling the IRS are up. We expect tax returns that sail through the e-filing process with accurate information for the stimulus and child tax credit payments will see refunds in the expected timeframe. If your return gets pulled for manual review because IRS has different amounts than what was reflected on your tax return, it could mean months of delays in getting your refund. It is important to make sure you have the documentation reflecting the stimulus and child tax credit amounts you received.
Enjoy your holidays!! We wish you a Merry Christmas and Happy Hanukkah! Happy New Year as we look forward to a brighter, more prosperous, and less chaotic 2022!!!
