Coming Soon: Your 2021 Taxes – Be Prepared!
By E. B. Boatner with ROR Tax Professionals’ Larry Murphy, Enrolled Agent, and Mike Cassidy, Partner and Income Tax Specialist
“Wait! It’s not that time of year,” you plead, “Not yet!” Ah, but now is the time, because, as the old song warned, “It’s later than you think.” And so Lavender has asked ROR Tax Professionals for some early tips to get you started on 2021.
Why should people be getting ready this early?
This is a great time for taxpayers to think about things that need to be done by the end of the year. Should you increase your 401K contributions for the rest of the year? Do you need to make estimated tax payments so you will not be penalized when you file your tax return? Do you want to make 529 contributions for a state deduction, which needs to be made by the end of the year? Is it a good year for Roth conversions? These are all questions for which taxpayers will want to learn the answers now, before the inevitable, onrushing deadline.
What are the main items that can be gotten together now?
Taxpayers should start compiling amounts for itemized deductions like medical expenses and charitable contributions. They should have totals for these amounts and make sure that they have proper documentation. If the taxpayer has their own business or a rental property they should make sure they have good records of income and expenses.
I read that numerous new tax laws are coming up—is that so? What are some of them?
There are a few exciting tax laws that are in effect only for 2021 for taxpayers with dependents. One of them is an increased child tax credit from $2,000 to $3,600 for children under age 6 and from $2,000 to $3,000 for children ages 6 to 17. The additional amounts are phased out at $75,000 in income for single taxpayers, $112,500 for head of household and $150,000 for those married filing jointly and qualified widowers. The $2,000 regular tax credit still has a phase out at $400,000 for married filing jointly and $200,000 for all other taxpayers.
There is also an increase in the dependent care credit for 2021 only. The dollar limit for eligible expenses increased from $3,000 to $8,000 for one eligible child and from $6,000 to $16,000 for two or more eligible children. The maximum credit increased from 35% of eligible expenses to 50%. The income level where this credit phases out has been increased substantially from $15,000 to $125,000, making many more taxpayers eligible for the higher credit.
What are solid deductions, and what are red flags for audit? For example, when I was a freelance photographer, I remember being warned against deducting home office spaces, though equipment was okay.
With so many of us working from home in 2020 and 2021, the home office deduction is discussed more and more often. A home office needs to meet two conditions to qualify for a business deduction. It needs to be your principal place of business and all or part of the home needs to be used exclusively and regularly for business. If you meet these conditions, we encourage you to take this deduction.
A deduction with more relevance this year is the deduction for business meals. Business food and beverage purchases from a restaurant in 2021 or 2022 will be 100% deductible, an increase from the previous deduction of 50%.
What particular sets of people may have particular concerns?
Taxpayers who received unemployment for 2021 may have some concerns with having to owe taxes. Last year, the federal government allowed an exclusion of the first $10,200 of unemployment for taxpayers with income below $150,000. For married taxpayers, each spouse could exclude the first $10,200, if both received unemployment. Extra unemployment benefits continue in 2021 until September 6th, and no exclusion has been passed for 2021. These taxpayers may need to make an estimated payment to avoid having a balance due with penalties at tax time.
Taxpayers who are required to make Required Minimum Distributions need to make those distributions this year after not having to take them in 2020. Taxpayers with this requirement should make sure the distribution is made by the end of the year.
Final Deposits into retirement funds and the like?
401k contributions need to be made by the end of the year. IRA and Roth IRA contributions can be made by the filing deadline of April 15th, 2022. SEP and Keogh contributions can be made up to the due date for filing your tax return or the extended due date if you file a timely extension.
Charitable donations—which count, which don’t?
In 2021, taxpayers will be able to deduct $300 in cash charitable contributions ($600 for married filing jointly) if they are taking the standard deduction.
Individuals who itemize deductions and make a cash contribution to a qualified charity, may deduct up to 100% of their Adjusted Gross Income in some situations. This is also for 2021 only.
For further questions the cadre of professionals at ROR are standing by to assist you.
ROR Tax Professionals
4500 Glen Park Rd. Ste. 100
St. Louis Park, MN 55416