A few items to consider in 2021
Required Minimum Distributions (RMD’s)
The CARES Act waived required minimum distributions from 401(k)’s and Individual Retirement Accounts (IRAs) for 2020. At this time that waiver only applies to 2020 and is not extended to 2021. The age at which a taxpayer is required to start their RMD is now age 72. It was moved from the previous age of 70.5 to age 72. Individuals turning age 72 in 2021 must take their RMD by year-end or they can delay their payment until April 18, 2022. Those who continue to work past 72 can postpone until they retire, if they do not own more than 5% of the company that employs them.
Individual who donates to charity should consider a Qualified Charitable Distribution (QCD) directly from their IRA to the charity. These payments meet the requirements for their RMD and avoid the amount donated being reported on their tax return as a taxable distribution. For those taxpayers who do not have enough to itemize their deductions, this is a way to in effect deduct their charitable donations contributed via the QCD and to take full advantage of the standard deduction.
A revamp of the child credit for 2021 could catch some parents by surprise
The American Rescue Plan Act of 2021 increased the child tax credit from $2,000 to $3,000, $3,600 for children under the age of 6 and extends the credit to those who are 17. The revamped credit is now fully refundable, and the IRS will pay 50% of the credit in advance to qualifying families.
The IRS is scheduled to start sending periodic payments starting in July and provides for the payments to be completed by December 31. Taxpayers should be aware that these advance payments could reduce the credits they normally received when they file their taxes. They should anticipate the impact of these advance payments could have when they file their taxes. And it also appears, if the taxpayers are not entitled to the credits received in advance, they may be paid back when they file their taxes.
The law also requires the IRS to develop an on-line tool for families to update changes to their adjusted gross income or circumstances. The system will have the ability to compute and recompute payments as taxpayers provide new information. It will also be able to issue and track payments. Taxpayers can also elect out of the advance payments if they choose.
Due to the increase in potential fraud, there is concern over the security of this system. The IRS estimates it paid over $7.2 billion in refundable child tax credits improperly.
Your chances of getting audited by the IRS may have increased
Over the past several years, the number of taxpayers audited by the IRS has decreased. Some data on most returns can be audited through automation and most returns are subjected to some audit procedures every year. For example, wage statements (W2), 1099’s, 1098’s, Schedules K-1 and other statements submitted each year to the IRS by issuing third partied can be verified and matched to the taxpayers returns. And some audits are “correspondence audits” whereby the IRS requests documentation from the taxpayer to be submitted to the IRS via the mail. While a reducing number of taxpayers have been called into the IRS office or are visited by an IRS agent.
Recently it was announced an increase in the number of large partnerships are coming, as well as the number of audits of high-income individuals. Many tax law changes being announced in Washington have also stated, selected tax law changes could be funded by an increase in the number of IRS audits.
Can you deduct the donation for the use of your vacation home in a charitable auction?
Unfortunately, no. You do not get a tax deduction. Technically, you have only donated a partial interest, which does not qualify for a deduction. And the number of days used of the vacation home count as personal days used.
Need information from a return you have filed.
Through an IRS on-line tool, you can now a printout of a summary of key tax information on your return. If you need a copy of the entire return you will need to file Form 4506 with the IRS and pay $43 per return.
The tax professionals at WarrenJackson can assist you in unraveling the complexity of the Tax Code. Contact one of our professionals today.