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2021 individual taxes: Answers to your questions about limits

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension). However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year. Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation. How much can I contribute to an IRA for 2021? If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.) I have a 401(k) plan through my job. How much can I contribute to it? For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020). How much do I have to earn in 2021 before I can stop paying Social Security on my salary? The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.) I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021? A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021. If I don’t itemize, can I claim charitable deductions on my 2021 return? Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married […]

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2021 individual taxes: Answers to your questions about limits

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension). However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year. Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation. How much can I contribute to an IRA for 2021? If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.) I have a 401(k) plan through my job. How much can I contribute to it? For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020). How much do I have to earn in 2021 before I can stop paying Social Security on my salary? The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.) I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021? A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021. If I don’t itemize, can I claim charitable deductions on my 2021 return? Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married […]

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Tax Rate Hikes and the Economy

President Biden entered office with an ambitious agenda. From expanded healthcare subsidies and increased social security benefits, to student loan forgiveness. This would be costly. As a candidate, Biden proposed a series of tax rate increases on high-income families to pay for some of his new programs. Under his plan, corporate income tax rates and top personal income rates would rise. Top earners would face new Social Security taxes, and millionaires would face much higher tax rates on capital gains and dividends. What would these tax rate hikes look like, and what would they do to the economy? Part 1: What are the Corporate Income Tax Increases? Until 2018, the US had the highest statutory corporate tax rate in the developed world. Even before accounting for new state taxes, the top rate was 35%. This was well above rates in Ireland (12.5%), Canada (15%), and the UK (19%). The Tax Cuts and Jobs Act of 2017 (TCJA) permanently lowered the top rate to 21%. The current administration wants to increase the rate to 28%, which is higher than most developed countries, but still 20% lower than the 2017 rate. There are some reasons for why there isn’t support for the old rate: At higher rates, corporations have more incentive to avoid the tax. They hire expensive tax lawyers to find clever ways to reduce their tax bills. They move their headquarters/profits to low-tax jurisdictions. A higher tax rate shifts a corporation’s focus from producing better products at lower costs to finding ways to reduce its tax liability. It affects what they produce, where they build it, and how they finance it. The end result is that consumers pay more but get less and the government takes in less tax revenue. The person who pays a tax is often not the same person who bears the cost of the tax. In the case of corporate taxes, economist John Cochrane explains that “as an accounting matter, every cent corporations pay comes from higher prices, lower wages, or lower payments to the shareholders. The question is which one.” Economist Michael Boskin argues that corporate tax is born increasingly by workers: “Corporate taxes, like others, are ultimately paid by people. In a static economy with no international trade, shareholders are likely to bear the costs. The US economy is neither static nor closed to trade, and so taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers. In a growing economy, the diminished investment slows productivity growth and future wages. Slower economic growth and lower wages are a high price to pay for a tax that yields surprisingly little revenue. It’s no wonder then that there isn’t much support for pushing the rate back up to its former level. Part 2: What About Personal Income Taxes? About half of all federal […]

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2021 Tax Calendar

To help you make sure that you do not miss any important 2021 deadlines, we have provided this summary of when various tax-related forms, payments and other actions are due. Please review the calendar and let us know if you have any questions about the deadlines or if you would like assistance in meeting them. Date Deadline for: February 1 Businesses: Providing Form 1098, Form 1099-MISC (except for those that have a February 16 deadline), Form 1099-NEC and Form W-2G to recipients. Employers: Providing 2020 Form W-2 to employees. Reporting income tax withholding and FICA taxes for fourth quarter 2020 (Form 941). Filing an annual return of federal unemployment taxes (Form 940) and paying any tax due. Employers: Filing 2020 Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration. March 15 Calendar-year S corporations: Filing a 2020 income tax return (Form 1120S) or filing for an automatic six-month extension (Form 7004) and paying any tax due. Calendar-year partnerships: Filing a 2020 income tax return (Form 1065 or Form 1065-B) or requesting an automatic six-month extension (Form 7004). April 15 Individuals: Filing a 2020 income tax return (Form 1040 or Form 1040-SR) or filing for an automatic six-month extension (Form 4868) and paying any tax due. (See June 15 for an exception for certain taxpayers.) Individuals: Paying the first installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES). Individuals: Making 2020 contributions to a traditional IRA or Roth IRA (even if a 2020 income tax return extension is filed). Individuals: Making 2020 contributions to a SEP or certain other retirement plans (unless a 2020 income tax return extension is filed). Individuals: Filing a 2020 gift tax return (Form 709) or filing for an automatic six-month extension (Form 8892) and paying any gift tax due. Filing for an automatic six-month extension (Form 4868) to extend both Form 1040 and, if no gift tax is due, Form 709. Household employers: Filing Schedule H, if wages paid equal $2,200 or more in 2020 and Form 1040 is not required to be filed. For those filing Form 1040, Schedule H is to be submitted with the return and is thus extended to the due date of the return. Trusts and estates: Filing an income tax return for the 2020 calendar year (Form 1041) or filing for an automatic five-and-a-half month extension to October 1 (Form 7004) and paying any income tax due. Calendar-year C corporations: Filing a 2020 income tax return (Form 1120) or filing for an automatic six-month extension (Form 7004) and paying any tax due. Calendar-year corporations: Paying the first installment of 2021 estimated income taxes. April 30 Employers: Reporting income tax withholding and FICA taxes for first quarter 2021 (Form 941) and paying any tax due. May 17 Exempt organizations: Filing a 2020 calendar-year information return (Form 990, Form 990-EZ or Form 990-PF) or filing for an automatic six-month extension (Form 8868) and paying any tax due. Small exempt organizations (with gross receipts normally of $50,000 or less): Filing a 2020 e-Postcard (Form 990-N), if not filing Form 990 or […]

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RE: Paycheck Protection Program — Tax Implications of Expenses Paid with a Forgiven PPP Loan

The Internal Revenue Service (IRS) recently issued Revenue Ruling 2020-27 which provides that expenses paid with Paycheck Protection Program (PPP) loan proceeds are not deductible in the tax year paid or incurred, if at the end of the tax year the taxpayer has a “reasonable expectation of forgiveness.” As a result, many calendar-year taxpayers that received a PPP loan will have additional income to report on their 2020 tax return if they wish to be in accord with IRS guidance. The IRS states in Rev. Rul. 2020-27 that a taxpayer has a reasonable expectation of forgiveness if he/she intends to apply for loan forgiveness. Therefore, unless a taxpayer has decided not to file for loan forgiveness, the taxpayer is presumed to have a reasonable expectation of forgiveness. Subsequent to the IRS’s ruling, several members of Congress have expressed concern with the IRS’s position and have made it clear that the congressional intent in the CARES Act was to ensure that PPP loan recipients whose loans are forgiven are not required to treat the proceeds as taxable income. Thus, they are strongly encouraging the IRS to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most. In addition, there may be state income tax implications as many states have not conformed to the federal government’s tax treatment of PPP loans or related forgiveness. Although there is a possibility that congressional action could reverse the IRS position, its likelihood remains uncertain. Given the potential of penalties for underpayment of estimated tax because of the disallowance of the related expenses, our firm believes impacted taxpayers should take proactive action. In order to avoid underpayment of estimated tax penalties, taxpayers should increase their withholding or estimated tax payments to satisfy the prior-year tax safe harbor rules (100% / 110% of 2019). If you have applied, intend to apply, or are undecided as to whether to apply for PPP loan forgiveness, then, absent further guidance, you should consider the following options for the filing of your 2020 federal income tax return: 1. Extend your tax return to allow additional time for congressional action in opposition to the IRS position. 2. File your tax return based on Notice 2020-32 and Revenue Ruling 2020-27 guidance by NOT deducting expenses paid with forgiven PPP loan proceeds. If the current IRS position is reversed, you can file an amended return to claim these deductions. 3. File your tax return taking a deduction for expenses but disclose (i.e., file IRS Form 8275) a position that is contrary to current IRS guidance. Disclosure helps to avoid the imposition of penalties if the IRS ultimately disagrees with the position but likely increases the taxing authority’s scrutiny of your return. 4. Choose not to apply for the PPP loan forgiveness and deduct the expenses as usual. Immediate Action Required Given the uncertainty that exists with the conflict between the current tax guidance as promulgated by the IRS […]

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Why Your Business Should Have an Active Social Media Presence

Did you know that the ad spend on Facebook grew by almost 30% in 2020? According to the same report, the trend indicated that business budgets were tightened. However, more budget was allocated to digital channels and social media. This is also the expected trend for 2021. If you’re still not investing in social media marketing, it’s time to get on board with the trends. Here are benefits you can get from it: Boost Brand Awareness One of the biggest advantages of having an active social media is the increase in brand awareness. Social media allows businesses a platform to reach out to users who may not have heard of them before. Social media also allows you to enable sending targeting ads. When you send relevant ads based on a user’s preferences, they are more likely to be interested in your content. This feature also allows you to target ads based on different criteria which may include location, gender, age, etc. Increase Website Traffic and Leads As more people see what you have to offer, you are likely to see an increase in website traffic. Since you are reaching out to targeted audience, you are also likely to see more traffic coming from qualified leads. This may lead to a boost in lead generation efforts. Not only that, you’re also likely to see a boost in average time spent on a website. Pro Tip: To keep track of your leads coming from different platforms, use an advanced program specially designed for lead generation. Improve your Brand Recall A memorable social media marketing campaign can go a long way in creating a lasting impression in front of your target audience. It’s okay if users don’t purchase your product right away. If users can remember your brand easily, you can move them down the sales funnel with a few more touchpoints. Social media helps you boost your visibility and improve your ad recall. If you run a social media campaign for a long time, you can make sure that you are reaching out to more people and improving their ability to recognize your brand. Get More Brand Credibility Social media allows you to work with influencers to promote your products on different channels. Not only can you boost your reach and get more engagement, but you can also boost your brand credibility. Social media influencers work hard to build relationships with their followers.  Because of their expertise, they hold credibility in their field and therefore, their followers wait for their recommendations and advice. In addition, other sponsored content can also help you establish your brand as a thought leader in the industry. Get more Engagement When you upload content on social media that resonates with your audience, they are likely to respond to it. You’ll get more likes, shares, and comments if the content strikes a chord with them. This can result in a boost in engagement. You can also do things like host contests, create polls, and publish live videos to keep […]

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IRS Expected to Audit More Small Businesses in 2021

After years of low examination rates, the IRS announced it will increase audits of small businesses by 50 %. This news comes during a time when complex tax law changes and economic stimulus programs, in response to COVID-19, have made businesses’ books even more complicated than usual. The Illinois CPA Society cautions this could lead to audits and enforcement actions against many different businesses. These businesses range from long-held family-owned operations to the many online businesses launched as the pandemic drags on. With the IRS planning to hire more specialized auditors to begin strengthening its enforcement efforts, ICPAS offers the following tips to safeguard your business interests and help avoid an audit: Keep Clear Records Accurately and honestly reporting all income, deductions, credits, expenses, and other figures can help keep an audit at bay. Make sure you have adequate documentation to support the figures reported on your business’ information return. This will make your individual tax return less likely to be have errors or be audited. Mind your deductions Unusual itemized deductions raise red flags for auditors, especially now that most taxpayers only claim the standard deduction. If your small business is driving you to seek unique deductions or report business losses, enlist the help of a CPA to guide you. Reporting losses for three years or more could increase your risk of an examination into whether you’re actually in business. Make your estimated tax payments If you anticipate owing more than $500 in taxes for your business entity throughout the year, you should be making quarterly estimated tax payments. Failing to make these payments raises your risk of an audit and/or penalties. Go Digital Today’s bookkeeping software utilizes tools to keep your records accurate and secure. This helps your CPA electronically prepare and file your tax returns—the best method for preventing the filing of erroneous returns that might trigger an audit. Read up on the rules Since many small businesses are formed as partnerships, it’s important to determine if yours is subject to the Centralized Partnership Audit Regime, which dramatically changed IRS partnership audit procedures.

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CAA 2021 Extension and Expansion on Employee Retention Credit

Scope This  is to alert Vertical Advisors’ clients about Expansion and extension of Employee Retention Credit (ERC) provided by the Consolidated Appropriations Act, 2021 (CAA, 2021) which was signed on December 27, 2020. This credit is also available for the period March 12, 2020 to January 1, 2021 based on the prior bill called Families First Coronavirus Response Act. However, if a business received a PPP related to the prior period, generally the credit will not apply. Under the CARES Act, the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before Jan. 1, 2021. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands upon the ERC provided by the CARES Act until June 30, 2021 (Sec. 207). This credit will generally benefit businesses that have employees that did not receive PPP money. However, if a business has received PPP money, the ERC could still be applied related to wages not included in the PPP covered period. Highlights ERC Calculation: As noted above, the credit applies to wages paid in both 2020 and 2021. For wages paid prior to 12/31/2020, the credit amount is 50% of qualified wages, up to $10,000 in total per employee. Thus, the maximum Retention Credit in total amount is $5,000 per employee. The Retention Credit applies to: The employer’s share of Social Security tax under IRC Section 3111(a) (6.2% of wages) The portion of the employer’s and employee representative’s share of RRTA tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate due. If the Retention Credit exceeds the employer’s Social Security or RRTA tax liability for the quarter, the excess may be refunded to the employer. The credit will need to be claimed on IRS Form 941 (Quarterly Payroll form).  Please see Item D of this section for details on how to claim and report the credit. For wages paid after 12/31/2020, the credit amount is 70% of qualified wages, up to $10,000 per quarter (up from $10,000 total) of qualified wages paid to an employee. Thus, the maximum ERC amount available for 2021 is $14,000 per employee ($7,000 per quarter).  This would apply to Q1 and Q2, 2020 payroll form 941.  If you have already filed the forms, it can be amended. CAA also allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year (Sec. 207(e)(1)). Qualified Wages: CARES Act section 2301 created the ERC for wages paid from March 13, 2020 to December 31, 2020, by employers that are subject to closure or significant economic downturn due to COVID-19. The CAA extends the ERC to include wages paid before July 1, 2021 (from January 1, 2021). Qualifying wages are based on the average number of a business’s […]

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Where Did Americans Move in 2020?

Which States Did America Flock to in 2020? States compete with each other in a variety of ways, including attracting (and retaining) residents. Sustained periods of inbound migration lead to (and reflect) greater economic output and growth. Prolonged periods of net outbound migration, however, can strain state coffers. This can contribute to revenue declines as economic activity and tax revenue follow individuals out of state. United Van Lines, the largest moving company in the United States, keeps track of its clients’ migration among the 48 contiguous states. It publishes that data each January, comparing the number of inbound moves to outbound moves for each state. Because those who use United Van Lines are individuals and companies, this data is only a subset of all moves. However, the National Movers Study still provides a targeted look at the types of interstate migration patterns we can expect to see in government-issued data once it becomes available. The 2020 National Movers Study shows Idaho, South Carolina, Oregon, South Dakota, and Arizona as the states with the highest proportion of inbound moves. New Jersey, New York, Illinois, Connecticut, and California saw the highest proportion of outbound migration. Inbound and outbound moves were nearly balanced in Colorado, Wisconsin, and Michigan. (Vermont also saw a high percentage of inbound moves but it was excluded from the survey’s rankings because the sample size was too small.) Reasons for the Moves In this study, United Van Lines tracks a few of the most common reasons that people pack up and move to a new state. While “state tax climate” is not a listed reason in this study, we can see glimpses of how taxes can affect decision-making. Taxes may have limited influence on whether someone takes a job, but they can influence where jobs are available. They can also influence where a person taking a position might locate. The latter is perhaps most visible in smaller states and states with metropolitan centers located near state borders. For example, tens of thousands of individuals work in greater Chicago but live in Indiana. Many interstate commutes are attributable to stark differences in tax landscapes, particularly property taxes. While it is difficult to measure the extent to which tax considerations factor into individuals’ moving decisions, there is no doubt that taxes are important in many individuals’ personal financial deliberations. With the rise of remote work, individuals are likely to be more mobile than ever. They are able to make decisions about where to live that are independent of where their employer is located. Another reason people moved was retirement. Top 10 States for Retirement-Motivated Moves, 2020 State Rank Delaware 1 Florida 2 South Carolina 3 Arizona 4 Wyoming 5 Idaho 6 New Mexico 7 Nevada 8 Maine 9 North Carolina 10 Note: Source: United Van Lines, 2020 National Movers Study It’s unsurprising that retirees gravitated toward states with good climates, but many of these top states also have tax climates that would be attractive to retirees. Nine out of these 10 states either […]

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