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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 […]

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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 […]

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Tax Strategies to Repay Debt and/or Build Up Cash

Many businesses have struggled financially during the COVID-19 pandemic. Some businesses have benefited from the PPP and SBA EIDL programs. We expect most businesses to receive loan forgiveness for their PPP loan, but if you received an EIDL loan, you might be concerned on how you are going to pay it back. Generally, if a business had to receive a loan during 2020, it means they incurred more expenses than revenue, and thus needed a loan. This should mean the company or business will have a loss for the 2020 tax year. If you expect your business to have a loss, then there may be an opportunity to take that business loss and turn it into cash. The CARES Act changed the tax laws related to net operating loss (NOLs) options, in which the CARES Act allows NOLs to be carried back up to five (5) years if the loss was incurred in tax years 2018, 2019 and/or 2020. If you incurred a NOL then you might be able to carry it back up to 5 years and receive a cash refund based on taxes paid in those years. If you incurred a loss, and generated a NOL, speak with your tax advisor before the end of the year to determine if you can benefit from the NOL carry back. Contact Vertical Advisors, LLP if we can be of assistance.

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What does the executive action deferring payroll taxes mean for employers and employees?

On August 8, 2020, President Trump signed an executive memorandum that defers an employee’s portion of Social Security and Medicare taxes from September 1 through December 31, 2020. At this point, the taxes are just deferred, meaning they’ll still have to be paid at a later date. However, the action directs U.S. Treasury Secretary Steven Mnuchin to “explore avenues, including legislation, to eliminate the obligation to pay the taxes.” The exact impact on employers and employees isn’t yet known. There are many open questions, including President Trump’s legal ability to implement the deferral. Some experts believe there may be legal challenges to this executive action. Deferral details The payroll tax deferral will be available for “any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000.” The deferral will be calculated on a pretax basis or the equivalent amount with respect to other pay periods. Plus, the amounts will be deferred without any penalties, interest, additional amount or addition to the tax. Stay tuned for additional guidance No doubt there is much to flesh out about this payroll tax deferral. Secretary Mnuchin has been instructed to provide additional guidance and employers can’t act on the deferral until that happens. It’s also possible Congress could take action. We’ll be monitoring developments and their implications, so turn to us for the latest information. © 2020

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Urgent Tax Update Regarding Possible NIIT Claim for Refund – 2016 Tax Year

To our clients and friends. There have been some last-minute discussions in the income tax community that the Supreme Court of the United Stated  (SCOTUS) may rule that the Net Investment Income Tax (NIIT) which was established as part of Obamacare is unconstitutional.  If the SCOTUS makes that ruling, then taxpayers that have paid NIIT have up to three years from the date their tax returns were filed, or 2 years from when the tax was paid, to file an amended tax return to request a refund of the NIIT. However, since the SCOTUS hasn’t made that ruling, and may not, taxpayers have the option to file a protective claim for refund for tax year 2016, to meet the filing timeline.  The 2016 tax returns may need to be filed as soon as July 15, 2020 or at a late date during 2020 depending on the date your 2016 return was filed. Currently Vertical Advisors is pulling data for the tax returns we prepared for 2016, and we will inform you if the data suggests you paid in NIIT for tax year 2016.  If you didn’t have our firm prepare your 2016 return, and you would like us to review your 2016 returns, please let us know immediately as there is a 3 year statute of limitation for the date you filed.  With the postponement of the April 15, 2020 deadline, tax returns with an April 15, 2017 signature date which would normally require an amended return to be filed by April 15, 2020 have been given extra time till July 15, 2020. For tax returns we have prepared, we will also review 2017 activity and future years also. If we did find that you paid NIIT during 2016 tax year we will be contacting you shortly to discuss your options.  To make a request for this protective claim, please contact us at advisors@verticaladvisors.com or at 949-756-8080. Warmest Regards, Peter DeGregori, CPA MST

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