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Will the Sale of Your Home be Taxable? April 7, 2021

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

We all expect that no tax will be due some day when we sell our homes. At least, that is what all of our friends and family tell us. And, there is a good chance that they will be correct at least under today’s rules which are always subject to change. The below article gives us the story from the 30,000 foot view. And, as long as you have lived in your home for at least two (2) years out of the last five (5) years and your gain is below $250,000 – single / $500,000 – married filing jointly; then, you may not even need to report the transaction on your return, much less pay any taxes. 

But when the transaction involves anything out of the ordinary such as a gain in excess of $250,000 / $500,000; the property was formerly a rental; was used as your business property; used as an office in the home; you or your spouse are in the military or an involuntary conversion occurs – just to mention a few, things can get complicated very quickly and a lot of tax money may be potentially due. So do your homework BEFORE you sell your home to help avoid any unpleasant surprises.

The article below was written by Mr. Geoff Williams. It takes a deeper dive into some tax consequences of selling your home. 

– Mark Bradstreet

The IRS is often more benevolent than you would think in these matters.

If you’re thinking about selling your home, here’s what you need to know about the taxes you may owe.

YOU MAY HAVE THOUGHT about the tax benefits of buying a home, but you probably haven’t thought much about the taxes you’ll pay when you sell your home. As you can imagine, the taxes on a home sale could theoretically be a small fortune, enough to almost scare you away from selling at all.

So, if you’re looking to be proactive and prepared, here are answers to some questions you may have.

Can I Avoid Paying Taxes on a Sale of a Home?

Yes. There is a very good chance that you won’t pay taxes on your home sale. In fact, if you’ve been worrying about this, it may be for nothing.

When you make money from the sale of your home, the IRS typically lets home sellers keep the first $250,000 they earn from the sale of the house. (That’s $250,000 if you’re single; if you’re married and filing jointly, you get to keep $500,000 of capital gains.)

So, What Happens if the Capital Gains Are Higher Than the $250,000 or $500,000 Thresholds?

In that case, you may be subject to capital gains taxes.

Here’s a hypothetical scenario to give you a sense of how much you might pay if you sell a home for well over $500,000 as a married couple filing jointly.

According to David Reyes, financial advisor and CEO of Reyes Financial Architecture in San Diego, if you bought a house 10 years ago for $350,000 and sell it now for $1 million (a relatively reasonable hypothetical in California), “you would owe taxes on any amount over the $500,000 – which would be $150,000.”

As in, you would owe taxes on that $150,000 (rather than having a $150,000 tax bill).

That said, you can probably get that $150,000 number to shrink a bit. “The IRS allows you to deduct certain closing costs such as title insurance and attorney fees. You can also deduct the commission that you pay your real estate agent. You may also deduct any home improvements that you made to the property. This figure becomes your cost basis,” Reyes says.

Those home improvements, incidentally, could add up to a lot. Did you replace the roof recently? Did you add a swimming pool to your backyard, or perhaps renovate the kitchen or add a room to the house? Hopefully you saved the receipts.

Reyes says that after all these deductions, you would pay taxes on the net proceeds.

“Let’s say that your total of all eligible deductions is $50,000. You would pay capital gains taxes on the (remaining) $100,000,” Reyes says. “Depending on your tax bracket, you could pay taxes of up to 20% federal income taxes, plus state taxes. This would be a tax of $20,000, plus state income tax.”

State Income Tax?

Yes, you may have to pay state income tax with the sale of your home – but you shouldn’t when the federal taxes are exempt. Still, check with your tax preparer just to be sure. “Every state is different,” Reyes says.

How Do I Report the Sale of My Home on My Income Taxes?

You may not have to. Says Reyes: “If you have a gain on your home that is under the exclusion, you do not have to report this on your tax return. If you do have a gain that is above the exclusion, you must report it on the Schedule D of your 1040.” For most people, yes, but there may be some complications to consider. We’ll run through some of the bigger ones.

The home is a rental. Is this a house that you don’t live in? Or maybe you did 10 years ago and then you rented it out, and now you’re selling the home? Even if you are making less than $250,000 or $500,000, you will be paying taxes on the sale. But keep in mind: If you lived in the house for a minimum of two years within the last five years, and you rented it out for the remainder of that period, you will avoid paying taxes if the profits are under the $250,000 or $500,000 thresholds.

The home is a vacation home or a second home. Again, you’ll be paying taxes on the house. It needs to be your primary residence.

Within the last two years, you sold a home – and claimed the $250,000 or $500,000 exclusion. So, you sold a house and didn’t have to pay the taxes on it? Awesome. But you did that 20 months ago? You will probably have to pay taxes.

Did You Say Probably?

You might be able to get an exclusion, or at least a partial one. This is one of those cases where it wouldn’t be a bad idea to talk to a tax preparer. In fact, whenever you are selling or buying, it’s generally a good idea to talk to a tax preparer to see how the home will affect your taxes. But if you sold a house 20 months ago and bought a new house with your spouse, and now you’re divorcing and selling the home to one or the other, you might be able to get an exclusion.

You may also be able to get an exclusion if your spouse died, and now you’re forced to sell the house.

If you lost your job and are now receiving unemployment benefits, you can probably get an exclusion.

But getting a partial or full exclusion doesn’t have to involve a tragic reason. For instance, if you and your spouse are having twins, triplets or even more kids, and you have suddenly outgrown the house, you may be able to get an exclusion. If that’s the case, you’ll want to talk to a tax preparer, and along with all of the parenting and baby books you’re buying, consult the IRS’s “Publication 523 (2019), Selling Your Home.”

Credit given to: Geoff Williams, Contributor for US News published May 20, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Tax Strategies for a Bonus or Windfall March 31, 2021

Posted by bradstreetblogger in : Business consulting, General, Retirement, tax changes, Tax Rules, Tax Tip , add a comment

Nice recap below which discusses some tax saving or tax deferral options available in the event of a bonus or windfall.                                                                                                       – Mark Bradstreet

Here are 5 Tax Strategies for a Bonus or Windfall.

Yes, it’s inevitable: That cash bonus for a job well done can result in you paying a bigger chunk of money to the Internal Revenue Service (IRS). To start, the IRS considers bonuses to be supplemental wages, which means your employer is required to immediately withhold 22% of your windfall. You could get some of that back at tax time. But then again, a bonus might bump you into a higher tax bracket, which starts at 10% for low-income taxpayers and tops out at 37%.

Heed another precaution, says Rosalind Sutch, a Philadelphia certified public accountant (CPA) at the tax consulting firm Drucker & Scaccetti: “If you work in two or more states during the year, you might need to pay taxes on your bonus to each state.”

Take heart: Your tax advisor can map out a few strategies to let you keep as much of that extra cash as the IRS allows.

KEY TAKEAWAYS

1. Set It Aside For Later

Remember, Uncle Sam truly wants you to have a great retirement. He’s encouraging us all to build up our nest eggs by using contributions to qualified retirement savings accounts, such as 401(k)s and traditional IRAs, to reduce taxable income. With that in mind, a bonus or windfall can represent a great way to jumpstart your retirement savings, especially if you’re allowed to use your bonus to make a special contribution. That, of course, will depend on your plan’s rules.

401(k)s

It might make very good sense to use the extra cash to maximize your 401(k) contribution. This move may even reap an additional reward if your employer kicks in a matching sum—provided you qualify under plan guidelines. The amount you can contribute to your 401(k) or similar workplace retirement plan is $19,500 in 2021. The 401(k) catch-up contribution limit—if you’re 50 or older—will be $6,500 in 2021.

IRAs

For 2021, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit. The deduction you can take on IRA contributions, however, is subject to limits based on your income, filing status, and whether your employer has a retirement plan in place.

Roth IRA

Another strategy, says Sutch, is to make a contribution to a non-deductible IRA, then convert the account to a Roth IRA as quickly as possible—at very least before the end of the year. You will need to pay taxes on any gains made because of an increase in the value of the converted IRA, but distributions you take later will be tax-free. That’s an important consideration that can save you money if the assets of the Roth IRA increase, tax rates increase, or you end up in a higher bracket on the eve of your retirement.

The caveat is that you’ll need to walk through the paperwork carefully with your accountant to avoid tripping up and generating taxable income, especially if you already have an IRA. Also, you’ll need to fit the Roth income limitations.

2. Defer Compensation

When it comes to getting back some of that 22% withheld bonus, you have a number of options. For one, you might look into a deferred compensation plan at work, which will allow you to spread out both the money you pocket and the tax liability. If you are paid in shares of stock, you’ll want to mull over the best time to cash out of a security that has increased in value—in order to offset or limit capital gains. Long-term capital gains rates are 0%, 15%, and 20%, depending on your income level.

3. Pay Your Taxes

Yes, the heading here sounds like a no-brainer. But let’s be a bit more specific: One beneficial way to use your bonus is to “catch up” on estimated tax payments or your withholding-tax obligations and thereby sidestep an IRS penalty for coming up short.

And that’s not all you can do. Under certain circumstances, you might be able to pay next year’s real-estate taxes in advance. It all depends on when your real estate taxes were assessed. Under IRS rules, you can deduct the prepayment of property taxes for the next tax year if the assessment was received and paid in the current tax year. Any prepayment of property taxes that have yet to be assessed cannot be deducted. Taxpayers are advised to check with their accountant before trying this tack.

4. Give It Away

If you itemize your deductions on Schedule A, you can shield some of your bonus by making a charitable donation to charity. For most cash contributions, up to 60% of adjusted gross income can be deducted. The IRS maintains an online resource to help taxpayers determine the deductibility of their contributions to tax-exempt organizations.

If you are unable to decide on a charity, you might consider donor-advised funds (DAFs), a tool for high-net-worth individuals. When you contribute to a DAF, the money goes into an account with your name. You are permitted to take the full charitable deduction in the year in which it was made, even though the funds might not be dispersed to charity until later. However, as with donations to charity groups, taxpayers should be certain donations to the DAF are deductible.

5. Pay Up Your Expenses

Another way to shelter a bonus or windfall is to pay upcoming deductible business or personal expenses before Dec. 31. You might consider upgrading your computer equipment or footing utility bills for your home office before year-end.

Using a credit card may make sense, provided you can pay off the additional balance in January.

Another idea: If you’re signed on for a health savings account at work, consider using part of your bonus or windfall to pay up to the contribution limit. Just be sure it’s money you can carry over to next year, or that you know you will spend in time.

The Bottom Line

As soon as you know of a bonus or windfall, book a meeting with your tax advisor to start safeguarding as much as you can.  

“Like a lot of tax issues, things can get very complicated,” says Sutch. “You don’t want to get whipsawed on some of the more intricate rules, so it’s a good time to lean on a competent tax adviser’s advice.”

The only windfall that won’t put you in that situation: the (maximum) $15,000 that someone can give you tax-free each year. Neither you nor the giver owes taxes on a gift that falls within the legal limit. Such gifts can add up: For example, if all four of your grandparents gave you the maximum, you could collect $60,000 per year, gift-tax free.

Credit Given to:  JAMES ANDERSON  Published in Investopedia on Feb 1, 2021.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

IRS Announces Higher Estate and Gift Tax Limits for 2021 March 24, 2021

Posted by bradstreetblogger in : Deductions, General, Retirement, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes , add a comment

Many of our clients have the best of intentions of completing their estate planning. Not that I am perfect. Many of us have been fine-tuning our estate plan for decades. Granted this process is never really done. It is a work in process. But if you have a plan in place only in your head, your family may be surprised by the estate tax owed. Some rather painless steps may be taken with the help of an estate planning attorney to avoid these unpleasant surprises.


– Mark Bradstreet               

How much money should go to the tax collector when you die?

The Internal Revenue Service announced today the official estate and gift tax limits for 2021: The estate and gift tax exemption is $11.7 million per individual, up from $11.58 million in 2020. That means an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could shield $23.4 million. 

(Speculative portion who may be our next President was omitted since this was written shortly before Election Day)

The IRS announced the new inflation-adjusted numbers in Rev. Proc. 2020-45. Forbes contributor Kelly Phillips Erb has all the details on 2021 tax brackets, standard deduction amounts and more. We have all the details on the 2021 retirement account limits, including the higher $58,000 overall 401(k) limit, too.

If you’re rich and you’re worried about the estate and gift tax exemption amounts going down, the time to start a gifting plan is now. The IRS finalized rules last year saying that it wouldn’t claw back lifetime gifts if/when the exemption is lowered.

The annual gift exclusion amount for 2021 stays the same at $15,000, according to the IRS announcement. What that means is that you can give away $15,000 to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A husband and wife can each make $15,000 gifts, doubling the impact.

Separately, you can make unlimited direct payments for medical and tuition expenses.

When you’re doing advanced estate planning—making gifts in excess of $15,000 annual exclusion gifts—you’re using your lifetime gift/estate tax exemption. With the new 2021 numbers, a couple who has used up every dollar of their exemption before the increase has another $240,000 of exemption value to pass on tax-free. For folks who are worried that that’s a lot to give, there are newfangled spousal lifetime asset trusts (aka a SLATs). They’re also IRS-tested advanced estate-freeze strategies like grantor-retained annuity trusts (GRATs) and installment sales to grantor trusts, where you give away the upside of assets transferred to the trust tax-free. For planning tips, see Trusts In The Age Of Trump.

Keep in mind the $23.4 million number per couple isn’t automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption—a move called “portability”—you must elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.

And note, if you live in one of the 17 states or the District of Columbia that levy separate estate and/or inheritance taxes, there’s even more at stake, with death taxes sometimes starting at the first dollar of an estate.

Here’s a look at the federal estate tax/gift tax exemption over the years, according to the Tax Policy Center:

2021: $11.7 million/$11.7 million
2018: $11.18 million/$11.18 million
2011: $5 million/$5 million
2009: $3.5 million/$1 million
2008: $2 million/$1 million
2003: $1 million/$1 million

Credit Given to: Ashlea Ebeling – a Senior Contributor for Forbes published on 10/26/20.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Choice of Business Entity March 10, 2021

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

Entity choice is one of my favorite topics. It reminds me of a chess game. The choice of your business entity is the cornerstone of your tax and legal foundations. Not all entities are taxed in the same fashion, others treat the taxation of a sale of its assets differently, and still others will have varying types of owner’s compensation just to mention a few of the different entity attributes. Other entity choices make switching from one entity to another very expensive. For example, switching a C corporation to an LLC may be a very expensive proposition. But, going the other direction by switching an LLC to a C corporation is usually painless. Nellie Akalp in the following article does an excellent job of discussing more of the pros and cons of entity choice.
                                                                    -Mark Bradstreet

A lot is riding on the business entity type you choose. The business structure you decide on affects your legal liability as an owner, tax obligations, growth potential, and compliance requirements you’ll need to satisfy on an ongoing basis. To make matters more complex, the entity type that’s right at the beginning of a business’s existence may not continue to be the ideal choice as the company grows and evolves.

So, what’s an entrepreneur to do? First and foremost, I encourage business owners to consult with a licensed attorney and accountant or tax advisor to get professional guidance. Every situation is unique, so it’s critical to have expert advice before making the crucial decisions of choosing a business entity and assessing when it’s time for a change.

To help you prepare for your all-important discussions with your legal and financial advisors, the following is food for thought about some of the most popular business entity types.

Business entity basics

1. Sole proprietorship and general partnership

Many small businesses start as either a sole proprietorship (one owner or a married couple) or general partnership (multiple owners). When business owners don’t formally register their companies with the state, they are, by default, considered either a sole proprietorship or general partnership. There is no legal or financial separation between the business and its owners.

Pros of sole proprietorships and general partnerships:

Cons of sole proprietorships and general partnerships:

2. Limited liability company (LLC)

The LLC business structure may be described as a bit of a cross between a sole proprietorship or partnership and a corporation. By default, an LLC is considered the same tax-paying entity as its owners (“members”). However, the LLC is regarded as a separate legal entity from its members. Articles of Organization must be filed with the state to form an LLC. 

Pros of limited liability companies

Cons of LLCs

3. C Corporation

A C Corporation is regarded as a separate taxpayer and legal entity from its owners. Business income and expenses are tied to the business, and the corporate entity reports and pays taxes. Ownership of a C Corp is through purchasing shares of stock.

Incorporating as a C Corp involves filing Articles of Incorporation (sometimes called Certificate of Incorporation) with the state. Other state requirements must also be met to start a corporation.

Pros of C Corporations

Most legal protection for owners—The C Corp structure provides the highest degree of liability protection for business owners. Under most circumstances, shareholders, directors, and employees have protection from lawsuits and debts of the corporation. 

Growth potential—C Corporations can have an unlimited number of shareholders and may issue multiple classes of stock. Typically, investors will be more interested in funding companies organized as corporations rather than those operating as other entity types.  

Tax flexibility—Eligible corporations may choose to be taxed as an S Corporation (see more about that in the next section). Often, corporations are eligible for more tax deductions than businesses operating as other business structures. 

Perpetual life—Ownership interests in a corporation may be transferred to others. Shareholders can sell, gift, or bequeath their shares of company stock, and the corporation continues to exist. Only when a C Corp is formally dissolved is its life ended. 

Cons of C Corporations

More compliance complexity and costs—In most states, it costs more to incorporate a business than to form an LLC. There are more internal and external rules to start and operate a C Corp, such as appointing a board of directors, drafting bylaws, filing an initial report, filing annual reports, etc.

Double taxation—A C Corporation’s profits get taxed at the federal corporate income tax rate. Then they are again taxed to shareholders when the corporation distributes those profits as dividends. This creates a double tax because the dividends paid do not qualify as tax deductions for the corporation. Another potential disadvantage from a shareholder’s individual tax perspective, is that they may not deduct any loss of the corporation on their personal tax returns.  

Overview of the S Corporation election for LLCs and corporations

The S Corporation is a tax election that qualifying LLCs and corporations can choose.

The benefit for LLCs is that S Corp election can reduce the amount of self-employment tax business owners must pay. An LLC taxed as an S Corp still gets pass-through tax treatment (tax obligations pass-through to the owners’ returns), but only the wages and salaries of business owners on the company’s payroll are subject to Social Security and Medicare taxes. Any profit distributions paid to owners do not have those taxes levied on them.

To request S Corporation election, an LLC must file IRS Form 8832 (to be taxed as a corporation) and IRS Form 2553 (to choose S Corporation election).

S Corp tax treatment allows corporations to avoid the sting of double taxation. As an S Corporation, a corporation’s profits and losses flow through to shareholders’ personal tax returns. The corporate entity does not pay income tax. Shareholders who are employed by the corporation pay Social Security and Medicare taxes on their wages or salaries from the company, but the dividend income paid to shareholders is not subject to those taxes.

Note that S Corporations may not exceed 100 shareholders. Therefore, corporations with more than that are not eligible for S Corp election.

Is your business entity type still the right one for you?

Business owners operating as a sole proprietor, general partnership, or LLC may find that their business is outgrowing the limitations of their entity type. A few things that might drive entrepreneurs to consider changing their business structure include:

The process to switch from one business entity type to another will vary by business structure and in which state the business is operating. An attorney and accountant can help determine whether a change may be beneficial. Also, a lawyer can advise on the correct steps to take to change business entities. Details are often available on states’ Secretary of State websites, as well. 

Ideally, when starting your business, it’s helpful to think both short-term and long-term about what structure will best serve your needs and vision. With some research, reaching out to the right resources for guidance, you will be empowered to make an informed decision. 

Credit Given to:  Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the Founder and CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states. Nellie and her team recently launched a partner program for legal, tax and business professionals to help them streamline the business incorporation and compliance process for their clients.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Energy Credit Incentives for Individuals February 24, 2021

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

The below information regarding home energy credits was taken directly from the IRS website. I was reluctant to pull the same information from a contractor’s website. Not always, but sometimes, they are a bit over-zealous in their interpretation of the tax law when it comes to business. Buyer beware!

Please remember that a tax credit typically reduces your income taxes dollar for dollar. A tax deduction reduces your taxable income. Your federal income tax is based upon your taxable income. So, all things being the same a federal credit is typically worth more than a federal tax deduction.

If you are considering some home energy improvements of some sort, please be sure to do your homework on whether they may qualify. Also, please pay particular attention to the expiration dates below for different types of home energy improvements. 

                                               -Mark Bradstreet

Q. Are there incentives for making your home energy efficient by installing alternative energy equipment?

A. Yes, the residential energy efficient property credit allows for a credit equal to the applicable percent of the cost of qualified property. Qualifying properties are solar electric property, solar water heaters, geothermal heat pumps, small wind turbines and fuel cell property. Only fuel cell property is subject to a limitation, which is $500 with respect to each half kilowatt of capacity of the qualified fuel cell property. Generally, this credit for alternative energy equipment terminates for property placed in service after December 31, 2021. The applicable percentages are:

  1. In the case of property placed in service after December 31, 2016, and before January 1, 2020, 30 percent.
  2. In the case of property placed in service after December 31, 2019, and before January 1, 2021, 26 percent.
  3. In the case of property placed in service after December 31, 2020, and before January 1, 2022, 22 percent.

Q. Is a roof eligible for the residential energy efficient property tax credit?

A. In general, traditional roofing materials and structural components do not qualify for the credit. However, some solar roofing tiles and solar roofing shingles serve as solar electric collectors while also performing the function of traditional roofing, serving both the functions of solar electric generation and structural support and such items may qualify for the credit. Components such as a roof’s decking or rafters that serve only a roofing or structural function do not qualify for the credit.

Q. Does any guidance issued for the energy credit under section 48 of the Internal Revenue Code apply to the residential energy efficient property tax credit under section 25D of the Internal Revenue Code?

A. IRS guidance issued with respect to the energy credit under section 48 in publication items such as Notice 2018-59, has no applicability to the residential energy efficient property credit under section 25D.

Q. What improvements qualify for the residential energy property credit for homeowners?

A. In 2018, 2019 and 2020, an individual may claim a credit for (1) 10 percent of the cost of qualified energy efficiency improvements and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the taxable year (subject to the overall credit limit of $500).

Qualified energy efficiency improvements include the following qualifying products:

Residential energy property expenditures include the following qualifying products:

Please note that qualifying property must meet the applicable standards in the law.

The residential energy property credit, which expired at the end of December 2014, was extended for two years through December 2016 by the Protecting Americans from Tax Hikes Act of 2015. The Consolidated Appropriations Act, 2018 extended the credit through December 2017. The nonbusiness energy property credit expired on December 31, 2017 but was retroactively extended for tax years 2018, 2019 and 2020 on December 20, 2019 as part of the Further Consolidated Appropriations Act.  The credit had previously been extended by legislation several times. See Notice 2013-70 PDF for more information on this credit as well as the credit for alternative energy equipment.

Q. Who qualifies to claim a residential energy property credit? Are there limitations?

A. You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year. In 2018, 2019 and 2020, the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows). There are also other individual credit limitations:

The residential energy property credit is nonrefundable. A nonrefundable tax credit allows taxpayers to lower their tax liability to zero, but not below zero.

Published on the IRS Website – October 2020

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Bonus Depreciation: A Simple Guide for Businesses February 17, 2021

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Rules, Tax Tip, Taxes , add a comment

In our tax and business planning meetings, we tend to drone on forever about the use of accelerated depreciation methods. Not that long ago, our first choice was Section 179; and, Section 168 (bonus depreciation) was our second choice. Reason being that, unlike Section 179, Section 168 was originally for NEW property only. That has changed in the last few years and now qualifying property for Section 168 may be NEW OR USED. Also, unlike Section 179, Section 168 does not have a ceiling on qualifying purchases. The business plan is a fundamental tool and is necessary for a startup that needs a sense of direction. The business plan also typically includes a brief look at the industry within which the business will operate and how the business will differentiate itself from the competition. If you are looking for professional Business Plans Writers make sure to check out this url https://wimgo.com/s/usa/business-plan-writers/.

Who doesn’t love a bonus? If you purchase fixed assets for your business, one bonus you want to get familiar with is bonus depreciation. Here’s a look at what you need to know about this valuable tax-saving tool.

What is bonus depreciation?

Depreciation allows a business to write off the cost of an asset over its useful life, or the number of years the asset will be used in the business. For example, if you purchase a $10,000 piece of machinery that you’ll use for ten years, rather than expense the full $10,000 in year one, you might write off $1,000 per year for ten years.

That $1,000 write-off is nice, but it might not be enough of an incentive to encourage you to reinvest in your business–and Congress wants business owners to stimulate the economy by purchasing assets. That’s why they invented bonus depreciation.

Bonus depreciation is a way to accelerate depreciation. It allows a business to write off more of the cost of an asset in the year the company starts using it.

Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), a business can now write off up to 100% of the cost of eligible property purchased after September 27, 2017 and before January 1, 2023, up from 50% under the prior law. However, that 100% limit will begin to phase down after 2022. Starting in 2023, the rate for bonus depreciation will be:

To take advantage of bonus depreciation:

Step 1: Purchase qualified business property.

Qualified business property includes:

Step 2: Place the property in service

Placing property in service means you have to start using the asset in your business. For example, if you purchase a piece of machinery in December of 2020, but don’t install it or start using it until January of 2021, you would have to wait until you file your 2021 tax return to claim bonus depreciation on the machinery.

Step 3: Claim bonus depreciation on your tax return

You can write off up to 100% of the cost of the asset on Form 4562, which gets filed along with your business tax return.

Frequently asked questions about bonus depreciation

Depreciation is complicated, so many business owners have questions about when and how bonus depreciation applies to their business. Here are some common ones.

Do I have to take bonus depreciation?

If you purchase depreciable property in your business, depreciating the property isn’t optional–it’s required.
But bonus depreciation isn’t mandatory. If you purchase property that qualifies for bonus depreciation, and for whatever reason don’t want to write off 100% of the cost, you can elect not to take it. Instead, you can use the applicable MACRS depreciation method instead.

Is bonus depreciation the same as Section 179?

Business owners often confuse bonus depreciation with the Section 179 deduction because they both allow a business to write off the cost of qualified property immediately. While these two tax breaks serve a similar purpose, they aren’t the same.

A business can’t claim Section 179 unless it has a taxable profit. For example, if your business has $5,000 of taxable income before taking the Section 179 deduction into account, and you purchase a $10,000 piece of machinery, your Section 179 deduction is limited to $5,000. At that point, you can opt to claim regular depreciation on the remaining $5,000 or carry your unused Section 179 deduction forward and deduct it in a future tax year.

On the other hand, bonus depreciation isn’t limited by the business’ taxable income. Returning to the previous example, you could take a Section 179 deduction of $5,000 to reduce your taxable income to zero, then take bonus depreciation for the remaining $5,000.

Are there different bonus depreciation rules for vehicles?

Depending on the type and size of the vehicle, there may be different bonus depreciation limits. The IRS sets different limits for vehicles to keep people from claiming large tax deductions on luxury cars or ones that are used mainly for personal driving.

For example, vehicles with a gross vehicle weight (GVW) rating of 6,000 pounds or less are limited to $8,000 of bonus depreciation in the first year they’re placed in service.

On the other hand, heavy vehicles with a GVW rating above 6,000 pounds that are used more than 50% for business can deduct 100% of the cost.

Can I claim bonus depreciation on used property?

The TCJA expanded the definition of qualified property to include used property. Previously, only new assets were eligible for bonus depreciation.

However, to be eligible for bonus depreciation, the property must meet the following requirements:

Bonus depreciation can be a valuable tax break for businesses that purchase furniture, equipment, and other fixed assets. However, depreciation laws and limits are always changing.

Before you decide to buy property, it’s a good idea to talk to your tax professional to be sure you’re making the right move for your business.

Credit Given to:   Janet Berry-Johnson, CPA. This article was published on November 3, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Multiple Considerations of Working From Home February 10, 2021

Posted by bradstreetblogger in : Business consulting, General, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip , add a comment

Wish I had come across this article in the late spring.  Regardless, I think it is worth exploring in an effort to keep us all on the same page and avoid some of the inevitable surprises.

                                                                                                 -Mark Bradstreet

Millions of employees could be in for a rude surprise in April when they find out their home office isn’t deductible and the states can’t agree on who gets their money. Time to put a tax pro on speed dial?

It’s very likely that you’re reading this from your home—even if you’re working. As the coronavirus pandemic continues to spread across the country, many of us are finding that the new normal means not leaving the house, or at least not for work anyway.

How dramatic are the numbers? A Federal Reserve Bank of Dallas report found that of all those employed in May, 35.2% worked entirely from home, compared to just 8.2% in February. Further, a whopping 71.7% of US workers who could work from home did so in May. Some folks who are staying home do so for safety and convenience, while others are required by their employer or the state or local government to remain at home; in Pennsylvania, for example, by Order of the Governor, “Telework Must Continue Where Feasible.”

With big name companies extending work-from-home until the end of the year, next summer, or as an option for a growing number of workers, forever, ad hoc accommodations no longer seem sufficient—on either a personal, or a tax policy level.

Here’s the latest on the sometimes-confusing tax aspects of work-from-home, as well as some practical tips I’ve picked up as a tax lawyer and writer who has long worked from home.

UNDERSTAND THE LEGAL RELATIONSHIP BETWEEN YOU AND YOUR EMPLOYER

Increasingly, the lines between employees and independent contractors (or freelancers) are becoming blurred. To be clear, you are not self-employed just because you are working from home. If you are receiving a paycheck from an employer, and those wages will be reported to you and to the Internal Revenue Service on a W-2, you are an employee. Working from home is not enough, on its own, to make you an independent contractor receiving a 1099. And while you certainly may receive a Form W-2 and a Form 1099 in the same tax year, you should not receive a Form W-2 and a Form 1099 for the same type of work from the same employer.

Why does it matter? As a result of the Tax Cuts And Jobs Act (TCJA), a.k.a., the Trump tax cuts, for the tax years 2018 through 2025, you cannot deduct home office expenses if you are an employee. There is no hardship exemption or coronavirus waiver. It’s a very bright-line rule: employees who work from home can no longer claim the home office deduction. The reason you are working from home does not matter to the IRS.

However, if you are self-employed – even as a gig worker – you can continue to deduct qualifying home office expenses. (More on that later.)

ASK YOUR EMPLOYER WHAT YOU CAN TAKE FROM THE OFFICE.

Clearly, you can’t take home the snack bar. But if you’re missing out on some of your favorite things – like your office chair or your trusty stapler – ask your employer if you can take them home. That can save you (and your employer) money. The TCJA rules apply to all unreimbursed job expenses for employees, not just to your physical home office.  If you’re an employee and your employer doesn’t reimburse costs, your out-of-pocket expenses – from the cost of a new laptop or printer to copy paper to that fancy new ergonomic chair – are not deductible for federal income tax purposes. But if your employer has already spent the money to buy them for you, simply relocating them to your house means everybody wins.

FAMILIARIZE YOURSELF WITH YOUR BENEFITS

Does your employer offer you a monthly reimbursement for cell phone costs? Is there a stipend for home office expenses available? Is there a discount available for office supplies purchased through a particular vendor? If your costs are going up because you’re working from home, consider your options. Some money-saving measures may already be available through your company’s HR department. If you don’t see what you’re looking for, just ask. An enlightened employer may well find your reasonable requests a lot more economical than finding a replacement for you or finding that without the proper equipment, you’re less productive.

It’s not just the home office deduction that is creating confusion among those working from home. Employees who normally work in an office in one state, but live (and are now working from) another may be facing additional tax-filing complications.

IF YOUR OFFICE AND HOME ARE IN DIFFERENT STATE.  PUT A TAX PRO ON SPEED DIAL.

The messiness of being taxed in multiple states is at least on Congress’ radar; the HEALS Act  proposed by Senate Republicans last month would allow employees who perform employment duties in multiple states to only be subject to income tax in their state of residence and any jurisdiction where the employee is present and working for more than 30 days during the calendar year—or 90 days for frontline health-care workers. (That 90-day provision is designed to protect nurses and doctors from other states who raced to New York in the spring to help out and now worry they’ll owe New York taxes.)  The HEALS provision would only apply through 2024 and wouldn’t cover professional athletes, professional entertainers, qualified approved film, television or other commercial video production employees, or certain public figures. And even that bill, which is going nowhere, would still allow employees working from home during the pandemic to be taxed in their home state and the state where their normal office is.

Bottom line:  there is currently no national standard for the withholding, filing and payment of state income taxes for employees who work in more than one state or work in one state and live in another.  That means you may have tax requirements where you typically work as well as where you live. Usually, you can sort that out via withholding, tax agreements, and credits.

So, what if working at home in one state when your company is in another state means that you’re subject to tax in both places? If either state has a physical presence rule (most states do), figuring the split between the two can be confusing. Typically, you may have too much tax withheld from your paycheck for your nonresident state and not enough for your resident state.

For example, if you live in Connecticut but you normally work in New York, you’ll likely have to file a resident tax return in Connecticut and a nonresident tax return in New York. If you worked in New York all year, it should be relatively easy: only New York withholds taxes and then when you file your Connecticut tax return you get a credit for the taxes paid to New York. But if you worked in New York through March – and then in Connecticut through August – and then back to New York? Not so simple.

And remember the tax credit? To make it work, you have to file in the right order. You first file and report income to the state where you work and then claim the credit on your resident tax return. If you mix up the order, you may end up missing out on the credit and get stuck paying additional state tax, or miss out on a refund you’re otherwise entitled to.

Moreover, that assumes that the states agree on the rules. It gets more complicated when states have differing tax rates and residency rules.

So, you could try to figure it out yourself… but the American Institute of Certified Public Accountants (AICPA) just updated their guidance on state tax filings, and it’s 523 pages long: it’s a lot less stressful to hire a professional. 

KNOW YOUR STATE’S TAX LAWS

I know that I just advised you to hire a tax professional, but you should still be aware now of the basic rules in your state to make sure you don’t get a nasty surprise in April.  During the pandemic, the AICPA developed recommendations that would allow businesses to continue to withhold state income tax from employees based on the employer’s location instead of the employee’s work-from-home location – in other words, under these recommendations, your tax and withholding wouldn’t change at all. To date, 13 states (AL, GA, IL, IN, MA, MD, MN, MS, NE, NJ, PA, RI, and SC) have issued guidance that follows the AICPA’s suggestion on withholding. What that means is that employees in those states should be protected from paying double tax where one state uses the convenience of employer test (like CT, NY, DE, NJ or PA) and the other state uses the physical presence standard (remember, states use different tests). But if you live in a state that has signed on to this recommendation – but work in a state that hasn’t (or vice versa) – you’re out of luck.

In addition,  a slightly different list of 13 states (AL, GA, IA, IN, MA, MD, MN, MS, ND, NJ, PA, RI, and SC), as well as Washington, D.C. and Philadelphia have followed AICPA’s recommendation that an employee working remotely in a state due to Covid-19 restrictions does not create nexus and apportionment for his or her employer for tax purposes. (In other words, by allowing you to work from home, the employer will not create corporate tax problems for itself in your home state.) 

Some states also have individual reciprocity with other states. For example, Pennsylvania has agreements with IN, MD, NJ, OH, VA and WV. Remember, normally, if you earn income in one state and live in another, you file a tax return in both the state where you live and, in the state, where you work. However, if you’re lucky enough to live in a state with a reciprocity agreement with the state where you might work, you file and pay only in your home state: you don’t have to pay taxes – or even file – in the state where you work. So, if you live in Pennsylvania but work in Ohio, your employer would withhold tax for Pennsylvania, while Ohio takes a pass. Easy peasy.  

But if you live and work in states that don’t have reciprocity – and haven’t signed onto the AICPA recommendations – you may have to file tax returns (and possibly pay) in both states. You’ll need to know which rules apply to avoid a surprise—and maybe a big bill- at tax time. 

KEEP A CALENDAR OR A LOG

Sure, there may be a day when you want to look back on all of this with fondness, but there’s a more practical reason for keeping good records: you may need to keep track of your day by day working locations for tax reasons. Proving that you were where you claim to be can be handy if you (or your employer) is audited. Plus, keeping a log could keep you from falling prey to the habit of working seven days a week.

CHECK YOUR WITHHOLDING

Ask now – not later – about withholding. Find out how much is being withheld by your employer for the state where you live (and now work) and whether that will be enough to avoid a tax bill come Tax Day. If not, you may need to make estimated payments to avoid a penalty. 

Warning: If you normally work exclusively from an office in another state, work from home might increase your home state liability for 2020.  But it’s not all gloom and doom: if your home state has a lower tax rate than the rate where your office is located, working at home for much of 2020 could save you taxes. 

DON’T FORGET ABOUT SECURITY

The IRS recently issued a reminder to tax professionals who work from home to secure remote locations by using a virtual private network (VPN) to protect against cyber intruders. That’s good advice for anyone who relies on the internet. A VPN provides a secure, encrypted tunnel to transmit data via the internet between a remote user and the company network. VPNs are critical to protecting and securing internet connections. Failure to use VPNs can result in remote takeovers by cyber thieves, giving criminals access to your entire office network.

DON’T DO ANYTHING DRASTIC

The loss of the home office deduction for employees has some taxpayers wondering whether it makes sense to quit their day jobs and become self-employed. That’s an individual decision, but if you’re focusing simply on the home office piece, the numbers probably don’t support that kind of shift. For more to consider when it comes to business-related decisions in light of tax reform, check out this article.

What if you really are self-employed—meaning you get a 1099 and not a W-2.  Then you would report the home office deduction on federal form 8829, Expenses for Business Use of Your Home, which is filed along with your Schedule C, Profit or Loss From Your Business, on your 1040.

GET COMFORTABLE

My home office has undergone a transformation since March. With a full house, I found that I needed more soundproofing, so new carpeting and drapes were a must. I also needed better headphones. Don’t be afraid to spend where practical. The TCJA did not change the home office expense rules for self-employed persons and independent contractors. Those expenses are deductible so long as they otherwise meet the home office deduction criteria.

CREATE BOUNDARIES

I’m not just talking about virtual boundaries (like turning off your phone after hours) but actual, real, physical barriers. Being able to shut a door, put up a room divider, or even put on a pair of noise-canceling headphones can be an essential way to create your workspace and signal that you shouldn’t be disturbed.  Moreover, if you’re self-employed and angling for a home office deduction, it’s not only desirable, it’s mandatory: to claim a federal income tax deduction for a home office, you must use a specific area of your home exclusively for your trade or business.

It doesn’t have to be a separate room (like mine), but it must be a separately identifiable space (like my husband’s desk). You do not meet the requirements if you use the area in question for both business and personal purposes: it must be space that is used solely for business and not, say, an office or desk or computer that is also used by your children for their virtual lessons or to play Fortnite. 

I’ve always had a separate home office and I have a separate phone line for my office, which makes it deductible as a business expense. But if my husband uses our primary phone for business, he’s out of luck: the IRS has consistently taken the position that your primary phone land line is never tax deductible even if you don’t use it for anything else. 

Our internet connection is shared, so, like my utilities, I can’t deduct the whole thing as part of my home office deduction; it must be pro-rated. An upgrade in service to make it faster could also be pro-rated. Also, I can confirm that relying on a stable connection with two teleworkers and three students in virtual school can be challenging at best.  

DON’T GO IT ALONE

Even if you – like me – spend time working from home normally, you’re still likely used to seeing a friendly face or two. During the year, I attend conferences and bar functions, meet with clients, and chat with my paralegal. It is, quite frankly, weird to simply stay at home if you’re used to having people around. It helps to have opportunities to meet up – even if it’s virtually – with your colleagues. Take time to engage on social media (I highly recommend #TaxTwitter for those who work in tax) and say yes to virtual events (like a #virtualtaxpro happy hour). Socializing is healthy, and you can learn a lot from your fellow workers who are going through the same thing. We’re all learning as we go.

SET OFFICE HOURS

My hours are very nearly the same as before. I make it a point to get up at the same time every morning and sleep at roughly the same hours each night (though a few late-night drops of thousand-plus page coronavirus stimulus bills have admittedly kept me up reading). But normalcy is important to me. It also helps my kids know when it’s okay to ask questions for school or alert me to the fact that Bayern won the Bundesliga.

Credit given to: Kelly Phillips Erb. Published in Forbes on Aug 12, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

Small Business Tax Deduction Checklist February 3, 2021

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

We receive a ton of questions regarding what is tax deductible. If the expense is associated with your business then it is most likely deductible. As a side note, many people are unaware that upon starting a new business, your personal assets that are now used in the new business may be deducted as an expense or as depreciation expense. Those personal assets have now been converted to from personal use to business use. They may be deducted at their fair market value at the time they were placed into service. Fair market value is typically defined as “garage sale” value. These assets may include computers, faxes, phones, copiers, printers, desks, chairs, tables, etc. The article that follows drills down further with a list of some common business tax deductions.

The not-so-good news? Every business needs to file taxes. The great news? There are many expenses you can apply to your income to help alleviate your tax burden. These deductions will reduce your profits, meaning that you will pay lower overall taxes. While the IRS does not specifically list what you can claim, they do state that if a cost you’ve incurred is “ordinary and necessary” to running your business, then you can deduct it.

We’ve created a checklist below of most of the deductions you can claim for your small business. As always, check with your accountant or tax preparer if you have any questions or need clarification. Note that some of the expenses listed below will need to be “depreciated” or expensed over several years. Speak to your tax preparer for more information.

Rent, Mortgage, and Utility Tax Deductions

These tax deductions include costs associated with renting a building for business, using part of your home as an office, utility bills, and other factors. 

Rent and Mortgage Expenses

Utility Bills Expenses

You cannot claim a telephone landline unless it is specifically dedicated to your business. You can claim a percentage of your mobile phone bill depending on how much you use your mobile phone for business.

Office Expenses and Tax Deductions

You can take additional deductions on money you spend for your business office.

Office Furniture Expenses

Office Computer Expenses

Office Software Expenses

Office Equipment Expenses

Office Supplies and Sundries Expenses

Office Maintenance and Repairs Expenses

Employee Expenses and Tax Deductions

If you pay a salary to employees, then you can deduct some of those costs from your business revenue. Employee expenses and taxes can be complex, so we recommend speaking to an accountant or tax preparer to understand what you can deduct.

Freelance, Contractor, and Professional Tax Deductions

You can claim costs for professional services like tax preparation or legal fees, and for paying freelancers or other contractors to complete work for your business.

Accountancy Expenses

Legal Expenses

Freelance and Contractor Expenses

Car and Vehicle Tax Deductions

If you use a vehicle in part or exclusively for your business, you can deduct those costs. You can either track everything individually, or use the IRS mileage rates.

Advertising and Marketing Tax Deductions

You can deduct any money you spend on promoting your business.

Travel and Accommodation Tax Deductions

If you travel or stay away from home for business, those costs are deductible.

Loan Interest and Bad Debt Tax Deductions

If you have taken out loans for your business, you can deduct the interest.

Education and Training Tax Deductions

When you provide training to yourself or your staff, those costs can be deducted.

Payment and Bank Fee Tax Deductions

Your bank is likely to charge you for business services, and you’ll also pay a fee for accepting charge, credit, or debit cards.

Insurance Tax Deductions

You can deduct insurance premiums incurred by your business:

Qualified Business Income Tax Deductions

Depending on the type of business you run, and subject to certain limits, you can claim up to 20% of your profits as a tax deduction. Speak to your accountant about this, as it can be a complex area.

Miscellaneous Tax Deductions

Depending on the type of business you run, there are potentially dozens of other areas you can expense. 

We hope you’ve found this small business tax deductions checklist useful. This list is not exhaustive, but it will give you a good starting point for your expenses. As always, talk to a professional tax preparer or accountant about your unique tax circumstances to ensure you’re claiming expenses correctly.

Credit given to Lisa Xiong and published on March 6, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

IRA and 401(k) Contribution Limits for 2021 January 27, 2021

Posted by bradstreetblogger in : Business consulting, General, Retirement, Tax Planning Tips, Tax Rules, Tax Tip, Taxes , add a comment

Please find below the 2021 contribution ceilings for IRAs and 401(k) plans.  These ceilings and limitations for contributions to retirement plans are not to be taken lightly.  Penalties (excise taxes) for overfunding some retirement plans are absolutely shocking.  And, the penalties are incurred annually until the excess funds are removed. 
                                                                                                                                                                                               -Mark Bradstreet

Bad News on IRA and 401(k) Contribution Limits for 2021

Retirement savers will be disappointed with the contribution limits for next year, but at least more people will qualify for retirement tax breaks in 2021.

There’s good news and bad news from the IRS for Americans saving for retirement with IRAs, 401(k)s, and other retirement accounts in 2021.

Let’s start with the bad news: Contribution limits won’t go up next year.

And now the good news: The maximum income levels allowed to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver’s Credit all increase for 2021.

Retirement Plan Contribution Limits for 2021

For 2021, employees who are saving for retirement through 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan can contribute up to $19,500 to those plans during the year. That’s the same contribution limit in place for 2020.

Income Ranges for 2021

Increased income ranges for the traditional IRA deduction, Roth IRA contributions, and the Saver’s Credit means more Americans will qualify for these tax breaks.

If you’re contributing to a traditional IRA, the deduction allowed for your contribution is gradually phased-out if your income is above a certain amount. For 2021, the phase-out ranges are:

For people saving for retirement with a Roth IRA, the actual amount that you can contribute to the account is based on your income. To be eligible to contribute the maximum for 2021, your modified adjusted gross income must be less than $125,000 if single or $198,000 if married and filing jointly (up from $124,000 and $196,000, respectively, for 2020). Contributions begin to be phased out above those amounts, and you won’t be able to put any money into a Roth IRA in 2021 once your income reaches $140,000 if single or $208,000 if married and filing jointly ($139,000 and $206,000 for 2020). The phase-out range for a married person filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000 for 2021.T

Finally, the 2021 income limit for the Saver’s Credit for low- and moderate-income workers is $66,000 for married couples filing jointly ($65,000 in 2020), $49,500 for head-of-household filers ($48,750 in 2020), and $33,000 for singles and married people filing separately ($32,500 in 2020).

Credit given to: Rocky Mengle. Published on November 5, 2020.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.

What You Need to File your Taxes January 20, 2021

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Rules, Tax Tip, Taxes , add a comment

Our job includes minimizing your income tax liability both in the short-term and long-term. Our ability to do so is closely tied to the accuracy and completeness of the information given us. Our client tax organizer and checklist are designed to help you report your income and deductions to us.  When your tax organizer and checklist are not completed, we may not know what we don’t know. Always, a good idea to call, mail, text or email any new events or questions during the year so we may either give you immediate suggestions and/or be on the alert during your tax preparation.

The following article by the Taxslayer Blog Team is written from the 30,000 feet view. Our tax organizer and checklist are more comprehensive. But the article will give you a starting point for gathering your tax information. 
                                                                                                                                                                                                -Mark Bradstreet

Tax Prep Checklist: Everything You Need to File Your Taxes

If you’d rather do something – anything – other than filing your taxes, remember that the sooner you file, the sooner you’ll get your refund. To make the e-filing process quicker, gather your forms and documents before you begin. Below is a checklist of the basic forms and records you’ll need to make slaying your taxes a cinch. 

Personal Information 

Income and Investment Information 

Self-Employment and Business Records (where applicable) 

Medical Expense Receipts and Records 

Charitable Donations 

Other Homeownership Info 

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Mark Bradstreet, CPA

–until next week.