September 10, 2021
Employees Who Work for Tips – If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.
September 15, 2021
Individuals – Make a payment of your 2021 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2021.
Partnerships – File a 2020 calendar year income tax return (Form 1065). This due date applies only if you were given an additional 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.
S corporations – File a 2020 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.
Corporations – Deposit the third installment of estimated income tax for 2021. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.
Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.
Questions? Call one of Loeffler Financial Group Tax Advisors at 717-393-7366.
Higher Taxes May Be In Your Future
Here’s what to think about now.
There’s little question the tides are moving towards a higher tax environment with multiple trillion dollar spending bills, a new administration, and deficits as far as the eye can see. Instead of feeling helpless, here is a quick look at what might be on the horizon and some thoughts on how to be prepared.
- Self-employment tax risk. Social Security and Medicare fund collections took a hit during the pandemic. This is because of high unemployment and new federal benefits allowing employers to receive a credit on these taxes to help continue paying employees to take leave due to COVID-19. Over the next few years, there will be tremendous pressure to add funds back into these programs. This might be done by increasing the taxability of benefits or dramatically increasing the income subject to Social Security taxes.
- Potential action: Continue to work on a retirement plan that is not as dependent on Social Security benefits. If you are a small business owner, and your business income is subject to self-employment tax (SE tax) now is a good time to consider reorganizing your business to shield some of your business income by moving to an S corporation.
- Capital gains tax rate increases. In 2021, the highest long-term capital gains tax rate is 23.8% (20% capital gains tax rate plus a 3.8% surtax as part of the Affordable Care Act) but if planned correctly, you could pay either nothing or 15% federal tax on long-term capital gains. Congress could see the sales of long-term securities and other assets as a valuable source of tax revenue by eliminating this preferential tax rate and instead using ordinary income tax rates (currently as high as 37%).
- Potential action: Actively manage investment profits, netting your gains against your losses. If you have any assets that have appreciated over time and intend to sell in the near future, consider trading in 2021 to avoid a potential increase in the capital gains tax rates.
- Tax planning problems for your estate. There are several considerations to take into account when looking at your estate’s tax plan. First, under current law, say for example your parents bought one share of stock in 1980 for $10 and you inherit the share of stock when it’s worth $100 and immediately sell it for the same $100. You would not owe any federal taxes on the $90 difference. In the future, this feature, called stepped-up cost basis, may become limited or removed to increase tax revenue. Second, the estate tax rate currently set at 40% is under pressure to be increased. This is entirely possible when you consider that this tax rate was 55% in 2001.
- Potential action: Consider gifting money or securities to family, friends or a foundation during your lifetime. Individual gifts in 2021 of $15,000 or less ($30,000 for married couples) don’t count against the lifetime gift-giving limit.
- Tax rate volatility. With huge federal deficits that are now beyond the scope of imagination, what will happen next? Just the latest legislation adds a whopping $1.9 trillion to what must be paid back. While interest rates are being held at historic lows to help lower the cost of this added debt, it cannot continue unabated. And the meteoric rise in home prices is just one of the costs of this low interest approach. The current proposals in Washington suggest an increase in tax rates is not too far in the distant future.
- Potential action: Do a forecast of your future income and tax rates. If you think tax rates and your taxable income will be increasing in the next few years, you will want to move as much money as possible into tax-advantaged accounts like Roth IRAs. You should also understand any state tax ramifications to help with your tax planning.
While Congress is debating what to do with your tax rates, now is the time to create a strategy so that if or when tax rates do increase, you will be prepared.
Year-round tax planning is for everyone. An important part of that is recordkeeping. Gathering tax documents throughout the year and having an organized recordkeeping system can make it easier when it comes to filing a tax return or understanding a letter from the IRS.
Good records help:
- Identify sources of income. Taxpayers may receive money or property from a variety of sources. The records can identify the sources of income and help separate business from nonbusiness income and taxable from nontaxable income.
- Keep track of expenses. Taxpayers can use records to identify expenses for which they can claim a deduction. This will help determine whether to itemize deductions at filing. It may also help them discover potentially overlooked deductions or credits.
- Prepare tax returns. Good records help taxpayers file their tax return quickly and accurately. Throughout the year, they should add tax records to their files as they receive them to make preparing a tax return easier.
- Support items reported on tax returns. Well-organized records make it easier to prepare a tax return and help provide answers if the return is selected for examination or if the taxpayer receives an IRS notice.
In general, the IRS, and the experts at Loeffler Financial Group suggest that taxpayers keep records for three years from the date they filed the tax return. Taxpayers should develop a system that keeps all their important information together. They can use a software program for electronic recordkeeping. They could also store paper documents in labeled folders.
Records to keep include:
- Tax-related records. This includes wage and earning statements from all employers or payers, interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents and records of virtual currency transactions. Taxpayers should also keep receipts, canceled checks, and other documents – electronic or paper – that support income, a deduction, or a credit reported on their tax return.
- IRS letters, notices and prior year tax returns. Taxpayers should keep copies of prior year tax returns and notices or letters they receive from the IRS. These include adjustment notices when an action is taken on the taxpayer’s account, Economic Impact Payment notices, and letters about advance payments of the 2021 child tax credit. Taxpayers who receive 2021 advance child tax credit payments will receive a letter early next year that provides the amount of payments they received in 2021. Taxpayers should refer to this letter when filing their 2021 tax return in 2022.
- Property records. Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure their basis for computing gain or loss.
- Business income and expenses. For business taxpayers, there’s no particular method of bookkeeping they must use. However, taxpayers should find a method that clearly and accurately reflects their gross income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
- Health insurance. Taxpayers should keep records of their own and their family members’ health care insurance coverage. If they’re claiming the premium tax credit, they’ll need information about any advance credit payments received through the Health Insurance Marketplace and the premiums they paid.
Contact Loeffler Financial Group for additional questions on recordkeeping or what additional paperwork you should keep on file. 717-393-7366.
Taxpayers receiving Social Security benefits may have to pay federal income tax on a portion of those benefits. Social Security benefits include monthly retirement, survivor, and disability benefits. They don’t include supplemental security income payments, which aren’t taxable.
The portion of benefits that are taxable depends on the taxpayer’s income and filing status.
To find out if their benefits are taxable, taxpayers should take half of the Social Security money they collected during the year and add it to their other income. Other income includes pensions, wages, interest, dividends, and capital gains.
- If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable.
- If they are married filing jointly, they should take half of their Social Security, plus half of their spouse’s Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable.
Fifty percent of a taxpayer’s benefits may be taxable if they are:
- Filing single, single, head of household or qualifying widow or widower with $25,000 to $34,000 income.
- Married filing separately and lived apart from their spouse for all of 2020 with $25,000 to $34,000 income.
- Married filing jointly with $32,000 to $44,000 income.
Up to 85% of a taxpayer’s benefits may be taxable if they are:
- Filing single, head of household or qualifying widow or widower with more than $34,000 income.
- Married filing jointly with more than $44,000 income.
- Married filing separately and lived apart from their spouse for all of 2020 with more than $34,000 income.
- Married filing separately and lived with their spouse at any time during 2020.
Still have questions, our tax accountants at Loeffler Financial Group are here to help!
The Interactive Tax Assistant on IRS.gov can help taxpayers answer the question Are My Social Security or Railroad Retirement Tier I Benefits Taxable?
Call Loeffler Financial Group today to learn more about Social Security and your tax benefits, 717-393-7366!
Tax filing time is an ideal time to review your financial affairs. You have to gather information to prepare your tax return at this time. Why not take one more step and do something positive for your financial well-being?
The following suggestions will get you started on your financial review:
Hold a discussion with your family. Spouses and children need to share and prioritize their financial aspirations.
- Write down your financial goals. How much money will you need to meet each goal? When will you need the money, and how will you get it?
- Construct a net worth statement (a list of your assets and debts), and compare it to last year’s statement. Are you gaining or losing ground?
- With your goals (and the effects of inflation) in mind, review the performance of your investments.
Take steps to protect what you already have. Goals may become instantly unobtainable if you lose your present assets or your income potential.
- Do you have adequate disability insurance coverage to replace take-home pay if you become incapacitated?
- Do you have enough life insurance if you or your spouse should die?
- Do you have replacement value property insurance on your home?
- Do you have adequate insurance for calamities such as automobile accidents or lawsuits? Note: Make sure that you need all of the insurance that you have. Do not duplicate employer-provided coverage. Review your coverage annually; do not just automatically renew policies.
Review your will and your estate plan. Did your situation change during the year (marriage, divorce, births, deaths, move to another state, for example)? If so, make appropriate changes to your will and estate plan.
Review your credit use. Keep your credit card bills current. If you’re finding that hard to do, it’s probably time to cut up some of those credit cards and get your debt under control.
Organize your records. If you had trouble assembling data for your financial review, you need a better system. Set one up.
Tax credits are one of the most powerful ways to lower your income taxes. A tax credit reduces your tax bill dollar for dollar. A tax deduction, on the other hand, only reduces your taxable income, so your benefit is determined by your tax bracket.
For example, a tax deduction of $1,000 will lower your tax bill by $320 if you are in the 32% tax bracket. A $1,000 tax credit will lower your tax bill by $1,000.
Here are some of the most common tax credits; most are subject to income limits.
- Child credit. Taxpayers who have dependent children under age 17 may be eligible for a child tax credit of $2,000 per child.
- Dependent care credit. Expenses paid for the care of dependent children under 13 and certain other dependents may qualify for a tax credit.
- Education credits. Qualified college and vocational school expenses for eligible students may qualify for a credit. Under the American Opportunity Tax Credit, up to $2,500 per student can be claimed for tuition and fees paid during four years of post-secondary education. Under the Lifetime Learning Credit, up to $2,000 per family is available for post-secondary education expenses and for education expenses to acquire or improve job skills.
- Earned income credit. This credit is intended for low-income taxpayers. The size of the credit depends on the amount of your earned income (wages and self-employment income), investment income, and your filing status. Qualifying children can increase the credit.
- Business credits. There are a number of credits available to businesses. They include the research credit the work opportunity credit, the disabled access credit, and the low-income housing credit.
Don’t overlook valuable credits that could reduce your taxes. For details on the credits for which you might qualify, call Loeffler Financial Group today at 717.393.7366 for a review of your situation.
The Roth IRA has been widely discussed and analyzed. One of the most challenging questions this retirement vehicle brings up is whether or not you should convert your existing IRA to a Roth IRA.
How the Roth IRA works:
You’re allowed to contribute up to $5,500 to a Roth IRA in 2018 ($6,000 in 2019) plus an additional $1,000 if you are 50 or older, the same as any other IRA, but your contributions aren’t tax-deductible. However, there’s an important, offsetting benefit: Principal and earnings in a Roth IRA may never again be subject to federal income tax, and a Roth IRA isn’t subject to mandatory distribution requirements.
Example: Barbara contributes $5,500 to a Roth IRA. Although Barbara receives no tax deduction, this IRA can grow to any amount and it could never again be subject to tax. And for the rest of Barbara’s life, withdrawals may be as large or small as desired, provided Barbara is at least 59 1/2 years old and she’s had the IRA for at least five years.
What about a conversion?
The law also allows you to convert an existing IRA to a Roth IRA. If you convert to a Roth IRA, you’ll have to pay regular income tax on your existing IRA. But once you pay the tax, your rollover Roth IRA will offer the benefits of a Roth IRA.
Fortunately, the conversion lends itself to a checklist approach. The checklist below is designed to give you a start in dealing with the conversion question, but it’s not intended to be the last word.
| Do you currently have an IRA? | Yes______ No______ |
| Use this checklist to help you decide if you should convert to a Roth: | |
| Do you expect to be in a higher tax bracket when you retire? | Yes______ No______ If you expect to be in the same or lower tax bracket when you retire, it may not make sense to pay the conversion tax today. |
| Will you be able to pay the resulting income tax with cash from outside your IRA? | Yes______ No______ If you must tap into your IRA to pay the tax, conversion to a Roth IRA is unlikely to pencil out. But remember: you can reduce the potential tax bill by making a partial conversion. |
| Will you be able to leave the money in the rollover Roth IRA for at least five years? | Yes______ No______ You could incur tax and a penalty if you tap your Roth IRA in less than five years. |
If you checked “Yes” to all questions, you might be a good candidate for a rollover Roth IRA. However, even if the checklist indicates that you should convert to a Roth IRA, your personal situation may still point in the opposite direction.
Before you make a final decision – yes or no – be sure to contact an expert for investment and tax advise. Should you wish additional information please call Loeffler Financial Group at 717-393-7366.
Out of sight, out of mind. When it comes to old tax returns, that’s an approach many people like to follow. But before you completely forget about your old tax forms, you may wish to consider filing an amended return.
Why file an amended return?
If you made a mistake on a prior-year tax return, an amended return is the way to set things right. Arithmetic errors, missing information, and oversights are all fairly common, and generally there’s no reason to fear filing an amended return – whether you owe money to the IRS or vice versa.
Certain special situations can also trigger amended returns. For example, if you suffer a casualty loss in a presidentially declared disaster, you may deduct the loss on your tax return for the year of the disaster, or you may amend the prior-year return and deduct the loss in that year. The best strategy depends on your tax bracket for both years, plus other factors such as the amount of your loss and whether it occurred early or late in the year.
An amended return can help ease the sting of certain business and worthless security losses. You also may benefit from an amended return if there’s a retroactive change in the tax law as a result of new legislation or a favorable court ruling.
Use Form 1040X
Form 1040X (“Amended U.S. Individual Income Tax Return”) is the IRS form designed for amended filings.
Generally, you have three years from the time your return was filed or two years from the time the tax was paid, whichever is later, to file an amended return.
Be sure the changes you want to make are valid. The tax laws have changed frequently over the past several years. What was deductible one year might not be deductible the very next year, and the list of items includable in taxable income has also changed from year to year.
Also, although filing an amended return is not necessarily a red flag for an audit, some changes are looked at more closely than others. For example, claiming additional travel and entertainment expenses on an amended return may be risky.
If you have omitted income from your return, you should file a 1040X as soon as you become aware of the omission. You may owe additional taxes, interest, and perhaps penalties. The proper presentation of previously omitted items is crucial and is best left to a professional.
Regardless of the reason for the amended return, be sure to keep good records to substantiate the reasons for the change.
If, as a result of the changes, the IRS owes you, you will receive a refund with interest. If you owe the IRS, payment should be made with the 1040X. The IRS will bill you for any additional interest.
Looking to have your return amended? Contact Loeffler Financial today at 717-393-7366.
Your home. Your office. Are they one and the same? If so, you may be able to take a home-office deduction that can save income and self-employment taxes.
The deduction gives you the opportunity to claim expenses related to the business use of your home, such as utilities, repairs, and insurance. Meet the requirements, and you’re eligible whether you rent or own your home.
Taxpayers who qualify may use a simplified deduction calculated at $5 a square foot for up to 300 square feet of an area in a home that is used regularly and exclusively for business. The deduction is capped at $1,500 a year.
Here are two questions that can help you decide if you qualify for a home-office deduction.
Do you pass the regular and exclusive business use test? The rules say you have to use your home office on a continuing basis, and that it has to be dedicated to your business.
While you’re not required to have a separate room, personal or family use of your work area means no deduction.
What business activities do you conduct in your office? Meeting customers or clients in your home office qualifies as business use.
Taking care of management and administrative tasks such as writing reports and billing clients also qualifies, as long as you don’t have another office that you use primarily for the same activities.
If your office is separate from your home and you meet the regular and exclusive business use test, you can deduct related business expenses – even if you don’t meet clients or perform management activities there.
Special rules apply to work-at-home employees and daycare facilities. In addition, exceptions apply when you use your home for storing inventory or product samples. Please call Loeffler Financial Group at 717-393-7366 if you would like more information.