Tag Archives: tax liability

At the Mid-Year Mark

calculator with taxes text lying on wooden desk with place for text

{6 minutes to read} We had another wet holiday weekend on July 4th this year. Wet days like these bring back some good vibes from my homeland — the Caribbean. On the zinc top roofing — the raindrops dance to a different and sweeter rhythm.

In spite of the wet days across the Tri-states, I hope you made the best of the holiday — Independence Day. Webster’s dictionary defines this holiday as “a holiday celebrating the anniversary of a country’s independence from another country that ruled it in the past-” As for the United States of America, this holiday was born on July 4, 1776, as a day that represents the Declaration of Independence and our independent nation.

While we are on the matter of independence — for a limited time, the IRS gives us more independence — to deduct food and drinks purchased from a restaurant. Let’s be strategic in taking advantage of this expansion to reduce our tax liability. After all, we create and develop most of our business relationships over meals.

We are officially at the mid-year mark –

This gives us the opportunity to assess the past six months of actions and plan more intently for the next six months.

The intent of this article is to share a few of the changes that will impact the 2021 tax year. One of these changes is related to families (with dependent – children or adults) and another is the larger deduction for certain meal expenses. However, before we begin, let’s note two of the areas for which I get the most inquiries from individuals. These happened in the 2020 tax year but will impact 2021 tax-year filers as well.

•2020 Retirement distribution – if you withdrew money from your retirement funds in 2020 and selected to allocate the withdrawal evenly over 3 years – you are required to add/include the portion that belongs to 2021 as part of your income.

•Unused flexible spending for health and dependent care – there can be carry-over from 2020 to 2021 – so please manage your 2021 contributions.

So, what’s new for 2021?

Business meals are now 100% deductible (limited time). Under the lock-down of the pandemic, most among us were not able to break bread with our work colleagues and business acquaintances, resulting in huge losses for the restaurant industry. In an effort to assist that industry, the lawmakers temporarily increased the deductible amount for business meals. This is a win-win for restaurant owners and their patrons.

Under the Consolidated Appropriations Act, 2021, a temporary exception was enacted to the previous 50% limitation. Per the IRS, “beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.

Below are new credits only available in 2021

1. Child Tax Credit – Earlier this year, Congress passed the American Rescue Plan Act (ARPA) which increases the credit for dependent children and allows partial payment of the credit this year — before you file your 2021 tax returns.

Here is how the credit works:

a. Income and Age Limitations:

On the last day of the year, ARPA allows individual tax returns to qualify to take a child credit of $3,000 for children under the age of 18. To qualify, the child must have a social security number and be claimed as a dependent on the 2021 return. The full amount is refundable, if income is $150,000 or less for joint filers (i.e., MFJ), and for HOH and +Single, the amount is $112,500 and $75,000 respectively. If or when the income exceeds $400,000 for MFJ, If income exceeds the above, the amount of the credit decreases until it is fully phased out.

Read here to see if you qualify for this credit.

2. Child & Dependent Care Credit – Under ARPA, the child & dependent care increases/expands for 2021 only. These are expenses we pay to take care of a child or a qualified dependent while we work. Individual taxpayers qualify for a refundable credit at a rate of up to 50% for the first $8,000 of expenses for one (1) dependent and up to $16,000 in expenses for more than one dependent. There is no advance for this credit. Prior to 2021, the maximum credit was 20% of $3,000 for one dependent/child and up to $6,000 for two or more.

3. So, how has the credit expanded or changed in 2021?

a. The maximum credit amount refundable is $4,000 for a child or dependent.

b. Income limitations – The credit amount starts to reduce when income is $125,000, and phases out fully at $438,000.

c. Residency limitations – you must live in the United States for at least ½ of the year.

During a time of crisis (e.g. the current pandemic), more developed countries like the USA extend financial help to the people. In 2020, such help showed up in the form of stimulus checks, unemployment income, etc. At the same time, scammers, referred to by the IRS as “the Dirty Dozen,” began to crop up. In a notice (alert) dated June 28, 2021, the IRS posted a notice with the subject line – Americans urged to watch out for tax scams during the pandemic. For your protection, please read the details from the IRS website.

In closing, in spite of the necessary boundaries that are still required due to the current pandemic, my hope is that we freely celebrate our independence. Scripture reminds us that we have free will. Let us resolve to use our free will to express light and love – as a way of being.

One last thought before you go, if you have not filed your 2019 or 2020 tax returns you may not be able to receive some of these credits. As always, you can freely contact us if you need assistance to file your returns.

With gratitude,

Nadine.

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com

The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.

Is a Roth Conversion the Right Move for You?

Cropped view of senior woman writing in notebook with roth ira and traditional ira words

Let’s Welcome the Season of Hope!

Many believe that Thanksgiving Day opens the doors to welcome the “Season of Hope.” There is often a sense of vibrancy in the atmosphere between this day and the end of the year.

Maybe this is partially due to the Christmas lights and the flames from the menorah at Hanukkah. Regardless of your faith or lack thereof, I think you may agree with me that there is some joy from the brightness at this time of year.

Moving along — There’s much we can do before the year ends; I hope to shed some light on what you may already know.

As a result of the 2020 pandemic — a vast number of taxpayers in 2020 are faced with lower taxable income and low tax liability.

This is one of two (2) pandemic-specific articles; in this article, I will discuss tax planning surrounding Roth retirement conversion. In the next article, I will discuss the implications of under-paying taxes.

RETIREMENT SAVINGS: ROTH CONVERSION

A Roth IRA (“Roth”) is a type of retirement savings that allows individuals to withdraw their savings tax-free; it is widely used and often recommended by financial advisors. Roth allows our retirement savings to grow tax-free since contributions are made with after-tax dollars, unlike the traditional IRA retirement savings option that defers the taxes — ie, the tax is due in the future. In summary, with Roth, we pay the taxes now and with Traditional, we pay the taxes later. Before I continue, each option has its benefits from a tax-planning viewpoint; and can be uniquely beneficial to the saver.

Roth conversion in its simplest form consists of moving money from the tax-deferred savings bucket to the taxable savings bucket (in so doing we tell the government to tax us now using the current tax rate and allow our savings to grow tax-free).

Roth conversion can be a great tax-planning strategy in a period of low income and low taxes. For most taxpayers, 2020 is a lower-income year.

So, who are the individuals who are most likely to benefit?

The individuals who are most likely to benefit are taxpayers in a low tax bracket in 2020, and those who may foresee earning much more income in future years.

I discussed conversion from traditional IRA to Roth IRA; that is switching your past contribution from one bucket to the next. New contributions to a Roth may also benefit in a year with low income and a low tax rate.

For self-employed and/or pass-through income earners, consider making a Roth IRA contribution rather than a traditional IRA for 2020 — this may be possible if you generally make your contributions later in the year or before you file your tax returns (note, the account must be set up or open in 2020 in order to delay contribution) — this is common with SEP retirement savers. Please check with your financial advisor to discuss your Roth savings options.

401K Retirement savers – Please check with your employer’s selected administrator to find out if your plan offers you the ability to convert or contribute to a Roth IRA.

Tax implications of Roth Conversions — work with your financial advisor:

•Once you convert, you can’t undo – Roth conversion is permanent.

•Once you convert, the tax bill is due.

•You must leave the traditional IRA account by December 30, 2020, to qualify for the tax conversion.

On a related topic — RMD — taxpayers who are generally required to take a distribution each year (i.e. RMD) can also benefit if one is in a lower tax bracket than in previous years. Consider a withdrawal from your RMD in 2020. Yes, you read that correctly — It is true that, under the CARES Act, no RMD is required in 2020. However, this does not mean you are not allowed to withdraw. If your 2020 income is very low and you are likely to fall in a much lower tax bracket (after the withdrawal), why not consider a withdrawal of the 2020 RMD and pay a lower tax on it, rather than paying a higher tax debt in the future?

So how do I get started?

First, you would need to have a close estimate of your total income for 2020. If your income is from multiple sources you may want to consider using the service of a financial advisor and tax professional to prepare a tax liability projection.

Next, in order to assess your tax rate — you can use the 2020 tax brackets table enclosed to see which tax bracket your income may apply to you — there are still four (4) tax brackets from 10% to 25% with relatively low tax rates. For example, if your taxable income is approx. $40K and $80K (single and MFJ, respectively) your tax rate is as low as 12%.

Please see all tax brackets and status in the enclosed link from Kiplinger, here.

If you want to consider at least one of these options, act on it now. The great King Solomon reminds us that timing is important — In the Good Book, he penned (Proverbs 6:4), “Don’t put it off; do it now! Don’t rest until you do.”

In closing, I hope I was able to shed some light that will allow you to choose the savings option that is better for you. As always, the ultimate decision is yours.

Thank you for reading.

With gratitude,

Nadine.

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com

Year-End Tax Planning for Employees and Families

Year-End Tax Planning for Employees and Families by Nadine Riley {8:48 minutes to read} There’s something different about entering the month of November, in my opinion. I believe it is due to how close November is to the end of the year. It’s that penultimate month. November allows us to pause and rethink where we have been and where we would like to be before the year ends:

Some of us will pause to focus on the things we should have done and dwell there (do nothing).
Others will look back and choose to act and make a change that could be beneficial.

Continue reading →