Roth Conversion in 2021?

Roth Conversion in 2021?In 2020, a year when all income brackets benefited from lower tax rates, the stock market took a nosedive at the beginning of the pandemic. For investors sharp enough to see the opportunity, this was an ideal time to convert a traditional IRA into a Roth IRA.

When you conduct a Roth conversion, the assets are taxed at ordinary income tax rates in the year of the conversion. So, the best time to do this is when your current income tax rate is low and when your IRA account balance loses money due to declining market performance. Once you convert the account to a Roth, those assets continue to grow tax free and are no longer subject to taxes when withdrawn later.

If you believe those stocks will rebound, you can direct the traditional and new Roth IRA custodians to move the shares as they are, rather than selling them for cash. Or, if you are converting the entire account and choose to remain with the same brokerage, you can simply instruct the custodian to change the account type. This way you can keep the same investments, pay applicable taxes on the account balance at the time of the conversion, and then never have to pay taxes on future gains.

While the stock market did recover in 2020, many market analysts believe equities are currently overpriced and could experience another correction this year. On top of that, with Democrats now in control of the White House and both houses of Congress, many expect legislation that will increase income taxes, at least among wealthier households.

Therefore, in order to avoid higher taxes on a long-accumulated traditional IRA, 2021 might be a good year to conduct a Roth conversion. The key is to try to time that conversion with a market loss. By conducting a conversion before income taxes increase, you’ll pay a lower rate, and all future earnings can grow tax-free and be distributed tax-free. Bear in mind, too, that a Roth does not mandate required minimum distributions at any age. The full account balance of a Roth has the opportunity to continue growing for the rest of the owner’s life.

A Roth conversion is not the best strategy for everyone. Consider the following scenarios that are not ideal for conversion.

  • An investor under age 59½ will be assessed a penalty on newly converted Roth funds withdrawn in less than five years, so this might not work for an early retiree who needs immediate income.
  • If you expect to be in a lower tax bracket during retirement, you should wait until then to pay taxes on distributions of your traditional IRA. Also, if you think you might relocate to a state with lower or no state income tax during retirement, not converting eliminates state taxes on that money entirely.
  • Watch out for a bump in income taxes on a Roth conversion. You might not want to convert if those assets put you in a higher tax bracket during the year of conversion.
  • Also note that if you convert after age 65, higher income reported that year could increase premiums for Medicare Part B benefits, as well as taxes on Social Security benefits.
  • If the non-spousal IRA beneficiary is likely to remain in a lower tax bracket than the owner, he might as well leave the assets in the traditional IRA. Otherwise, the owner will waste more of his estate’s assets to pay taxes on the conversion.
  • If you don’t have available cash outside the traditional IRA to pay the taxes on the conversion, the money will come out of the account and substantially drop the value. Consider whether or not your investment timeline is long enough to make up for that loss.
  • If your goal is to leave that IRA money to a charity, don’t bother to convert. Qualified charities are exempt from taxes on donations.

If you’re planning to leave a Roth IRA to your heirs, they also enjoy tax-free distributions as long as that Roth was opened and funded for at least five years before you pass away. This is another reason why it might be better to convert to a Roth IRA sooner rather than later.

3 Best Ways to Save for College

Save for CollegeWhat if you could save enough for your child to go to college debt-free? It might sound impossible, but with dedication, hard work, and careful planning, you can do just that. According to Dave Ramsey, American personal finance advisor, here are the top three tax-favored plans to get started.

The Education Savings Account (ESA)

Otherwise known as the Education IRA, this plan allows you to save $2,000 (after tax) per year, per child. Let’s do that math. If you begin saving when your child is born and put away $2,000 a year until they’re 18, you’ll be investing $36,000. Not too shabby. And the good news is that qualified distributions are tax-free, which means you won’t have to pay anything when you withdraw the funds to pay for college. The other upside is, depending on the rate of growth, you’ll earn more than you would in a regular savings account. However, there are some caveats. You can’t contribute if you make more than $110,000 (single) or $220,000 (married filing jointly); the contribution cap is $2,000 a year; and the money must be used by the time your child is 30.

The 529 Plan

If you want to save more for your child’s education or you don’t qualify for the income limits of the ESA, then this might be a better fit because you can contribute up to $300,000, depending on what state you live in. Ramsey recommends you look for a 529 Plan that allows you to choose your investment funds. Also, he says most of the time there aren’t any income restrictions based on your child’s age; however, there are some limits, so choose wisely. This plan also grows tax-free. One thing to note: restrictions may apply if you want to transfer your funds to another child.

The UTMA or UGMA (Uniform Transfer/Gift to Minors Act)

One of the best things about these plans is they’re not just designed to save for education. For example, if your kiddo wants to take a gap year, this can cover living expenses. The account is set up in your child’s name but it’s controlled by a custodian (usually a parent or grandparent). The custodian manages the account until the child is 21 (18 for the UGMA). One of the pluses of this plan is that since the account is owned by the child, the earnings are usually taxed at the child’s rate, which is generally lower than that of the parents. For some people, the savings can be significant. However, there are two important things to know: (1) once your child is of legal age, she can use the funds however she likes (a trip to Europe, a sports car…or college?) and, (2) the beneficiary can’t be changed after selected.

While setting up a college fund is a smart goal, it’s not the only one. Prior to starting down these paths, Ramsey recommends that you consider paying off your mortgage, credit cards, and your own student loans. He also suggests setting up an emergency fund of three to six months and allocating 15 percent of your salary to retirement through a 401(k) and/or a Roth IRA. For more help, he recommends both parents and children read “Debt-Free Degree.” This book walks you through how to go to college without student loans.

Saving for an education might feel completely overwhelming, but if you start early enough, do your homework and create a solid plan, it’s absolutely possible.

Sources

https://www.daveramsey.com/blog/saving-for-college-is-easier-than-you-think

https://www.troweprice.com/personal-investing/accounts/general-investing/ugma-utma.html#:~:text=Because%20money%20placed%20in%20an,this%20savings%20can%20be%20significant.&text=Up%20to%20%241%2C050%20in%20earnings%20tax%2Dfree.&text=Any%20earnings%20over%20%242%2C100%20are%20taxed%20at%20the%20parent’s%20rate

How Cloud Accounting Helps Small Businesses Gain Competitive Edge

Cloud AccountingIn a continuously changing business environment, small businesses have a challenge to keep up. It’s especially expensive to keep pace with ever changing technology. Luckily, with affordable cloud accounting solutions, small businesses can maintain a competitive edge.

What is Cloud Accounting

Cloud accounting involves moving your business books online. Unlike desktop accounting systems, cloud accounting permits you to access accounting software from a web browser without the need to install it on your personal computer.

Companies that offer cloud computing provide their services on remote servers and applications. For a fee, you gain remote access to the services that fit your business needs.

Cloud Accounting Benefits for a Small Business

Here are benefits offered by cloud accounting that enable small businesses to gain a competitive edge:

  • No need to invest in expensive software and hardware
    With cloud accounting, you need only subscribe to a company offering cloud accounting services. This removes the need to purchase the actual software and necessary hardware. It also means there are no extra costs for maintenance, allowing a business to focus on core business activities. 
  • Save on upgrade costs
    Software keeps changing and needs frequent patches and upgrades. This is expensive for a small business running a traditional accounting software, and most end up using outdated software.

    Subscribing to cloud accounting means the service provider takes care of the upgrades, and you have access to new features instantly.

  • No need to hire an in-house accountant or bookkeeper
    If your business is small and running on a tight budget, subscribing to a cloud accounting solution will save you the cost of hiring a person for manual accounting and other bookkeeping processes. By connecting the system with your bank account, the transactions will be updated automatically, thereby saving you time and ensuring accuracy.
  • Easy to scale
    With cloud-based services, you can easily scale your business as it grows by adding to the services you subscribe to. At the same time, if your business is experiencing a slowdown and you need to reduce expenses, you can scale down by reducing the number of subscribed services.
  • Data accessibility
    You can easily access your financial status at any time, unlike when you run a traditional desktop accounting system. This is possible from any device that has an internet connection.
  • Access to various functions, features and support
    Cloud accounting enables a small business to have access to different accounting features and functions, such as project estimates, finance, billing, invoicing, tax summary, and stocks, among others. This is because of the ability to select services depending on the needs of your business and your budget.
  • Enables remote working and collaboration
    Cloud accounting allows for remote working, which is especially important with the ongoing COVID-19 pandemic and recommendations to work from home. This enhances collaboration with your team and financial advisor because you can all work on the same system at the same time, regardless of your location. The accountant also needs not go through the trouble of importing client data.
  • Financial reports
    Cloud accounting allows for access to regular reports that include insights about the financial state of your business. This enables a business owner to have an up-to-date picture of how the business is performing anytime, whether at home, at work or on the go.
  • Data security
    Data on the cloud is more secure than data stored on a hard drive, which can be accessed if it is stolen. In the case of a natural disaster, your business productivity is not greatly affected because you can still access your data. This is because it’s the responsibility of the cloud provider to ensure data security, make regular backups, scan servers for vulnerabilities and use the latest technology.

Final Words

Cloud accounting enables small businesses to enjoy business efficiency and increased productivity while reducing costs. Businesses of all sizes, even small ones, have to keep up with changing technology. Any business that wants to maintain a competitive edge has the option to do away with traditional accounting desktop software.

Economic Stimulus, Making the Post Office Solvent Again, Gun Control, Voting Rights and Restricting China’s Influence

Gun Control, Voting RightsAmerican Rescue Plan Act of 2021 (HR 1319) – This $1.9 trillion relief bill provides stimulus money to address the continued impact of COVID-19. Provisions include issuing $1,400 checks to taxpayers, increasing the Child Tax Credit up to $3,000 and the dependent care credit to $4,000, and providing funds for schools, small businesses, renters and landlords, increased subsidies for Americans who buy individual health insurance, and $160 billion allocated toward vaccine development and distribution. The bill was introduced by Rep. John Yarmuth (D-KY) on Jan. 15, first passed in the House on Feb. 27 and in the Senate on March 6, and was signed into law by President Biden on March 11.

SAVE LIVES Act (HR 1276) – This bill was introduced by Rep. Mark Takano (D-CA) on Feb. 24. The legislation would authorize the Department of Veterans Affairs (VA) to furnish a COVID-19 vaccine to veterans ineligible for the VA health care system, who live abroad, and family caregivers of veterans, among others. The bill passed in the House on March 9 and in the Senate on March 17. It has been returned to the House for approval of changes.

USPS Fairness Act (HR 695) – This act would repeal the requirement that the U.S. Postal Service annually prepay future retiree benefits, decades in advance. The current mandate, which was signed into law in 2006, has since threatened the viability of the USPS. While the Post Office generates enough revenue to cover its operating costs, this prepayment of pension and retiree healthcare benefits has pushed its bottom line into the red. The bill was introduced by Rep. Peter DeFazio (D-OR) on Feb. 2 and enjoys bipartisan support.

Violence Against Women Reauthorization Act of 2021 (HR 1620) – This is a reauthorization of the Violence Against Women Act of 1994, a popular law that protects and provides resources for victims of domestic abuse and sexual violence. The bill expired at the end of 2018 after Congress failed to act due to partisan disputes over guns and transgender issues. It was re-introduced by Rep. Sheila Jackson Lee (D-TX) on March 8 and passed in the House on March 17. It is currently under consideration in the Senate.

Bipartisan Background Checks Act of 2021 (HR 8) – This bill establishes new background check requirements for every firearm sale. It prohibits a firearm transfer between private parties unless a licensed gun dealer, manufacturer or importer first takes possession of the firearm to conduct a background check. The bill was introduced by Rep. Mike Thompson (D-CA) on March 1 and passed in the House on March 11. This bill is currently under review in the Senate.

For the People Act of 2021 (HR 1) – This bill was introduced by Rep. John Sarbanes (D-MD) on Jan. 4 and passed in the House on March 3. It is currently under consideration in the Senate. The purpose of this legislation is to protect and expand voter rights. Specifically, the bill:

  • Expands voter registration (automatic and same-day registration)
  • Increases voting access (vote-by-mail and early voting)
  • Prohibits removing voters from voter rolls
  • Requires states to establish an independent commission to deploy congressional redistricting
  • Establishes provisions related to election security, including sharing intelligence information with state election officials and supporting states in securing their election systems
  • Prohibits campaign spending by foreign nationals, requires additional disclosure of campaign-related fundraising and spending, mandates additional disclaimers in political advertising, and establishes an alternative campaign funding system for certain federal offices
  • Establishes additional conflict-of-interest and ethics provisions for personnel who work in the three branches of government
  • Requires the president, the vice president, and certain candidates for those offices to disclose 10 years of tax returns

CONFUCIUS Act (S 590) – This bill, also referred to as the Concerns Over Nations Funding University Campus Institutes in the United States Act, is designed to mitigate China’s influence on U.S. post-secondary educational institutions that are directly or indirectly funded by the Chinese government. Specifically, educational institutions contracted with Confucius Institutes that also receive federal funding must include provisions in those agreements that prohibit the application of foreign law on those campuses and grant full control over teaching plans, activities, research grants and employment decisions to the U.S. university. The act was introduced by Sen. John Kennedy (R-LA) on March 4 and passed in the Senate on the same day. It is currently under consideration in the House.

Uncle Sam May Pick Up the Cost of Your COBRA Medical Coverage

Article Highlights:

 

  • COBRA coverage
  • Federal COBRA Subsidy
  • Period for Subsidy
  • Alternate Coverage

The recently passed American Rescue Plan Act (ARPA) includes a provision for the federal government to pick up the cost of COBRA health coverage for employees’ involuntary termination of their employment or reduction of hours subject to certain qualifications.

COBRA is the acronym for Consolidated Omnibus Budget Reconciliation Act, which was passed years ago, and gives workers and their families who lose their health benefits the right to choose to continue obtaining group health benefits provided by their group health plan for limited time periods, under certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events. Qualified individuals may be required to pay the entire premium, for coverage, up to 102% of the cost to the plan.

COBRA generally requires that group health plans sponsored by employers with 20 or more employees in the prior year offer employees and their families a temporary extension of health coverage (called continuation coverage) in certain instances in which coverage under the plan would otherwise end.

The ARPA provides premium assistance, a 100% federal subsidy (i.e., makes the health insurance coverage no cost to the former employee), for COBRA premiums for eligible individuals who have a COBRA option through their employment beginning April 1 and continuing through September 30, 2021. On top of that, this subsidy is also tax-free.

An individual qualified for this subsidy is one who is eligible for COBRA coverage as an employee, former employee, covered spouse, or covered dependent, and elects to have COBRA coverage due to involuntary termination of their employment or reduction of hours and is not eligible for other group coverage or Medicare.

Individuals who do not have a COBRA election in effect on April 1, 2021, but who would be otherwise qualified for the subsidy also qualify. Also qualified are those  who elected to have COBRA coverage but discontinued it before April 1, 2021, are still within their maximum coverage period and make the COBRA election during the period starting April 1, 2021 and ending 60 days after they are provided with a required notification of the extended election period by their former employer.

The duration of this subsidized coverage will begin April 1, 2021, and end on September 30, 2021, unless, under the terms of the COBRA coverage, the covered period is less, or the COBRA beneficiary becomes eligible for coverage under another group health plan or Medicare. A penalty of $250, or more for intentional failures, applies to beneficiaries who fail to notify the government that they become ineligible for the subsidy.

Where the COBRA group health plan sponsors permit it, the premium assistance will apply to any compliant coverage in which the employee enrolls, provided the premium does not exceed the premium for the coverage in which the individual was enrolled and does not provide only excepted benefits or is not a qualified small employer health reimbursement arrangement or health flexible spending arrangement.

The employer, or insurer for fully insured plans, will pay for the subsidized COBRA coverage, and in turn, will be reimbursed for the cost of the coverage by the federal government through a credit claimed against its Medicare payroll tax. If the credit exceeds the tax, the difference is refundable and can be claimed in advance. ARPA requires employers provide notices to assistance eligible individuals of: the subsidy’s availability, the extended election period for COBRA coverage, and the subsidy’s expiration.

Contact your prior employer related to your benefits under COBRA coverage.  For more information, related to this new law change please give this office a call.

Big Increase in Child Tax Credit For 2021

Article Highlights:

 

  • Additional Credit Amounts
  • Refundability
  • High-Income Phaseout
  • Advance Payments
  • Reconciliation of Advance Payments with Credit
  • Child’s Death
  • Online Portal

 

An increased child tax credit is part of President Biden’s stimulus package to help tackle the coronavirus pandemic and stimulate the economy. This stimulus package, which was passed by Congress on March 10, 2021 and is known as the American Rescue Plan Act, will provide lower-income parents with substantial financial assistance and support various other efforts to stimulate the economy. Even though the benefit of a tax credit traditionally isn’t available until after the tax return for the year has been filed, for 2021, the IRS will pay a portion of the credit in advance in the form of monthly payments from July through December.

Here are the details.

  • Additional Credit Amounts – Normally, the credit is $2,000 per eligible child. For 2021, it has increased to $3,000 for each child under age 18 (normally under age 17) and $3,600 for children under age 6 at the end of the year.
  • Refundability – A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the child tax credit is nonrefundable, but for 2021, it is fully refundable.
  • High-Income Phaseout – The credit is designed to only provide parents of lower incomes with a tax benefit. Thus, the credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold.

 

2021 MAGI PHASEOUT – CHILD TAX CREDIT
Filing Status Threshold
Married Filing Jointly 150,000
Heads of Household 112,500
Others 75,000

 

 

 

 

Example 1: Jack and Jill have two children—Ella, age 4, and Joe, age 8. Their child tax credit for 2021 before the phaseout will be $6,600 ($3,600 + 3,000). They file a joint return and their AGI is below $150,000, so they are entitled to the full $6,600. However, if their AGI for 2021 is $170,000, they would have to reduce (phase out) the credit by $1,000 ($50 x [($170,000-$150,000)/1,000]). Thus, their child tax credit would be $5,600.

Note: This phaseout only applies to the increase in the credit. Families that aren’t eligible for the higher child credit would still be able to claim the regular credit of $2,000 per child subject to the normal phaseout thresholds of $400,000 for married couples filing jointly and $200,000 for others.

Example 2: Using Jack and Jill from example #1, they qualified for a credit of $6,600 before phaseout. If their AGI had been $220,000, they would be completely phased out of the additional 2021 credit but would still qualify for the normal $2,000 per child credit. Since their AGI is below the regular $400,000 phaseout threshold, their credit for 2021 would be $4,000 (2 x $2,000).

Advance Payments – Under a special provision included in the new tax law, to get the credit benefit into the hands of taxpayers as quickly as possible, the Secretary of the Treasury has been charged with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments equal to 1⁄12 of the amount the IRS estimates the taxpayer would be entitled to by using the information on the 2020 return. If the 2020 return has not been filed, the 2019 information is to be used. If the 2019 return is used to determine the advance payments, the amount of the payments can be altered (either reduced or increased) when the 2020 return is filed. The initial advance payment won’t arrive before July 1, 2021, and monthly payments would end in December 2021. Any balance of the credit due to a taxpayer would be claimed on their 2021 tax return.

  • Reconciliation on the 2021 Tax Return – The advance payments will reduce the child tax credit claimed on the tax return, but not below zero. If the aggregate amount of the advance payments to the taxpayer exceeds the amount of the allowable credit, the excess must be repaid unless the taxpayer meets the safe harbor test.
  • No Repayment Safe Harbor – The amount of the excess advance repayment is eliminated or reduced based on a safe harbor that applies to lower- income taxpayers. Thus, families with a 2021 MAGI below the applicable income threshold (see table below) will not have to repay any advance credit overpayments that they receive.
SAFE HARBOR APPLICABLE MAGI
Filing Status Threshold
Married Filing Joint 60,000
Heads of Household 50,000
Others 40,000

 

 

 

 

Child’s Death – A child isn’t taken into account in determining the annual advance amount if the death of the child is known to the IRS as of the beginning of the calendar year for which the estimate is made.

Online Portal – The Secretary of the Treasury will establish an online portal for taxpayers to elect to not receive advance payments or provide information that would affect the amount of the advance payment, including the birth of a qualifying dependent, change in marital status or significant changes in income.

 

It will take the Treasury some time to initiate the advance payments, but if you have questions about the child tax credit, please give this office a call.

 

 

Are Your Unemployment Benefits Taxable?

Article Highlights:

 

  • CARES and COVID Tax Relief Acts
  • Unemployment Benefits
  • American Rescue Plan
  • Tax-Exempt Portion of Unemployment
  • Bogus Forms 1099-G
  • Kiddie Tax and Unemployment
  • States’ Taxation of Unemployment

 

With the passage of the CARES Act stimulus package early in 2020, the federal government began supplementing the normal state weekly unemployment benefits by adding $600 per week through the end of July 2020. When this provision ran out, and with Congress at a stalemate, President Trump issued an executive order in early August that extended the supplement, but at $400 per week, with the federal government providing $300 and the state the other $100. Then, the COVID Tax Relief Act that was enacted in late December of 2020 extended the federal unemployment supplement through March 14, 2021, but at $300 per week. Now, President Biden’s American Rescue Plan that Congress enacted in March of 2021 has extended the $300 benefit through September 9, 2021, and increased the number of weeks an individual can qualify for the benefits from 50 to 74.

The American Rescue Plan Act originally slated the weekly amount to be $400. That was before a provision to treat the first $10,200 of unemployment income as tax exempt was included, at which point the weekly supplemental amount was reduced to $300. However, the tax exemption of the first $10,200 of unemployment compensation will only apply to taxpayers with AGIs less than $150,000. Prior to this change, unemployment benefits were fully taxable income for federal purposes.

This change is retroactive to 2020, and if you have already filed your 2020 tax return, on which you included unemployment compensation, and you qualify for the income exclusion, the return can be amended to take advantage of the up to $10,200 tax-exempt portion of the unemployment income. There is a remote chance the IRS might make the adjustment automatically.

Those who received unemployment benefits will be sent a Form 1099-G (Certain Government Payments) from the state that paid the benefits. This tax form shows the amount of unemployment benefits paid to the individual during 2020 and the amount of income tax withheld, if any.

There have been reports of people receiving Form 1099-G when they never applied for and didn’t collect any unemployment benefits for 2020. In these cases, the individual’s personal information was apparently used fraudulently by someone else to claim the unemployment benefits. If this happens to you, you should contact the government office that issued the erroneous form to request a correction.

Also, be aware that children under age 19, or full-time students over age 18 and under age 24 with unearned income in excess of $2,200, are subject to what is referred to as the kiddie tax. The kiddie tax taxes the child’s unearned income at the parent’s rate. Normally, we think of unearned income as being interest, dividends and capital gains, but certain other types of income, including unemployment benefits, are considered to be unearned income. This can lead to some unpleasant tax surprises, as those who have already filed their 2020 tax returns may have discovered. But the $10,200 retroactive exclusion should eliminate the unemployment tax for most kiddie tax returns. An amended return may be needed in this situation.

There are several states where unemployment benefits are not taxable. Of those, seven states do not have a state income tax, so obviously, unemployment benefits are not taxable in those states, which are the following:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Several states have state income tax but do not tax unemployment benefits:

  • California
  • Montana
  • New Hampshire
  • New Jersey
  • Oregon
  • Pennsylvania
  • Tennessee
  • Virginia

Two states exempt 50% of amounts above $12,000 (single taxpayer) or $18,000 (married taxpayers):

  • Indiana
  • Wisconsin

The remaining states fully tax unemployment benefits.

A word of caution: Some states may pass laws to conform to the federal treatment, or even automatically conform. Unfortunately, that information was not available when this article was prepared.

If you’ve collected unemployment compensation, the benefits’ impact on your tax bill will depend on a number of factors, including the amount of unemployment income you received, whether your benefits are covered by the $10,200 exclusion, what other income you have, whether you are single or married (and, if married, whether you and your spouse are both receiving unemployment benefits), and whether you had or have income tax withheld from benefit payments.

 

If you have questions about the taxation of unemployment compensation, please give this office a call.

It’s Official! Another Round of Stimulus Payments Approved by Congress

Article Highlights:

  • Economic Impact Payments
  • High-Income Taxpayer Phaseout
  • Reconciliation
  • Dependents
  • Decedents
  • Social Security Number Requirements
  • Non-Filers
  • IRS Information Sites

The American Rescue Plan Act has passed and includes a third much-anticipated economic impact payment (EIP). This is one of several government measures intended to help financially stressed citizens. This will be the third round of EIPs since the pandemic began disrupting the economy at the beginning of 2020, leaving many Americans without jobs or any way to support their families.

This round of EIPs will be:

  • $1,400 ($2,800 for joint filers), plus
  • $1,400 per dependent—unlike the prior payments, the payment will apply to all of a taxpayer’s dependents regardless of age.

Since the payments are meant for lower-income taxpayers, they will phase out for higher-income taxpayers. Thus, the payment amounts will phase out for taxpayers with adjusted gross incomes (AGI) between:

  • $150,000 and $160,000 for married taxpayers filing jointly;
  • $112,500 and $120,000 for head-of-household filers; and
  • $75,000 and $80,000 for all other filers.

The Treasury will make these payments automatically based on a taxpayer’s filing status, AGI, and claimed dependents on their 2019 return—or the 2020 return if it has been filed and processed by the IRS by the time the IRS generates the payments.

Example: Don and Shirley file jointly, have one dependent, and their 2019 AGI is $152,500 (they had not filed their 2020 return by the time the third round of EIPs were determined). Because their AGI is a quarter of the way through the phaseout range for joint filers, their EIP3 will be reduced by 25%. Here is the computation for their EIP3:

EIP for Don & Shirley:                    2,800

EIP for their dependent                   1,400

Total before phaseout                     4,200

Phaseout (25%)                          <1,050>

Economic impact payment              3,150

Had Don and Shirley had an AGI of less than $150,000, their EIP would have been $4,200.

Had Don and Shirley had an AGI of $160,000 or more, their EIP would have been $0.

It is anticipated that the Treasury will begin issuing the EIP3s within a week after President Biden signs the American Rescue Plan Act into law.

Reconciliation – When taxpayers file their 2021 tax returns, they will need to reconcile the payments they received with the amounts they were entitled to based upon the 2021 tax return filing status, AGI and claimed dependents. If payments were less than what they were entitled to, the difference becomes a refundable tax credit on the 2021 tax return. Taxpayers who received more than they were entitled to are not required to repay any difference.

Example (continued) – Don and Shirley’s actual 2021 AGI ends up being $148,000, so none of the recovery rebate credit (RRC) has to be phased out because the AGI is less than $150,000. Therefore, they’ll be allowed $1,050 (the difference between $4,200 and the EIP3 they received of $3,150) as a refundable credit on their 2021 tax return.

Dependents – Dependents who file their own returns are not eligible for an EIP or the RRC.

Decedents – Individuals who died prior to January 1, 2021 will not be eligible for the EIP3 or RRC.

Social Security Number – A Social Security number is required for eligibility for filers and their dependents. An exception to the SSN requirement is if a dependent is adopted or placed for adoption and has an ATIN (adoption taxpayer identification number). The SSN has to have been issued by the Social Security Administration on or before the due date for filing the 2021 return.

Regulations – The Act specifies that the Treasury Secretary is to issue regulations or other guidance to ensure, to the maximum extent administratively practicable, that in determining the amount of the RRC, an individual is not taken into account more than once. This includes claims by different taxpayers and by reason of a change in joint return status or dependent status between the taxable year for which an advance refund amount is determined and the taxable year for which the RRC is determined.

Non-filers – An individual does not have to file a tax return to be eligible for the EIP. The Treasury has developed methods for directing payments to non-filers, such as Social Security recipients who don’t have other income. If you are a non-filer who received the two prior EIPs, you should automatically receive this third one. Although it may take a bit of time for the IRS to update their website to incorporate the recent changes, they provide a Non-Filer Tool on their website.

Following Up – You will be able to check on the status of your rebate using the “Get My Payment” feature on the IRS webpage.

Also, realize there may have been births, deaths, changes in dependents, marriages, separations, divorces, and income changes that can cause the rebate amounts to be different from expected or, in some cases, incorrect.

The IRS provides an extensive Q&A related to rebate issues and situations that may answer any questions related to your rebate once the information is updated for this third round of payments.

If you have any other questions, please give this office a call.

Four Essential Questions You Should Ask Your Tax Professional This Season Related to COVID-19

Good tax professionals ask the right questions to ensure they understand your situation and can help you to the best extent the law allows. Given the host of pandemic-related tax changes for 2020, it’s good to keep these four questions below in mind. If your tax preparer doesn’t ask these questions in your tax organizer or during a meeting, raise them yourself.

1. Did you receive your stimulus payment?

Not everyone received all the stimulus they were entitled to. As a result, the amount of your stimulus payments needs to be reconciled on your 2020 tax return to calculate if you qualify for the Recovery Rebate Credit.

The way the Recovery Rebate Credit works is that if you qualified for stimulus payments but didn’t receive them, then you’ll receive a credit on your 2020 tax return. On the other hand, if you received too much, there is no impact to your refund or balance due. You can’t lose here, so make sure you discuss your stimulus payments.

2. Did you work remotely? If so, when and where?

As a result of the pandemic, a lot of people worked from home for all or part of the year. If you lived in the same state you worked in, then there’s no cause for concern or further investigation. In situations where workers lived and therefore worked remotely in a different state than they normally would have commuted to when going into the office, then there could be an issue.

If you worked from another state for any part of the year, make sure you ask your tax preparer about this so you can understand the filing requirements in each state and any nexus issues. Just remember that if you are a W-2 employee, it doesn’t matter if you worked from your home, there is no home office deduction unless you’re self-employed.

3. Did you take any distributions from your retirement accounts in 2020 due to COVID-related circumstances?

Typically, early distributions from tax-advantaged retirement accounts such as 401(k) and IRAs are subject to a 10 percent penalty. There are provisions in the law that allowed penalty-free distributions in 2020 under certain circumstances related to COVID-19. Also, the income from distributions is spread over three years, which can further reduce the overall tax rate (unless you elected to tax it all in the year of distribution).

If you took distributions from a retirement account and were impacted by COVID-19, make sure your tax professional is aware of these exceptions; and ask the right questions to see if you qualify for any of the preferential treatment.

4. Are you self-employed and missed work because you were sick with the coronavirus or needed to care for someone who was ill with it?

Under the Families First Coronavirus Response Act (FFCRA), those who are self-employed can be eligible for sick and family leave credits if they or a family member had coronavirus and couldn’t work between April 1 and Dec. 31, 2020, as a result. If eligible, your tax preparer will file Form 7202 with your Form 1040 to make the claim.

Conclusion

Doing the best as a tax preparer means knowing your client’s situation and circumstances. There’s a good chance your tax professional is already on top of the COVID-19 changes, but it’s good to keep the questions above in mind just in case.

Some Businesses Rely on Line of Credit to Escape Damages Caused by Pandemic

As businesses attempt to work their way through to a post-pandemic world, there are various means to bridge the financial gap. As recommended by the U.S. Small Business Administration (SBA), some companies can use a line of credit to reach international customers or opportunities outside the United States to make up for the damage COVID-19 caused with fewer domestic sales. How can businesses use a line of credit to increase their chance of survival and pivot to profitability as we move through 2021?

According to Debt.org, a business line of credit functions like any other line of credit that uses revolving debt. Businesses use a portion of their line of credit to meet financial obligations and repay based on the lender’s terms. Common lines of credit borrowing limits can range from $1,000 to $250,000 and are generally not secured against the business’ assets, accounts receivables, etc.

As a U.S. Bank study found, via the National Federation of Independent Businesses (NFIB), 82 percent of companies that go out of business do so because of inadequate cash flow management. The NFIB and U.S. Bank study explains that an inability to purchase inventory, satisfy employee payroll, on-board workers, or obtain some sort of financing increases the likelihood of a business failing.

However, businesses that are approved for and use a line of credit for meeting payroll, purchasing raw materials and items necessary to keep their business running (including rent or lease payments), greatly increases the business’s chance of survival. So, as revenues and profits shrink, employers can tap their line of credit to increase the chances of surviving.

Business Survivability Considerations

Continuous access to funds allows owners to have greater control over a business’s finances and helps them make better growth-driven decisions. For example, Noam Wasserman, a Harvard Business School professor, explains that oftentimes outside investors force founders out of their company – only half of founders were still the CEO three years after the business’s inception. If a line of credit gives the business enough financial flexibility, then the founders can stay in control.

Another way to leverage a line of credit is highlighted in the SBA export assistance programs due to COVID-19-related losses. Small business owners that export products directly, or indirectly to a third party that does the exporting, may be eligible.

Prior to a company completing a sale to an international client, or for prospecting for new international export markets, businesses can apply for a line of credit or a term note, up to $500,000, under the SBA’s Export Express loan program.

Through the SBA’s Export Working Capital loan program, approved applicants can obtain as much as $5 million in financing or a revolving line of credit related to the firm’s export-related business. This assistance also can help businesses better fulfill export orders as well as provide financial assistance for additional ex-U.S. sales. The financing can assist in keeping international orders through more favorable payment options for their foreign customers.

While there is never a guarantee that a business will survive, today’s companies that take advantage of different lending options, such as a line of credit, have a better chance to set themselves up for the post-COVID-19 recovery.

Sources

https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

Personal Lines of Credit

Why Do Small Businesses Fail?

https://hbr.org/2008/02/the-founders-dilemma