Individual Tax

Regular financial checkups give you an opportunity to identify where you can improve your overall tax situation. They also help identify areas of concern that may require more detailed attention. In a similar fashion, regularly reviewing your tax situation with a financial professional can identify opportunities to improve your tax picture and can often shed light on areas where you may be paying too much in taxes. Simple strategies that range from adjusting your withholding to timing the sales of securities can be employed to potentially reduce your tax bill.

Adjust Your Withholding

This is a simple and basic move. If you had too little tax withheld last year, you ended up paying the IRS what you owed when you filed your return and may incur a penalty. If you had too much tax withheld, you received a tax refund. You may regard a large tax refund as a plus — but the reality is that a large tax refund is simply an interest-free loan of your money to the government. It may make more sense to have less tax withheld up front and receive more in your paycheck. That way, you can save or invest the money and potentially earn interest, dividends, or perhaps enjoy a capital gain on your investments.

Time the Sale of Securities

How long you own a profitable asset before you sell it can impact how much income tax you pay on your gain. Holding on to an appreciated asset for more than one year before you sell it results in long-term capital gain. The tax rate on long-term capital gains is 0%, 15%, or 20% depending on your taxable income and filing status. For example, if you are married and filing jointly in 2021, the long-term capital gains rate is 0% with income of up to $80,800, 15% with income between $80,801 and $501,600, and 20% with income over $501,600. In contrast, short-term capital gains are taxed at higher ordinary income tax rates.

If you have capital losses, look into selling investments in your taxable accounts to generate capital gains that can be offset by the losses. You could also potentially reduce taxes by investing in municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and might be exempt from state and local income taxes as well. Of course, credit ratings should be analyzed before purchase.

Add to Your Retirement Plan

You could potentially lower your income tax liability by increasing the amount you contribute to your tax-favored retirement plan (limits apply). If you’re age 50 or older, and your plan permits, you may be able to add to your retirement account by making catch-up contributions in addition to your regular plan contributions.

Consider a Health Savings Account

A health savings account (HSA) can also be a good tax saving option. You can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own provided you are covered by a qualified high-deductible health plan. You can invest in an HSA and have it grow in a tax-deferred manner similar to an individual retirement account. And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

It is said that the only certainties in life are death and taxes. That expression may ring particularly true to anyone who has served as the executor of an estate. Nearly all estates have to file an income tax return for the decedent, and the executor also may have to file one or more income tax returns and an estate tax return for the estate. Read on for more information related to these requirements.

Decedent’s Final Income Tax Return

The executor is responsible for filing the decedent’s final income tax return (Form 1040 or Form 1040-SR). Because most individual taxpayers file on a calendar-year basis, the final tax year will typically cover the period from January 1 to the date of death. The final return is generally due on April 15 of the year following the date of death. An automatic six-month extension may be obtained by filing Form 4868 and paying any tax due with the extension.

The executor may file a joint income tax return with the decedent’s surviving spouse, provided the spouse has not remarried by year-end. Filing jointly can offer certain tax advantages but may not be the best option in all cases.

Estate Income Tax Return

The IRS considers the decedent and the estate to be separate tax entities. If the estate generates $600 or more in gross income, the executor is required to file an income tax return (Form 1041) for the estate. Before filing, the executor must obtain a tax ID for the estate.

The executor may elect to use a calendar or fiscal year for the estate. Careful consideration should be given to this decision because, in some cases, the executor may obtain additional tax deferral for a beneficiary by electing a fiscal year that ends after the close of the beneficiary’s taxable year.

Estate Tax Return

Because the estate tax exclusion amount is high — $11.7 million for 2021 — many estates will not owe any federal estate tax. The exclusion amount is typically adjusted for inflation every year. However, the exclusion amount is scheduled to drop to $5 million, as adjusted for inflation, in 2026.

Even where no estate tax is due because the exclusion amount is at the current high level, the executor may want to file an estate tax return if the decedent was married. That’s because current law permits a married person’s executor to make an election to pass the unused exclusion amount to the surviving spouse for eventual use on his/her own estate tax return.

In general, this “portability” election must be made on a timely filed estate tax return of the first spouse. Therefore, if there is any chance that the surviving spouse’s entire estate (including the amount passed from the first spouse) will exceed his/her individual exclusion amount, the executor for the first spouse will want to file an estate tax return to make the portability election.

The duties of an executor are complex and time consuming. The assistance and input of a professional experienced in taxes and estate planning can be invaluable when attempting to settle an estate.

Once you’ve filed your tax return, you may be tempted to clean house and get rid of some of your old records that are taking up space. The guidelines that follow will help you decide which items can go and which should stay in your files.¹

Income and Expenses

Keep for at least three years after the date you file your return (or its due date, if later) the records proving your income and expenses, such as:

• Form(s) W-2
• Form(s) 1099
• Form(s) K-1
• Bank and brokerage statements
• Canceled checks or other proof of payment

Three years is generally considered a minimum. If you can, consider keeping these items six years, the IRS’s time limit for auditing a return when income is substantially understated and no fraud exists.

Investments

You’ll need your investment records to figure your gains and losses when you sell the investments. After you’ve sold an investment, continue to retain your records for as long as you keep the other items supporting the tax return on which you report the sale (three or six years). Investment records include statements showing when you purchased the investment, the purchase price, brokerage commissions, and any reinvested dividends.

Residence Purchases and Improvements

Hold on to closing statements and other paperwork related to the purchase of your principal residence for use when you eventually sell the home. Put records of any home improvements you’ve made in the file, too. While many homeowners won’t have a taxable gain when they sell their homes because of the $250,000 ($500,000 for married couples) exemption, special circumstances, such as renting out your home or having a home office, could result in a taxable profit.

Your Tax Returns

Maintain one or more permanent files with important personal documents, including your tax returns. If you don’t file a return, the IRS can assess tax at any time. You’ll need a copy of your return in case the IRS has no record of your filing.

¹This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is diferent. Contact your tax professional to discuss your personal situation.

Every year brings some degree of change regarding filing income taxes. While 2020 taxes are a done deal, it’s never too early to begin thinking about the next tax year. To help you be prepared for next year’s filing, here are 6 Ways Income Taxes Will Be Different for 2021.

Standard Deduction Increase

Standard deductions reduce the amount of your income that is subject to federal tax. Most taxpayers do not have enough deductions to itemize, so they take the standard deduction. Annual adjustments for inflation cause the standard deduction to increase slightly each tax year. For 2021, here are the standard deductions and the amount of the increase from the prior year.

• Married filing jointly $25,100, up $300
• Single and married filing separately $12,550, up $150
• Head of household $18,800, up $150

While itemizing is more work, if your itemized deductions exceed the standard deduction allowance for your tax filing category, itemizing makes sense.

Higher Tax Brackets

You already know the more money you earn, the more you pay in taxes. How much you earn, your income, along with your filing status, determines your tax bracket. There are seven tax brackets with the top tax rate being 37 percent for taxable income over $518,400. Brackets are adjusted annually to account for inflation. For 2021, tax bracket thresholds were increased by about 1 percent over 2020 levels.

Capital gains

When you sell an investment like real estate, stocks, or bonds, for more than you paid the net profit you make is taxed as either short- or long-term capital gains. If you held your investment for less than one year, you pay short-term capital gains. For investments held more than one year and one day, the capital gains tax on the profit you made is long-term. Short-term capital gains are taxed like regular income and up to $3,000 of short-term losses can be deducted. However, long-term capital gains are taxed different rates (0 – 20 percent) depending on taxable income and marital status.

For example, if you’re single and your income is below $40,400 in 2021, you fall into the 0 percent capital gains tax bracket. However, if you’re single and earn between $40,401 and $445,850, you move into the 15 percent bracket. Above that, it’s the 20 percent bracket for you.

The 0 percent bracket is approximately double for married couples ($80,800), but above that, brackets are close to the single filer brackets (15 percent up to $501,600 and 20 percent above that).

Individual Tax Credits

Tax credits lower your overall tax bill. There are quite a few credits to consider, but the most popular ones are the earned income tax credit, the saver’s tax credit, and the lifetime learning tax credit.

Earned income credit is for low- and middle-income taxpayers and is based on income, filing status, and number of children, although taxpayers without children can qualify. For 2021, the earned income credit ranges are up very slightly over 2020 and range from $543 to $6,728. Some criteria for the credit are having at least $1 of earned income, investment income must be $3,650 or less. Other stipulations apply, so check with your tax preparer to see if you qualify.

Saver’s credit is also designed for low- and middle-income taxpayers and is to encourage retirement contributions. Taxpayer adjusted gross income (AGI) must be less than $33,000 in 2021 (up slightly from $32,500 in 2020) to qualify for the credit for single or married filing separately. Married filing jointly AGI must be less than $66,000 in 2021 (up from $65,000 in 2020).

Lifetime learning credit is for taxpayers who incur education expenses during the year. There was little change in this credit for 2021. Married filing jointly income limits increased $1,000 (from $118,000 to $119,000 for full credit and from $138,000 to $139,000 for partial credit). Other filing statuses will see no change for 2021.

Alternative Minimum Tax

The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly. This is a change from 2020 when the exemption amount was $72,900 and $113,400 for married couples filing jointly.

Fringe Benefits, Medical Savings Accounts, and Estates

Most employee fringe benefits allowances for 2021 will continue at their 2020 levels; however, changes occur in health savings account (HSA) contributions, which increase by $50 for single and $100 for families from 2020.

The maximum out-of-pocket amounts for high-deductible health plans (HDHP) increases by $100 for single and $200 for families.

The federal estate tax targets the amount of wealth you can pass along when you die. It is no concern unless your estate is worth more than $11.7 million when you die. That figure is up from $11.58 million in 2020.

Retirement Plans

Contributions for 401(k) plans will not change from 2020 top off amount of $19,500 with a $6,500 catch-up contribution allowed for individuals 50 or older. Maximum contributions from all sources (employer and employee) rise by $1,000.

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Of course, these are an overview of changes for the 2021 tax year. To be sure you’re up to speed on all the tax changes that impact you, be sure to speak to your trusted accountant.

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance Apremiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

The recently enacted tax reform law made some significant changes to the system of income tax deductions used by consumers. Here are highlights of the changes.

The standard deduction is increased.

The standard deduction has grown. Because of the significant increases, many taxpayers who formerly itemized their deductions may now benefit from the standard deduction instead.

 

Changes in Standard Deductions
Filing Status	Old Law	New Law
Single	$6,500	$12,000
Married filing jointly	$13,000	$24,000
Head of Household	$9,550	$18,000
Married filing separately	$6,500	$12,000

The deduction for state and local taxes is reduced.

For those who itemize their deductions, the maximum amount permitted for all state and local taxes (SALT) combined is $10,000 per year ($5,000 for married individuals filing separately). How the new limit affects you will depend on your specific situation. If you live in a high-tax state, you may see much of your SALT deduction reduced, and that could mean that itemizing deductions is no longer the better option.

The mortgage interest deduction has a lower cap.

For mortgage debt incurred after December 15, 2017, you may only deduct interest on debt value up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. For home equity debt, the deduction for interest is suspended through 2025, unless the proceeds are used to buy, build, or substantially improve the home that secures the loan.

Casualty and theft losses are not now generally deductible.

Beginning this year, only losses that occur as the result of a federally-declared disaster may be deducted. Formerly, casualty and theft losses had generally been deductible to the extent they exceeded 10% of adjusted gross income (AGI).

Miscellaneous itemized deductions are suspended.

Various miscellaneous expenses, such as unreimbursed employee business expenses and tax preparation expenses, were formerly deductible as an itemized deduction to the extent they totaled more than 2% of the taxpayer’s AGI. The new law suspends the deduction for these expenses.

Charitable contributions are still deductible if you itemize.

Cash contributions will now be allowed up to 60% of the taxpayer’s “contribution base,” up from 50%. A taxpayer’s contribution base is generally equal to AGI exclusive of any net operating loss carryback for the year. This change will affect only those taxpayers who contribute a significant proportion of their income to charity.

Medical expense rules become more generous.

Taxpayers with substantial medical expenses who also itemize can now deduct unreimbursed medical expenses in excess of 7.5% of their AGI, down from the deductibility threshold of 10% previously.

Moving expenses lose their tax advantage.

The deduction for qualified moving expenses, which can be claimed even if a taxpayer doesn’t itemize, has been suspended, except for members of the Armed Forces on active duty (provided certain conditions are met).

The alimony deduction for payers is eliminated.

The tax treatment of alimony payments will change significantly under the new law. Such payments will no longer deductible by the payer (and the recipient will no longer be required to include the alimony in income). The change applies to alimony paid under any divorce or separation agreement executed after December 31, 2018.

Note that some of these provisions are scheduled to sunset in 2019 or 2026 unless Congress acts to extend them.

Send us an e-mail or call us today at 727-544-1120 and ask for Debbie Jackson to discuss your tax planning needs with an experienced Largo CPA.