It’s TaxQuips time from TaxMama.com® – today TaxMama® wants to talk to you about the sticker shock (high tax return balances) you just faced – and how to reduce some of that financial pain.
There’s a lot going on right now, and new legislation about to be passed tomorrow. Drop by TaxMama.com tomorrow for a quick summary of the final changes.
Meanwhile, you thought you did everything right last year, but when you prepared your tax returns, you suddenly owe a whole lot of money that you didn’t expect to owe.
What caused that? A few things – here are the main issues you face, and perhaps, didn’t quite anticipate:
- The new IRS withholding tables are so confusing your employer didn’t withhold as much as you expected.
- You received a lot of unemployment income and didn’t know it was taxable!
- We expect a small fix for this in the American Rescue Act, making the first $10,200 of unemployment income tax-free, as long as your adjusted gross income (AGI) is under $150,000.
- You took distributions from your IRA or retirement plans, knowing there would be no penalties. But you didn’t realize that ALL of those funds are taxable – and dramatically increased your AGI.
- With the higher AGI, all sorts of things that were not normally taxable before, suddenly became taxable – like your Social Security benefits, and the advance-paid insurance premiums from the “Marketplace.”
- There may be other issues you will only see if you run a report to compare this year’s and last year’s tax return numbers.
Is there a way to reduce any of these unexpected taxes? Now? After the end of 2020?
Actually, yes! Here are several things you can do – they all revolve around reducing your AGI to avoid causing some of your other income or credits to become taxable. For folks who got the Premium Tax Credit (health insurance), you need to reduce your AGI below 400% of the poverty level.
- If you or your child have education expenses, consider claiming the $4,000 tuition and fees deduction instead of a tax credit. It sounds counter-intuitive. But this will reduce your AGI.
- Take advantage of the $300 above the line deduction for cash contributions to charity. (It won’t help much…but it’s something.)
- Fund your IRA for 2020 even if you cannot afford it. You must do this by April 15th. Designate the funds as a 2020 contribution so you can reduce your AGI. You can take the money out later as a 2021 distribution.
- If you took a large distribution from your retirement account last year, based on your COVID19 qualifications (FAQ #3), you can spread that income over three years – instead of including it all in your 2020 AGI. THIS can make a huge difference to your taxes.
- Since they have already taken out withholding based on the full amount, consider rolling over part of your refund to 2021 and 2022, since you will be adding 1/3 of this income to your tax return for those years.
- Fund a business retirement account from your business profits. Depending on your profits or the type of retirement account you use, you can fund anywhere from $13,000 to $57,000 for 2020. (Some of them will let you borrow some of your money back.)
There’s more you need to know, and your tax pros are rapidly learning everything we can to get you the most tax credits and refunds, legally possible.
For those folks planning to study for the EA Exam this year, it’s going to be a really tough exam! Join me our annual webinar (a discount is included for those who attend):
Everything You Wanted to Know About the 2021-2022 Enrolled Agent Exam.
Sign up for one of these dates.
March 18 – 4:00 pm Pacific
April 19 – 10:05 am Pacific
Meanwhile, I will be posting various updates and webinars that I am teaching, on this Events page – https://irsexams.school/events-and-webinars/
And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At https://iTaxMama.com/AskQuestion
To make comments please drop into the TaxQuips Forum.
Keep an eye on these links – the IRS is adding topics every month -no charge and potential CPE or CE credits.
IRS webinars for Professionals – https://www.irs.gov/businesses/small-businesses-self-employed/webinars-for-tax-practitioners
The next one is Sale of Partnership Interest –
IRS webinars for Small Businesses – https://www.irs.gov/businesses/small-businesses-self-employed/webinars-for-small-businesses
There are some for North Carolina businesses – and the link to the Partnership webinar above.
IRS Webinars for Exempt Organizations and Governmental Entities – in case you are involved with a non-profit, there’s lots of guidance here.
You’re never too old to learn! And since you’re generally stuck at home anyway – why not improve your skills?!