2021 Year End Newsletter

Greetings!
With the year-end fast approaching and another new tax bill on the horizon, we wanted to send you our annual newsletter with some of the latest highlights of the pending bill and some tax tips for year end. It has been difficult to plan for year end. One main caveat that spans much of the below-mentioned planning items is that there’s still much uncertainty regarding proposed legislation surrounding income and estate taxes.

Our team at Gannon CPA wishes you and your family healthy and happy holidays! To a brighter 2022!
Proposed Tax Legislation
There is federal legislation in the Senate that has tax law changes that may pass by year-end and affect 2021 and 2022 taxes. Here are some of the items in the bill:
  • Increase in the cap on state income tax deduction from $10k to $80k for those who itemize
  • A corporate AMT based on book income
  • Expanded NIIT (net investment income tax) for individuals, estates, and trusts
  • Surcharge on high-income individuals; 5% tax on modified adjusted gross income in excess of $10 million ($5 million for taxpayers filing as married filing separately).
  • Additional surcharge of 3% (on top of the 5%) on taxpayers with modified AGI of $25 million or more
  • Application of 3.8% Net Investment Income (“NII”) Tax to Trade or Business Income and would apply to taxpayers earning more than $400,000 single ($500k for married filing joint)
  • Surtax on Non-Grantor Trusts. A 5% tax would apply to the adjusted gross income of a non-grantor trust in excess of $200,000.
  • The lifetime gift and GST exemptions which could decrease them from $11.7 million per person (current) to approximately $6 million beginning in 2022.
Business Tax Tips
  • Massachusetts passed a "Passthrough Entity Level Tax" this fall. There is now an option for pass-through entities to pay state income taxes on an entity level to avoid the limitation on state tax deductions on the federal level. If the business is a cash based business, these payments must be done by year-end.
  • Bonus depreciation remains at 100% for both used and new equipment.
  • If you are able to hire your children, you may be able to pay them up to $12,000 federal income tax free. Please note, however, that you must have documentation of their hours and the tasks they performed.
  • Reduce owner's salary in order to maximize the 20% business deduction.
  • ERC credit remains in effect for all business that qualify through 2021 Q3; and for some businesses is still available for 2021 Q4 (startup businesses).
  • Business meals qualify for 100% deduction for food and beverages provided by a restaurant from for tax years 2021 and 2022.
Penalties on late filing of Form 1099's

Penalties are increasing for late filing of Form 1099's. The penalties start at $50/per Form 1099 filed late and increase to an unlimited penalty if not filed at all.

The general rule is if you pay $600 or more to an individual or unincorporated business for business related services, you must issue a Form 1099 by the end of January of every year for the prior years expenses. That can include everything from rental expenses to cleaning to contract labor.

In addition, the IRS has increased their scrutiny on the filing of these forms.
Paid Family and Medical Leave Act (PFMLA)

Starting in 2019, both MA employees and employers were required to begin paying (equally) an additional payroll tax. This payroll tax entitles those who require the use of Family and Medical Leave to be eligible to get up to 12 weeks of paid family leave and up to 20 weeks of paid medical leave paid by the Commonwealth of Mass. If you are self-employed, you are not required to contribute, but you can choose to opt-in. These benefits began January 1, 2021.

Paid family leave may be taken to:
  • Care for a sick family member
  • Bond with a newborn child
  • Bond with a child after adoption or foster care placement
  • Manage family affairs when a family member is on active duty in the armed forces

For additional information please reference the MA DOR PFML Fact Sheet.
Individual Tax Tips
  • There are increased reporting requirements and scrutiny of digital currency transactions. Keep track of your gains/losses and transfers for year end reporting. (In 2023, the brokerage houses of virtual currency will have to report gains/losses to the IRS)
  • Maximize your retirement contributions. If you are over 50, you can put more away.
  • If you have investments, harvest tax losses.
  • Consider harvesting any capital gains that can be realized in the 0% tax bracket (available to lower income filers).
  • Maximize your FSA through your company.
  • Maximize on an HSA through your company or open your own HSA. (see more about this below)
  • Contribute to a Roth IRA's using the rollover rules if your income is low in 2021 or using the "back door" Roth IRA contribution method.
  • For 2021, even those who do not itemize may take up to $300 in an above the line charitable deduction. ($600 for married filing joint)
  • Review charitable contributions to maximize income tax deductions.
  • Consider donating appreciated assets that have been held for more than one year, rather than cash.
  • Opening and funding a Donor Advised Fund (DAF) is appealing to many as it allows for a tax-deductible gift in the current year and also the ability to dole out those funds to charities over multiple years.
  • Qualified Charitable Distributions (QCDs) are another option for those over 70.5 and especially for those who don’t typically itemize on their tax returns.
Health Savings Accounts

Health Savings Accounts (HSAs) continue to be one of the best tax deductions as well as a great way to save for retirement. When contributions are made to HSAs, the contribution is considered pre-tax and as long as the money is used for medical expenses it remains tax free. Thereby giving you a completely tax free vehicle on the federal side. A single person may contribute up to $3,600, while families can contribute up to $7,200, for 2021. (Additional $1,000 after 55 years old)
Child Tax Credit
The child tax credit and advance payments are based on several factors, including the age of children and income. It is a refundable credit, which means normal non-filers should file to receive the full benefit.
  • The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
  • The credit for children ages six to 17 (at the end of 2021) is up to $3,000 –– with up to $250 received in monthly payments.
  • Taxpayers can take full advantage of the credit if their income is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Monthly payments began immediately by the IRS if a 2019 or 2020 tax return was filed and claimed the child tax credit or given the IRS information using the non-filer tool. With the advance payments began mid year, the remaining amount of the credit should be claimed on the tax return at year end.
Estate and Gift Planning Strategies
  • Make use of annual exclusion gifts ($15,000 per donee, $30,000 per married couple) (this amount is increased to $16k for 2022) to help save on potential future estate taxes.
  • Capitalize on the unlimited gift exemption for direct payment of tuition and medical expenses.
  • Consider intra-family loans and opportunities to leverage the current low-interest-rate environment.
  • Review lifetime gift and GST gifting opportunities to use additional applicable exclusion and exemption amounts.
529 Plans
Consider gifting to a 529 plan by year-end if saving for a child's or grandchild's education.

Contributions to 529 plans are now deductible in Massachusetts up to $2,000 for those who are married, filing jointly and $1,000 for all other individuals. To be eligible for this deduction, the taxpayer must be contributing to a Massachusetts plan.
Retirement, Investments and other planning
Let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, changes in residency, and significant planned expenditures (real estate purchases, college tuition payments, etc.).
  • Update pre-tax and Roth contributions to retirement accounts for 2022.
  • Review your various insurance policies and confirm whether the amount of coverage and deductibles are still adequate.
  • Review beneficiary designations with your custodian and update, as necessary.
  • Confirm that you have spent or have a plan to spend the entire balance in your Flexible Spending Accounts and set 2022 contribution amounts.
  • Review your investment portfolio and target asset allocation. Confirm whether you are within the targeted ranges for each asset class as recent market performance could have caused allocations to drift dramatically.
  • Review any scheduled 4th quarter estimated tax payments and assess any liquidity needs.
  • Consider an additional tax payment or increase in tax withholdings to eliminate a penalty.
  • Evaluate progress towards financial goals.
  • Plan for the unique change for IRA and 401(k) required minimum distributions in 2022 and beyond. With the change in the lifetime expectancy factors, required minimum distributions (RMDs) amounts could be somewhat smaller than prior years.
IRS and Other Scams
Fraudulent activity remains a significant threat. Our firm takes security very seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you: 
  • Receive a notice or letter from the Internal Revenue Service (IRS) regarding a tax return, tax bill or income that doesn’t apply to you
  • Get an unsolicited email or another form of communication asking for your bank account number or other financial details or personal information
  • Receive a robocall insisting you must call back and settle your tax bill
  • Unemployment claims have been among the other fraudulent activity for the last few years. The scammers are using other peoples social security. If you receive a notice that doesn't seem correct, please let us know.

Make sure you’re taking steps to keep your personal financial information safe. It is never safe to email personal information unless using encryption. Let us know if you have questions or concerns about how to go about this. Contact us first.
Did you move? make sure to change your address on a change of address form with both the IRS and your state of filing. This also helps mitigate fraudulent filing on your behalf.
Quick Links
Use the below links to pay your estimated tax payments.
SCANNING

If you regularly scan documents to the portal, we have found that the following settings make the scan most legible:

DPI of 300
Black & White print
PDF
If you want to take pictures with your phone, this app converts the pages from JPG to a PDF. It is offered by Microsoft and available on all phones and tablets.
READING ELECTRONIC DOCUMENTS

Download the latest Adobe Acrobat reader
Quickbooks Online App-
if you are not using the app in order to scan in receipts, you are missing out. After scanning in the receipts, you can categorize and the receipt is contained with your books for easy access.
Gannon CPA Portal Access
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