Tax Tips from Tax & Accounting Plus – Part 7

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Required Minimum Distribution (RMD) Age Raised. The SECURE Act raised the RMD age from 70½ to 72.

Maximum Age to Make IRA Contributions.  Under the SECURE Act, an individual of any age can make contributions to a traditional IRA as long as the individual has compensation.  Compensation generally means earned income from wages or self-employment.

Estate and Gift Tax Exemption Amount.  For 2021, the estate and gift tax exemption amount is $11,700,000.

Deduction for Qualified Business Income (Pass-Through Entity Deduction).  An individual taxpayer generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified REIT dividends, and qualified publicly traded partnership income. In the case of a partnership or S corporation, the deduction applies at the partner or shareholder level. Special rules apply to specified agricultural or horticultural cooperatives. A limitation based on Form W-2 wages and capital gain is phased in when the taxpayer’s taxable income exceeds a $164,900 ($329,800 MFJ) threshold amount.

Depreciation Section 179 Expense Deduction.  The new law increases the maximum amount a taxpayer may expense under Section 179 to $1,050,000, while the SUV limit is $26,200. It increases the phase-out threshold amount to $2,620,000. The provision provides that the maximum amount a taxpayer may expense is $1,050,000 of the cost of qualifying property placed in service for the tax year. The $1,050,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $2,620,000. The new law expands the definition of Section 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. Property used predominantly to furnish lodging or in connection with furnishing lodging generally includes beds and other furniture, refrigerators, ranges, and other equipment used in the living quarters of a lodging facility such as an apartment house, dormitory, or any other facility (or part of a facility) where sleeping accommodations are provided.  The new law also expands the definition of qualified real property eligible for Section 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service:  Roofs; Heating, ventilation, and air-conditioning property; Fire protection and alarm systems and Security systems.

Domestic Production Activities Deduction.  The domestic production activities deduction under IRC section 199 is no longer allowed.

Entertainment Expense Deduction.   The new law provides that no deduction is allowed with respect to: 1) An activity generally considered to be entertainment, amusement or recreation, 2) Membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or 3) A facility or portion thereof used in connection with any of the above items. The provision repeals the prior law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50% limit to such deductions). The new law also disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.

Health Flexible Spending Arrangement (FSA).   Voluntary employee salary reduction contributions to a health FSA cannot exceed $2,750 for 2021.

HSAs, MSAs, FSAs and HRAs.  After December 31, 2019, qualified medical expenses are no longer limited to medicines and drugs that are prescribed by a physician.  Therefore, over-the-counter medicines and drugs can be reimbursed tax free.  This includes menstrual care products, such as tampons, pads, liners, etc.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).   For 2021, the total amount of payments and reimbursements under a QSEHRA cannot exceed $5,300 ($10,700 for family coverage). 

Capital Gain and Qualified Dividend Maximum Tax Rates.  The breakpoints no longer follow the tax brackets for regular income tax purposes.  The breakpoints are as follows:

Single Taxable Income   $ 0 to  40,400  maximum rate =   0%
$ 40,401 to 445,850 maximum rate = 15%
$ 445,851 and over    maximum rate = 20%
MFJ or QW Taxable Income$ 0 to  80,800  maximum rate =   0%
$ 80,801 to 501,600 maximum rate = 15%
$ 501,601 and over     maximum rate = 20%
MFS Taxable Income $ 0 to   40,400  maximum rate =   0%
$ 40,401 to 250,800 maximum rate = 15%
$ 250,801 and over     maximum rate = 20%
HOH Taxable Income$ 0 to   54,100  maximum rate =   0%
$ 54,101 to 473,750 maximum rate = 15%
$ 473,751 and over     maximum rate = 20%
 Estates and Trusts Taxable Income$ 0 to     2,700  maximum rate =   0%
$ 2,701 to   13,250 maximum rate = 15%
$ 13,251 and over    maximum rate = 20%

The breakpoints for the 25% maximum rate for unrecaptured section 1250 gain, and the 28% maximum rate for 28% rate gain follows prior law. Thus, the 25% and 28% maximum rates apply when taxable income exceeds the 24% tax bracket for regular income tax purposes.

Economic Impact Payments (Stimulus). Effective  for  2021,  a  third  round  of  economic  impact  payments/Recovery Rebate Credits are available, up to $1,400 per taxpayer ($2,800  MFJ),  plus  $1,400  per  dependent.  Unlike  rounds  1  and  2,  dependents  do  not  need  to  be  under  age  17.  Any  person  who  can be claimed as a dependent on the tax return qualifies for the $1,400 per dependent amount. The beginning AGI phaseouts are the same as rounds 1 and 2, but the ending fully phaseout applies when AGI reaches $80,000 for Single and MFS, $160,000 for MFJ and QW, and $120,000 for HOH.

The stimulus payments are technically an advance payment of a new temporary tax credit that taxpayers can claim on their 2021 return.  Of course, 2021 returns were not yet filed, so the IRS used 2020 return information to calculate the payment. 

When you file your 2021 return, the stimulus payment will be recalculated using your 2021 information.  Then that amount will be compared to what you have already received.  If it is determined you did not receive enough, then the difference will be given to you on your 2021 return.  If it is determined that you were given more, no worries, you get to keep it and not pay it back.

The stimulus payments are not taxable and should not be included in your income.

It is very important that you know how much you received for the stimulus payment in 2021.  So please verify, no guessing.  If what we put down doesn’t match what the IRS has in their records, it can delay the processing of your return.

Thank You!  Our professional staff wants to help you understand the tax law changes and help you get as BIG a refund as possible.  So, avoid the rush and contact us early.  Remember the earlier you file, the faster you will get your refund.  Also, please pass on the news to your friends and relatives and take advantage of the Friendly Referral $25 + $25 program.  Tell them they are more than welcome to stop by or call for a free quote to prepare their taxes.  Thanks!

We hope you had a wonderful holiday and the best year possible in 2021.  Now, let Tax & Accounting Plus, Inc. help you get 2022 started right by helping you with the new tax laws and providing you with a professional and personal tax service.  Tax & Accounting Plus will continue to work to earn your business by providing superior accounting, bookkeeping, payroll, incorporation, business planning, non-profit and tax services.  Remember… We Work For You!