Important Information About Charitable Giving This Year

For many nonprofits and taxpayers alike, Giving Tuesday is the start of the charitable giving season. While most organizations are legitimate, taxpayers should always research charities before donating. It is also a good idea to understand the expanded tax benefits of giving to causes that mean something to you personally. Taxpayers should also know that they may be able to deduct donations to tax-exempt organizations on their tax returns.

The first step when deciding where to make donations is to visit IRS.gov and use the Tax Exempt Organization Search tool to search for information about an organization’s federal tax status and filings. Here are several facts about this valuable tool that taxpayers should be aware of:

  • Donors can use it to confirm an organization is tax-exempt and eligible to receive tax-deductible charitable contributions.
  • Users can find out if an organization had its tax-exempt status revoked. A common reason for revocation is when an organization does not file its Form 990-series return for three consecutive years.
  • TEOS does not list certain organizations that may be eligible to receive tax-deductible donations, including churches, organizations in a group ruling, and governmental entities.
  • Organizations are listed under the legal name or a “doing business as” name on file with the IRS. No separate listing of common or popular names is searchable.

Taxpayers can also use the interactive tax assistant, Can I Deduct my Charitable Contributions? to help them determine whether a charitable contribution is deductible. As a reminder, taxpayers should get a written acknowledgment for any charitable contributions of $250 or more.

Expanded Tax Benefits in 2021

Tax law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations even if they don’t itemize their deductions. Taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.

Qualified Charitable Distributions

Taxpayers age 70 1/2 or older can make a qualified charitable distribution, up to $100,000, directly from their IRA, other than a SEP or SIMPLE IRA, to a qualified charitable organization. It’s generally a nontaxable distribution made by the IRA trustee directly to a charitable organization. It is important to note that a qualifying deduction may also count toward the taxpayer’s required minimum distribution requirement for the year. Please call for more information.

Cash Donations

Most cash donations made to charity qualify for the deduction. Cash contributions include those made by check, credit card, or debit card, as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization. Cash contributions don’t include the value of volunteer services, securities, household items, or other property.

There are some exceptions (they also apply to taxpayers who itemize their deductions), however. Cash contributions that are not tax-deductible include those:

  • Made to a supporting organization
  • Intended to help establish or maintain a donor-advised fund
  • carried forward from prior years
  • Made to most private foundations
  • Made to charitable remainder trusts

Questions about charitable giving this tear? Don’t hesitate to contact the office.

Tax Benefits of Health Savings Accounts

While similar to FSAs (Flexible Savings Plans) in that both allow pretax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits. Let’s take a look:

What is a Health Savings Account?

A Health Savings Account is a type of savings account that allows you to set aside money pretax to pay for qualified medical expenses. Contributions that you make to a Health Savings Account (HSA) are used to pay current or future medical expenses (including after you’ve retired) of the account owner, their spouse, and any qualified dependent.

There are several caveats that individuals should be aware of, however, such as:

  • Medical expenses that are reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return are not eligible.
  • You cannot be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care, and you cannot be claimed as a dependent on someone else’s tax return.
  • Spouses cannot open joint HSAs. Each spouse who is an eligible individual who wants an HSA must open a separate HSA.
  • Insurance premiums for taxpayers younger than age 65 are generally not considered qualified medical expenses unless the premiums are for health care continuation coverage (such as coverage under COBRA), health care coverage while receiving unemployment compensation under federal or state law.

Tax-Advantaged Savings Accounts

Health Savings Accounts (HSAs) offer a triple tax advantage:

  • Contributions are made pretax.
  • Growth is tax-free.
  • Distributions are tax-free as long as they are used for qualified health care expenses.

Contributions to an HSA, which can be opened through your bank or another financial institution, must be made in cash. Contributions of stock or property are not allowed. An employee may be able to elect to have money deposited directly into an HSA account through payroll withholdings. If your employer does not offer this option, you must wait until filing a tax return to claim the HSA contributions as a deduction. Unlike contributions to FSAs, you may change the amount withheld at any time during the year as well, and unused funds automatically roll over into the next calendar year (there is no “use it or lose it”).

Funds in the account may be invested much like any other retirement savings account; however, less than 10 percent of account holders do so, according to the Employee Benefit Research Institute. Whether funds can be invested depends on whether the HSA administrator offers this option. There may also be a minimum balance requirement, which could limit individuals with smaller account balances.

High Deductible Health Plans

However, a Health Savings Account is not available to everyone and can only be used if you have a High Deductible Health Plan (HDHP). Typically, high-deductible health plans have lower monthly premiums than plans with lower deductibles, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).

A high-deductible plan can be combined with a health savings account, allowing you to pay for certain medical expenses with tax-free money that you have set aside. Using the pretax funds in your HSA to pay for qualified medical expenses before you reach your deductible and other out-of-pocket costs such as copayments reduces your overall health care costs.

Calendar year 2021. For the calendar year 2021, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. The beneficiary’s annual out-of-pocket expenses, such as deductibles, copayments, and coinsurance, are limited to $7,000 for self-only coverage and $14,000 for family coverage. This limit doesn’t apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only use deductibles and out-of-pocket expenses for services within the network to figure whether the limit applies.

Last-month rule. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).

You can make contributions to your HSA for 2021 until April 15, 2022. Your employer can make contributions to your HSA between January 1, 2022, and April 15, 2022, that are allocated to 2021. The contribution will be reported on your 2021 Form W-2.

Summary of HSA Tax Advantages

  • Tax deductible. You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
  • Pretax dollars. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
  • Tax-free interest on earnings. Contributions remain in your account until you use them and are rolled over year after year. Any interest or other earnings on the assets in the account are tax-free. Furthermore, an HSA is “portable” and stays with you if you change employers or leave the workforce.
  • Tax-free distributions. Distributions may be tax-free if you pay qualified medical expenses.
  • Additional contributions for older workers.Employees, aged 55 years and older are able to save an additional $1,000 per year.
  • Tax-free after retirement. Distributions are tax-free at age 65 when used for qualified medical expenses including amounts used to pay Medicare Part B and Part D premiums, and long-term care insurance policy premiums. You cannot, however, use money in an HSA to pay for supplemental insurance (e.g., Medigap) premiums.

Help is Just a Phone Call Away

Please contact the office if you have any questions about health savings accounts.

Defer Capital Gains Using Like-Kind Exchanges

If you’re a savvy investor, you probably know that you must generally report as income any mutual fund distributions, whether you reinvest them or exchange shares in one fund for shares of another. In other words, you must report and pay any capital gains tax owed.

But if real estate’s your game, did you know that it’s possible to defer capital gains by taking advantage of a tax break that allows you to swap investment property on a tax-deferred basis?

What Is Section 1031?

Named after Section 1031 of the tax code, a like-kind exchange generally applies to real estate and was designed for people who wanted to exchange properties of equal value. If you own land in Montana and trade it for a shopping center in Rhode Island, as long as the values of the two properties are equal, nobody pays capital gains tax even if both properties may have appreciated since they were originally purchased.

Section 1031 transactions don’t have to involve identical types of investment properties. You can swap an apartment building for a shopping center or a piece of undeveloped raw land for an office or building. You can even swap a second home that you rent out for a parking lot.

There’s also no limit as to how many times you can use a Section 1031 exchange. It’s entirely possible to roll over the gain from your investment swaps for many years and avoid paying capital gains tax until a property is finally sold. Keep in mind that gain is deferred but not forgiven in a like-kind exchange, and you must calculate and keep track of your basis in the new property you acquired in the exchange.

Section 1031 is not for personal use. For example, you can’t use it for stocks, bonds, and other securities, or personal property (with limited exceptions such as artwork).

Properties of Unequal Value

Let’s say you have a small piece of property, and you want to trade up for a bigger one by exchanging it with another party. You can make the transaction without having to pay capital gains tax on the difference between the smaller property’s current market value and your lower original cost.

That’s good for you, but the other property owner doesn’t make out so well. Presumably, you will have to pay cash or assume a mortgage on the bigger property to make up the difference in value. In the tax trade, this is referred to as “boot,” and your partner must pay capital gains tax on that part of the transaction.

To avoid that, you could work through an intermediary who is often known as an escrow agent. Instead of a two-way deal involving a one-for-one swap, your transaction becomes a three-way deal.

Your replacement property may come from a third party through the escrow agent. Juggling numerous properties in various combinations, the escrow agent may arrange evenly valued swaps.

Under the right circumstances, you don’t even need to do an equal exchange. You can sell a property at a profit, buy a more expensive one, and defer the tax indefinitely.

You sell a property and have the cash put into an escrow account. Then the escrow agent buys another property that you want. They get the title to the deed and transfers the property to you.

Mortgage and Other Debt

When considering a Section 1031 exchange, it’s important to consider mortgage loans and other debt on the property you are planning to swap. Let’s say you hold a $200,000 mortgage on your existing property, but your “new” property only holds a mortgage of $150,000. Even if you’re not receiving cash from the trade, your mortgage liability has decreased by $50,000. In the eyes of the IRS, this is classified as “boot,” and you will still be liable for capital gains tax because it is still treated as “gain.”

Advance Planning Required

A Section 1031 transaction takes advance planning. You must identify your replacement property within 45 days of selling your estate. Then you must close on that within 180 days. There is no grace period. If your closing gets delayed by a storm or by other unforeseen circumstances, and you cannot close in time, you’re back to a taxable sale.

Find an escrow agent specializing in these types of transactions and contact your accountant to set up the IRS form ahead of time. Some people sell their property, take the cash, and put it in their bank account. They figure that all they must do is find a new property within 45 days and close within 180 days, but that’s not the case. As soon as “sellers” have cash in their hands or the paperwork isn’t done right, they’ve lost their opportunity to use this provision of the code.

Personal Residences and Vacation Homes

Section 1031 doesn’t apply to personal residences, but the IRS lets you sell your principal residence tax-free as long as the gain is under $250,000 for individuals ($500,000 if you’re married).

Section 1031 exchanges may be used for swapping vacation homes but present a trickier situation. Here’s an example of how this might work. Let’s say you stop going to your condo at the ski resort and instead rent it out to a bona fide tenant for 12 months. In doing so, you’ve effectively converted the condo to an investment property, which you can then swap for another property under the Section 1031 exchange.

However, if you want to use your new property as a vacation home, there’s a catch. You’ll need to comply with a 2008 IRS safe harbor rule that states in each of the 12-month periods following the 1031 exchange, you must rent the dwelling to someone for 14 days (or more) consecutively. In addition, you cannot use the dwelling more than the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented out for at a fair rental price.

You must report a section 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred. If you do not precisely follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

Help is Just a Phone Call Away

While they may seem straightforward, like-kind exchanges can be complicated, and you need to be careful of all kinds of restrictions and pitfalls. If you’re considering a Section 1031 exchange or have any questions, don’t hesitate to call.

Key Tax Changes Could Affect Your Tax Situation in 2021

Key tax provisions in the American Rescue Plan Act of 2021 could affect your tax situation. Here’s what you need to know:

Child and Dependent Care Credit Increased for 2021 Only

The new tax law affected taxpayers in several ways. First, it increased the dollar amount of the credit and the amount of eligible expenses for child and dependent care. It also modified the phase-out amount for the credit to allow higher earners to take advantage of the credit. Finally, the new law made the child and dependent care credit fully refundable.

For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%. In addition, eligible families can claim qualifying child and dependent care expenses of up to $8,000 for one qualifying individual (up from $3,000 in prior years) or $16,000 for two or more qualifying individuals (up from $6,000 before 2021). This means that the maximum credit in 2021 of 50% for one dependent’s qualifying expenses is $4,000, or $8,000 for two or more dependents.

When figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses.

As before, the more a taxpayer earns, the lower the credit percentage. Under the new law, however, more people will qualify for the new maximum 50% credit rate because the adjusted gross income (AGI) level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000.

For adjusted gross incomes above $125,000, the 50% credit percentage is reduced as income rises and plateaus at a 20 percent rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20 percent until reaching $400,000 and is then phased out above that level. It is completely unavailable for any taxpayer with AGI exceeding $438,000.

Also of significance is that in 2021, for the first time, the credit is fully refundable. As such, an eligible family can get it, even if they owe no federal income tax.

Workers Can Set Aside More in a Dependent Care FSA

For 2021, the maximum amount of tax-free employer-provided dependent care benefits increased from $5,000 to $10,500. An employee can set aside $10,500 in a dependent care FSA if their employer has one instead of the normal $5,000.

Workers can only do that if their employer adopts this change. Interested employees should contact their employer for details.

Childless EITC Expanded for 2021

For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit that helps many low- and moderate-income workers and working families. That’s because the maximum credit is nearly tripled for these taxpayers and is, for the first time, made available to both younger workers and senior citizens.

In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don’t qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.

Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.

Changes Expanding EITC for 2021 and Future Years

Changes expanding the EITC for 2021 and future years include:

Singles and Couples – who have Social Security numbers can claim the credit, even if their children don’t have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for the credit.

Workers and Working Families – who also have investment income can get the credit. The limit on investment income is increased to $10,000 starting in 2021. After 2021, the $10,000 limit is indexed for inflation. The current limit is $3,650.

Married but Separated Spouses – can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year, and must have a qualifying child living with them for more than half the year.

Expanded Child Tax Credit for 2021 Only

The new law increases the amount of the Child Tax Credit, makes it available for 17-year-old dependents, makes it fully refundable, and makes it possible for families to receive up to half of it, in advance, during the last half of 2021. Moreover, families can get the credit, even if they have little or no income from a job, business, or another source.

Prior to the taxable year 2021, the credit is worth up to $2,000 per eligible child. The new law increases it to as much as $3,000 per child for dependents ages 6 through 17 and $3,600 for dependents ages five and under.

The maximum credit is available to taxpayers with a modified AGI of:

  • $75,000 or less for singles,
  • $112,500 or less for heads of household and
  • $150,000 or less for married couples filing a joint return and qualified widows and widowers.

Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI. Furthermore,

the credit is fully refundable for 2021. Before this year, the refundable portion was limited to $1,400 per child.

Advance Child Tax Credit Payments

From July through December 2021, up to half the credit will be advanced to eligible families by the Department of Treasury and the IRS. These advance payments will be estimated from their 2020 return, or if not available, their 2019 return.

For that reason, the IRS urges families to file their 2020 returns as soon as possible – including many low-and moderate-income families who don’t normally file returns. Often, those families will qualify for an Economic Impact Payment or tax benefits, such as the EITC. This year, taxpayers have until May 17, 2021, to file a return.

To speed delivery of any refund, be sure to file electronically and choose direct deposit. Doing so will also ensure quick delivery of the Advance Child Tax Credit payments to eligible taxpayers later this year.

In the next few weeks, eligible families can choose to decline to receive the advance payments (more information about this, below). Likewise, families will also be able to notify Treasury and IRS of changes in their income, filing status, or the number of qualifying children using the IRS Child Tax Credit Update Portal.

Help is Just a Phone Call Away

For the most up-to-date information on these and other changes affecting your tax situation in 2021, don’t hesitate to contact the office. With taxes becoming more complicated every year, it’s never too early to consult a tax and accounting professional for assistance.

Child Tax Credit Payments Start July 15

The Internal Revenue Service has started sending letters to more than 36 million American families who, based on tax returns filed with the agency, may be eligible to receive monthly Child Tax Credit payments starting July 15, 2021. Here’s what families need to know:

Background

The expanded and newly-advanceable Child Tax Credit was authorized by the American Rescue Plan Act, enacted in March. The letters are going to families who may be eligible based on information they included in either their 2019 or 2020 federal income tax return or who used the Non-Filers tool on IRS.gov last year to register for an Economic Impact Payment.

Families who are eligible for advance Child Tax Credit payments will receive a second, personalized letter listing an estimate of their monthly payment, which begins July 15.

Most families do not need to take any action to get their payment. Normally, the IRS will calculate the payment amount based on the 2020 tax return. If that return is not available, either because it has not yet been filed or has not yet been processed, the IRS will instead determine the payment amount using the 2019 return.

Eligible families will begin receiving advance payments, either by direct deposit or check. The payment will be up to $300 per month for each qualifying child under age 6 and up to $250 per month for each qualifying child ages 6 to 17. The IRS will issue advance Child Tax Credit payments on July 15, August 13, September 15, October 15, November 15, and December 15.

Eligible Families Should File Tax Returns As Soon as Possible

The IRS urges individuals and families who haven’t yet filed their 2020 return – or 2019 return – to do so as soon as possible so they can receive any advance payment they’re eligible for. Doing so ensures that the IRS has their most current banking information, as well as key details about qualifying children. This includes people who don’t normally file a tax return, such as families experiencing homelessness, the rural poor, and other underserved groups.

Throughout the summer, the IRS will be adding additional tools and online resources to help with the advance Child Tax Credit. One of these tools will enable families to unenroll from receiving these advance payments and receive the full amount of the credit when they file their 2021 return next year instead. In addition, later this year, individuals and families will also be able to go to IRS.gov and use a Child Tax Credit Update Portal to notify IRS of changes in their income, filing status, or number of qualifying children; update their direct deposit information, and make other changes to ensure they are receiving the right amount as quickly as possible.

New Online Tool Available

An online Non-filer Sign-up tool is scheduled to go live on the IRS.gov website on July 15 to help eligible families who don’t normally file tax returns register for the monthly Advance Child Tax Credit payments. This tool provides a free and easy way for eligible people who don’t make enough income to have an income tax return-filing obligation to provide the IRS the basic information needed—name, address, and Social Security numbers – to figure and issue their Advance Child Tax Credit payments. Often, these individuals and families receive little or no income, including those experiencing homelessness and other underserved groups.

People who did not file a tax return for 2019 or 2020 and who did not use the IRS Non-filers tool last year to register for Economic Impact Payments can also use this tool, which enables them to provide required information about themselves, their qualifying children age 17 and under, their other dependents, and their direct deposit bank information so the IRS can quickly and easily deposit the payments directly into their checking or savings account.

The tool is an update of last year’s IRS Non-filers tool and is designed to help eligible individuals who don’t normally file income tax returns register for the $1,400 third round of Economic Impact Payments (also known as stimulus checks) and claim the Recovery Rebate Credit for any amount of the first two rounds of Economic Impact Payments they may have missed.

Eligible families who already filed or plan to file 2019 or 2020 income tax returns should not use this tool. Once the IRS processes their 2019 or 2020 tax return, the information will be used to determine eligibility and issue advance payments. Families who want to claim other tax benefits, such as the Earned Income Tax Credit for low- and moderate-income families, should not use this tool and instead file a regular tax return.

Other useful new online tools, include:

  • An interactive Child Tax Credit eligibility tool to help families determine whether they qualify for the Advance Child Tax Credit payments.
  • Another tool, the Child Tax Credit Update Portal, will initially enable anyone who has been determined to be eligible for advance payments to unenroll or opt-out of the advance payment program. Later this year, it will allow people to check on the status of their payments, make updates to their information, and be available in Spanish. More details will be available soon about the online Child Tax Credit Update Portal.

Child Tax Credit Changes

The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children between ages 6 and 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds were not considered as qualifying children for the credit.

The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of:

  • $75,000 or less for singles,
  • $112,500 or less for heads of household, and
  • $150,000 or less for married couples filing a joint return and qualified widows and widowers.

For most people, modified AGI is the amount shown on Line 11 of their 2020 Form 1040 or 1040-SR. Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every extra $1,000 in modified AGI.

In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax. Before this year, the refundable portion was limited to $1,400 per child.

Watch Out for Scams

As always, everyone should be on the lookout for scams related to both Advance Child Tax Credit payments and Economic Impact Payments. The only way to get either of these benefits is by either filing a tax return with the IRS or registering online through the Non-filer Sign-up tool, exclusively on IRS.gov. Any other option is a scam.

Be sure to watch out for scams using email, phone calls, or texts related to the payments. Remember: The IRS never sends unsolicited electronic communications asking anyone to open attachments or visit a non-governmental website.

Help is Just a Phone Call Away

Don’t hesitate to contact the office for the most up-to-date information on the Child Tax Credit and advance payments.