Retiring Soon? 4 Tax Issues You May Face

If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications. Here’s a brief rundown of four tax and financial issues you may deal with when you retire: Taking required minimum distributions This is the minimum amount you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 72 (70½ before January 1, 2020). Roth IRAs don’t require withdrawals until after the death of the owner. You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions...

Advance Child Tax Credit Payments Begin July 15th

Eligible parents will soon begin receiving payments from the federal government. The IRS announced that the 2021 advance child tax credit (CTC) payments, which were created in the American Rescue Plan Act (ARPA), will begin being made on July 15, 2021. How have child tax credits changed? The ARPA temporarily expanded and made CTCs refundable for 2021. The law increased the maximum CTC — for 2021 only — to $3,600 for each qualifying child under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold. Advance payments will receive up to $300 monthly for each child under 6, and up to $250 monthly for each child 6 and older. The increased credit amount will be reduced...

Still Have Questions After Filing Your 1040?

Even after your 2020 tax return has been successfully transmitted to the IRS, you may still have  questions after filing your return. Here are brief answers to three questions that we’re frequently asked at this time of year. Are you wondering when you will receive your refund? The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount. Which tax records can you throw away now?  At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file...

Plan Ahead for the 3.8% Net Investment Income Tax

High-income taxpayers face a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some steps you may be able to take to reduce its impact. The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, $200,000 for unmarried taxpayers and heads of household. The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you. Net investment income includes interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. In...

Working in the Gig Economy Results in Tax Obligations

Before the COVID-19 pandemic hit, the number of people engaged in the “gig” or sharing economy had been growing, according to several reports. And reductions in working hours during the pandemic have caused even more people to turn to gig work to make up lost income. There are tax consequences for the people who perform these jobs, which include providing car rides, delivering food, walking dogs and providing other services. Bottom line: If you receive income from freelancing or from one of the online platforms offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made. Basics for gig workers The IRS considers gig workers...

Some 2020 Unemployment Compensation is Tax Free

In recent months, there have been a number of tax changes that may affect your individual tax bill. Many of these changes were enacted to help mitigate the financial damage caused by COVID-19. Here are two changes that may result in tax savings for you on your 2020 or 2021 tax returns. The 2020 return was due on May 17, 2021 (because the IRS extended many due dates from the usual April 15 this year). If you couldn't file by that date, you could have requested an extra five months to file your 2020 tax return by October 15, 2021. Your 2021 return will be due in April of 2022. Some unemployment compensation from last year is tax free Many people lost their jobs last year due to...

Determining the "Basis"in your Residence

The housing market in many parts of the country is strong this spring. If you’re buying or selling a home, you should know how to determine your “basis.” How it works You can claim an itemized deduction on your tax return for real estate taxes and home mortgage interest. Most other home ownership costs can’t be deducted currently. However, these costs may increase your home’s “basis” (your cost for tax purposes). And a higher basis can save taxes when you sell. The law allows an exclusion from income for all or part of the gain realized on the sale of your home. The general exclusion limit is $250,000 ($500,000 for married taxpayers). You may feel the exclusion amount makes keeping track of the basis relatively unimportant. Many homes...

Who Qualifies for Head of Household Tax Filing Status

When you file your tax return, you must check one of the following filing statuses: Single, married filing jointly, married filing separately, head of household or qualifying widow(er). Who qualifies for "head of household" tax filing status, which is more favorable than single? To qualify, you must maintain a household, which for more than half the year, is the principal home of a “qualifying child” or other relative of yours whom you can claim as a dependent (unless you only qualify due to the multiple support rules). A qualifying child? A child is considered qualifying if he or she: Lives in your home for more than half the year, Is your child, stepchild, adopted child, foster child, sibling stepsibling (or a descendant of any of these), Is under...

What if You're Not Ready to File Your 1040 by 5/17/21?

“Tax day” is just around the corner. This year, the deadline for filing 2020 individual tax returns is Monday, May 17, 2021. The IRS postponed the usual April 15 due date due to the COVID-19 pandemic. If you still aren’t ready to file your return, you should request a tax-filing extension. Anyone can request one and in some special situations, people can receive more time without even asking. Taxpayers can receive more time to file by submitting a request for an automatic extension on IRS Form 4868. This will extend the filing deadline until October 15, 2021. But be aware that an extension of time to file your return doesn’t grant you an extension of time to pay your taxes. You need to estimate and pay...

Importance of Meeting Tax Return and Payment Deadlines

The May 17 deadline for filing your 2020 individual tax return is coming up soon. It’s important to file and pay your tax return on time to avoid penalties imposed by the IRS. Here are the basic rules. Failure to pay  Separate penalties apply for failing to pay and failing to file. The failure-to-pay penalty is 1/2% for each month (or partial month) the payment is late. For example, if payment is due May 17 and is made June 22, the penalty is 1% (1/2% times 2 months or partial months). The maximum penalty is 25%. The failure-to-pay penalty is based on the amount shown as due on the return (less credits for amounts paid through withholding or estimated payments), even if the actual tax bill turns out to...