Header Right

admin

6 Ways Income Taxes Will Be Different in 2021

by

Every year brings some degree of change regarding filing income taxes. While 2020 taxes are a done deal, it’s never too early to begin thinking about the next tax year. To help you be prepared for next year’s filing, here are 6 Ways Income Taxes Will Be Different for 2021.

Standard Deduction Increase

Standard deductions reduce the amount of your income that is subject to federal tax. Most taxpayers do not have enough deductions to itemize, so they take the standard deduction. Annual adjustments for inflation cause the standard deduction to increase slightly each tax year. For 2021, here are the standard deductions and the amount of the increase from the prior year.

  • Married filing jointly $25,100, up $300
  • Single and married filing separately $12,550, up $150
  • Head of household $18,800, up $150

While itemizing is more work, if your itemized deductions exceed the standard deduction allowance for your tax filing category, itemizing makes sense.

Higher Tax Brackets

You already know the more money you earn, the more you pay in taxes. How much you earn, your income, along with your filing status, determines your tax bracket. There are seven tax brackets with the top tax rate being 37 percent for taxable income over $518,400. Brackets are adjusted annually to account for inflation. For 2021, tax bracket thresholds were increased by about 1 percent over 2020 levels.

Capital gains

When you sell an investment like real estate, stocks, or bonds, for more than you paid the net profit you make is taxed as either short- or long-term capital gains. If you held your investment for less than one year, you pay short-term capital gains. For investments held more than one year and one day, the capital gains tax on the profit you made is long-term. Short-term capital gains are taxed like regular income and up to $3,000 of short-term losses can be deducted. However, long-term capital gains are taxed different rates (0 – 20 percent) depending on taxable income and marital status.

For example, if you’re single and your income is below $40,400 in 2021, you fall into the 0 percent capital gains tax bracket. However, if you’re single and earn between $40,401 and $445,850, you move into the 15 percent bracket. Above that, it’s the 20 percent bracket for you.

The 0 percent bracket is approximately double for married couples ($80,800), but above that, brackets are close to the single filer brackets (15 percent up to $501,600 and 20 percent above that).

Individual Tax Credits

Tax credits lower your overall tax bill. There are quite a few credits to consider, but the most popular ones are the earned income tax credit, the saver’s tax credit, and the lifetime learning tax credit.

Earned income credit is for low- and middle-income taxpayers and is based on income, filing status, and number of children, although taxpayers without children can qualify. For 2021, the earned income credit ranges are up very slightly over 2020 and range from $543 to $6,728. Some criteria for the credit are having at least $1 of earned income, investment income must be $3,650 or less. Other stipulations apply, so check with your tax preparer to see if you qualify.

Saver’s credit is also designed for low- and middle-income taxpayers and is to encourage retirement contributions. Taxpayer adjusted gross income (AGI) must be less than $33,000 in 2021 (up slightly from $32,500 in 2020) to qualify for the credit for single or married filing separately. Married filing jointly AGI must be less than $66,000 in 2021 (up from $65,000 in 2020).

Lifetime learning credit is for taxpayers who incur education expenses during the year. There was little change in this credit for 2021. Married filing jointly income limits increased $1,000 (from $118,000 to $119,000 for full credit and from $138,000 to $139,000 for partial credit). Other filing statuses will see no change for 2021.

Alternative Minimum Tax

The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly. This is a change from 2020 when the exemption amount was $72,900 and $113,400 for married couples filing jointly.

Fringe Benefits, Medical Savings Accounts, and Estates

Most employee fringe benefits allowances for 2021 will continue at their 2020 levels; however, changes occur in health savings account (HSA) contributions, which increase by $50 for single and $100 for families from 2020.

The maximum out-of-pocket amounts for high-deductible health plans (HDHP) increases by $100 for single and $200 for families.

The federal estate tax targets the amount of wealth you can pass along when you die. It is no concern unless your estate is worth more than $11.7 million when you die. That figure is up from $11.58 million in 2020.

Retirement Plans

Contributions for 401(k) plans will not change from 2020 top off amount of $19,500 with a $6,500 catch-up contribution allowed for individuals 50 or older. Maximum contributions from all sources (employer and employee) rise by $1,000.

Of course, these are an overview of changes for the 2021 tax year. To be sure you’re up to speed on all the tax changes that impact you, be sure to speak to your trusted accountant.

We’re ready to prepare your taxes! Call us today at 703-971-2422 or schedule a free consultation online to speak to a tax professional who genuinely cares about providing quality tax preparation services.

PPP Loan Forgiveness in 2021

by

 

PPP loan forgiveness memo on the board.REFRESHER: What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a Small Business Association (SBA)-backed loan to help businesses retain employees during the Coronavirus (COVID-19) pandemic enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Funds can be used for payroll expenses and benefits and some non-payroll related expenses such as mortgage interest, rent, and utilities.

There are first and second-draw PPP loans. First-draw loans are available for first-time applicants, and second-draw loans are for businesses who already took advantage of a first-draw PPP loan.

PPP Loan Forgiveness

PPP loans can be forgiven if the following criteria are met:

  • employee retention and compensation rates must be maintained
  • loan funds must be spent according to the loan terms
  • no less than 60 percent of loan funds are spent on payroll

When Congress passed the new spending bill at the end of 2020, the covered period for PPP loans was extended through March 31, 2021. With this extension, the SBA released new guidance for these loans and loan forgiveness.

Expanded PPP Loan Forgiveness

Eligible Forgivable Non-Payroll Expenses

Under these new guidelines, the number of eligible “forgivable” non-payroll expenses were expanded to cover payments for:

  • software and cloud computing services
  • property damage costs related to vandalism or looting not covered by insurance
  • supplier costs for contracted goods (including perishable goods) ordered before taking out the loan
  • expenses related to compliance with federal, state, or local health and safety guidelines related to the pandemic from March 1, 2020, until the national emergency declaration expiration

Covered Period for Forgiveness

The covered period for PPP loans is when a recipient can spend the funds and still qualify for loan forgiveness. The covered period was either eight or 24 weeks; however, recipients can choose when the covered period ends under the new guidelines. They can choose a date between 8 and 24 weeks after their loan origination date.

Simplified Loan Forgiveness Application

For loans under $150,000, a simplified forgiveness application is available. For borrowers who submit a signed certification under one page in length to the lender, loans are forgiven in full. The certification must include:

  • the total loan amount
  • an estimate of the total loan amount spent on payroll costs
  • the number of employees the employer retained as a result of receiving their PPP loan

Applying for PPP Loan Forgiveness

Borrowers must wait until all PPP loan funds are used before applying for forgiveness. Forgiveness can be applied up to the maturity date of the loan. Forgiveness must be applied for within ten months after the last day of the covered period of the loan, or payments will no longer be deferred, and borrowers must begin repayment of the loan.

The appropriate loan form with all documentation for payroll and non-payroll expenses along with the forgiveness documentation should be submitted to the borrower’s lender to start the forgiveness process.

For more help with PPP loans, contact your accounting professional.

Find out how we can use our wealth of knowledge, proven accounting strategies, and impeccable organizational skills to manage your accounting. Call 703-971-2422 to schedule your free consultation now.

Diversification — The Tax Angle

by

Image of two young businessmen interacting at meeting in officeMany investors may be aware of the importance of diversification. However, some investors take diversification one step further. In addition to investing in different asset classes (e.g., stocks, bonds, cash, commodities, real estate), these investors choose to hold investments in different types of accounts to obtain the benefits of tax diversification.

The basic premise: Spreading money among accounts that are treated differently for tax purposes provides investors with the flexibility to better manage their taxes and potentially enhance their after-tax returns.

Tax-Deferred Accounts

Traditional individual retirement accounts (IRAs), 401(k) plans, and other employer-sponsored retirement plans allow investors to defer income taxes on investment earnings. And pretax or tax-deductible contributions to these accounts provide current tax savings. When investors eventually withdraw their money, however, they must pay taxes on the previously tax-deferred amounts they receive — at the ordinary income tax rates in effect in the year of withdrawal. And they cannot benefit from the potentially more favorable tax rates on long-term capital gains and qualifying stock dividends.

Roth Accounts

Roth IRAs and Roth accounts in employer plans also offer tax-deferred earnings. However, investors can avoid taxes on Roth investment earnings permanently (under current law, that is) by not taking withdrawals until a five-year period has elapsed and they’ve reached age 59½.

Tax free is better than tax deferred, but Roth accounts have a downside: They cannot accept pretax or tax-deductible contributions. So investors receive no immediate tax benefit. Converting a traditional IRA or tax-deferred plan account to a Roth account triggers income taxes on all previously untaxed conversion amounts.

Taxable Accounts

Investing in taxable accounts generally means paying taxes on any earnings each year. An upside: Under current law, the federal tax rates on net long-term capital gains and qualifying stock dividends are lower than the rates that apply to ordinary income. Investors may be able to manage their tax exposure by:

  • Holding appreciated stock instead of selling it. This strategy defers taxes on the gains. Of course, by holding their stocks, investors risk price declines.
  • Investing in mutual funds that attempt to keep investors’ taxes to a minimum by controlling portfolio turnover and timing the realization of gains and losses.
  • Owning municipal bonds or municipal bond funds that pay tax-exempt interest. (Caution: Interest on certain municipal bonds is potentially subject to alternative minimum tax.)

Using tax-deferred, Roth, and taxable accounts strategically can help investors navigate what might be a changing tax landscape in the years ahead.

Call us at 703-971-2422 today to discuss how we can help you manage your tax obligations and reduce your tax burden or request a free consultation and we’ll contact you right away.

Protect Your Business Data from Hackers

by

concept with many questions, educationDo you know where your company’s data is? Without strong security controls in place, your data could be anywhere — and you could be dealing with a privacy breach. As technology grows more complex and the flow of information accelerates, opportunities for the misuse and abuse of data are bound to increase.

Flow Chart of Data

It’s imperative that you know exactly what data your business collects. Pay particular attention to the personally identifiable information (PII) you have for both customers and employees. Create a detailed flow chart showing what information is gathered, how it is captured, how it is used, where it is stored, how it is shared, and how it is ultimately disposed of.

Risk and Regulations

An effective data management plan helps ensure compliance and manage risk by establishing policies and procedures that control the flow and use of information. In addition to federal privacy legislation, the vast majority of states have laws to prevent security breaches, and some industries have developed their own privacy guidelines. Note that each phase of the information “life cycle” may require a unique set of controls.

Privacy Policies

Privacy policies are the “public” face of your data management plan. Best practices include:

  • Notify customers about your privacy policies. Explain why information is collected, how it is used, why it is retained, and why it is disclosed (if it is).
  • Obtain customers’ consent to use the information as outlined in your policies.
  • Collect only the information you need and only for the purposes outlined.
  • Keep personal information secure.
  • Allow customers to review and update their PII.
  • Do not retain information any longer than needed to fulfill your stated purpose or as required (by law or regulation).
  • If you disclose information to a third party, do so only with consent and only for the purposes outlined.
  • Monitor your compliance efforts on an ongoing basis.

For more tips on how to keep business best practices front and center for your company, give us a call today. We can’t wait to hear from you.

Find out how we can use our wealth of knowledge, proven accounting strategies, and impeccable organizational skills to manage your accounting. Call 703-971-2422 to schedule your free consultation now.

Renting Residential Real Estate — A Tax Review for the Nonprofessional Landlord

by

Working together on laptopInvesting in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

Selling the Property

A gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.

From small businesses to individuals, our Fairfax, VA CPA firm applies the same level of dedication to every client, with sound tax strategies and unsurpassed attention to detail. Call our office now at 703-971-2422 to discover how we can decrease your tax obligations. We welcome new clients and offer a free consultation so contact us today.

Get Your Business Costs Under Control Today

by

Business adviser are analyzing market data to clients or partners have been informed. Business Analysis Concept.Increasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort, business costs are often very ripe for a quick trimming. Here are some possibilities.

Supplies and Other Purchases

Usually, in any business, relatively few items represent a very large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by making sure you always bid out significant purchases or by more actively seeking less expensive alternatives.

For many companies, inventory carrying costs are a very significant expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and Other Services

The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage.

Look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you are not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash Management

To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts.

On the receiving side, deposit all receipts daily. And always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed Expenses

One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives.

To learn more ways to control your business costs give us a call today. Our trained staff of professionals is always available to answer any questions you may have.

Find out how we can use our wealth of knowledge, proven accounting strategies, and impeccable organizational skills to manage your accounting. Call 703-971-2422 to schedule your free consultation now.