In the Heat of Tax Season!
If you’re interested in minimizing your tax obligations and maximizing your savings, consider the helpful tips and ideas you’ll find in this newsletter.
Call if you would like to discuss how any of this information relates to you. If you know someone that can benefit from this newsletter, feel free to send it to them.
Upcoming Dates in the Tax Calendar
- April 15th – First quarter 2021 estimated tax payments are due
- May 17th – Individual Income Tax Returns for 2020 are due
In This Issue
- Estimated Tax Payments due April 15
- Higher Taxes May Be in Your Future – Review your tax and estate plan NOW
- Businesses Get More Time to Apply for PPP Loans and Other Relief Provisions
- Restaurant Revitalization Fund – First Come, First Serve
- IRS Enforcement News: IRS Budget Increases & Targeting Crypto Users
Estimated Tax Payment Reminder
Now is the time to make your estimated tax payment
Reminder: First Quarter Estimated Taxes Now Due
Despite the individual tax filing due date being delayed until May 17, 2021, there is no delay in paying first quarter estimated tax payments for the 2021 tax year. So it is time to review your tax situation for the 2021 tax year and make an estimated quarterly tax payment using:
State of California: https://www.ftb.ca.gov/pay/estimated-tax-payments.html
If you have a filing or payment requirement due to another State, please be sure to make it.
First-quarter due date: Thursday, April 15, 2021
You are required to withhold or prepay throughout the 2021 tax year at least 90 percent of your 2021 total tax bill, or 100 percent of your 2020 federal tax bill. A quick look at your 2020 tax return and a projection of your 2021 tax obligation can help determine if a quarterly payment might be necessary in addition to what is being withheld from any paychecks.
Here are some things to consider:
If you do not have proper tax withholdings throughout the year, you could be subject to an underpayment penalty. A quick payment at the end of the year may not be enough to avoid the underpayment penalty.
In addition to paying income taxes, self-employed workers must also account for paying Social Security and Medicare taxes. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes.
ALERT! The tricky part of this approach in 2021 is with the individual tax filing due date being delayed until May 17, 2021, the IRS hasn’t announced whether it will apply a penalty to 2020 refunds applied to 2021’s tax obligation as a first-quarter payment if made after April 15.
Pay more in the first quarter.
By paying a little more than necessary in the first quarter, you can be in a position to adjust future estimated tax payments downward later in the year if your 2021 tax obligation appears like it will be lower than you originally thought.
Not sure if you need to make a quarterly payment?
Take a quick look at your 2020 tax return to see the amount of tax you paid. Divide the tax by the number of paychecks for the year. Is enough being withheld from your paycheck? Consider adjusting your withholdings with your employer if you think it is necessary to cover your 2021 tax bill.
*If your income is more than $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2020 tax obligation to be safe from an underpayment penalty on your 2021 tax return.
Higher Taxes May Be in Your Future
Here’s what to think about now.
There’s little question the tides are moving towards a higher tax environment with multiple trillion dollar spending bills, a new administration, and deficits as far as the eye can see. Instead of feeling helpless, here is a quick look at what might be on the horizon and some thoughts on how to be prepared.
Self-employment tax risk.
Social Security and Medicare fund collections took a hit during the pandemic. This is because of high unemployment and new federal benefits allowing employers to receive a credit on these taxes to help continue paying employees to take leave due to COVID-19. Over the next few years, there will be tremendous pressure to add funds back into these programs. This might be done by increasing the taxability of benefits or dramatically increasing the income subject to Social Security taxes.
Continue to work on a retirement plan that is not as dependent on Social Security benefits. If you are a small business owner, and your business income is subject to self-employment tax (SE tax) now is a good time to consider reorganizing your business to shield some of your business income by moving to an S corporation.
Capital gains tax rate increases.
In 2021, the highest long-term capital gains tax rate is 23.8% (20% capital gains tax rate plus a 3.8% surtax as part of the Affordable Care Act) but if planned correctly, you could pay either nothing or 15% federal tax on long-term capital gains. Congress could see the sales of long-term securities and other assets as a valuable source of tax revenue by eliminating this preferential tax rate and instead using ordinary income tax rates (currently as high as 37%).
Actively manage investment profits, netting your gains against your losses. If you have any assets that have appreciated over time and intend to sell in the near future, consider trading in 2021 to avoid a potential increase in the capital gains tax rates.
Tax planning problems for your estate.
There are several considerations to take into account when looking at your estate’s tax plan. First, under current law, say for example your parents bought one share of stock in 1980 for $10 and you inherit the share of stock when it’s worth $100 and immediately sell it for the same $100. You would not owe any federal taxes on the $90 difference. In the future, this feature, called stepped-up cost basis, may become limited or removed to increase tax revenue. Second, the estate tax rate currently set at 40% is under pressure to be increased. This is entirely possible when you consider that this tax rate was 55% in 2001.
Consider gifting money or securities to family, friends or a foundation during your lifetime. Individual gifts in 2021 of $15,000 or less ($30,000 for married couples) don’t count against the lifetime gift-giving limit.
Tax rate volatility.
With huge federal deficits that are now beyond the scope of imagination, what will happen next? Just the latest legislation adds a whopping $1.9 trillion to what must be paid back. While interest rates are being held at historic lows to help lower the cost of this added debt, it cannot continue unabated. And the meteoric rise in home prices is just one of the costs of this low-interest approach. The current proposals in Washington suggest an increase in tax rates is not too far in the distant future.
Do a forecast of your future income and tax rates. If you think tax rates and your taxable income will be increasing in the next few years, you will want to move as much money as possible into tax-advantaged accounts like Roth IRAs. You should also understand any state tax ramifications to help with your tax planning.
While Congress is debating what to do with your tax rates, now is the time to create a strategy so that if or when tax rates do increase, you will be prepared.
We strongly urge you to take some time and review your estate plan and plan for the future. Should you have any questions or concerns regarding your tax situation please feel free to call.
Businesses Get More Time to Apply For PPP Loans
The legislation provides other business relief provisions.
Here’s what you need to know about the Paycheck Protection Program (PPP) loans and other business relief provisions of the recently-passed American Rescue Plan Act.
PPP loan application deadline extended.
The deadline to apply for PPP loans is now May 31, 2021.
Sick leave extended.
If your business provides sick leave for COVID-related reasons, you might get reimbursed for the sick pay through a tax credit.
- Businesses that voluntarily provide sick leave through September 30, 2021 qualify for the credit. There are limits for each employee. However, for employees who took 10 days of sick leave in 2020 using this same provision, they can take another 10 days beginning April 1, 2021.
- Refundable tax credits are available through September 30, 2021.
- Covered reasons to get the tax credit now include sick leave taken to get COVID testing and vaccination, and to recover from the vaccination.
These benefits are also extended to self-employed workers.
Family Medical Leave Act Provisions extended.
- Additional coverage is now available through September 30, 2021.
- Qualified wages for this provision move to $12,000 (up from $10,000) however the credit was not increased.
- The Family Medical Leave Act also applies to the self-employed.
Big increase in Employee Retention Credit.
Businesses can get up to a $28,000 tax credit per employee in 2021, up from a $5,000 maximum credit in 2020. This credit can be claimed through Dec. 31, 2021.
There are many more provisions in the close to $2 trillion dollar spending package, including money given to states. As everyone digests this new 500-plus page piece of legislation, more clarifications will be forthcoming from the IRS and other sources.
Restaurant Revitalization Fund – First Come, First Serve
Steve Moskowitz reminds you and your favorite restaurants that the money provided for restaurant relief via the Restaurant Revitalization Fund is currently on a First Come, First Serve basis with the program opening date still to be determined.
Check out our recent webinar on the Restaurant Revitalization Fund.
IRS Enforcement News: 10% IRS Budget Increase Announced & IRS Launches ‘Operation Hidden Treasure’ to Target Unreported Crypto-Income
Two recent announcements:
- Bloomberg tax reports that President Joe Biden is seeking more than $1 billion dollars in additional funding for Internal Revenue Service – showing his administration is serious about getting the agency the resources it needs to audit more wealthy individuals and corporations. This budget increase combined with the IRS Office of Fraud Enforcement is likely to result in additional investigations.
- Operation Hidden Treasure to Target Unreported Bitcoin and Crypto Users IRS through its New Fraud Enforcement Office has announced a new program to identify civil and criminal tax matters related to unreported cryptocurrency. There are several Summons out to various exchanges and the IRS has partnered with civilian companies: Chainalysis and Excygent.
- Little Known Tax Strategies That Could Save you a Fortune – Bacon Wrapped Business with Brad Constanzo Podcast
- Put the Tax Code to Work for Your Business – 15 Key Items to Review Yearly
Upcoming Webinar: Medical Practice Profit Optimization May 26, 2021, at 12pm
While this webinar is designed specifically for medical practices, you may want to take a look at the type of analysis and forecasting Moskowitz LLP can provide to you and your business.
Hire Us for Tax Preparation Services Now