Shoreline Tax & Accounting Services, LLC

Preparing for a Smooth Tax Season (1/2)

The IRS recently posted a number of reminders about things taxpayers can do in December to make sure they are ready for the upcoming tax season. Here are some key highlights:

ORGANIZE YOUR RECORDS:

Many tax deductions and credits require written documentation. Make sure your receipts for deductible expenses are safely stored with your tax records, or for digital documents, backed up in multiple locations. To claim a tuition credit like the Lifelong Learning or American Opportunity Tax Credit, you will need a copy of Form 1098-T from the school where you paid qualifying tuition and fees.

CHECK THE STATUS OF YOUR ITIN:

If you use an individual taxpayer ID number (ITIN) to file tax returns, make sure that the number has not expired. In general, if you have not used your ITIN to file a federal return at least once in the last three years (2018, 2019 or 2020), it will expire on December 31, 2021. All ITINs with middle digits in the 70-88 range have also expired, as well as some with middle digits from 90 through 99. An expired ITIN can lead to processing delays or the IRS rejecting your return.

CONTRIBUTE TO YOUR QUALIFIED RETIREMENT PLAN:

If you have not reached the annual contribution limit for your retirement plan, such as an IRA or 401(k), you may wish to put more money into the plan before the year ends. Contributions to traditional IRAs and other plans may be tax deductible, reducing your 2021 taxable income. Depending on your adjusted gross income (AGI), your retirement contributions may also qualify you for the Saver's Credit, which can reduce your tax on a dollar-for-dollar basis.

A tax professional can help you find the best year-end tax strategy for your retirement accounts, and suggest other steps to ensure a worry-free filing season without unpleasant surprises.

Giving Tuesday and Charitable Donations - Did You Know?

Giving Tuesday is an annual event that highlights charitable giving after Thanksgiving.

If you are considering charitable donations, you may be able to donate to a Donor-Advised Fund (DAF) every two or three years instead of every year. This may qualify you to receive tax benefits now, allow the amount to grow tax-free, and the decision on which qualified charity to fund can be made later.

If you are 70.5 years or older, you may also be able to make a qualified charitable distribution (QCD) directly from your IRA this year. QCDs may allow the donation to be deducted from your income. A tax advisor can help you structure your charitable giving.

The IRS has released a tool to make it easier to get information about qualified charitable organizations. The Exempt Organizations Select Check tool can be found at: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

Year-End Flexible Spending Arrangements (FSAs)

The IRS reminds taxpayers that FSAs for qualified health expenses are generally subject to a “use it or lose it” rule, meaning that the taxpayer forfeits any funds remaining in the account at the end of the year.

However, in many cases, employers may allow either a grace period to use up FSA funds from the previous year, or a partial carryover of funds to the next year.

If you have money remaining in your 2021 FSA, check with your employer's benefits department about whether you have a carryover or grace period option. If not, you may want to schedule qualified medical purchases or procedures now, to ensure that you use up FSA funds before January 1.

Year-End 2021 Retirement Plan RMD Planning – Did You Know?

Many taxpayers who hold traditional IRAs or other retirement accounts must make annual withdrawals called Required Minimum Distributions, or RMDs. The CARES Act waived most RMDs for tax year 2020, and also created special tax rules for 2020 RMDs that were reclassified as "coronavirus-related distributions." Those special provisions have now expired, so standard IRS rules apply for 2021 RMDs.

In general, taxpayers with traditional IRAs or certain other retirement plans must take a 2021 RMD if they either (a) reached age 70 1/2 in 2019 or before, or (b) reach age 72 in 2021. As a rule, RMDs are taxable income, usually at the person's ordinary income tax rate.

In addition, someone who inherited an IRA from a person who died before 2020 generally must take a 2021 RMD, regardless of their age. If you inherited a retirement plan from someone who died on or after January 1, 2020, you may either need to take annual RMDs or withdraw all funds from the account within 10 years, depending on your circumstances. These rules apply to both traditional and Roth inherited IRAs, although RMDs from Roth IRAs may not be taxed.

For most people, the deadline to take 2021 RMDs is December 31, 2021. However, those who turn 72 this year generally have until April 1, 2022 to take their first RMD. If this exception applies to you, keep in mind that you will need to take your second RMD by December 31, 2022. Therefore, you may end up owing tax on both your first and second RMDs in 2022. Taking your first RMD in 2021 will prevent this issue.

RMD amounts depend on the recipient's age and other factors. A tax professional can help you determine whether you must take a 2021 RMD or other IRA withdrawal, how to calculate the amount, and how to report the withdrawal to the IRS.

IRS Adds Income Changes to CTC Update Portal and Announces Signup Deadline

Families who are currently receiving advance payments of the 2021 Child Tax Credit (CTC) may now use the online CTC Update Portal (link below) to report changes in their incomes. Reporting an income change may qualify taxpayers for a higher monthly payment amount, or ensure that they do not need to repay advance CTC payments next spring.

The maximum monthly payment is $300 per child qualified under age 6, and $250 per qualifying child of age 6 through 17. Generally, a small change in income will not affect a household's payment amount. However, if you have not been receiving the maximum amount and had a significant income drop in 2021, you may qualify for a substantially larger December payment.

Similarly, if your income greatly increased in 2021 compared to 2020, you should report this change to avoid potentially facing an advance CTC repayment requirement. You must use the portal to report your income changes by November 29 in order for the IRS to make any necessary adjustments to your December payment. The IRS expects to launch a Spanish version of the portal by that time.

Eligible families who have not been receiving advance CTC payments because the IRS does not have their information may still register for the program. The IRS especially urges lower-income taxpayers who are not required to file tax returns to use the online signup portal (link below) by the November 15 deadline. Those who sign up in November will receive a single advance payment in December, of up to $1,800 per qualifying child under 6, and $1,500 per qualifying child age 6-17.

IRS CTC UPDATE PORTAL: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

IRS CTC SIGNUP PORTAL: https://www.whitehouse.gov/child-tax-credit/sign-up/

Business Advertising Expenses – Did You Know?

If you have business income, including earnings from small business ownership or many self-employment activities, you may qualify to deduct advertising expenses on your tax return. In general, the IRS allows taxpayers to deduct “ordinary and necessary” business expenses. Generally, advertising and marketing costs are considered ordinary and necessary if:

- They are common in your trade, field or industry; AND
- They are helpful and appropriate for your trade or business.

Typical deductible expenses include traditional advertising (such as signage, print, and TV and radio ads), along with paid ads on social media or freelancing platforms. You may also be able to deduct costs associated with “goodwill advertising” that enhances the visibility of your product, service or brand. For example, you might run an ad that mentions your business, but primarily promotes an upcoming charity event or educates the public about an important cause.

Deductible marketing costs may also include expenses related to providing food, entertainment or facilities to the public to promote community goodwill. However, IRS rules governing deductions for meal and entertainment expenses have very specific requirements. A business tax professional can help you determine whether you can deduct your goodwill advertising and other marketing costs, and if so, how to document expenses and claim your deduction.

2021 IRS Interest Rates Unchanged

The IRS has announced that for the rest of the year, there will be no change to interest rates related to tax underpayment or overpayment. Typically, individuals and businesses must pay interest charges if they do not pay the full amount of tax they owe by the appropriate deadline. The IRS also pays interest to taxpayers whose refunds were delayed beyond the time frame that federal regulations allow for processing returns.

For individuals, the IRS can ordinarily take up to 45 days to process a tax return and issue a refund without paying interest to the taxpayer. In cases where a refund is delayed and the IRS must pay interest, the amount of interest is usually calculated from the original filing deadline or the date the return was received, whichever came later.

For individual taxpayers, the IRS currently charges interest at a 3% annual rate for tax underpayments and late payments, and pays interest at 3% on delayed refunds. The same rates generally apply for businesses other than corporations. The interest rates for corporations depend on the size of the refund or underpayment. A tax professional can help you plan your tax payments and file your returns in a timely manner to avoid paying interest.

IRS 2021 Advance CTC Payments FAQs – Did You Know?

The IRS recently answered a number of common questions about the 2021 Child Tax Credit (CTC) advance payments that Americans began receiving in mid-July. Here are the highlights:

DO I HAVE TO PAY TAX ON THE CTC ADVANCE PAYMENTS?

No. The CTC is a tax credit. As long as you qualify for the credit, the advance payments do not count as income and are not taxable. You can check your eligibility using the IRS Advance CTC Eligibility portal (link below).

WILL ADVANCE CTC PAYMENTS DISQUALIFY ME FOR OTHER FEDERAL PROGRAMS?

No. Because these payments are not income, they will not affect eligibility for federal programs with income limits, like the Earned Income Credit, Pell Grants, or higher education credits.

WILL THE IRS REDUCE THE PAYMENTS DUE TO BACK TAXES OR OTHER DEBTS?

No. Past-due taxes, overdue child support, and other federal or state debts will not affect CTC advance payment amounts. However, these issues may affect a taxpayer's final CTC amount when they file their 2021 tax return, possibly reducing their refund or increasing their tax. Also, some states do allow reduction of CTC advance payments to cover a taxpayer's private debts.

I AM ELIGIBLE FOR THE 2021 CTC BUT MY ADVANCE PAYMENTS ARE DELAYED?

The most common reason for a delay in receiving advance CTC payments is that the IRS does not have your current mailing address or banking information. Check the IRS Advance CTC Update portal (link below) to see if you need to update your info. The IRS is also withholding advance CTC payments to victims and possible victims of tax-related identity theft, to prevent further fraud. These payments will be sent when the ID theft cases are resolved.

If you are unsure whether it is best for you to accept CTC advance payments, or to opt out and claim the entire credit when you file your 2021 tax return, a tax professional can help you decide.

IRS Advance CTC Eligibility portal: https://www.irs.gov/credits-deductions/advance-child-tax-credit-eligibility-assistant

IRS Advance CTC Update portal: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

6-Month Filing & FBAR Extensions Deadline

For taxpayers who have extensions to file their 2020 returns, the filing due date for those returns is Friday, October 15, 2021.

The October 15 deadline to file under an extension applies to several common returns, including:

2020 INDIVIDUAL INCOME TAXES:

Most individual taxpayers who requested an extension to file their 2020 federal tax returns must file by October 15. However, additional extensions may be available to some taxpayers affected by recent disasters.

2020 CORPORATE INCOME TAXES:

The October 15 deadline also applies to C corporations that requested an extension to file their 2020 corporate income tax returns (Form 1120).

FOREIGN BANK ACCOUNT REPORT (FBAR):

Many U.S. taxpayers, including individuals and businesses, must file an annual report of their foreign bank and other financial accounts, called an FBAR. Typically, filing an FBAR is necessary if the total value of a taxpayer's foreign accounts exceeds $10,000 at any time during the calendar year. However, certain accounts, such as those held within a qualified IRA or other retirement plan, may not need to be reported. Most taxpayers who are required to file a 2020 FBAR and have not yet done so must file by October 15.

Remember that in general, an extension to file tax returns is NOT an extension to pay any tax due. Therefore, those who have not yet filed but expect to owe 2020 tax should estimate the amount they owe and pay that amount as soon as possible, even if they will not file their returns until October 15. Immediate payment will minimize any interest charges and late payment penalties.

Special Tax Benefits for Charitable Donations Extended Through 2021 – Did You Know?

The CARES Act of 2020 included provisions to make it easier for taxpayers to donate to charities. Congress and the IRS have extended these temporary rules through tax year 2021. One key rule raises the deduction limit for charitable contributions, while another allows taxpayers to deduct certain donations even if they don't itemize deductions on their tax returns.

Standard IRS rules limit the deduction that taxpayers who itemize deductions can claim for charitable donations to at most 60% of adjusted gross income (AGI). However, under the extended special rules, these taxpayers may elect to claim a deduction of up to 100% of their AGI for qualified monetary donations made during calendar year 2021.

Taxpayers who claim the standard deduction ordinarily cannot deduct any charitable donations on their tax returns. However, the special rules allow these taxpayers to claim a deduction of up to $300 (up to $600 for joint filers) for qualified monetary contributions made to charities in 2021. You may claim this deduction in addition to the standard deduction for your filing status.

Only monetary contributions qualify for these special tax benefits. Monetary contributions include donations to qualifying charities made by cash, check, digital payment or credit card, as well as by paying unreimbursed expenses while doing volunteer work. Donations of goods, property (including virtual currency) or labor do not qualify for these temporary deduction rules.

The extended special rules are set to expire at the end of 2021. A tax professional can help you plan your charitable giving for the rest of the year to take advantage of the available tax benefits. The IRS search tool for nonprofit organizations (link below) can help you find eligible charities that accept qualifying monetary contributions.

IRS Nonprofit Search: https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations

IRS Working with Three Collection Agencies Beginning Fall 2021

The IRS sometimes refers taxpayer accounts to private collection agencies (PCAs). These agencies may contact affected taxpayers directly about their tax debts. To protect taxpayers from collection scams, the IRS publishes information about the PCAs that are currently under contract with the federal government. Beginning September 23, 2021, the three PCAs with official IRS authorization for tax account collections are:

- CBE Group, based in Waterloo, Iowa (phone 800-910-5837)
- Coast Professional, Inc., based in Albion, New York (phone 888-928-0510)
- ConServe, based in Fairport, New York (phone 844-853-4875)

The IRS always sends a letter to taxpayers to inform them that their accounts have been referred to a PCA, showing the name and contact info of the PCA. If the PCA listed does not appear on the above list, the letter may be fraudulent and the taxpayer should call the IRS for more information. The PCA will also send a letter confirming that it has received the IRS referral. Both of these letters have detailed information to help taxpayers verify that any future calls or notices from the PCA are legitimate.

PCAs under contract with the IRS are authorized to discuss payment options with taxpayers, but NOT to take enforcement actions like imposing a lien or levy. Taxpayers should always make payments only to the IRS or U.S. Treasury. A representative of an authorized PCA will never ask a taxpayer to make a payment directly to the PCA. The IRS advises taxpayers who receive suspicious calls from someone claiming to represent a PCA to end the calls, and instead call the PCA listed on their IRS notice directly.

Home Testing for COVID Is an FSA & HSA Eligible Expense – Did You Know?

The IRS recently reminded taxpayers that home testing for COVID-19 (coronavirus) is a qualified medical expense for various medical spending and savings accounts. The cost of home testing may be paid or reimbursed with tax-protected funds from an eligible account. Specifically, you may use a health flexible spending arrangement (FSA), health savings account (HSA) or certain other cafeteria plans to pay or receive reimbursement for testing expenses.

Other COVID-related eligible medical expenses include the cost of personal protective equipment (PPE) like masks, hand sanitizer and sanitizing wipes. The equipment must be used primarily to prevent or reduce the spread of coronavirus in order to qualify for FSA, HSA or other medical cafeteria plan reimbursement.

You can maximize the tax benefits of your FSA or HSA by making expenditures or accepting reimbursements at well-chosen times. A tax advisor can help you formulate the best strategy for using your account.

Quarterly Estimated Tax Payments - Reminder

If you are making quarterly estimated tax payments to the IRS, the due date for the June 1 - August 31 quarter of the year is September 15, 2021.

For payments made using IRS Direct Pay, you can make payments until 8PM EST, and for payments using a credit or debit card, payments can be made up to midnight on the due date.

IRS Announces New Tax Relief for Those Affected by Disasters

The IRS has announced filing and payment deadline extensions for taxpayers affected by Hurricane Ida and the California wildfires. These tax relief measures include a later due date for taxpayers who requested a 6-month extension for their 2020 tax returns, and an extension for estimated tax payments. Some affected taxpayers may also qualify for a waiver of penalties. If you receive an IRS penalty notice but may qualify for disaster penalty relief, you can call the number on the notice to ask about an abatement.

In general, the IRS offers various forms of relief to taxpayers in regions covered by federal disaster declarations. Relief programs include providing free transcripts of past tax returns to those whose records have been damaged or lost. To learn about federal tax relief measures in your region, visit the IRS Around the Nation webpage (link below) and click on your state.

The IRS also reminds taxpayers of steps they can take to prepare for a disaster before it strikes. They include scanning paper records to create digital copies that can be stored in the cloud or on USB drives, and photographing rooms to document important belongings. If you or your loved ones have been affected by a disaster, a tax professional can help you determine your IRS relief rights.

IRS Around the Nation Resource Page: https://www.irs.gov/newsroom/around-the-nation

IRS Opens Address Change Portal for Advance CTC Payments – Did You Know?

The IRS recently added a new address change feature to the 2021 Child Tax Credit (CTC) Update Portal (link below). This tool allows families who are receiving advance payments of the 2021 CTC to update the mailing address that the IRS has on file. It is especially important for families who get their advance CTC payments by paper check to update their address information. Otherwise, checks may be delayed or even returned to the IRS by the post office.

Households that receive their advance payments by direct deposit should also use the portal to report mailing address changes as soon as possible. The IRS will use the updated address information to mail important tax documents, including Letter 6419 in January. If you receive advance CTC payments, you will need this letter to complete your 2021 tax return and claim any remaining credit amount you are owed. For many taxpayers, the advance payments will only total about 50% of their allowed credit.

You can also use the 2021 Child Tax Credit Update Portal to switch from paper check to direct deposit payments, change your direct deposit account information or opt out of advance payments for the rest of the year. The IRS will take changes reported by August 30 into account for the round of payments being sent on September 15. Changes reported after that date will affect the October 15, November 15 and/or December 15 payments.

IRS Child Tax Credit Update Portal: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

Tracking Tips - Did You Know?

For those that work in summer or other jobs that include tipping, the IRS recommends keeping a tips diary so that tips can be accurately reported on your tax return, to your employer, and as proof of tip income.

The IRS provides a Form 4070A (https://www.irs.gov/pub/irs-prior/f4070a--2005.pdf) that can be used as a tip diary, or you can use a notebook to note down for the record:

- Cash tips you get directly from customers or from other employees.

- Tips from credit and debit card charge customers that your employer pays you.

- The value of any noncash tips you get, such as tickets, passes, or other items of value.

- The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.

Some Taxpayers May Choose to Unenroll from 2021 Advance CTC – Did You Know?

Millions of U.S. households received their first advance payments of the 2021 Child Tax Credit (CTC) in July. While these payments will help many families, some taxpayers may come out better by unenrolling from the advance payment program. If the advance payments add up to more than your total credit for 2021, you may end up owing tax for the year.

In most cases, the IRS bases CTC advance payments on the taxpayer's 2020 federal tax return, or their 2019 return if their 2020 return has not been processed. Certain life changes during 2021 could reduce your CTC amount, or even make you ineligible for the credit. Therefore, you may wish to consider opting out of advance payments if any of the following occur:

- A qualifying child who lived with you in 2020 (or 2019) will not live with you for more than half of 2021.
- Your income increases significantly in 2021.
- Your filing status changes in 2021.
- You previously met the CTC residency requirement, but will not live in a U.S. state or D.C. for more than half of 2021. In this case, unenrollment may be required.

You can also choose to unenroll from advance payments simply because you want to receive your entire 2021 CTC when you file your tax return in the spring. To unenroll for any reason, use the IRS Advance CTC Update tool (link below).

Note that for married couples filing jointly, both spouses must unenroll from advance payments. If only one spouse opts out, the other will still receive monthly advance payments equal to half of the original payment amount calculated for the household.

IRS Advance CTC Portal to unenroll: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

IRS Warns Businesses About Tax Promoter Scams – Did You Know?

As part of the Dirty Dozen list of the worst tax scams of 2021, the IRS has issued multiple warnings to business taxpayers about tax promoters. These individuals and entities promise to help businesses claim large deductions and credits that will dramatically reduce their tax. Many tax promoters charge substantial fees for their “services,” which often involve schemes that violate IRS regulations.

Some tax promoter scams deal with the Research and Experimentation Credit, commonly called the Research & Development or R&D Credit. Promoters often mislead business owners into believing that they can claim sizable R&D Credits with relatively little effort. In reality, to legally claim this credit, a business must demonstrate that a designated research activity satisfies a long list of IRS requirements. In addition, the progress of qualified research activities, and all associated expenses, must be thoroughly documented over a period of time.

Similarly, while conservation easements can provide legitimate tax deductions, tax promoters often peddle bogus “syndicated easements” based on phony partnerships. The IRS rejects many of these arrangements, and has recently stepped up enforcement of conservation easement rules. Tax promoters also push “micro-captive” insurance scams, pension plans that abuse international tax treaties, and shady methods to improperly defer capital gains on property sales.

The IRS recently created a new Office of Promoter Investigations (OPI) to crack down on these and similar scams. Importantly, the OPI is authorized to pursue action against not only promoters, but also any businesses that participate in the scams. In general, if a tax-reducing scheme sounds too good to be true, it usually is. To protect your enterprise, check with a business tax professional about the rules and regulations before claiming any of these deductions or credits.

IRS Identity Protection PINs – Did You Know?

Beginning in 2021, the IRS now offers IP PINs to all interested taxpayers. Unlike a Social Security Number (SSN), this unique code is known only to the taxpayer and the IRS. Having an IP PIN helps to protect you against others filing fraudulent returns in your name, along with other forms of tax-related identity theft.

If you choose to obtain an IP PIN, you will need to include it on all electronic and paper IRS forms filed in 2021, including your 2020 federal tax return. Thereafter, you will receive a new IP PIN each year by mail. Although there is currently no way to opt out of the program once you have registered and received a PIN, the IRS plans to allow opt-outs beginning with tax year 2022.

The easiest way to apply for an IP PIN is to use the Get an IP PIN tool at http://www.IRS.gov/IPPIN. You will need to verify your identity by providing your legal name, birthdate, federal tax filing status, mailing address, and SSN or Individual Taxpayer Identification Number (ITIN). You will also need a financial account other than a checking or savings account, such as a major credit card, student loan, auto loan, mortgage, or home equity loan. If you have a mobile phone, you can request an activation code to receive your IP PIN instantly. Otherwise, the IRS will mail you the code you need to complete your registration and get your PIN.

If you cannot complete the online verification process but your adjusted gross income (AGI) is $72,000 or less, you may file Form 15227 (Application for an IP PIN) by mailing or faxing it to the IRS. You can then use your most recent tax return to complete the verification process over the phone with an IRS agent. Otherwise, you can apply for an IP PIN in person by making an appointment at an official IRS Taxpayer Assistance Center.

Summer Activities May Affect Your 2021 Taxes – Did You Know?

Both major life events and small changes to your work or family routines can have an impact on your taxes. These events and changes often occur during the summer, especially this summer with the economy reopening. If your life circumstances take either a planned or unexpected turn this summer, you may want to take a few extra steps to prepare for tax season next spring.

If you get married, you should report any name or address change to the Social Security Administration, IRS and post office to ensure that you receive important tax documents. If your child returns to in-person day camps or daytime education programs, some of the cost may qualify for the Child and Dependent Care Credit. Make sure to save records of all fees paid.

Seasonal and part-time work create a variety of record keeping and tax reporting considerations. If you are a student and do not earn enough money to owe federal income tax, you may need to file a 2021 tax return to claim a refund of any tax withheld from your pay. Those who earn side income from a part-time job or gig economy work may need to adjust their paycheck withholding for their primary job to make sure enough tax is withheld. You can use the IRS Withholding Estimator tool (link below) to check where you stand.

Also keep in mind that income earned as a freelancer or independent contractor may be subject to self-employment tax. Figuring out whether you are officially an employee or an independent contractor can get tricky for temporary work. A tax pro can help you determine your status, and plan for self-employment tax if appropriate.

IRS Withholding Estimator: https://www.irs.gov/individuals/tax-withholding-estimator