Accounting on Us
There are always new tips and tricks created by new legislation or changes to interpretations of the existing laws.
Super tax savings
Easter eggs of the tax game
Jennifer King, CPA
I am not a video game person, so when my husband bought a Nintendo Switch last year for us to try I sighed and wondered how long it would be before it started collecting dust in our entertainment center. But one game – Mario Odyssey – combined everything I could want in a video game. There was just enough nostalgia to remind me of my first Nintendo back in the early 90’s. There was a two-player mode so my husband and I could have “dates” at home playing on the couch in our sweats. My character, Cappy, was a hat that could not die or be killed but could perform useful maneuvers like collecting moons and neutralizing lava. There were literally hundreds of moons and purple coins to appeal to the completionist in me. We played that game almost daily during the first two months of the pandemic.
Tax planning is a lot like Mario Odyssey. There are different tax types (business, estate & gift, individual, and international) just like there are different Mario Odyssey worlds (Sand Kingdom Tostarena, Snow Kingdom Shivera). Within each tax “world” there are numerous tips and tricks you can discover, just like the moons and coins in Mario Odyssey.
Individual Tax – (Luncheon Kingdom – Mount Volbono)
Individuals can take advantage of tax deferred or tax-free benefits their employers offer. Here are some common 2021 limitations for workplace benefits.
- 401(k) Contribution Limit: $19,500 + $6,500 catch up benefit for those 50 and older
- HSA Contribution Limits: $3,600 (self-only), $7,200 (family)
- FSA Contribution Limit: $2,750
- Educational Assistance: $5,250
- Qualified Transit or Parking Assistance: $270/month
- Dependent Care Assistance: $5,000 (married filing jointly)
Charitably inclined taxpayers can use charitable gifting to reduce their taxes. For 2021, cash donations of $300 (single) or $600 (married filing jointly) can be claimed as an above-the-line deduction, so even taxpayers taking the standard deduction can benefit from charitable giving. Another option for retired taxpayers is to make qualified charitable distributions of up to $100,000 per person from an IRA. Qualified charitable distributions are not included in income, which can have incidental benefits like reduced Medicare premiums.
It is no secret that kids are expensive, but there are some tax savings that can be gained by having children. Taxpayers with adjusted gross income of $400,000 (married filing jointly) or $200,000 (all other filing statuses) can claim a $2,000 child tax credit for each qualifying child. Some taxpayers may also qualify for an additional child tax credit of $1,400 per child, which is partially refundable.
Even though the IRS or Department of Revenue may feel like King Bowser and the Broodals, there are some taxpayer friendly programs. One program is the First Time Penalty Abatement program. For most taxpayers who have no filing or penalty issues for the prior three years, the IRS can waive failure-to-file, failure-to-pay, and failure-to deposit penalties for a single year. Even if you do not qualify for first time penalty abatement, you may still benefit from asking the IRS to put you into a currently not collectible status to prevent them from taking negative collection action against you, such as levying your bank account. If you cannot pay your outstanding liability in a lump sum but can pay over time, you can ask the IRS to put you into an installment agreement. If you were supposed to be filing certain forms or in certain states for prior years, some taxing authorities have amnesty programs that allow you to file prior year tax returns but pay reduced or no penalties for late filing.
Business Tax (Metro Kingdom – New Donk City)
After a hard year, business taxpayers received some good news with the passage of the Consolidated Appropriations Act on December 21, 2020. In the Act, Congress affirmed that expenses paid with forgiven Paycheck Protection Program loan funds will be deductible, contrary to the IRS’s position for most of the year. The earlier CARES Act also had other favorable business provisions like a five-year net operating loss carryback provision for losses from 2018-2020 and the waiver of the 80% limitation on net operating losses.
One thing that businesses should pay careful attention to is where they may have state filing requirements. In 2018, the Supreme Court ruled that states can collect sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the state, such as a factory or employees. Since that decision, all but a handful of states have enacted laws subjecting out-of-state sellers to sales tax if their sales are over a certain threshold.
Estate & Gift (Moon Kingdom – Honeylune Ridge)
The current lifetime estate and gift exemption for 2021 is $11.7 million, so less than 1% of estates are required to file an estate tax return. However, there are two things to keep in mind. First, the lifetime exemption amount could be reduced and is frequently a talking point around election time. Second, an estate consists of all assets that a person has ownership of, including homes, life insurance, and retirement accounts.
One of the easiest ways to reduce your estate is through annual gifting. In 2021, the annual exclusion for gifting is $15,000 per recipient. If you only make annual exclusion gifts, you will not use up your lifetime exemption and you will not be required to file a gift tax return reporting the gifts.
Another way to reduce your estate is by using the “Med/Ed” exclusion. The IRS does not consider amounts paid directly to an educational institution for educational expenses or to a medical facility for medical expenses as gifts, even if you pay the bill of another person. For example, if you want to pay for your grandchild’s tuition, you can make a check out directly to the university and it would not be counted against your annual exclusion amount or your lifetime exemption amount.
Unlike Mario Odyssey where the moons and coins are static, tax law is constantly changing. There are always new tips and tricks created by new legislation or changes to interpretations of the existing laws. It is crucial to always consult your Henry+Horne tax advisor for individualized guidance that works best for you.
Jennifer A. King, CPA, Senior Manager, specializes in estate, gift + trust tax planning and preparation. She can be reached at (480) 483-1170 or JennyK@hhcpa.com.