Individuals with disabilities and parents of children with disabilities may qualify for a number of tax credits and other tax benefits. Listed below are several tax credits and other available benefits if you or someone listed on your federal tax return has a disability.

Increased Standard Deduction

Since a change in the law more than 35 years ago, taxpayers (or spouses when filing a joint return) who are legally blind have been eligible for a standard deduction add-on. Thus, for 2021, if a taxpayer is filing jointly with a blind spouse, they can add $1,350 to their standard deduction of $25,100; if both spouses are blind, the add-on doubles to $2,700. For other filing statuses, the additional amount is $1,700. In addition, while being age 65 or older isn’t a disability, it should be noted that there is an “elderly” add-on to the standard deduction of $1,350 or $1,700, depending on filing status. These add-ons apply only to the taxpayer and spouse, not to dependents.

Exclusions from Gross Income

Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income (i.e., they are not taxable). Amounts received for Social Security disability are treated the same as regular Social Security benefits, which means that up to 85% of the benefits could be taxable, depending on the amount of the recipient’s (and spouse’s, if filing jointly) other income.

Impairment-Related Work Expenses

Individuals with a physical or mental disability may deduct impairment-related expenses paid to allow them to work.

• Employees – Although the 2017 tax reform eliminated most miscellaneous itemized deductions, it retained the deduction for employees with a physical or mental disability limiting their employment. As a result, they can still deduct the expenses necessary for them to work as an itemized deduction.
• Self-employed – For self-employed, impairment-related expenses are deductible on Schedule C or F.

Impairment-related work expenses are ordinary, necessary business expenses for attendant care services at the individual’s place of work as well as other expenses in the workplace that are necessary for the individual to be able to work.

Earned Income Tax Credit (EITC)

The EITC is available to taxpayers with disabilities and the parents of a child with a disability, even when the child’s age would normally prevent the child from being a qualifying child. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children may qualify for the EITC.

Child or Dependent Care Credit

Taxpayers who pay someone to come to their home and care for their dependent or spouse with a disability may be entitled to claim this credit. For children, this credit is usually limited to the care expenses paid only until age 13, but there is no age limit if the child cannot care for himself/herself.

Special Medical Deductions When Claiming Itemized Deductions

• Impairment-Related Expenses – Amounts paid for special equipment or improvements installed in the home may be included as medical expenses deductible as part of itemized deductions if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the property’s value may only be partly included as a medical expense.
• Learning Disability – Tuition paid to a special school for a child with severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses eligible for the medical deduction when itemizing deductions. A doctor must recommend that the child attend the school. Fees for the child’s tutoring recommended by a doctor and given by a specially trained teacher qualified to work with children with severe learning disabilities might also be included.
• Drug Addiction – Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts, including the cost of the dependent’s meals and lodging, are included as medical expenses for itemized deduction purposes.
• Other Medical Expenses – Here are some other medical expenses that apply to individuals with disabilities:
  • Cost of Braille books and magazines that exceeds the price of regular printed editions.
  • Cost of a wheelchair used mainly for the relief of sickness or disability, not just to provide transportation to and from work, including the cost of operating and maintaining the wheelchair.
  • Cost and care of a guide dog or other animal aiding a person with a physical disability.
  • Cost of artificial limbs and hearing aids.

ABLE Accounts

Qualified ABLE programs provide a way for individuals and families to contribute and save to support individuals with disabilities in maintaining their health, independence, and quality of life.

Federal law authorizes states to establish and operate ABLE programs. Under these programs, an ABLE account may be set up for any eligible state resident – someone who became severely disabled before turning 26 – who would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec. 529 plans. The primary purpose of ABLE accounts is to shelter assets from the means testing required by government benefit programs.

Individuals can contribute to ABLE accounts, subject to per-account gift tax limitations (maximum $16,000 for 2022, up from $15,000, which it has been for several years). For years 2018 through 2025, working individuals who are beneficiaries of ABLE accounts can contribute limited additional amounts to their ABLE accounts, and these contributions can be eligible for the nonrefundable saver’s credit.

Distributions to the individual with a disability are tax-free if the funds are used for qualified expenses of the disabled individual.

For more information on the benefits available to disabled taxpayers or dependents, call the experts at Cray Kaiser (630) 953-4900.

The past few tax seasons have been riddled with new tax laws, pandemic logistic and staffing issues, and extended turnaround times by the IRS for processing returns. Although progress has been made, we anticipate another season of backlog for the IRS. This article talks about the issues at play and a best practice for getting your returns filed timely and accurately.

Rough Tax Season Ahead?

This could be another rough tax season for the IRS and taxpayers. Although this year’s filing season opened January 24, 2022 (the first day the IRS will accept and start processing 2021 returns), the Service still has a backlog of prior year returns to process and is plagued by staff shortages due to the pandemic and reduced funding in the last few years. Even though the majority of 2020 returns were filed electronically, many of those returns still required manual review, resulting in significant delays in the IRS issuing refunds. This was the case with millions of 2020 returns of taxpayers who received unemployment compensation and had filed before Congress passed a law that retroactively exempted up to $10,200 of 2020 unemployment income per filer (that provision has not been extended to 2021). Human review was also required for a significant number of returns on which the Recovery Rebate Credit had to be reconciled with the Economic Impact Payments #1 and #2.  

Similar issues are likely to affect 2021 returns, especially those where taxpayers received Advance Child Tax Credit (ACTC) payments and/or Economic Impact Payment #3, both of which must be reconciled on the 2021 return. Thus, to avoid return processing delays it is important to include the correct amounts received when doing the reconciliation. In January, the IRS began issuing Letters 6419 (for the ACTC) and 6475 (for EIP #3) to taxpayers; these letters provide the information needed for making the reconciliation calculations. Be sure you provide these letters to your tax return preparer. Having an accurate tax return can avoid processing delays, refund delays and later IRS notices.

IRS Processing Time

Despite reduced staffing and the continuing pandemic, the IRS projects that for this tax season they’ll process electronically filed returns and pay refunds that are designated to be direct deposited in the taxpayer’s bank account within 21 days of receiving the return. While this turnaround time can’t be guaranteed, the earlier you file, the better the chance that you’ll see your refund within that time frame. If the IRS systems detect a possible error, missing information, or there is suspected identity theft or fraud, the IRS may need to correspond with the taxpayer, requiring special handling by an IRS employee. In that case, it may take the IRS more than the normal 21 days to issue any related refund. Sometimes the IRS can correct the return without corresponding, in these instances the IRS will send an explanation to the taxpayer.

Don’t Procrastinate

To stop the filing of fraudulent returns, the IRS is prohibited by law from issuing a refund from a return where the Earned Income Tax Credit or Advance Child Tax Credit is claimed until mid-February. However, that doesn’t prevent taxpayers from filing their returns before then.

Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns and can file when they are ready. So, if you filed your 2020 return, but the IRS has still not processed it, don’t let that stop you from preparing and filing your 2021 return.

The best advice is don’t procrastinate in filing your return, even though the IRS may be bogged down.

IRS Customer Service Issues

In addition to return processing woes, the IRS has had customer service problems, specifically the lack of enough IRS representatives to answer the phone in response to taxpayers’ questions. Last tax season, because of Covid-19-related tax changes and staffing challenges, more than 145 million calls were received by the IRS phone system between January 1 and May 17, more than four times the number of calls in an average year. Alas, the Service was able to answer only about 10% of those calls, and callers who were lucky enough to have their calls answered generally had extremely long wait times before actually being able to speak with an IRS employee.

The IRS encourages taxpayers to go to the IRS.gov website to search for answers to their tax questions instead of calling the Service, but that often isn’t an adequate substitute for talking personally to a knowledgeable individual. Those who have their returns prepared by a tax pro have the benefit of being able to contact their tax professional with tax questions instead of being frustrated trying to reach or deal with the IRS. Given how understaffed the IRS is, it is more important than ever for taxpayers to have their returns professionally prepared.

If you are an existing Cray Kaiser client and have questions, please give our office a call at (630) 953-4900. If you have forwarded this on to a potential client who has been having troubles preparing their own tax return and would like professional preparation, we are also here to assist them. 

For tax purposes, the term “basis” refers to the monetary value used to measure a gain or a loss. For instance, if you purchase shares of a stock for $1,000, your basis in that stock is $1,000. If you then sell those shares for $3,000, the gain is calculated based on the difference between the sale price and the basis: $3,000 – $1,000 = $2,000. This is a simplified example, of course. Under actual circumstances, purchase and sale costs are added to the basis of the stock.

The basis of an asset is a very important concept for tax purposes because it is used to calculate deductions for depreciation and casualties, as well as gains or losses on the disposition of that asset.

It is important to keep in mind that the basis is not always equal to the original purchase cost. It is determined in different ways for purchases, gifts and inheritances. In addition, the basis is not a fixed value, as it can increase as a result of improvements or decrease as a result of credits claimed, business depreciation or casualty losses. Below is a primer on how basis is determined in various circumstances.

Cost Basis – The cost basis (or unadjusted basis) is the amount originally paid for an item before any improvements, as well as before any credits, business depreciation, expensing, or adjustments as a result of a casualty loss.

Adjusted Basis – The adjusted basis starts with the original cost basis (or gift or inherited basis) and then incorporates the following adjustments:

• Increases for any improvements (capitalizing the asset instead of expensing)
• Reductions for tax credits claimed based on the original cost or the cost of improvements
• Reductions for any claimed business depreciation or expensing deductions
• Reductions for any claimed personal or business casualty-loss deductions

Example: You originally purchased a home for $250,000. You added a room for $50,000, installed an electric solar system for $25,000, and replaced the old windows with energy-efficient, double-paned windows at a cost of $36,000. You claimed tax credits of $7,700 for the solar system and the windows, leaving you with an adjusted basis of $353,300 for your home. ($250,000 + $50,000 + $25,000 + $36,000 = $361,000 – $7,700 = $353,300)

Example: As the owner of a welding company, you purchased a generator for $6,000. After owning it for three years, you sell it to another welder. This was business property and you had taken depreciation of $3,376 over the three years. Your adjusted basis of the generator prior to the sale was $2,624. ($6,000 – $3,376 = $2,624)

Gift Basis – If you receive a gift, you assume the donor’s adjusted basis for that asset. In effect, the donor transfers any taxable gain from the sale of the asset to you (but not necessarily the loss).

Example: Your mother gives you stock shares that have a market value of $15,000 at the time of the gift. She originally purchased the shares for $5,000. You assume your mother’s basis of $5,000. If you then immediately sell the shares, your taxable gain is $10,000.

There is one significant catch. If the fair market value (FMV) of the gift is less than the donor’s adjusted basis and you then sell it for a loss, your basis for determining the loss is the gift’s FMV on the date of the gift.

Example: Let’s again assume your mother purchased stock shares for $5,000. However, this time the shares were worth $4,000 when she gave them to you, and you subsequently sold them for $3,000. In this case, your tax-deductible loss is only $1,000. (The sale price of $3,000 minus the $4,000 FMV on the date of the gift.)

Inherited Basis – Generally, a beneficiary who inherits an asset uses the asset’s FMV on the date of the owner’s death as the tax basis. The tax on the decedent’s estate is based on the FMV of the decedent’s assets at the date of death.

Example: You inherit your uncle’s home after he died in 2020. Your uncle’s adjusted basis on the home which he purchased in 1995 was $50,000, and its FMV was $400,000 when he died. Your basis on the home is equal to its FMV or $400,000.

Example: You inherit your uncle’s car after he died in 2020. Your uncle’s adjusted basis in the car which he purchased in 2015 was $50,000, and its FMV was $20,000 at his date of death. Your basis in the car is equal to its FMV or $20,000.

An inherited asset’s FMV is very important because it is used to determine the gain or loss after the sale of that asset. For vehicles, online valuation tools such as the Kelly Blue Book can be used to determine FMV. The value of publicly traded stocks can similarly be determined using website tools.

For most other assets, like real estate or family businesses, valuations generally require the use of certified appraisal services. The valuation team at Cray Kaiser is well versed in assisting clients with these more complex assets. If you have questions about your tax basis or business valuation and want to discuss how it might affect your tax situation, please call us at (630) 953-4900.

Did you know that tax planning can affect your future Medicare premium costs?  If not, you are not alone. Part B and Part D premiums are determined by a number of factors, the most important one being your Income-Related Monthly Adjustment Amount or IRMAA.

What is IRMAA?

IRMAA was put in place to require wealthier participants to share more in the cost of Medicare premiums. How exactly is “wealthier” determined? This may surprise you – it’s based on your income from two years prior to the time the premium is determined. In other words, your 2022 premiums will be based on your 2020 tax return. For single individuals, the cost of your premiums will increase if you report 2020 modified adjusted gross income (MAGI) in excess of $91,001. For a married couple, a MAGI in excess of $182,001 will result in higher premiums. Below is a chart outlining Part B premiums for 2022:

HOW MODIFIED ADJUSTED GROSS INCOME (MAGI) IMPACTS MEDICARE PREMIUMS

IRMAA is particularly harsh because it operates on a “cliff”. One extra dollar of MAGI can be very costly. Consider a couple who has a MAGI of just over $170,000. Their premiums are more than $100 per month higher than a couple who has a MAGI just under $170,000.  Managing your MAGI is key to managing the cost of your Medicare premiums.  So how can you plan?

Roth IRA Conversions

Converting a traditional IRA to a Roth IRA is not ideal in your later years, specifically because of IRMAA. A conversion is considered additional income under IRMAA and could quickly propel you into a higher MAGI with the associated higher monthly premium. However, performing a Roth conversion well before your Medicare years is a great planning tool to avoid IRMAA issues. Why? Because qualified Roth IRA distributions are not included in your MAGI. Also, by shifting assets out of your traditional IRA, you are reducing the required minimum distributions that you’ll need to take during your retirement years.

Plan Your Income In Advance

While we don’t have complete control over life events, it is possible to control your future income. To the extent it makes tax sense to do so, consider accelerating other income items ahead of your Medicare years. For example, you may consider selling appreciated assets earlier than two years before you claim Medicare. The capital gain is included in MAGI, but your effective federal tax rate on the gain could be as low as 0%. 

Working with your financial advisor to ensure that you understand how your holdings impact your MAGI is important as well. There are some holdings that are still good investments but are more tax-efficient than others. We can help if you have questions about tax planning in association with IRMAA considerations. Just call our office at (630) 953-4900.

You already know we at Cray Kaiser thrive on the personal relationships we develop with our clients. But even the best relationships can benefit from the use of technology. That’s why we developed our online portal – to allow us and our clients to safely and securely share the documentation we all need, especially during tax season. It is easy to navigate, however, if you run into difficulties, the following tips and tricks should help.

Logging In

• Begin by going to www.craykaiser3dev.wpengine.com.
• On the left side, you will see LOGIN.

• Click on this and enter your username and password and select “I’m not a robot”.
• If you have forgotten your username, simply contact our office so we can provide that information to you.
• If you have forgotten your password, please select the “Forgot password” and you will receive instructions for resetting your password.

• Once your password is reset, you may get a message asking if you wish to add Multifactor Authentication and we highly recommend you add this additional layer of security. If you wish to set up Multifactor click “Setup Now” and you will be guided through the steps using your phone. If you do not wish to have Multifactor Authentication, please select the “Remind Me Later” prompt.
• If you run into any issues with this process, please contact our office and we can assist you.
• Once you are in the online portal, please select/click Client Flow from the left-hand menu.

• There you will see the file folders that belong to you.

Uploading documents

• Click on the file folder where you wish to upload your documents. On the top left you will see upload; either drag and drop your documents into the box or click the “Add files” button.

• Once you drop your documents in the box, click the “Start upload” button.

• You will be notified via email if Cray Kaiser uploads a document to your account. Just a reminder, that any of the documents Cray Kaiser sends you will NOT be fillable.

Downloading files

• Click on the document you wish to download.
• On the top right hand-side, click on the Download button.
• This will open a Save As prompt. Click on that prompt to save your file in a safe location on your computer of file storage.

We hope these instructions help you to navigate our online portal. However, if you still have questions or issues, please don’t hesitate to contact us at 630.953.4900.

Some in Congress have proposed “free” (i.e., government-paid) tuition for community college attendance. Even if that proposal were to become law, it still leaves parents and their children-students responsible for paying for college and university attendance if the student wants a bachelor or higher degree. Over the years, Congress has provided a variety of tax incentives to help defray the cost of education. Some tax-related education benefits are currently available while others will be beneficial only with long-range planning, and the sooner these plans are implemented, the better.

Education Savings Plans – If your children are below college age, there are tax-advantaged plans that allow you to save for the costs of their higher education. While no Federal tax deduction is allowed for contributions to the plans, they do provide tax-free accumulation of earnings. It, therefore, makes sense that the earlier they are established, the more benefit you’ll get from them. Additionally, state tax deductions of up to $20,000 per year are allowed for certain plans.

• Section 529 Plans—Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for education expenses in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. These plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2022, you can contribute $16,000 without gift tax implications (or $32,000 for married couples who agree to split their gift). The annual amount is subject to inflation adjustment. There is also a special gift provision allowing the donor to prepay five years of Sec 529 gifts up front without gift tax.

In recent years Congress has expanded the definition of eligible expenses 529 Plans can cover to include the following:

• Elementary and Secondary School Tuition Expenses – From kindergarten thru grade 12, the annual withdrawal for each beneficiary is limited to $10,000. This special $10,000 amount applies only for tuition (not books, supplies, room and board, etc.) paid to public, private or religious schools.
  
  But remember, the primary goal of these plans is amassing tax-deferred investment income, which then can be withdrawn tax-free to pay qualified education expenses. Using these funds too early will not achieve the desired goal of accumulating and compounding investment income. Thus, you should carefully consider whether to use the funds for elementary and secondary school education expenses or to wait and tap the account for post-secondary education, with the latter choice maximizing investment income.

• Apprenticeship Expenses – Qualified expenses include fees, books, supplies, and equipment required to participate in registered apprenticeship programs certified by the Secretary of Labor under Sec 1 of the National Apprenticeship Act, effective for distributions made in years after 2018.

• Repayment of Student Loans –Distributions after 2018 from a 529 plan of up to $10,000–a lifetime limit–may be used to pay the principal and interest on qualified higher education loans of the designated beneficiary or a sibling of the designated beneficiary. To prevent double-dipping, Sec 529 plan distributions used to pay interest on the education loan cannot be used for the above-the-line deduction for student loan interest (discussed later in this article).

Coverdell Education Savings Account—These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools. A total of $2,000 per year can be contributed (but is not deductible) for each beneficiary under the age of 18. The ability to contribute to these plans phases out when the modified adjusted gross income of the contributor is between $190,000 and $220,000 for married taxpayers filing jointly, and between $95,000 and $110,000 for all others.

Education Tax Credits—If you currently have a child or children attending college, there are two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), that may benefit you. Both are available for qualified post-secondary education expenses for a taxpayer, spouse, and eligible dependents. Both credits will reduce your tax liability dollar for dollar until the tax reaches zero.

• The American Opportunity Credit (AOTC)—is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. Forty percent of the American Opportunity credit is refundable (if the tax liability is reduced to zero). This credit phases out for joint filing taxpayers with modified adjusted gross income (MAGI) between $160,000 and $180,000, and between $80,000 and $90,000 for others (except no credit is allowed for those who file married separate returns).

• The Lifetime Learning Credit—is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. The MAGI phaseout ranges are the same as those for the AOTC, and like the AOTC, the Lifetime Learning Credit is not allowed for taxpayers who file married separate returns.

Qualifying expenses for these credits are generally limited to tuition. However, if required for the enrollment or attendance of the student, activity fees and fees for course-related books, supplies, and equipment qualify. For those accessing the Lifetime Learning Credit, course materials and supplies are eligible only if purchased directly from the educational institution.

Qualified tuition and related expenses paid by a student are treated as if paid by the taxpayer if the student is a claimed dependent of the taxpayer. So if a third party (most typically a grandparent, but it could be anyone besides you or the dependent) makes a payment directly to an eligible educational institution for the student’s qualified tuition and related expenses, the student would be treated as having received the payment from the third party and would qualify as having paid the tuition and related expenses personally. If the student is your dependent, you could be eligible to claim the credit.

Education Loan Interest—You can deduct qualified education loan interest of up to $2,500 per year in computing AGI. This is not limited to government student loans and could include home equity loans, credit card debt, etc., if the debt was incurred solely to pay for qualified higher education expenses. For 2022, the student loan interest deduction phases out for married taxpayers with an AGI between $145,000 and $175,000 and for unmarried taxpayers between $70,000 and $85,000. These amounts are subject to annual inflation adjustment. This deduction is not allowed for taxpayers who file married separate returns.

While it is possible that Congress may add more tax-related benefits for assisting parents and students to pay for higher education costs, you shouldn’t depend on their actions (or inactions). We recommend starting the planning process as soon as possible, and making sure not to overlook the credits and deductions available for the current students in your family. If you would like assistance in planning for your children’s future education or would like more information about the education benefits available now, please call us at (630) 953-4900.

Throughout 2020 and 2021 we’ve encouraged our business clients to take advantage of the Employee Retention Credit (ERC) that was first introduced in the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act and further modified in the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021. We assisted dozens of clients in realizing benefits from this program, but now that we are past the December 31, 2021 deadline to claim an ERC credit, all attention is now on the tax status of these funds.

The IRS has determined ERC funds are not to be included in an employer’s gross income, rather the credit is subject to “expense disallowance rules.” This means an employer’s wage deduction should be reduced by the amount of the ERC, resulting in a smaller wage expense and essentially rendering the credit taxable.

For businesses who received an ERC in 2021, as indicated above, the IRS has mandated that the amount received from your ERC be a reduction from your expenses, thereby increasing your taxable income. We are reminding all clients who received an ERC to prepare for this impact as they begin tax preparations.

For businesses that received an ERC in 2020, the regulations indicate that the same rules will apply. We are uncertain if the IRS will provide additional guidance, as this could require numerous amended tax returns.

The ERC program provided welcome relief to a number of businesses, but the tax ramifications are complicated. As always, please contact Cray Kaiser at 630-935-4900 for assistance in understanding your specific situation.

If you have children under 18, you may have already received your first advance child tax credit payment, either by check or by direct deposit. However, keep in mind you would have received this credit on your 2021 tax return when you file anyway. While we’ve discussed the Advance Child Tax Credit previously, now that the government is issuing payments, we thought we would revisit if it makes sense to opt out of the credit.

What is the advance credit?

The American Rescue Plan Act of 2021 authorized advance credit payments for one year only (2021). The monthly payments are automatically made to all qualifying individuals unless they go to the IRS website and opt-out. The Biden Administration estimates that 39 million families are qualified for the advance payment, with about 2.6% opting out of the first payment (July 15, 2021).

The estimated payments are determined based on a taxpayer’s family makeup (number of children and filing status) and income, using information from 2020 tax returns (or 2019 if the 2020 return hasn’t yet been filed).

A taxpayer whose advance credit payments exceed what their actual credit turns out to be will need to repay the excess with their 2021 tax return.

Who might want to opt out?

Some taxpayers may be in for an unpleasant surprise when they discover they were not qualified for the advance payments they received. There are several scenarios where this could happen, such as:

1. A change in the number of qualified children, for example, due to a divorce
2. The children’s ages disqualify them for the credit, or reduce their credit
3. The taxable income on the 2021 tax return is more than what was reported in prior year(s), thereby reducing or eliminating the credit due to the income thresholds

Example: On their 2020 tax return Harry and Mary claimed two children, one age two and the other age seven, and their income was under the $150,000 threshold. Thus, for 2021 they would have a child age three and another age eight, and the IRS would estimate their credit for 2021 to be $6,600 ($3,600 + $3,000). Therefore, their advance monthly payments would be $550 ($6,600 x 50%) divided by six months. 

In 2021, Harry and Mary both received pay increases pushing their income above the income thresholds. With their higher income, they are no longer eligible to receive the credit. As a result, they would have an additional tax due of $6,600, the amount of the advance credit received.

If you’ve received advance child credit payments, in January 2022 the IRS will send you a letter recapping the amount of advance credit they sent you. This information will be needed when reconciling the advance credit payments with the actual credit on your 2021 return.

Contact Cray Kaiser at (630) 953-4900 if you have questions about how the advance payments may impact your 2021 tax return, whether you should opt-out of additional advance payments, or if you want to adjust your withholding or estimated tax payments to account for the advance credits.       

The Internal Revenue Service (IRS) is reminding entities with Employer Identification Numbers (EINs) of their responsibility to update that information whenever the contact information or responsible party changes. IRS regulations require EIN holders to update responsible party information within 60 days of any change. Notifying the IRS of those changes is easily accomplished by filing Form 8822-B, Change of Address or Responsible Party – Business.   

Especially given the pandemic, taxpayer contact information may be outdated due to moves, office closures, etc. By alerting the IRS to your new address, you will ensure that you are receiving tax notifications on a timely basis.

The IRS is urging those entities with EINs to update their applications if there has been a change in the responsible party or contact information, calling it a key security issue.  According to the IRS, the data around the “responsible parties” for business-type entities is often outdated or incorrect, meaning that the IRS does not have accurate records of who to contact for potential fraudulent claims or identity theft issues. Inaccurate information results in a time-consuming process to identify the point of contact so the IRS can inquire about a suspicious tax filing.

It is estimated that there are approximately 100,000 EIN holders with outdated responsible party information. The IRS completed a mail campaign to these EIN holders in August.  

Responsible Party: Generally, a responsible party is the individual (a natural person) who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. The person identified as the responsible party should have a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.

• Tax-exempt organizations: The responsible party is generally the same as the “principal officer” as defined in Form 990 instructions.
• Trusts: The responsible party is a grantor, owner, or trustor.
• Decedent estates: The responsible party is the executor, administrator, personal representative, or other fiduciary.

Here are some tips for completing Form 8822-B (used by businesses):

• P.O. Box: Enter your box number instead of your street address only if your post office does not deliver mail to your street address.
• “In Care of” Address: If you receive your mail in care of a third party (such as an accountant or attorney), enter “C/O” followed by the third party’s name and street address or P.O. box.
• Signature: An officer, owner, general partner or LLC member manager, plan administrator, fiduciary, or an authorized representative must sign. An officer is the president, vice president, treasurer, chief accounting officer, etc. If you are a representative signing on behalf of the responsible party, you must attach a copy of your power of attorney to Form 8822-B. To do this, you can use Form 2848. The Internal Revenue Service will not complete an address or responsible party change from an “unauthorized” third party.

If you need to change both the business and personal contact information, use Form 8822 to change your home address. Although the IRS will automatically update their records to match a taxpayer’s most recent tax filing, it is wise to file Form 8822 to make sure you receive any correspondence from the IRS since the IRS is only required to mail correspondence to your last known address. 

If you have a state filing obligation, you should also notify the appropriate state agencies of the changes.

After you file either Form 8822-B or Form 8822, please forward a copy to this office so we can update your file. If you need assistance with these tax forms, Cray Kaiser can help. Please give us a call to discuss changes in your contact information.  

More and more Americans are on the move these days. Remote work is increasingly popular and allows employees the flexibility to not necessarily live where they work. Additionally, tax changes introduced by the 2017 Tax Cuts and Jobs Act (TCJA) limited the important SALT (State and Local Tax) deduction to $10,000 for single and married individuals. That deduction had previously made residing in high-tax states less costly for affluent individuals.

When you combine those two factors alone, it makes sense that people are looking to see where the grass may be greener. There’s also the fact that states may begin adding new taxes to make up for budget shortfalls, or in the case of Illinois, seeking to increase taxes among select taxpayers. So, it comes as no surprise we are getting a lot of questions about relocating.

If you’ve found yourself looking at real estate ads in a different state, it is important that you take a 360-degree view of what moving would mean for you. As attractive as it may seem to pack up your things and move to a state with a more appealing tax scheme, there are other things to think about. If you move, make sure you do so in a way that accomplishes your tax goals.

Be sure to factor the following into your decision-making process.

Taxes Are Not the Only Consideration

Moving to another community is a shock to the system in more ways than one, but moving to a different state will have an even greater impact. Not only do you need to think about the quality-of-life issues involved, but also the implications of owning multiple homes in multiple states. You will need to choose where your primary residence is going to be, and make sure you can prove compliance. Non-tax-related considerations include:

• Quality of life issues include proximity to family and friends, familiarity with resources, culture, climate, and access to mass transportation hubs for those who enjoy travel. These are just a few things that directly affect your level of satisfaction and enjoyment of life. Moving may leave you feeling isolated and uncertain after years of confidently navigating life at your current address.
• Availability of state-of-the-art medical care is not something to be taken for granted. Especially if you currently live in an area with major teaching hospitals nearby, you should consider that moving to a more remote location may limit your immediate access to quality health care.
• Different areas of the country have vulnerabilities to hurricanes, earthquakes, and other types of disasters. If you are moving to an area that has a higher risk for damage due to weather or other natural causes, investigate what your homeowners’ insurance costs are going to be. And consider whether you are willing to live with the potential risk of natural disasters.

The Taxes Worth Considering

If you’ve already included the non-tax considerations listed above and you are still intent on making a move, then it is time to understand what doing so will mean to your economic picture. It’s a good idea to sit down and discuss your plans with your financial advisors long before putting your home up for sale, as you may have second thoughts after weighing the consequences of a move. Among your considerations are:

• There may be more to a state’s taxes than what you are thinking about. States require tax revenue to support public services, so though you may think you are considering a no-tax state, there is really no such thing. You should review other taxes imposed, such as local sales taxes and real estate taxes, to name a few.
• If you receive income from a trust or retirement plan, you will need to look into exactly how it is taxed at the state level in the state you’re thinking about relocating to. Every state has its own strategy, and you may not be happy with what you learn.  For example, under current law, Arizona taxes retirement income; Illinois does not.
• If your compensation scheme includes deferred bonuses or salaries that will be paid out during your retirement, it is important to determine how the state you are considering relocating to treats deferred compensation and how your specific pay will be treated.
• If you will maintain your current home and employment, beware of special state tax laws that may keep you ensnared in your current home state tax regime. New York, for example,  is aggressively auditing employees that maintain connections to the state and sought to avoid New York state tax.

Made Up Your Mind? Here Are Your Next Steps

Like everything else in life, relocating to another state and making it your primary residence is not as easy as just deciding to do it. It is important that you do your due diligence to make sure that you have complied with everything required of your new home. You need to follow several essential steps in order to reap the tax rewards that you are seeking. Here are just a few of those steps:

• Change your vehicle registration to your new address
• Apply for a driver’s license for your new address
• Register to vote from your new address
• Find out whether your state requires a “Declaration of Domicile” or similar document, and if so, apply for and file it
• File your federal tax returns from the new address
• Obtain property and casualty insurance at the new address
• File state taxes as a new resident, as well as former state tax returns as a non-resident if you earn any income in that state
• Adjust all banking records, legal documents, and credit card records to reflect your new address
• Change the address on your passport
• Get established with community, professional, religious and social networks associated with the new address
• Establish relationships with medical providers proximal to the new address

Add contacting the Cray Kaiser office at (630) 953-4900 to your to-do list to make sure that all-important items have been addressed and everything is reviewed and updated with your estate plan.