It’s time to review your year-end tax plans

It’s time to review your year-end tax plans, now that it looks unlikely that individual federal income tax rates aren’t going up next year, except possibly for taxpayers with modified adjusted gross incomes over $10 million. We also don’t expect changes to the estate tax rate or the stepped-up basis rules for inherited property.

Most people will benefit using this strategy:

Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. Qualified charitable distributions can count as RMDs, but they are not taxable and they are not added to your adjusted gross income (AGI) and won’t trigger a Medicare premium surcharge. Doing so allows the individual to receive the full tax benefit of the charitable contributions that otherwise might be limited as many taxpayers no longer itemize their deductions. It also allows you to get the full benefit of the deduction on your Vermont return.

Make the most of your generosity when donating to charitable organizations. Contribute appreciated property, such as stocks or shares in mutual funds. If you’ve owned the property for more than a year, you can deduct its full value in most cases if you itemize. Neither you nor the charity pays tax on the appreciation.

Don’t donate assets that have dropped in value. If you do, the loss is wasted.

Donate cash to make use of two rules that apply for 2021: Nonitemizers can deduct up to $300…$600 for joint filers…of their charitable cash contributions. Also, the 60%-of-AGI limit on charitable cash gifts by individuals is suspended.

Use your annual gift tax exclusion. You can give up to $15,000 to each person this year without paying gift tax or tapping your lifetime estate-and-gift-tax exemption. Your spouse can also give $15,000. Say you’re married with four kids and six grandkids. You can give each relative up to $30,000 ($300,000 total) this year in excludable gifts. Annual gifts over the exclusion amount will trigger filing of a gift tax return for 2021, but no gift tax will be due unless your total lifetime gifts exceed $11,700,000.

Boost your federal income tax withholding if you expect to owe tax for 2021. It can help avoid an underpayment penalty. You’re off the hook for the fine if you prepay, via tax payments or withholding, at least 90% of your 2021 total tax bill or 100% of what you owed for 2020 (110% if your 2020 AGI exceeded $150,000).

You can give your employer a new W-4 to have more tax taken from wages. IRA owners taking RMDs can use this income tax withholding strategy:

Have more tax withheld from a year-end distribution from your traditional IRA. Tax withheld at any point in the year is treated as if evenly paid throughout the year.

Don’t forget about the 0.9% Medicare surtax on earned income. It kicks in for singles and household heads with earnings over $200,000…$250,000 for joint filers. Employers must begin to withhold the tax from worker paychecks in the period when wages first exceed $200,000, regardless of the employee’s marital status. This can lead to underwithholding for a couple if each spouse earns under $200,000, but their combined wages total more than $250,000. The same goes for an employee with a self-employed spouse if the couple’s combined earnings will exceed $250,000.



Pay attention to the required minimum distribution rules for traditional IRAs. Individuals 72 and older must take annual withdrawals or pay a 50% penalty. To arrive at the 2021 RMD amount, start with your IRA balances as of Dec. 31, 2020, and use the tables in IRS Pub. 590-B. The amounts can be taken from any IRA you pick.

The same rules apply to 401(k)s and similar workplace retirement plans…

With two exceptions: First, people who work past 72 can delay RMDs from their current employer’s 401(k) until they retire, provided they own no more than 5% of the firm that employs them. Second, for people with multiple 401(k)s, 403(b)s and the like, the required minimum distribution must be taken from each account.

If 2021 is your first RMD year, you have until April 1, 2022, to take the RMD. The distribution will still be based on your total IRA balance as of Dec. 31, 2020. If you opt to defer your first RMD to 2022, you will be taxed in 2022 on two payouts: The one for 2021 that you deferred and the RMD for 2022. This doubling up would hike your 2022 income and could push you into a higher income tax bracket.

Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. Qualified charitable distributions can count as RMDs, but they are not taxable and they are not added to your AGI and won’t trigger a Medicare premium surcharge.

Many key dollar limits on retirement plans will be higher in 2022.

The maximum 401(k) contribution rises to $20,500. People born before 1973 can contribute an extra $6,500. These limits also apply to 403(b) and 457 plans. The cap on SIMPLEs ticks up to $14,000. People 50 and up can put in $3,000 more.

Retirement plan contributions can be based on up to $305,000 of salary. The pay-in limitation for defined-contribution plans increases to $61,000. Anyone making over $135,000 is highly paid for plan discrimination tests.

The 2022 pay-in cap for traditional IRAs and Roth IRAs remains $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and older. But the income ceilings on Roth IRA pay-ins go up. Contributions phase out at AGIs of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles.

Also, deduction phaseouts for traditional IRAs start at higher levels, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers. If only one spouse is covered by a plan, the phaseout for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000.

More low-income retirement savers will qualify for the savers’ credit in 2022. The break is for certain individuals who stash money in an IRA, 401(k), 403(b), SEP or similar retirement plan. The maximum saver’s credit of $2,000 for joint filers and $1,000 for others is capped at 50%, 20% or 10% of contributions, depending on AGI. For 2022, it fully phases out at AGIs over $34,000 for single filers, $51,000 for heads of household and $68,000 for married couples filing jointly.

Retirees rehired by their former employers won’t disqualify a pension plan, the Service reminds employers. A rehire because of unforeseen circumstances, such as the coronavirus pandemic, won’t jeopardize the bona fide retirement status of the individual’s former retirement. So, for example, public school districts seeking to address urgent hiring needs can rehire former teachers and other staff who have retired and have begun receiving pension benefits. Also, if the plan permits, those employees may continue receiving the benefits even after they are rehired.

There’s also this pension rule to help keep older workers on the job:

Employees who are at least age 59½ or the plan’s normal retirement age can continue to work for the employer and receive in-service pension benefits.


Businesses that deferred payment of 2020 payroll taxes will hear from IRS.

The CARES Act enacted last year allowed employers to defer payment of their 6.2% share of Social Security tax, otherwise required to be made from March 27, 2020, through Dec. 31, 2020. And self-employed individuals could defer payment of a portion of their SECA tax owed for the same period. Half of the deferred amount is due Dec. 31, 2021…the other 50% on Dec. 31, 2022.

IRS is mailing letters reminding firms to make the first deferral payment. The CP256V notice reminds self-employeds and employers that the first payment is due Dec. 31, 2021, and provides detailed instructions on how to pay the amount.

A hospital administrator is liable for the business’s unpaid payroll taxes. After the hospital ran into financial trouble, a key creditor required the business to freeze its bank accounts except for certain payments made with the creditor’s OK. During this period, the administrator did not send withheld payroll taxes to IRS.

She owes the 100% trust fund penalty for willful failure to deposit. She managed the hospital’s operations and had check-signing authority. She knew that the hospital was not satisfying its payroll tax obligations. And she prioritized paying other creditors first (Cashaw, TC Memo. 2021-123).


Estate tax pros are following another famous singer’s Tax Court case:

The estate of Prince R. Nelson, known as Prince. The late singer’s estate disputes adjustments that IRS made to Form 706. One big issue is the value of his music rights at the time of his death in 2016. Trial is set for March 21, 2022.

This follows on the heels of the Court’s ruling in the estate of Michael Jackson in May 2021. The Tax Court gave the King of Pop’s estate a substantial victory.

A gift-tax-formula clause used to value interests in a partnership is shot down.

The donees received gifts of set dollar amounts in a family limited partnership. The gifts were to be converted into LP interests after an appraisal of the firm was done. The donor’s accountant later appraised the value of a 1% LP interest at $341,000. IRS asserted the donor undervalued the gift and imposed additional gift tax. The donor claimed she transferred specific amounts through a formula clause, and that the percentages of LP interests transferred go up with a higher valuation. An appeals court rejected this, ruling the formula clause invalid (Nelson, 5th Cir.).

Failing to tell IRS to treat a remittance as a tax payment costs a taxpayer.

He sent a $10.2 million check to IRS in 2011 to cover potential gift tax for a large gift. His representative referred to the payment as a deposit when asked about it by IRS. The taxpayer finally filed the gift tax return in 2014, reporting zero gift tax liability, and again referred to the $10.2 million payment as a deposit. IRS audited the return, and after haggling in court, IRS and the taxpayer settled on gift tax of $6.8 million. IRS paid him $3.4 million…the difference between the $10.2 million original payment and the $6.8 million tax liability. The taxpayer wanted interest. The Tax Court said no because the 2011 check was a deposit, not a tax payment (Hill, TC Memo. 2021-121).


Does the fine for nonwillful foreign account nonreporting apply per account… Or per nonfiled FBAR form? This is a highly contested issue in the courts. The penalty for a person’s nonwillful failure to report a foreign account is $10,000. Seven months ago, we reported on a case in which the Ninth Circuit Court of Appeals decided that the penalty applies per missing FBAR form. Many federal district courts follow this same approach, although not all. In a recent case, a U.S. citizen with several foreign accounts failed to report them on the FBAR form for 2004-10. After determining the late reporting was nonwillful, IRS assessed a $200,000 penalty ($10,000 x 20 violations). A district court upheld that fine (Solomon, D.C., Fla.). The taxpayer immediately appealed the case to the Eleventh Circuit Court of Appeals.


When will I get my unemployment-benefits-exclusion refund check for 2020? IRS continues to work on these returns, but the process is slow going. The March stimulus law made nontaxable up to $10,200 of unemployment benefits received in 2020 for taxpayers with adjusted gross incomes of less than $150,000. IRS continues to adjust tax on applicable returns in phases and send out refunds. It began with the simplest returns and is now turning to more complex returns. So far, the Service has issued 11.7 million unemployment-benefit tax refunds, and the agency says it plans to send another batch of refunds before year-end.

IRS is making progress on its backlog of individual returns for 2020.

But not enough. As of Nov. 5, IRS had 6.8 million 2020 individual returns requiring manual processing. That number might seem high, but it is going down. Compare it with 7.8 million unprocessed individual returns as of Sept. 18.

There are also big delays in other areas of IRS’s operations. For instance, it is taking months to process W-7 forms requesting individual tax ID numbers. It’s now working on W-7 forms it received in early July. Resolving identity theft cases reported by individuals on Form 14039 is taking 250 days…up from IRS’s 120-day goal. And businesses still awaiting their money after applying by fax for quick refunds on carrybacks of net operating losses are realizing the process isn’t at all quick.


Mixed news for taxpayers under the new bipartisan infrastructure law: the employee retention tax credit is no more. Lawmakers ended it early.

This federal payroll tax break helped businesses that were financially hurt by the coronavirus pandemic but kept paying wages to their employees. The credit was slated to end at year-end, but the law moved up the expiration date to Sept. 30.

There’s tax reporting on virtual currency. Cash is defined more broadly to include cryptocurrency for purposes of the rule that businesses file Form 8300 to report cash of over $10,000 received from customers. And brokers and exchanges will have to report sales price and other information on digital currency trades.

Firms with pension plans will get more time to make up for underfunding in the plans. A revenue-raising item in the infrastructure law rejiggers interest rates that pension plans use to discount their liabilities and compute required contributions. This provision raises revenue because employer deductions for pay-ins will be lower.

And the Tax-Court-petition filing deadline is extended in certain instances if the Court is otherwise unable to accept petitions filed electronically or by paper.

Let’s now turn to the Democrats’ $1.75 trillion social spending package. Even if the House were to approve the Build Back Better proposal…

It would then go to the Senate, where its prospects will again be dicey. The upper chamber needs all 50 Democrats on board, and some aren’t there yet. Sen. Joe Manchin (D-WV) objects to the size of the package, among other things. Sen. Bernie Sanders (I-VT) wants a $400,000 income threshold put on the easing for deducting state and local taxes on Schedule A of federal income tax returns. The House’s Build Back Better bill would hike the current $10,000 SALT deduction cap to $80,000 from 2021 through 2030, and then lower it back to $10,000 for 2031. And Sen. Ron Wyden (D-OR) wants to add more tax changes for the wealthy.

Resource: Kiplinger Tax Letter

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