HOW TO DEAL WITH THE UPCOMING MAY 17TH DEADLINE

As all of you know, the income tax deadline for filing individual income tax returns and any payments due on these returns has been extended to May 17th. My advice is that if you have not submitted your return, that you get on it quickly. One month will fly by more quickly than you think.  Keep in mind, even those returns on extension must have payments submitted by May 17th. An extension of time only grants you an extension of time to file income tax returns, not to pay them.

TIME FOR A TAX CHECK-UP

This is a good time for everyone to examine their personal tax situation.  The last 14 months have made for some very strange looking tax returns. As we hopefully head for more stable economic times it is important that everyone assess their personal income tax situation in order to avoid surprises next April.

Self-Employment Tax

If you are an individual that is self-employed (sole proprietor or single member LLC), and you are subject to self-employment tax it is important to realize that the rate is approximately 14.1%.  In addition, individuals that own interests in partnerships or LLCs may also be subject to self-employment tax.  If an individual is subject to self-employment tax and does not account for this amount in their estimated tax payments it can be painful in April. I am therefore stressing to all those individuals that are subject to self-employment tax that they make quarterly estimated income tax payments to avoid pain and misery in April.

Additionally, self-employed individuals always have a more difficult time estimating their current tax situation then do W-2 employees. Income can vary greatly year to year, and you must monitor your individual situation in order to avoid surprises.

Changes in your personal situation

There may be changes in your personal situation that can affect your tax liability.  An example of this might be the child tax credit. Child tax credits which are available for children under the age of 17 in the amount of $2,000 have been expanded only for 2021.

The new credit allowed is $3,000 per child under age 18 and $3,600 per child under age 6. Again, these amounts are only for 2021.

One more change to this credit is the credit is fully refundable. The $2,000 credit is 70% refundable. If a family had a child eligible for the $2,000 credit but had no income tax liability, they would only receive $1,400 (70% of the $2,000 credit). If the family had an income tax liability of $500, they would be allowed a $1,900 credit ($500 vs. income tax and $1,400 refundable). If the tax liability were $600 or more, then this family would receive the full $2,000 credit. Under the expanded law, the family would receive the full $3,000 (or $3,600) regardless of whether or not they had an income tax liability.

One big thing to keep in mind are the AGI limits.

The expanded law uses threshold amounts of $150,000 for joint filers, $112,500 for head of household filers and $75,000 for everyone else. Credits phase out at the rate of 5% for each dollar of AGI in excess of these limits.

If you exceed the income limits just discussed there is still a $2,000 tax credit for children under the age of 17.   If you have a child that will reach age of 17 during the year, and your income exceeds the limits of the 2021 expanded credit, then the credit will not be available for you next April.  It is highly likely that you will still have a $500 credit, but you will not have a $2,000 credit. I also want to mention the income limitation on this ($2,000 or $500) credit although it is not nearly as important as it once was.  The credit starts to phaseout for married couples filing jointly at $400,000 and $200,000 for all others.

Medical expenses are not deductible unless they exceed 7.5% of your income.

Most married couples filing jointly did not itemize and used the $24,800 standard deduction in 2020.  This should be kept in mind as such things as charitable contributions, mortgage interest and real estate taxes may not impact your tax return as much as they did in the past.

In many instances individuals that have children in college are entitled to education credits either through the American Opportunity Credit or the Lifetime Learning credit.  Both of these credits, however, have income limitations and therefore a credit you are counting on now may not be available to you.  In some instances, it may make sense for a parent to not claim the child as a deduction and allow the child to claim the credit.  While this may raise the tax liability on the parents, the overall taxes on the family may be lower.  Additionally, the American Opportunity Credit is only available for the first 4 years of college and has a significantly higher income phaseout then the Lifetime learning Credit. Taxpayers should be alert as to how many years they have taken the American Opportunity credit and should plan for a potential reduced or completely phased out credit if they have already used the credit for 4 years.

Taxpayers should of course be reviewing their investment activity as well.  If a taxpayer has any capital gains, they may want to start to look at stocks that are not doing as well that could be sold at a loss to offset the gains. This strategy is typically performed closer to yearend, but taxpayers should monitor their capital gains and losses during the year to allow enough time to plan to offset some of these gains.

If you were subject to the Alternative Minimum Tax (AMT) this past year, it is a good idea to take a look at your estimated income and deductions to see if this tax will apply, although far fewer individuals are subject to this tax since the law was changed at the end of 2017.

Lastly, it is always important to remember that if you have any significant income not subject to withholding (income from a sole proprietorship or single member LLC, income from a partnership, multiple Member LLC, S corporation, trust, or investment income such as interest, dividends, or capital gains), then you will either have to increase the withholding on income that is subject to withholding or make quarterly estimated income tax payments.

Conclusion

If you found this year that your withholding was not sufficient to cover your liability you may have to increase your deductions or make quarterly estimated income tax payments in order to avoid being underpaid on your tax liability at yearend. You have over 8 months before yearend and almost a year before April 15th to remedy the situation which is much better than finding out a few weeks before your return is due.  Once again if you’re not sure, then check with a tax professional to help determine your tax position.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation