Tax-Smart Strategies to Pay for College

The big advantage of 529 plans is that qualified withdrawals are always federal-income-taxfree and usually state-income-tax-free too. What you may not know is that not all 529 withdrawals are tax-free qualified withdrawals, even in years when you have heavy college costs. This article explains what we think are the six most important things to know about 529 withdrawals:

Point No. 1: You Usually Have Several Payment Options
Point No. 2: Watch Out for Withdrawals from 529 Accounts Funded with Custodial Account Money
Point No. 3: The IRS Knows about Withdrawals
Point No. 4: Withdrawals May Be Taxable Even in Years When Substantial College Costs Are Incurred
Point No. 5: When You Keep a Withdrawal, There Are Tax Consequences
Point No. 6: Withdrawals Not Used for Education Can Also Be Hit with a 10 Percent Penalty Tax

Read more at: https://www.bradfordtaxinstitute.com/Tools/College-Premium.pdf

Advance Child Tax Credit

The IRS has shared a fact sheet with tips for the Advance Child Tax Credit and filing the 2021 tax return. Heres what to keep in mind when you file:
Tax preparers and their clients should carefully read advance CTC letter 6419: To help eligible taxpayers, the IRS sent letters to payment recipients to help ensure tax returns are accurate.
Make sure you are filing an accurate return. People who file an accurate tax return electronically with direct deposit will generally see their refunds within 21 days after the filing is accepted by the IRS. Incorrect entries could lead to an extensive delay.
To ensure people accurately complete their 2021 tax return, use the advance Child Tax Credit information in your IRS Online Account beginning January 31. When in doubt about the amount, check IRS Online Account.
A limited group of taxpayers may receive an IRS letter with an incorrect amount of the payments received. Those in this small, affected group generally involve people who moved or changed bank accounts in December 2021, and their checks were returned as undeliverable, or their direct deposits were rejected. The IRS encourages anyone who thinks the letter might not be accurate to rely on the amount of payments reflected in their Online Account.

The Online Account link: https://www.irs.gov/payments/your-online-account

2022 Retirement Plan Contribution Updates

401k
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $20,500. The maximum contribution from employee deferrals plus employer contributions is $61,000.

An over age 49 catch-up amount is unchanged at $6,500.

SEP-IRA
The maximum contribution is $61,000.

Simple-IRA
The amount individuals can contribute to SIMPLE retirement accounts also increases to $14,000 in 2022.

The over age 49 catch up remains at $3,000.

2022 Retirement Plan Contribution Updates

IRA
Limits on contributions to traditional and Roth IRAs remains unchanged at $6,000.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If neither the taxpayer nor their spouse is covered by a retirement plan at work, their full contribution to a traditional IRA is deductible. If the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated. The amount of the deduction depends on the taxpayer’s filing status and income.

Traditional IRA income phase-out ranges for 2022 are:
$68,000 to $78,000 – Single taxpayers covered by a workplace retirement plan
$109,000 to $129,000 – Married couples filing jointly. This applies when the spouse making the IRA contribution is covered by a workplace retirement plan.
$204,000 to $214,000 – A taxpayer not covered by a workplace retirement plan married to someone who’s covered.
$0 to $10,000 – Married filing a separate return. This applies to taxpayers covered by a workplace retirement plan

Roth IRA contributions income phase-out ranges for 2022 are:
$129,000 to $144,000 – Single taxpayers and heads of household
$204,000 to $214,000- Married, filing jointly
$0 to $10,000 – Married, filing separately

Saver’s Credit income phase-out ranges for 2022 are:
$41,000 to $68,000 – Married, filing jointly.
$30,750 to $51,000 – Head of household.
$20,500 to $34,000 – Singles and married individuals filing separately.

Some Things to Keep in Mind

Required Minimum Distributions:

Required minimum distribution (RMDs) were waived for the tax year 2020 only, so don’t forget to take your RMD for 2021 by Dec. 31, 2021!

If you turn 70 1⁄2 after 2019, you must begin taking RMDs from your traditional IRA by April 1st of the year following the year you reach age 72. For example, if you turned 72 in September 2021, you can either take your 2021 RMD in 2021 or you can wait until April 1, 2022. However, you must take your 2022 RMD by Dec. 31, 2022, which means you’ll have two RMDs to report on your 2022 return if you wait.

If you fail to take your RMD, you’re subject to a 50% excise tax on the amount not distributed. Don’t panic though! You can ask the IRS to waive the tax due to reasonable error if you take steps to remedy the shortfall. Contact our office and we’ll explain what needs to be done and prepare the necessary paperwork.

Charitable Contributions:

Ordinarily, if you choose to claim the standard deduction, you cannot deduct your charitable contributions. Good news though, if you don’t itemize deductions for 2021, you may deduct up to $300 ($600 if MFJ) on your 2021 tax return for cash contributions made to most charitable organizations.

If it’s better for you to itemize deductions, you can elect to apply a 100%-of-AGI deduction limit for cash contributions made to most charitable organizations during 2021. Without this election, the usual percentage limit applies (normally 60%), and the nondeductible amount carries over up to five years. We can discuss which AGI limit is best for you based on your specific facts and circumstances.

*Remember to obtain an acknowledgment letter from the charity before filing your return and retain a canceled check or credit card receipt for contributions of cash!!

Dear Clients…

As the year winds down, the tax reporting forms begin to arrive and we want to remind you which ones we need you to accumulate and send to us with your tax information. First, there are a couple of new forms this year that most people will see, and which we need you to provide to us:

__ IRS Notice 1444-C for the 2021 stimulus check; and
__ IRS Letter 6419 for those folks that received the advance child credit.

Speaking of the advanced child credit, if you received it in advance, please understand that your refund this year may be greatly reduced!

We still need the annual information forms that are sent to you for tax purposes. As a reminder, here is a simple checklist:

__ W-2 for wages __ W-2G for gambling __ 1099-Int for interest
__ 1099-DIV for dividends __ 1099-B Brokerage __ SSA-1099 Social Security
__ 1099-NEC for income __ 1099-Misc for income __1099-K for income
__ 1099-R for retirement __ 1099-G for refunds & unemployment
__ 1099-Int for mortgages __ 1098-T for tuition __ 1099-SA for HSA’s
__ K-1 forms from investments in S corporations or partnerships
__ Form 5498 for IRA values __ IRA and Roth IRA contributions for 2021

__ Child care costs, and the name, address, amount, and ID # of the recipient
__ Charitable donations-total amounts and recipients
__ Property tax paid on your home, property, or cars
__ Estimated tax payments and dates
__ Any letters you received from the IRS or state tax authorities
__ Our engagement letter

If you have a small business or rental property we can provide you with a separate checklist for those activities if needed.

Again, IRS scrutiny of foreign accounts means that you need to be absolutely clear about any non-US accounts or income so that we report it correctly.

If you have bought and/or sold a home in 2021 we need the closing statements on both purchases and sales.

Finally, in some tentative year-end planning, we are reasonably certain that Federal income tax rates will increase in 2022, so tax deductions will be more valuable next year vs. this year, and if you have any control over year-end bonuses it would be wise to call us and see if they would be better to receive them before the end of 2021 or wait until 2022.

Every year we are reminded how much we value your business, and we want to once again say thank you. Please call us with any questions.

Sincerely,
Your Accountants

Achieving a Better Life Experience Accounts: A financial solution for people with disabilities

Achieving a Better Life Experience (ABLE) accounts are tax-advantaged savings accounts for people who have disabilities and their family members. These accounts are useful to assist people with disabilities pay qualified disability-related expenses without affecting their eligibility for government assistance programs. Distributions are tax-free if used for qualified disability expenses.

The annual contribution limit is $15,000 in 2021. Certain employed ABLE accounts may make additional contributions up to either the designated beneficiary’s compensation for that tax year or the poverty line for a household of one person. The poverty line for 2021 is $12,880 in the continental US, $16,090 in Alaska, and $14,820 in Hawaii.

Some designated beneficiaries may be eligible to claim the saver’s credit for a percentage of their contributions. The beneficiary can claim said credit on Form 8880 (linked at the bottom). The saver’s credit is non-refundable and available to individuals who meet the following requirements: at least 18 years of age, not a dependent or a full-time student, and can meet the income requirements.

Families may rollover funds from a 529 plan to another family member’s ABLE account. Although, the ABLE account must be for the same beneficiary as the 529 account or for a member of the same family as the account holder. Rollovers from a section 529 plan count toward the annual contribution limit.

States can offer ABLE accounts to help people who become disabled before the age of 26 or their families pay for disability-related expenses. Some expenses may include transportation, housing, and/or education. These contributions are not deductible for federal tax purposes. Distributions, including earnings, are tax-free to the beneficiary if they are used to pay for qualified disability expenses.

Form 8880: https://www.irs.gov/pub/irs-dft/f8880–dft.pdf
Distributions From ABLE Accounts and ABLE Account Contribution Information form instructions:
https://www.irs.gov/pub/irs-pdf/i1099qa.pdf