TAX ISSUES FOR 2021 AND BEYOND
By now, most Americans have received the documents needed to complete their 2021 tax returns. The filing deadline this year is April 18. What follows is a list of tax-related issues to keep in mind as you prepare your taxes, including ways you can still make tax-advantaged contributions to various accounts.
Contributions to retirement accounts
You have until April 18 to make your maximum contribution to your retirement account. Even if your spouse doesn’t work, you may be able to make a contribution for him or her. Every dollar you contribute will reduce your taxable income, and earnings and future capital gains will be tax deferred.
Health savings accounts and flexible spending accounts
If you have a qualifying high-deductible health insurance policy, you should consider establishing an HSA. Your contributions are tax deductible; all income and growth are tax deferred; withdrawals are tax free if used for qualified medical expenses. You can roll the accounts over from one year to the next without mandatory withdrawals. You can maintain the accounts after retirement, and make tax-free withdrawals for qualified medical expenses.
Even if you don’t qualify for an HSA, you may be eligible for a flexible spending account, or FSA. The contributions are tax deductible, and withdrawals are tax free if used for medical expenses and dependent care. You must use these funds by yearend, however, to get the tax advantage.
Charitable contributions
Even if you don’t itemize on your 2021 return, you are allowed to deduct up to $300 for cash contributions to qualified charities on an individual return (or $600 for a joint return).
If you are required to make required minimum distributions (RMDs) for 2022, you can minimize your taxes by making a qualified charitable deduction (QCD) up to $100,000. Ask your trustee to make the contribution directly to the qualified charity from your retirement account. Whatever you contribute in this way reduces the taxable amount you have to withdraw from your retirement account to meet
RMD requirements for the year.
Capital gains
If you sold securities you held for longer than a year, it is important to use the proper basis to minimize your taxes. Many investors don’t add the dividends and capital gains that may have already been taxed — for example, in the case of reinvested mutual fund distributions — to their initial purchase price. Naturally, increasing the basis by earnings already taxed will minimize the capital gains tax you owe.
Qualified dividends
When you compute your taxes, make sure you report all qualified dividends that will appear on your Form 1099-DIV year-end statement from your financial institutions. Qualified dividends are taxed as long-term capital gains, which for some low-income returns are not taxable. Nonqualified dividends are taxable at ordinary income tax rates, so make sure you do report qualified dividends correctly.
Self-employment income
Self-employed income is eligible for tax deductions not available from other income. For example, you can deduct expenses related to vehicle mileage used for self-employment. Deductions are also available for publications, membership dues, office supplies and health insurance costs.
In addition, if part of your home is used “regularly and exclusively” for business purposes, you can take a deduction expenses for rent and utilities. Be careful: In an audit, you may find the IRS is strict about defining work space.
There is a complicated way and a simple way to figure out your home office deduction. Consult IRS Form 8829 for the complicated computation. A simple way to compute is to multiply the square footage of your workspace, up to a maximum of 300 square feet, by $5. That’s your deduction.
Other deductions
If you itemize, you can deduct the cost of private mortgage insurance. This deduction has not been available for many years, but it is now available for 2021.
All moving costs are deductible for active military members moving because of permanent change of station. If you are in the military reserve, and you travel more than 100 miles and stay overnight, you are entitled to deduct unreimbursed travel expenses, meals and lodging expenses.
Processing your return
Congress has not increased funding for the IRS despite the need for more resources. So you can expect delays in the processing of your tax returns. It is likely that paper returns will again not be processed in a timely manner. So, if you need a quick refund, you should use e-filing. If you do mail it, I suggest you use certified mail to be able to prove when you submitted your return. This will ensure that, if there is a delay in processing, you can prove you are entitled to interest due on refunds. Many readers have indicated they are still waiting for refunds, some from 2019.