From IRS News – IR-2022-52
The Internal Revenue Service reminds taxpayers they may be able to claim a deduction on their 2021 tax return for contributions to their Individual Retirement Arrangement (IRA) made through April 18, 2022.
An IRA is a personal savings plan that lets employees and the self-employed set money aside for retirement and can have tax advantages. Contributions for 2021 can be made to a traditional or Roth IRA until the filing due date, April 18, but must be designated for 2021 to the financial institution.
Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2021. For those 50 years of age or older at the end of 2021, the limit is increased to $7,000. Qualified contributions to one or more traditional IRAs may be deductible up to the contribution limit or 100% of the taxpayer’s compensation, whichever is less. There is no longer a maximum age for making IRA contributions.
Those who make contributions to certain employer retirement plans, such as a 401k or 403(b), an IRA, or an Achieving a Better Life Experience (ABLE) account, may be able to claim the Saver’s Credit. Also known as the Retirement Savings Contributions Credit, the amount of the credit is generally based on the amount of contributions, the adjusted gross income and the taxpayer’s filing status. The lower the taxpayer’s income (or joint income, if applicable), the higher the amount of the tax credit. Dependents and full-time students are not eligible for the credit. For more information on annual contributions to an ABLE account, see Publication 907, Tax Highlights for Persons With Disabilities.
While contributions to a Roth IRA are not tax deductible, qualified distributions are tax-free. Roth IRA contributions may be limited based on filing status and income. Contributions can also be made to a traditional and/or Roth IRA even if participating in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA-based plan).
Taxpayers can find answers to questions, forms and instructions and easy-to-use tools at IRS.gov. This news release is part of a series called the Tax Time Guide, a resource to help taxpayers file an accurate tax return. Additional help is available in Publication 17, Your Federal Income Tax For Individuals.
Higher education is important to many people and it’s often expensive. Whether it’s specialized job training or an advanced degree, there are a lot of costs associated with higher education. There are two education tax credits designed to help offset these costs – the American opportunity tax credit and the lifetime learning credit.
Taxpayers who paid for higher education in 2021 can see these tax savings when they file their tax return. If taxpayers, their spouses, or their dependents take post-high school coursework, they may be eligible for a tax benefit. To claim either credit, taxpayers complete Form 8863, Education Credits, and file it with their tax return.
These credits reduce the amount of tax someone owes. If the credit reduces tax to less than zero, the taxpayer could even receive a refund. To be eligible to claim either of these credits, a taxpayer or a dependent must have received a Form 1098-T from an eligible educational institution. There are exceptions for some students.
Here are some key things taxpayers should know about each of these credits.
The American opportunity tax credit is:
- Worth a maximum benefit of up to $2,500 per eligible student.
- Only available for the first four years at an eligible college or vocational school.
- For students pursuing a degree or other recognized education credential.
- Partially refundable. People could get up to $1,000 back.
The lifetime learning credit is:
- Worth a maximum benefit of up to $2,000 per tax return, per year, no matter how many students qualify.
- Available for all years of postsecondary education and for courses to acquire or improve job skills.
- Available for an unlimited number of tax years.
Taxpayers can use the Interactive Tax Assistant tool on IRS.gov to figure out if they’re eligible for either of these credits.
Compare Education Credits
Publication 970, Tax Benefits for Education
If your high school or college aged child needs to file a tax return only to have federal or state income taxes withheld from their pay refunded, then why not file for free? For federal taxes, this generally applies to dependents who earned no more than $12,550 (in 2021) unless they also have investment income exceeding $350.
Even if your child earns more than $12,550, if the only income is from W-2 wages, then please take advantage of the IRS’ free filing. Just be careful to check the box on Page 1 or their 1040 reflecting that the child can be claimed as your dependent or you might lose out on the valuable tax credit of $3k per child under the age of 17 (increased to $3.6k for kids 5 and under) or $500 per older dependent child.
While preparing your child’s tax returns, please consider contributing the lesser of your child’s gross wages or $6,000 into a Roth IRA for your child. Think decades of tax-free compounded growth on those contributions. The due date to contribute to an IRA for 2021 is 4/15/22.
If a child is filing a tax return to report significant investment income, however, the overly complex Kiddie Tax rules might deter even the most tax-savvy parents from trying to file for their kids using the free software.
And if you do have a working child who won’t earn more than $12,950 in wages during 2022, please instruct your child to claim Exempt on the new W4 form to avoid the need to file a tax return for that child next winter only to get a refund of federal taxes that didn’t otherwise need to be withheld. Here are the instructions for your child to claim exempt:
Exemption from withholding. You may claim exemption from withholding for 2022 if you meet both of the following conditions: you had no federal income tax liability in 2021 and you expect to have no federal income tax liability in 2022. To claim exemption from withholding, certify that you meet both of the conditions above by writing “Exempt” on Form W-4 in the space below Step 4(c). Then, complete Steps 1(a), 1(b), and 5. Do not complete any other steps.
The IRS now requires that all individuals answer this question about cryptocurrency on the first page of their personal tax returns: At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? According to the Form 1040 instructions:
If, in 2021, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR. A transaction involving virtual currency includes, but is not limited to:
- The receipt of virtual currency as payment for goods or services provided
- The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift
- The receipt of new virtual currency as a result of mining and staking activities
- The receipt of virtual currency as a result of a hard fork
- An exchange of virtual currency for property, goods, or services
- An exchange/trade of virtual currency for another virtual currency
- A sale of virtual currency
- Any other disposition of a financial interest in virtual currency.
Due to this reporting requirement, we now ask each of my clients during our tax prep meeting whether during the year they purchased, sold, or otherwise acquired any virtual currency, including bitcoin. The response we get is usually one of the following three questions:
- Have you?
- Should I?
- How can I invest in something I don’t understand?
To learn more about Cryptocurrency, check out Alex Oliver’s recorded Webinar available at: https://www.youtube.com/watch?v=MFfuClWwakA.
In his webinar, Alex addresses that a diversified portfolio has long included various types of assets that range from large, mid-sized, and small companies, to value versus growth-oriented businesses, to various sectors within the economy, fixed income, commodities, and much more. With the total market capitalization of cryptocurrencies rising from $1 trillion to $3 trillion in 2021, is it time to add crypto assets to your IRAs, Roth IRAs, and investment accounts? If so, what percentage of your portfolio is appropriate? Which avenues are the best ways to invest? Join Alex Oliver in a quickly evolving discussion around one of the hottest topics in the investing world.