By Alex E. Oliver, Wealth Manager, First National Corporation
The SECURE Act changed the deadline for establishing a profit sharing plan or cash balance plan in order for employer contributions to be made for the 2021 tax year. Previously, this would have been 12/31/21, but now is your tax filing deadline with extensions.
If you have not set up a retirement plan yet, it is now possible for you to profit share yourself up to $58,000 in deductions for the 2021 tax year. If you have traditionally maxed out your profit sharing contribution, you could now add on a cash balance plan for 2021 to defer another $50,000 – $200,000 and avoid income taxes.
Given the 4-6 week process of running projections and setting up a 401(k)/profit sharing plan/cash balance plan, a client looking to take advantage of this will almost certainly need to file a tax extension.
We would anticipate a strong uptick in the use of cash balance plans due to this deadline change, given that we can start with actual 2021 figures instead of working off projections. Note that we partner with First National Corporation to set these up and you will not charged additional testing fees for plans with less than 25 employees, so even if they are not currently managing their 401(k)/profit sharing plan, you can still open the cash balance plan at Fidelity/Schwab maintain your current 401(k) provider.
The deadline change also applies to the solo 401(k) employer portion. In the past, we have used the SEP-IRA for spring contributions, but typically recommended that you convert it to a solo 401(k) shortly thereafter so that you could make backdoor Roth IRA contributions. Thus, in some ways, the SEP-IRA is becoming obsolete given the added flexibility of the solo 401(k).
If this applies to you, please reach out to Alex@fncadvisor.com and your accountant for further consultation.
The tax rules continue to evolve at a record pace. Below are some reminders for you as we enter the 2022 tax filing season.
Advance Child Tax Credit Payments. For qualified taxpayers that will receive advance Child Tax Credit payments from July – December 2021, the IRS plans to send taxpayers Letter 6419 in January 2022. This IRS form letter will provide taxpayers the total amount of advance Child Tax Credit payments that were disbursed to taxpayers either via check or direct deposit during 2021. Please retain this letter for your records and provide it to your tax preparer with your other tax documents this coming winter as the amount reported on this letter will be needed to prepare your 2021 tax return accurately.
Third Economic Impact Payments (EIP). In January 2022 the IRS plans to send out Letter 6475 to taxpayers that received the third EIP earlier in 2021. This letter will state the amount of this third stimulus payment received by taxpayers. Please retain this letter for your records and provide it to your tax preparer with your other tax documents this coming winter as the amount reported on this letter will be needed to prepare your 2021 tax return accurately.
Identity Protection Personal Identification Number (IP PIN) reminder. For taxpayers who receive an IRS IP PIN annually, be on the lookout in January 2022 for a letter from the IRS with your 2021 IP PIN number. These letters, IRS Notice CP01A, are sent out annually to taxpayers via the US mail. Be sure to retain this notice with your other annual tax documents and provide a copy to your tax preparer this winter as the IP PIN is needed to file your tax return electronically.
The purpose of the IP PIN is to enhance security when electronically filing your tax return. The 6-digit number prevents someone else from filing a fraudulent tax return using your social security number. Each year the IRS will send taxpayers a new 6-digit code to be used on their individual tax return. Prior to January 2021, IP PINs were only available to taxpayers that had a prior year tax return fraudulently filed using their social security number. Beginning with personal tax returns being filed for the 2020 tax year, the IRS expanded their security program by allowing all taxpayers to obtain an IP PIN.
Charity deduction for taxpayers that do not itemize their tax returns. For the 2021 tax year, the IRS is again allowing taxpayers that file their tax return using the standard deduction to claim a charity deduction on their tax return. The maximum allowed charity deduction for non-itemizers is $300 for single, head of household and married filing separate filers. Joint filers are allowed a maximum deduction for charity in the amount of $600 over and above the standard deduction of $25,100. Only cash (cash, checks, and credit or debit card payments) qualify for this $300/$600 deduction. Cash payments to a Donor Advised Fund do not qualify for this special charity deduction, nor do in-kind contributions.
Record keeping rules for charitable donations of cash (and check and credit card payments) and marketable securities. In order to claim a cash charitable deduction, taxpayers must keep records in the form of bank records or written acknowledgement from the charitable organization.
- Donations less than $250 in any one day – taxpayer must keep a copy of a bank record such as a cancelled check or bank statement, or a written acknowledgement from the charitable organization stating the dollar amount and date of the charitable donation.
- Donations of $250 or greater in any one day – taxpayer must maintain written acknowledgement from the charitable organization noting the amount and the date of charitable contribution.
For donations of stock and other marketable securities, the charity should send the donor an acknowledgement letter that describes the security, the number of shares and the date of the donation
(i.e., “Thank you for your donation of 100 shares of XYZ Corporation on December 15, 20XX”) but does not place a monetary value on the shares. The letter should also state that “no goods or services were provided by the organization in exchange for the gift”. It is recommended that the charity send the donor a separate receipt that reports the quantity and value of the donated shares on the date of the gift. While this receipt is not required, the donor will want this information for his/her own records. The value of a gift of publicly traded stock is the mean of the highest and lowest quoted selling prices on the date of the gift (excluding weekends or holidays). Neither the acknowledgment letter nor receipt need to report to the donor the proceeds from the sale of the donated securities.
IR-2021-251, December 17, 2021
WASHINGTON — The Internal Revenue Service today issued the 2022 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on January 1, 2022, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 5 cents per mile driven for business use, up 2.5 cents from the rate for 2021,
- 18 cents per mile driven for medical, or moving purposes for qualified active-duty members of the Armed Forces, up 2 cents from the rate for 2021 and
- 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2021.
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Taxpayers can use the standard mileage rate but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.
Personal financial planning is an ongoing process. Financially speaking, 2021 was another good year for most of us even as the Covid-19 pandemic continues to affect all our lives. The stock markets set new all-time highs. Real estate prices around the country continue to increase. And interest rates remain near historic lows even though inflation has risen significantly in recent months.
Hello 2022. Who knows how financially friendly this year will be – especially with the Omicron variant now raging out of control and the threat of inflation adding an element of uncertainty to all of our financial lives. For that reason, here are ten prudent steps you can take to keep your personal finances moving on the right track:
- REset your retirement savings:Most people find it easier to max out their retirement contributions by budgeting a set amount each month. Instruct your employer to withhold $1,708.33 per month for your 401(k) or 403(b) plan to ensure that you hit the “salary deferral” max of $20,500 for 2022. Are you self-employed? If so, you can put away up to $61,000 this year into a SEP, Keogh or Solo 401(k), which equals $5,083.33 per month. And if you’ll be 50 or older by December 31st, the maximum 2022 contribution jumps to $27,000 for 401(k) and 403(b) salary deferrals and $67,500 for Solo 401(k)’s. Please also reset your salary to $305k which is the maximum salary for retirement plan contributions for 2022.
- REfinance your home mortgage: Mortgage interest rates remain near record lows. According to our go to mortgage guru Bob Cahill of Leader Bank, there are a variety of mortgage products currently available to people looking to purchase a new home or refinance an existing mortgage with extremely low rates.
- REduce your personal debt: There is still easy access to plenty of debt for most people. Remember, leverage equals risk. Make 2022 a year to pay down some of your personal debt. Perhaps you might also delay the purchase of a new car, scale down your awesome vacation (hopefully we can take a great vacation this year), or settle for a 60-inch flat screen TV.
- REvise your savings and debt reduction goals: Take a few minutes to set (and also write down) new savings goals including how much you’d like to put away towards your retirement, a child’s education, and/or the down payment on a home, and also to reset how much you plan to pay down your student loans, personal debt, and home mortgage by the end of the year. (Please watch Alex Oliver’s recorded webinar on Game of Loans: Income Based Repayment Versus Refinancing.)
- REbalance your investment portfolio:Warren Buffet said it best by stating, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” During 2021, the stock market once again hit another all-time high. By rebalancing your portfolio to its original or updated asset allocation, you lock in gains from the sectors that performed the best and move money into sectors that underperformed and soon enough might be poised to catch up.
- REdiscover fixed income investments:Earn a guaranteed and risk-free 7.12% interest rate through April 2022 while also making your portfolio a little more conservative by purchasing I-Bonds, a special type of inflation protected treasury bond issued by the US government.
- REvisit your life and disability insurance needs: As you move through your career and your life, your life and disability needs change. Give some thought to how much of these insurances you need versus how much you currently get through your employer’s benefit package and how much coverage you’ve already purchased for your personal policies.
- REview your overall health insurance costs: Consider switching to a qualified high deductible health insurance plan that allows you to contribute to a Health Savings Account (HSA). HSAs provide for tax-deductible contributions AND tax-free withdrawals. The maximum contribution for 2022 is $3,650 for individuals and $7,300 for people with family plans. Anyone 55 or older can add an additional $1k. Many people with HSAs choose to let the money contributed into their account grow tax-deferred, and instead pay for their family’s healthcare costs out of their household checking account. (Please watch Alex Oliver’s 2/21/20 webinar on Health Savings Accounts.)
- REsolve errors on your credit report:Each year, you’re entitled to three free credit reports, so there’s no excuse to not look at this important financial report annually, especially since errors are not uncommon. Order your free report at annualcreditreport.com.
Hopefully 2022 will be a better year for everyone than these past two years we’ve endured while dealing with the COVID pandemic. And hopefully 2022 will be another strong year for our personal finances.