- Tax filing season opens in a little less than two weeks. Friday February 12, 2021 is the first day that the IRS will begin to accept tax returns filed by taxpayers for the 2020 tax year. If you have all your tax documents early and are due a refund, get your tax return submitted to the IRS soon and beat the filing season rush.
- Do you need to file a tax return for your children or your parents this year? Save money by filing their taxes yourself using the IRS on-line service. The IRS offers free e-filing for taxpayers on their website. To qualify for this service, your income needs to be $72,000 or less. You can even prepare your state income tax return through this site as well. The link to the IRS Free E-file is:
- Another taxpayer convenience offered by the IRS on their website is the option to pay federal estimated tax payments directly online. Taxpayers can set up a direct debit payment to be paid straight from their bank account via EFT. Go green and avoid the trip to the post office. The link to pay your federal estimated tax payment online electronically is:
- If a taxpayer finds themself owing more in federal taxes than expected when their tax return is completed, or as a result of a tax notice or audit, the IRS allows taxpayers to set up a monthly payment plan to pay off their remaining tax balance due over time. Taxpayers can quickly set up an IRS Installment Agreement to make monthly payments until their tax balance owed is paid off. The IRS accepts the monthly payments either by check ($149 IRS set up fee) or via direct debit ($31 IRS set up fee) from the taxpayer’s bank account. A federal tax payment plan can easily be applied for and set up if needed on the IRS website at the following link:
The audit rate of personal income taxes continues to be low, hovering at around 0.5% of all personal tax returns filed each year based upon the past few tax filing seasons. However, the chance of being audited is real and the chance of receiving an IRS notice is more common than you may think. Keeping good records and not forgetting to report taxable items on your tax return will help to minimize the risk of being the subject of an IRS audit or receiving a tax discrepancy notice. With tax filing season just around the corner, we have compiled a list of “helpful hints” for taxpayers to follow when organizing their tax documents this winter to assist in reducing the risk of receiving one of those unwanted IRS letters.
Keys to minimize IRS Audit Red Flags
- Don’t report Schedule C collections that total less than the sum of all your 1099-NEC’s reported to you.
- Avoid reporting 3 consecutive years of losses on a Schedule C.
- Don’t be over aggressive reporting auto (100% business use), travel and meal expenses on your Schedule C.
- Avoid showing all tax-deductible expenses in round numbers ($X,000).
- Report all your cryptocurrency transactions (new on the IRS’s radar for 2020 tax returns).
- Report foreign investments owned as well as gifts and bequests received from foreign sources.
Keys to minimize IRS Tax Notices
- Be sure to report all W-2’s received.
- Don’t miss reporting stock sales reported on your year-end 1099-B.
- Keep accurate records of all your self-employment (1099-NEC) income – don’t miss reporting one on your tax return and under report total income received.
- Report your 1099-Q’s (qualified education distributions).
- Report Health Savings Account distributions, even if properly used for qualifying medical expenses (Form 1099-SA).
- Report the sale of your residence, even if the sale meets the capital gain exclusion rules (Form 1099-S).
- Correctly report your estimated tax payments.
Starting for 2020, expect to receive a Form 1099-NEC instead of a Form 1099-MISC to report income you received as a consultant or independent contractor during the year. The due date for businesses to issue 1099s to their contractors who earned more than $600 during 2020 is 1/31/21.
More info is available at: https://www.irs.gov/instructions/i1099msc
On December 27th, President Trump moved forward and signed the COVID-19 relief bill. This legislation had expeditiously passed both the House and Senate the prior Monday and was waiting for the President’s signature to make it official. This bill is the second major stimulus package passed in 2020. The final version of this bill provides needed financial help for both business and individuals. Highlights of the $900 billion Coronavirus relief package as it impacts individuals are noted below:
Additional Stimulus payments to taxpayers to begin being paid out – similar to the Economic Impact Payments (EIP) paid out earlier this year.
- $1,200 for married filing joint tax filers plus $600 for qualifying dependent children
- Phase-out begins at $150,000
- $600 for all other tax filers plus $600 for qualifying dependent children
- Single and MFS Phase-out begins at $75,000
- Head of household Phase-out begins at $112,500
Expansion in the special charitable deduction allowed for Non-Itemizers.
- The new stimulus package allows taxpayers who do not itemize their tax returns to take a charity deduction in the amount of $600 for married filing joint filers and $300 for all other filers in 2021. For 2020 the allowed amount is $300 for all tax filers. Only cash contributions paid directly to a charitable organization qualify for this deduction.
Revocation on the Limitation on Charitable Contributions.
- There is no income limitation on the allowed amount for a taxpayer’s charitable contribution of money for 2020 and 2021 tax years.
Expansion of expenses qualifying for the educator expense deduction.
- Qualified educator expenses will now include amounts paid for personal protective equipment (PPE) and other supplies used in the prevention of COVID-19 in the classroom. This deduction is still capped at $250 per year which many teachers were already spending annually on supplies.
Changes to employer flexible spending accounts (FSAs).
- The grace period for unused benefits and contributions to employer FSAs (such as for medical expenses and dependent care expenses) has been extended to 12 months after the year end for 2020 and 2021.
- Special carryforward rule where a dependent “aged out” during the Pandemic by turning 13. DCB funds can now be used for such child under age 14.
- Employer FSA plans can allow employees to make prospective changes to their contribution amounts mid-year in 2021 without a valid change in status event.
Additional unemployment benefits provided
- Supplementary Federal Pandemic Unemployment Compensation (FPUC) in the amount of $300 per week to be provided for 11 weeks to qualifying individuals – extended to March 14, 2021.
- $100 per week additional benefit for certain “mixed-earners” (individuals who earned income as both an employee and as a freelancer who earned at least $5,000 in self-employment income).
Personal financial planning is an ongoing process. Financially speaking, 2020 wasn’t a bad year for more than half the country’s workers (including most healthcare professionals) that weren’t involved with the restaurant, travel or entertainment industries severely impacted by the Covid-19 pandemic . The stock markets ended the year at all time highs. Real estate prices around the country outside of the major cities continue to increase. And interest rates and inflation both remain near historic lows.
Hello 2021. Who knows how financially friendly this year will be – especially with the pandemic still raging out of control and a new presidential administration taking over later this month. For that reason, here are nine 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 $1,625 per month for your 401(k) or 403(b) plan to ensure that you hit the “salary deferral” max of $19,500 for 2021. Are you self-employed? If so, you can put away up to $58,000 thisyear into a SEP, Keogh or Solo 401(k), which equals $4,833.33 per month. And if you’ll be 50 or older by December 31st, the maximum 2021 contribution jumps to $26,000 for 401(k) and 403(b) salary deferrals and $64.500 for Solo 401(k)’s.
- REfinance your home mortgage: Mortgage interest rates are at 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 2021 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 (if we can even 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 2020, 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. (Please register for Alex Oliver’s 1/13/21 webinar on: Investment Vision for 2021.)
- REcalculate how much your retirement savings will be worth when you retire: With the market indexes at all time highs, now’s a great time to take a look at how much buying power you can expect to have upon retiring. (Please watch Alex Oliver’s recorded webinar on: How to FIRE: Strategies for Becoming Financially Independent and Retiring Early.)
- 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 2021 is $3,600 for individuals and $7,200 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 2021 will be a better year for everyone than crazy 2020.
Lenders are now accepting applications for the Second Draw PPP loans. Keep in mind that the recent enacted Stimulus Package included a provision that the PPP2 Loan can be both fully forgiven and also not taxable to the business owner.
To be eligible for PPP Round 2, your practice must show at least one quarter during 2020 where the revenue dipped by more than 25% from the same quarter of the previous year. Most healthcare practices that were forced to close last spring should qualify based on their Q2 numbers. We gave instructions at: https://schwartzaccountants.com/2021/01/ppp-update/ on how you can create a report in your QuickBooks Online to confirm that your quarterly revenue fell by at least 25%. You are required to include the quarterly revenue for 2019 and 2020 on the Second Draw Borrower application form.
What if your business wasn’t open for all four quarters of 2019? According to the instructions:
- For entities not in business during the first and second quarters of 2019 but in operation during the third and fourth quarters of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than either the third or fourth quarters of 2019.
- For entities not in business during the first, second, and third quarters of 2019 but in operation during the fourth quarter of 2019, Applicants must demonstrate that gross receipts in any quarter of 2020 were at least 25% lower than the fourth quarter of 2019.
- For entities not in business during 2019 but in operation on February 15, 2020, Applicants must demonstrate that gross receipts in the second, third, or fourth quarter of 2020 were at least 25% lower than the first quarter of 2020.
Other requirements include being open on 2/15/20 and not currently permanently closed, and the business must have spent the full amount of the First Draw PPP Loan. The rules also state that current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant, and the Applicant understand that SBA encourages the purchase, to the extent feasible, of American-made equipment and products.
How Much PPP2 Can You Get?
Business owners can base the PPP2 application on the 2.5 times the average monthly payroll for 2019 OR 2020. The payroll is capped at up to $100k per employee, plus the employer payments for group health, life, disability, vision and dental insurance, employer retirement plan contributions, and state and local taxes assessed on employee compensation. Group benefits and retirement plan contributions are excluded for sole proprietors and partners while S-Corps exclude just the group benefits.
Like Round 1, up to 40% of the PPP2 funds can be spent on non-payroll costs as part of the PPP Forgiveness calculation. The SBA explains that PPP2 does expand the allowable expenses as follows:
Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, covered utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, and not more than 40% of the forgiven amount may be for non-payroll costs. If required, the Applicant will provide to the Lender and/or SBA documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of eligible expenses for the covered period following this loan.
More information and useful links are available at:
Second Draw PPP Loans:
Paycheck Protection Program Second Draw Application Form:
Paycheck Protection Program How To Calculate Maximum Loan Amounts For First Draw PPP Loans And What Documentation To Provide – By Business Type
Please reach out to your PPP Lender to get the ball rolling. If you want us to prepare the PPP application for you, our fee is $750, discounted to $500 for clients who use our firm’s payroll service.
The deadline to apply for PPP Round 2 is 3/31/21.