Monthly Archives: August 2021

Tax Update August 2021

Businesses can deduct 100% of restaurant meals in 2021 and 2022. The late 2020 stimulus law provides temporary relief from the 50% haircut that normally applies to the business meals write-off. The easing applies only to food and beverages purchased at a restaurant for takeout or dining in at the establishment.  Client meals and meals on travel are included. The taxpayer or an employee must be at the meal, and the cost can’t be lavish or extravagant. Prepackaged food

or beverages bought at a store or similar facility do not qualify for the 100% write-off. Neither does the cost of meals at an employer-operated facility such as a cafeteria.

RMDs are back, after being halted last year. Folks 72 and older must take annual RMDs from traditional IRAs or pay a 50% penalty. For 2021.  The amounts can be taken from any IRA you pick. The same rules apply to 401(k)s and other workplace defined-contribution plans, with two important exceptions.

First, people who work past 72 can delay RMDs from their current employer’s 401(k) until they retire, provided they don’t own more than 5% of the firm that employs them. Second, for people with multiple 401(k)s, the RMD must be taken from each account.  

If 2021 is your first RMD year, you have until April 1, 2022, to take the RMD. The distribution will still be based on your total IRA balance as of Dec. 31, 2020. If you opt to defer your first RMD to 2022, you will be taxed in 2022 on two payouts: The one for 2021 that you deferred and the RMD for 2022. This doubling up would hike your 2022 income and could push you into a higher income tax bracket.

 Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. If married, you and your spouse can give up to $100,000 each from your separate IRAs. Qualified charitable distributions can count as RMDs, but they are not taxable and they are not added to your AGI. You can’t deduct the donation on Schedule A. The IRA-to-charity strategy can be a good way to get tax savings from charitable gifts for taxpayers not taking charitable write-offs because of higher standard deductions.  The money from the IRA must go directly to a charitable organization. Transfers to a donor-advised fund, charitable gift annuity, charitable remainder trust or any other life-income or split-interest gift arrangement are not treated as QCDs.

More on advance monthly payments of the child tax credit. One element of the 2021 child tax credit regime requires IRS to make advance payments of the credit each month to qualifying families. The advance payments will account for half of a family’s 2021 child tax credit. IRS will issue these monthly payments to eligible families on July 15, Aug. 13, Sept. 15, Oct. 15, Nov. 15 and Dec. 15.

IRS will base eligibility for the payments on 2020 or 2019 returns. The agency has started sending letters to more than 36 million families that it believes are eligible for the advance child credit payment. The letters are generally for informational purposes. IRS plans to send a second round of letters this summer, and that latter mailing will list the family’s estimated monthly payment. Want to opt out of monthly payments? IRS has an online tool for this.

Here’s an idea to help a child or grandchild who is working this summer:   You can contribute to a Roth IRA for him or her…up to $6,000 for 2021, but not more than the child’s 2021 earnings. Earnings grow tax-free inside the Roth. If you go down this path, you have until April 18, 2022, to make this contribution. The payin counts toward your $15,000-per-donee gift tax exclusion ($30,000 if married).  This can provide a nice nest egg. And there are key tax advantages to Roths. Distributions after age 59½ are nontaxable. Contributions can be pulled out free of tax

at any time. And $10,000 of earnings can be taken out tax-free to buy a first house.

Still waiting for your tax refund on your timely filed 2019 or 2020 return? Millions of others are in the same boat, if that makes you feel any better. As of June 25, IRS had a backlog of 16.7 million 2019 and 2020 individual returns that require manual processing by agency employees. Some of these are paper returns. Others were suspended during electronic processing and need further review. Unfortunately, there is not much that taxpayers or preparers can do about the delays. But there are reasons for some hope. IRS expects to complete the processing of 2019 Forms 1040 that were filed on paper sometime this summer. And new returns are now trickling into IRS at a slower rate than during the midst of filing season.

An inherited an IRA from a relative allows 10 years from your relative’ death to clean out the account. This doesn’t mean payouts must be distributed evenly over a 10-year period. You can wait until year 10 to take out all the money, get annual payouts, or skip multiple years, if you want, as long as the IRA is depleted within 10 years. Many inherited IRA beneficiaries can stretch distributions over their lifetimes: Surviving spouses of the account owner. Beneficiaries who are chronically ill, disabled or not more than 10 years younger than the deceased IRA owner. Minor children (until a child reaches 18). And individuals who inherited IRAs before 2020.

Millions of families have begun receiving monthly child tax credit payments. These advance payments of up to $250 or $300 per child account for one-half of the family’s 2021 child tax credit. Lawmakers hope that these regular payments will help low-income families who struggle to make ends meet on a day-to-day basis. However, the payments don’t go just to low-income families. All families who qualify for the child credit will get payments from July through Dec. unless they opt out. The monthly child credit payments aren’t taxable. On your 2021 Form 1040,

which you file next year, you’ll reconcile the payments you got with your actual credit. If the child credit exceeds the payments that you received, you can claim the excess. If the credit is less than what you got, you may or may not have to repay the excess. IRS will mail a notice by Jan. 31, 2022, showing the total amount of payments made to you. Keep the letter with your tax records to help you fill out your 2021 return.