Another year is
coming to a close and, that means thinking income taxes. As always, we need to see
what can be done before the close of the year. Let’s go through a checklist:
Child Tax Credit: Children up to age 17 (it was 16 in
the past) receive a $3,000 tax credit. (Under age six get $3,600.) This credit
is fully refundable. If a family earns $40,000 and has five children, they will
get back about $20,000 from the feds and Maryland, which includes the child tax
credit and the earned income credit. This money is tax free. They will also get
free health insurance with zero deductibles. Of course, there are also food
stamps, worth maybe $1,000 per month. Doesn’t seem like a big incentive to work
hard and make more money. This child tax credit is reduced for any money you
have been receiving since July as that money was an advance of this credit.
Child Care Credit: If both parents work, there is a
tax credit for child care expenses for children from nursery until age 13 as
well as day camp. (It could be cheaper to attend TA camp than a backyard camp.)
This credit is for expenses that allow you to work. That sentence is subject to
interpretation. For the year 2021, only, the credit is 50% of what you paid, up
to $16,000, for a savings of $8,000. And fully refundable. Plus, more from the
state of Maryland. As always, you need to provide the name, address, and social
security number of the caregiver. You cannot prepay expenses. I am not sure
what that means. Can I prepay until June 2022? Is it calculated month to month?
What if the care provider has a rule that you must be paid up by December 31?
Important:
You
need to talk to your playgroup morahs now to get on the same page.
Charity:
As
always, charity is a tax deduction. However, you need to be able to itemize.
This is becoming more difficult as the standard deduction gets higher. However,
families can claim charity of $600 without itemizing. If you are over 70, it
might pay to give charity directly from an IRA. Get the details.
Itemizing: Given the difficulty of itemizing, a strategy is
called “bunching” is useful. This means giving charity – and itemizing – every other
year every other year. It is worth running a forecast to see how much you could
save. I have seen many cases where the savings are well over $2,000 every other
year. Furthermore, if your itemized deductions come to a bit under the standard
deduction, you could elect to itemize anyway. You will lose a little on the
federal return but save a lot on Maryland. Run the numbers both ways,
College:
The
American opportunity tax credit is still here. The first $2,000 of college
expenses gives a 100% tax credit. The second $2,000 is a 25% credit. Time your
payments to maximize this one. You must be enrolled in an accredited college
and get a 1098-T. You can count tuition fees, books, and supplies. This credit
is per student and is limited to the first four years of college. I think you
should keep a good notebook of what was spent in what years. Spending beyond $4,000
does not help. Make sure you do not spend too much in one year and then too
little the next year. Beyond that, there is still a 20% credit of tuition paid,
up to $10,000 per year. You could therefore save $2,000 per family.
Health Insurance: If you are receiving a premium tax
credit (you will receive a form 1095-A), you have to watch your income. You might
have to pay it back. If you need to reduce your income, put money into
an IRA. This is critical!
Assess your
out-of-pocket medical expenses and how to make them pre-tax. This is a mix of
making your premiums a fringe benefit and using HSAs and FSAs for out-of-pocket
medical expenses. This requires some know-how on the part of the employer.
Unemployment Income: This is taxable. It was only tax
free in 2020.
Retirement Income: If you are over 70, you need to
take money out of your IRAs and retirement accounts before year end. This is
your RMD, required minimum distribution.
Third Stimulus: The government sent out a third
stimulus in March 2021. Everyone received $1,400. If you did not receive it for
any reason, it will be added to your refund now. That would include $1,400 for
a child born in 2021.
Marriage: If you are getting married soon, you might
want to legally tie the knot in 2021.
Imagine the woman
has a job and earned $60,000, but the man is a student. Their wedding date is
in January. If they get married in December, they can file as married and have
their tax brackets cut in half. Furthermore, she will be able to claim a tax
credit for his tuition. Wow!
Savers Credit: If your income is under $68,000, you get
an extra tax credit for putting money into a retirement account, including IRAs.
If your income is under $41,000, it is a 50% credit. It is important to check
because you could save big with this one.
Employee Expenses: If you have expenses, they should
be reimbursed by the employer since the employee cannot deduct them. This could
include internet, cell phone charges, and supplies.
Earned Income Credit: As always, if you
have children and have low income, you receive an extra refund, which can be
worth several thousands of dollars. Important:
Your investment income cannot exceed about $3,500. Beware, as this can be a huge disaster if you go over that amount.
As always, there
are ways to save with good planning.
Eli Pollock can be reached at elipollock2@yahoo.com.
