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The Art of Tax Reduction

Like a master craftsman who has a knack for bringing the inanimate “to life,” a good tax planner can take the current tax law and shape it into something useful (like reduced taxes!)

With extensive COVID-19 relief legislation, keeping up with the changes has been challenging. Below is a summary of some provisions in effect for the 2021 tax year.

Change is coming, so please reach out to Ambassador Advisors for more information on how the proposed tax laws may affect your personal situation.

Above-the-Line Charitable Contribution Deduction

For 2021, taxpayers who don’t itemize can take advantage of a $300 above-the-line deduction for cash contributions to qualified charitable organizations ($600 for married filing jointly). An above-the-line deduction is an amount subtracted from gross income, arriving at adjusted gross income.

Increased Limit For Cash Contributions

The adjusted gross income (AGI) limit for cash contributions made to qualified charities has been increased to 100% through 2021. Donations to donor-advised funds and private foundations are not eligible for the increase. Further analysis should be made when donating both cash and noncash contributions, such as stock, especially if the taxpayer is in a lower tax bracket or doesn’t otherwise itemize.

Required Minimum Distributions (RMD)

RMDs have resumed for the 2021 tax year and must be taken by December 31, unless the taxpayer turned age 72 during the year, which defers the start date to April 1 of next year. Taxpayers at least age 70 and a half should consider making qualified charitable distributions (QCDs)—up to $100,000 per year—directly from a Traditional IRA to a qualified charity to reduce AGI. Qualified charitable distributions count toward RMDs and have become the best way for most to bless charity.

Child Tax Credit (CTC)

For eligible taxpayers in 2021, the CTC was increased and became fully refundable. The credit was increased by $1,600 for children under age 6 and by $1,000 for those ages 6 to 17. The increase starts to phase out for joint filers and qualifying widow(er)s with AGI of more than $150,000 ($112,500 head of household, $75,000 for all other taxpayers).

The phaseout for the increase is calculated separately from the phaseout for the base $2,000 per child credit. To allow families an immediate benefit, six advanced monthly payments of the credit started in July. The advanced payments are based on either the 2019 or 2020 tax return. The payments do not exceed more than 50% of the projected CTC and are up to $300 per month for each qualifying child under age 6 and up to $250 per month for children ages 6 to 17.

Qualified Medical Expenses

Personal protective equipment (PPE) purchased to prevent the spread of COVID-19 qualifies as medical expenses, starting on or after January 1, 2020. Items such as masks and hand sanitizer are now eligible to be paid, or reimbursed, under medical expense accounts such as FSAs, HRAs, HSAs, and MSAs. If a medical expense account is not used, and the items are not reimbursed by insurance, the costs can be included as a deductible medical expense.

Deductible medical expenses must exceed 7.5% of the taxpayer’s AGI and the taxpayer must itemize to receive a benefit. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law and made over-the-counter medications and menstrual care products qualified medical expenses, as well.

Repayment of Deferred Social Security Tax

Self-employed individuals and household employers who deferred half of their Social Security taxes for the 2020 tax year must repay half by December 31, 2021. The remainder is due by December 31, 2022. The repayment should be made with a separate tax payment and noted that it’s for “deferred Social Security tax” to be applied correctly.

Net Operating Losses (NOL)

For most business owners, NOLs can only offset 80% of taxable income in a tax year. Any remaining NOL is carried forward indefinitely. There is an exception for farm losses, which are eligible for a two-year carryback. Net operating losses arising in tax years prior to January 1, 2018 were limited to a 20-year carryforward, so taxpayers having NOLs from these years will need to track them separately.

Remember, changes are coming for 2022, so take advantage of these provisions while you can. Current tax law may not appear to have many similarities with piles of rocks, a sheet of metal, or a lump of clay, but God – as the Ultimate Craftsman – has endowed us with creative abilities and problem-solving skills. We can use these skills to serve you and ensure that we are being good stewards of God’s resources.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances. This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.

*Blog submitted by Ambassador Advisors

Ambassador Advisors, LLC

1755 Oregon Pike, Suite 100
Lancaster, PA 17601
717-687-2258

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The Art of Tax Reduction