Slim your 2021 tax bill by fattening your IRA
If you didn’t get around to contributing to an IRA in 2021 and you’re looking for ways to lower your tax bill, you may still have an option. Qualified taxpayers can make deductible contributions to traditional IRAs until the tax filing date of April 18, 2022, and claim the benefit on their 2021 returns.
Who is eligible?
You can make a deductible contribution to a traditional IRA if:
- You (and your spouse) aren’t active participants in an employer-sponsored retirement plan, or
- You (or your spouse) are active participants in an employer plan, but your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year to year by filing status.
For 2021, joint tax return filers who are covered by an employer plan have a deductible IRA contribution phaseout range of $105,000 to $125,000 of modified AGI. For taxpayers who are single or a head of household, the phaseout range is $66,000 to $76,000. For married filing separately, the phaseout range is $0 to $10,000. For 2021, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, the deductible IRA contribution phaseout range is $198,000 to $208,000 of modified AGI.
Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59½, unless an exception applies).
IRAs are often referred to as “traditional IRAs” as opposed to Roth IRAs. You also have until April 18 to make a Roth IRA contribution, though unlike traditional IRA contributions, Roth IRA contributions aren’t deductible. Withdrawals from a Roth IRA are tax-free if the account has been open at least five years and you’re age 59½ or older. (Contributions to a Roth IRA are subject to income limits.)
What’s the contribution limit?
For 2021, if you’re eligible, you can make deductible traditional IRA contributions of up to $6,000 ($7,000 if you’re 50 or over). In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2021, the maximum contribution you can make to a SEP is $58,000.
For more information about how IRAs or SEPs can help you save the maximum tax-advantaged amount for retirement, contact us — or ask during your return preparation appointment.
Two alternate IRA strategies for possible tax saving
- Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2021? That’s helpful in the future when you take tax-free payouts from the account, but the contribution isn’t deductible. If a deduction is important now, you can convert a Roth IRA contribution into a traditional IRA contribution using a “recharacterization” mechanism. Assuming you meet the requirements, you may then take a traditional IRA deduction.
- Make a deductible IRA contribution, even if you don’t work. Generally, you must have wages or other earned income to make a deductible traditional IRA contribution. An exception applies if your spouse is the breadwinner and you’re a homemaker. If so, you may be able to take advantage of a spousal IRA.
Hiring? You may be eligible for a valuable credit
Are you a business owner who needs to hire? Be aware that a law enacted at the end of 2020 extended through 2025 a credit for employers that hire individuals from one or more targeted groups, listed below. Employers can qualify for a tax credit known as the Work Opportunity Tax Credit (WOTC) that’s worth as much as $2,400 for each eligible employee. For certain veterans, the credit can be up to $4,800, $5,600 or $9,600, and for “long-term family assistance recipients,” up to $9,000 (more about these later). Employees who qualify for the credit must begin working for the employer before January 1, 2026.
Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:
- Qualified members of families that receive assistance under the Temporary Assistance for Needy Families program,
- Qualified veterans,
- Qualified ex-felons,
- Designated community residents,
- Vocational rehabilitation referrals,
- Qualified summer youth employees,
- Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
- Qualified Supplemental Security Income recipients,
- Long-term family assistance recipients, and
- Long-term unemployed individuals.
Employers must meet certain requirements
Many conditions must be fulfilled before employers can qualify for the credit. Each employee must have completed a minimum of 120 hours of service for the employer. Also, the credit isn’t available for employees who are related to the employer or who previously worked for the employer.
The rules and credit amounts differ for specific employees. The maximum credit available for the first year’s wages is $2,400 for each employee, or $4,000 for a recipient of long-term family assistance. In addition, for those receiving long-term family assistance, there’s a 50% credit for up to $10,000 of second-year wages. The maximum credit available over two years for these employees is $9,000 ($4,000 for year one and $5,000 for year two).
For some veterans, the limits are $4,800, $5,600 or $9,600. For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth workers is $1,200 per employee.
Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in some U.S. territories. Taxable employers can claim the WOTC against income taxes. However, eligible tax-exempt employers can only claim the WOTC against payroll taxes and only for wages paid to members of the qualified veteran targeted group.
A credit worth pursuing
Additional rules and requirements exist. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers that hire from targeted groups, the credit can be valuable. Contact us with questions or for more information about your situation.
What to do about fraudulent credit or debit card charges
It’s an awful feeling to learn that someone has used your credit or debit card to make fraudulent charges. Whether you’re liable for charges typically depends on the type of card, whether you still possess the card and when you alert the issuer.
If your credit card is lost or stolen and you report it to the card provider before it’s used in a fraudulent transaction, you can’t be held responsible for any unauthorized charges. If you report it after unauthorized charges have been made, you may be responsible for a specified dollar amount in charges. Some card issuers have decided not to hold their customers liable for any fraudulent charges regardless of when they notify the card company. And if your account number is stolen but not the actual card, your liability is $0. But either you or the card issuer must identify the fraudulent transactions for them to be removed.
When reporting a card loss or fraudulent transaction, contact the issuer via phone. Then follow up with a letter or email. This should include your account number, the date you noticed the card was missing (if applicable), and the date you initially reported the card loss or fraudulent transaction.
If you report a missing debit card before any unauthorized transactions are made, you aren’t responsible for any unauthorized transactions. If you report a card loss within two business days after you learn of the loss, your maximum liability for unauthorized transactions is $50.
But if you report the card loss after two business days but within 60 calendar days of the date your statement showing an unauthorized transaction was mailed, liability can jump to $500. Finally, if you report the card loss more than 60 calendar days after your statement showing unauthorized transactions was mailed, you could be liable for all charges.
What if you notice an unauthorized debit card transaction on your statement, but your card is still in your possession? You have 60 calendar days after the statement showing the unauthorized transaction is mailed to report it and avoid liability.
If you’re unsure about the specific conditions that trigger liability for unauthorized charges, contact your card issuer.
Act fast and you may avoid forfeiting FSA funds
Do you have a tax-saving flexible spending account (FSA) with your employer to help pay for health care expenses? For 2021, FSA participants could contribute up to $2,750 of pre-tax dollars to pay for medical expenses that might not otherwise be deductible (the amount rises to $2,850 for 2022). FSA contributions are also not subject to FICA taxes. Upon request, the plan reimburses participants for qualifying expenses, tax-free.
What if you don’t spend it all?
FSAs generally have a “use-it-or-lose-it” rule, which means you must incur qualifying medical expenditures by the end of the plan year (December 31 for a calendar year plan). Unused amounts when the plan year ends are generally forfeited — that is, unless the plan includes an optional grace period of up to 2½ months to incur qualifying expenses. For a 2021 calendar year FSA plan that has a grace period, that period will end on March 15, 2022. To avoid forfeiting FSA funds after March 15, participants in a calendar year plan will need to act fast to use their available funds for qualifying medical expenses.
In 2021, the IRS added COVID-19-related expenses to the list of qualifying FSA expenses. That includes COVID-19 home tests and personal protective equipment such as masks, hand sanitizer and sanitizing wipes purchased for the primary purpose of preventing the spread of COVID-19. Participants can ask their employers for a list of qualifying expenses and the documentation required for reimbursement.
March 15 — 2021 tax returns must be filed or extended for calendar-year partnerships and S corporations. If the return isn’t extended, this is also the last day for those types of entities to make 2021 contributions to pension and profit-sharing plans.
*At press time, the IRS hadn’t yet released instructions for 2021 Forms 940, 943 and 945. The due dates shown are based on those for 2020.
About Batley CPA
Batley CPA, LLC is a full-service CPA firm providing tax, accounting, payroll and advisory services to businesses and individuals throughout Green Bay and the Fox Cities. Batley CPA regularly provides clients with best practices and strategies to maximize cash flow, profit, reduce taxes, manage costs and risk, and bring meaning to financial and operational data. The company has offices in Appleton, Neenah and Green Bay.