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Financially savvy parents of college students should generally take the time to complete the Free Application for Federal Student Aid (FAFSA) each year. Students must file their FAFSA for the 2022–2023 academic year between October 1, 2021, and June 30, 2023. This means there's still time to file a FAFSA for the 2021–2022 school year. Currently, some schools use the College Scholarship Service (CSS) Profile (another financial aid application) to determine who gets what aid from their own financial programs. Although there's been no official word from the College Board, the creator of the CSS Profile, modifications corresponding to the FAFSA changes are expected. Important: The FAFSA asks for financial information, including information from tax forms and balances in savings, checking and certain other accounts. For example, the 2021–22 FAFSA asks for 2019 tax information. However, you may be able to request an adjustment if your family's financial situation has changed significantly from what's reflected on your federal income tax return (for example, a job loss or change in marital status). The FAFSA may result in financial aid for those who need it and benefits more people than you might think. It's generally recommended that you investigate the possibilities, even if you don't expect to receive much federal need-based assistance. In the past, the start date for filing the FAFSA was January 1, but a few years ago it was moved up to accommodate parents facing financial dilemmas. Other major changes related to this form are scheduled to take place for the 2023–2024 school year. However, they may be implemented sooner. Those provisions were part of the Consolidated Appropriations Act (CAA), which was signed into law late in 2020. Here's an overview of some important changes coming your way. Simplified Filing Requirements There's no getting around the requirement for filling out the FAFSA to qualify for aid from the federal government, individual states and many educational institutions. (The student technically files the FAFSA, but parents often are the ones effectively assuming this responsibility.) This form isn't easy to complete. The current version of the FAFSA features 108 questions, often requiring parents to track down information that isn't readily available. But the new-and-improved FAFSA will be much shorter. It's expected to include approximately 36 questions. And it will be far more convenient to fill out, allowing you to electronically import tax return data filed with the IRS. Obviously, that drastically cuts down the number of questions you have to answer about income. Also, students will no longer be required to report any drug-related convictions they've had in the past. Student Aid Index If a student submitting a FAFSA is denied financial aid, the reason can often be traced back to the expected family contribution (EFC) determined under the form. Essentially, this is the amount of money a family is considered to afford to put toward college costs, based on answers to questions on the FAFSA. But critics have argued that the formula for the EFC, as presently calculated, is flawed. Under the CAA, the EFC has been renamed the "student aid index" (SAI). Notably, the new calculation doesn't affect the amount of money families are required to pay for college, rather it's a barometer of their financial picture. To cut through the technicalities, it should become easier for a college to identify those students with the greatest financial needs through the SAI. College aid experts have long maligned the EFC as an inadequate means of helping to measure financial need. But the jury is still out on the potential impact of the newly designated SAI metric. Expansion of Pell Grants Pell Grants, which are based on financial need, can be especially valuable because they don't have be repaid. For the 2021–2022 school year, the maximum Pell Grant is $6,495 per student. This amount is indexed annually. Currently, eligibility for Pell grants is determined by the EFC figured on the FAFSA. But these rules are being revised to reflect family size and adjusted gross income (AGI) in comparison to federal poverty figures. In addition, the new rules will open up more avenues to those in financial need, including students who: Are incarcerated and participating in prison education programs, Have had a drug-related conviction in the past, and Didn't complete a program of studies because of a school closing (for example, due to COVID-19 or financial reasons). The changes will provide more financial aid for more students. In fact, this change is expected to boost eligibility for Pell Grants by more than half a million students. Discretionary Adjustment for Unemployment Many parents were forced out of work or had their hours reduced during the pandemic. Although the economy has been rebounding overall, some workers are still in dire straits. Under the CAA, certain consequences of the pandemic will become a piece of the financial aid puzzle. Specifically, the law allows financial aid administrators to use their professional judgment to adjust the income calculation of a student's family during times of national emergency. In some cases, a student may be able to use the unemployment factor to reduce his or her income to zero. Accordingly, the student may then be in line for a Pell Grant or other aid. Federal Direct Loans Students may benefit from Federal Direct Loans that are subsidized by the federal government while they're still in school. Uncle Sam picks up the interest tab while the student is enrolled in an undergraduate or graduate school program or if the student otherwise qualifies for deferment. However, as things stand now, these loans may be subsidized for only 150% of the length of their education programs. For instance, if the student has embarked on a four-year course of study, the loan may be subsidized for up to six years only. The CAA removes this arbitrary limitation. Beginning with the 2023–2024 school year, the subsidy can last as long as it takes for the student to complete the program. This change will relieve the pressure for many students who have to work during college, often causing them to take longer to wrap up their studies. For More Information These are the highlights of FAFSA-related changes under the CAA. Contact your financial advisor or educational institution for more information about what's in store for the 2022–2023 school year and beyond. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

In many areas, residential real estate markets have surged, and some are still surging. In these sellers' markets, big home-sale gains are likely. That's great news if you're a seller — but will you owe taxes on the profit? If you sell your principal residence for a large profit, you can potentially exclude tax (pay no federal income tax) on a certain amount of profit. Here are the basics of how to take advantage of this tax-saving opportunity. Gain Exclusion Qualification Rules Single taxpayers can exclude home-sale gains up to $250,000, and married joint-filing couples can exclude up to $500,000. However, you must pass the following tests to be eligible: 1. Ownership test . You must have owned the property for at least two years during the five-year period ending on the sale date. Two years means periods aggregating 24 months or 730 days. 2. Use test . You must have used the property as your principal residence for at least two years during the same five-year period. (See "What Counts as a Principal Residence?" at right.) Periods of ownership and use don't need to overlap. For example, you could rent a home and use it as your principal residence for Years 1 and 2, and then buy it and rent it out to others for Years 3 and 4. If you then sell the property in Year 5, you'd pass both the ownership and use tests and qualify for the gain exclusion privilege. Important: To qualify for the larger $500,000 joint-filer exclusion, at least one spouse must pass the ownership test and both spouses must pass the use test. Anti-Recycling Rule There's another qualification rule for the home-sale gain exclusion privilege: It's generally available only if you haven't excluded a gain from any earlier sale occurring within the two-year period ending on the date of the later sale. In other words, the gain exclusion privilege generally can't be "recycled" until two years have passed since you used it last. For married couples, the larger $500,000 joint-filer exclusion is only available when neither spouse excluded a gain from an earlier sale within the two-year period. For example, suppose you sold your previous principal residence on July 1, 2020, and excluded the gain. Before selling that home, you purchased another property and began using it as your new principal residence on January 1, 2020 (six months earlier). You plan to sell the second principal residence for a big profit in March 2022, mistakenly assuming you'll qualify for the gain exclusion break on that sale, too. Why is that assumption wrong? While you'd pass the ownership and use tests, the March 2022 sale date would run afoul of the anti-recycling rule, because it's within two years of the July 2020 sale. Therefore, you'd be ineligible to exclude any gain from the 2022 sale. However, if you can wait until July 2022 to sell your current principal residence, you can claim the gain exclusion break for that sale. Alternatively, if you can't wait that long to sell your current principal residence and the profit from that sale is bigger than the profit from the 2020 sale, you can amend your 2020 tax return. On the amended 2020 return, you could forego the gain exclusion break and, instead, report the profit from the 2020 sale as a taxable gain. Then you can claim the gain exclusion break for the more-profitable 2022 sale. Net Investment Income Tax Does the 3.8% net investment income tax (NIIT) apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn't subject to the NIIT. However, gain that exceeds the exclusion limit is subject to the tax if your income is over a certain amount. The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for unmarried taxpayers and heads of household. Gain from the sale of a vacation home or other second residence, which doesn't qualify for the exclusion, is also subject to the NIIT. Contact a Pro For many homeowners these days, the federal home-sale gain exclusion deal is one of the most valuable personal income tax breaks on the books. But there are numerous rules and restrictions. Your tax professional can help you cash in. As with any major financial transaction, you should consider the federal income tax consequences before closing on a home sale. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Roth IRA and 401(k) accounts were created in 1998. Contributions to Roth accounts are taxed on the front end at ordinary tax rates when made. But withdrawals from these accounts are generally tax-free on the back end . If you began saving for your retirement before 1998, even if you subsequently started contributing to a Roth account, you've probably accumulated a significant nest egg in traditional (non-Roth) retirement savings vehicles. Unlike withdrawals from Roth accounts, most or all of the money you take out of non-Roth plans will be taxed as ordinary income when they're taken. Whether those amounts are taxable depends on the extent to which you took tax deductions for your contributions. It might be a smart move to postpone taxes until you retire and then begin taking retirement plan distributions — or not. Since 2010, everyone, regardless of income, has been eligible to convert some or all non-Roth IRA and 401(k) savings into a Roth account. You can also convert 403(b) and 457(b) plan assets into a Roth IRA with the same tax implications. All distributions from those plans are tax-free, assuming you wait at least five years after the conversion before taking them and are at least 59½. Should you convert your non-Roth accounts into Roth accounts in 2021? Here are some factors to consider. Tax Hit Today The catch to executing a Roth conversion is that you face an immediate and potentially hefty tax hit. But under some circumstances, you'll come out ahead taxwise over the long run. Even if you don't come out ahead, heirs who inherit your Roth account might benefit. The outcome depends on the prevailing tax environment when they begin tapping into those funds. Viewing a conversion as a tax risk insurance policy can bring peace of mind. That is, you'll know that you're shielded from possible tax hikes. That assurance may be worth a price to you — just as life insurance policy premiums are. Traditionally, your current tax rate versus your anticipated future tax rate (when you plan to begin drawing down retirement plan assets) is the key factor determining whether a Roth conversion is a good idea. Specifically, if the tax rate that would apply to the conversion amount today is lower than the rate that will apply to your regular retirement income in the future, you may be better off doing a conversion today. But predicting future tax rates can be challenging. Before you make a decision based on an unknown rate or a higher tax bracket if your earning power is on the rise, find objective support for that belief. What do you see on the horizon that bolsters or refutes your belief about the direction tax rates are likely to take? Timing of Withdrawals Another variable to consider when evaluating a Roth conversion is how many years after the conversion you expect to wait before withdrawing funds. Specifically, retirement plans come with required minimum distributions (RMDs). Previously, the required beginning date (RBD) for RMDs was generally April 1 of the year after the year in which you turn 70½. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act pushed back the RBD to 72 for individuals who reach 70½ after 2019. RMDs don't apply to Roth IRAs while the original owner is alive. After your death, however, beneficiaries of your Roth IRA must take RMDs under the same rules that apply to traditional IRAs. The tax rules for inherited IRAs recently changed under the SECURE Act. Previously, whoever inherited the IRA had to begin taking RMDs right away, regardless of age. But the RMD amounts were based on the inheritor's life expectancy. That meant, for example, that a 55-year-old who inherited a conventional IRA might've had at least 30 years to stretch out those taxable RMDs. Under current law, amounts in inherited IRAs must be distributed (and taxed) beginning right away over a 10-year period. (There are a few exceptions to that rule. For example, it isn't applicable to spouses.) Estimating the Tax Hit A good starting point for evaluating a Roth conversion is locating taxable income on your most recent tax return and adding the amount of a traditional IRA you'd like to convert to a Roth account. Marginal tax bracket tables are available on the Internet or from your tax advisor. Use those tables to determine how much incremental tax you'll pay on the conversion. To illustrate, suppose you had taxable income of $75,000 in 2020 and you expect to earn roughly the same amount of income in 2021. If you convert $225,000 of traditional IRA funds into a Roth IRA, your taxable income would increase to $300,000 this year. Assuming you're unmarried, a large portion of the amount you converted would be taxed at 22% and most of the remainder would be taxed at 24%. Those historically low tax rates were set by the Tax Cuts and Jobs Act (TCJA). But, in 2026, they're scheduled to expire and return to higher pre-TCJA rates. For example, in the previous example, a large chunk of the converted amount would be taxed at 33% if tax rates increase to pre-TCJA levels. That may or may not actually happen — or they may go even higher. Plus, you also need to consider state income taxes, if applicable. Talk to a Trusted Professional You can play "what-if" using online Roth conversion calculators, but your retirement nest egg is too important for this to be a do-it-yourself project. Our tax professionals understand current tax law and has a handle on what changes are currently in the works. Contact us to evaluate whether a Roth conversion makes sense in your situation. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Employment disruptions caused by the COVID-19 economic slowdown have scrambled the retirement saving strategies of many Americans. According to a recent survey, nearly half of employed Americans either reduced or suspended their retirement savings during the pandemic. Moreover, around 30% of those surveyed reported being behind in saving for retirement. Looking on the bright side, at least those people had an idea of how much they needed to save. Unfortunately, many people's estimates are based on faulty assumptions — including the misguided belief that Social Security will cover most of their retirement needs. Assess Your Situation The Internet is loaded with retirement calculators. But before you can use them, you need to address several key questions: What lifestyle are you aiming for when you retire? If you're OK with reducing your current material standard of living, how low can you go? Do you intend to pass on an inheritance to loved ones and/or donate to favored charities? How long will you be willing (and physically able) to work before retiring? Beware: Some people may need to retire sooner than they anticipate for health or other reasons. How much investment risk can you handle? The offset to higher returns is usually greater volatility. Can you count on receiving a substantial amount of money from an inheritance, sale of a second home or other source? The longer you postpone retirement, the less you'll need to accumulate. It's not just that you'll have fewer years to live in retirement, but under current Social Security rules, each year you wait after you reach your full retirement age, 8% is added to the amount of your monthly benefit payment. (After 70, however, those increases stop.) The higher your Social Security benefit, the less you'll need to supplement it with retirement savings. Your Social Security benefit projection statement will help you with the number crunching. Important: When evaluating whether you're saving enough for retirement, remember that inflation can have a corrosive effect. For example, since 2000, the purchasing power of Social Security benefits has dropped by 30% due to inflation, according to a recent analysis by the Senior Citizens League. Do the Math Now it's time to calculate how much you'll need to set aside for retirement. To illustrate how this evaluation might work, suppose that Joan is currently 42, and she plans to retire at 67 (the full retirement age for people born in 1960 and later) with an income that's 75% of what it is today. Further, suppose that she has an average risk tolerance, isn't expecting any big financial windfalls down the road, and isn't planning to leave a large legacy to her loved ones or favorite charities. Using those assumptions, here are five basic steps Joan might follow to determine whether her savings plan is on track: Calculate 75% of current income. Joan currently earns $80,000; 75% of her earnings is $60,000. Estimate how much is needed to maintain her purchasing power in retirement. Joan expects to retire in 25 years. So, she'll need about $126,000 per year (or $10,500 per month) to maintain the purchasing power of $60,000, assuming a 3% inflation rate. (This is the future value of $60,000 at 3% for 25 years, assuming annual compounding.) Subtract projected Social Security benefits and any private pension benefits. Joan estimates she'll receive $5,750 per month from these sources. She'll need enough in retirement savings to make up the $4,750 difference each month ($10,500 – $5,750). That's the equivalent of $57,000 a year. Estimate the total amount of retirement savings needed. This step requires a figure known as a "safe withdrawal rate." That's the percentage of your retirement savings you can take out and spend each year. A simple actuarial rule of thumb is to divide your expected retirement age by 20. For example, Joan currently plans to retire at 67, so her safe withdrawal rate would be 3.35% (67 divided by 20). If you divide the annual retirement-savings income she'll need (from the third step) by her safe withdrawal rate, you'll arrive at a total savings amount of approximately $1.7 million ($57,000 divided by 3.35%). Subtract current retirement savings from the target amount to estimate how much more savings are needed. Joan currently has $700,000 in retirement savings, so her account is $1 million short of what's needed. We can help translate that figure into required monthly savings amounts based on the number of years until you expect to retire and the returns you can safely assume. For example, to accumulate another $1 million in her retirement account, Joan would need to save at least $1,318 per month, assuming a 7% annual return for 25 years. That amount could be reduced if Joan's employer matches her contributions to the company retirement plan. Rough Estimate This exercise will help give you a general idea of where you stand. It will also prepare you for a meaningful conversation with one of our financial professionals who can sharpen the estimates and offer practical suggestions for reaching your goal. Inevitably, there will be a wide margin of error with whatever number you come up with, especially for younger people who won't retire for decades. In addition, taxes can play a significant role in your savings strategy. The effects will vary depending on your tax rate, and whether you decide to use a Roth retirement savings account, a traditional tax-deferred account or a combination of these alternatives. Contact us to help determine what's right for your situation. It's Never Too Late to Save! People who are 50 or over at the end of the calendar year can make annual "catch-up contributions" to certain accounts to save more for retirement. Here are some of the contribution limits for 2021 for those who are younger than age 50 and those who are older: Traditional and Roth IRAs, $6,000 ($7,000 for those over 50), 401(k)s, 403(b)s, 457s and SARSEPs, $19,500 ($26,000 for people 50 and up), SIMPLE accounts, $13,500 ($16,500 for people 50 and up), and Simplified Employee Pension Plan (SEP) accounts, $58,000 (there's no SEP catch-up amount). Whenever possible, it's a good idea to contribute the maximum allowable to your retirement account to secure your future and get the full tax advantage. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

If you were adversely affected by the COVID-19 pandemic, you may have taken a tax-favored coronavirus-related distribution (CVD) from a traditional IRA last year. This privilege was allowed under the CARES Act, which was signed into law on March 27, 2020. What steps can you take now to achieve the optimal federal income tax results? CVD Basics Under the CARES Act, if you were eligible, you could take one or more CVDs from one or more traditional IRAs in 2020, up to a combined limit of $100,000. Then you can recontribute all or part of any CVD amount back into one or more IRAs within three years of the distribution date of the CVD. You can treat each distribution and later recontribution as a federal-income-tax-free IRA rollover transaction. This favorable tax treatment applies equally to CVDs taken from traditional IRAs, SEP-IRAs and SIMPLE-IRAs. There are no restrictions on the use of CVD funds. You can use the money to pay bills or help your adult kids and then recontribute within the three-year window. Or you can keep the CVD money and pay the resulting tax hit, which may be modest depending on your circumstances. So, a CVD can be a useful cash-management tool. Treating an Eligible Distribution as a CVD If you took a CVD from a traditional IRA last year, you should have received from the custodian or trustee a 2020 Form 1099-R that reported the distribution. The IRS also received a copy. So the IRS knows what happened. To treat an eligible IRA distribution as a CVD, IRS Form 8915-E should have been included with your 2020 personal federal income tax return. If you extended your 2020 return, you should include this form when you file by October 15. If you've already filed your 2020 return without the form, you're out of luck. The election to treat a distribution as a CVD can't be made or changed after the timely filing (including any extension) of your 2020 tax return. Beware of Certain Tax Consequences If you recontribute an IRA CVD amount within the three-year window, the ultimate result is the same as a federal-income-tax-free rollover transaction for that amount. However, you may have to put up with awkward interim tax consequences before you arrive at the favorable tax-free-rollover-equivalent outcome. Specifically, the three-year ratable inclusion rule is the default method for how CVDs are taxed. Under that method, the taxable portion of a CVD is spread equally over 2020, 2021 and 2022. So, if you took a $90,000 CVD last year, you would report $30,000 per year on your personal tax returns for 2020, 2021 and 2022. If you don't recontribute any of the CVD amount within the three-year window, those tax results would be the final outcome. Examples of Interim Tax Consequences If you took several CVDs from one or more IRAs (up to the $100,000 combined limit), the interim tax consequences apply separately to each CVD. For example, Zoe took a $90,000 CVD from her traditional IRA in 2020. The $90,000 would be fully taxable under the regular federal income tax rules. After recontributing the entire $90,000 sometime in 2023, before the three-year window closes, she must file amended returns for 2020, 2021 and for 2022 if she already filed her 2022 return to recover the interim federal income tax hits for those years. At the end of the day, the CVD is federal-income-tax-free, but Zoe had to jump through some hoops to get there. Xavier also took a $90,000 CVD from his traditional IRA in 2020. He decides to recontribute the entire amount in December 2022, rather than waiting until 2023. So, Xavier won't be hit with any interim tax for 2022. But he'll need to file amended returns for 2020 and 2021 to get back the interim tax hits for those years based on the $30,000 that was included in income on his tax returns for each of those years. Once again, the CVD ultimately turns out to be federal-income-tax-free. Alternatively, these taxpayers could report the entire $90,000 CVD as income on their 2020 tax returns. They would pay the entire interim tax hit with their 2020 returns. Assuming they recontribute all or part of the $90,000 within the three-year window, Zoe and Xavier would need to file an amended 2020 return to get back all or part of the tax hit for that year. Important: You must treat all the taxable income from CVDs received in 2020 the same way. Either report all the income using the three-year ratable income inclusion method or report all the income on your 2020 tax return. You can't mix and match these methods. How to Handle Recontributions If you recontribute all or part of any CVD amount by the due date of your 2020 federal income tax return (including any extension), don't report the recontributed amount as income on your 2020 return. But you must include Form 8915-E to report your recontribution. If you recontribute all or part of any CVD amount after the due date of your 2020 federal income tax return (including any extension), file an amended 2020 return to remove the recontributed amount from your 2020 income and recover the related tax hit for 2020. The amended return must include Form 8915-E to report the recontribution. As explained earlier, you can spread the income from 2020 CVDs equally over three years, starting with 2020. If you then recontribute any CVD amount within the three-year window before the due date of your federal income tax return for the year of the recontribution (including any extension), the amount of the recontribution reduces the ratable income inclusion amount that's reported on that year's return. For example, suppose you took a $75,000 CVD from your traditional IRA in 2020. You use the three-year ratable income inclusion method to report the CVD income as follows: $25,000 in 2020, $25,000 in 2021, and $25,000 in 2022. On April 10, 2022, you recontribute $25,000. On April 15, 2022, you file your 2021 federal income tax return. The recontribution reduces the amount that must be reported as CVD income for 2021 from $25,000 to $0. Assuming no further recontributions within the three-year window, you must still report $25,000 of CVD income on your 2022 return. So, when all is said and done, you report $25,000 of CVD income in 2020, recontribute $25,000 in 2021 and report the last $25,000 as income in 2022. No Recontribution Privilege for Inherited Accounts Beneficiaries of inherited traditional IRAs can receive CVDs if they're eligible individuals, and they can follow the three-year ratable inclusion rule to report taxable income from CVDs or they can report the entire amount with their 2020 returns. In either case, their CVDs are exempt from the 10% early distribution penalty tax. However, CVDs received by beneficiaries of inherited traditional IRAs (other than the surviving spouse of the IRA owner) can't be recontributed per IRS Notice 2020-50. What's Right for You? The optimal CVD strategy depends on your specific circumstances. For instance, if your 2020 taxable income was much lower than usual due to the COVID-19 economic fallout, there might be only a modest federal income tax hit from CVD income reported in 2020 under the three-year ratable inclusion rule. In this situation, if you took a CVD in 2020, you have extra cash in hand and can eventually get back any interim tax hits for CVD amounts that you recontribute within the three-year window. If you had negative 2020 taxable income because of business losses due to the COVID-19 economic downturn, it might be a good idea to report all the CVD income on your 2020 return. You may be able to shelter most or all that income with business losses. In this situation, you have extra cash in hand and will owe little or no extra federal income tax for 2020. If you have sufficient cash later, you can recontribute all or part of any CVD amount within the three-year window. You'll recover all or part of any extra 2020 tax hit from the CVD — and you'll get the recontributed amount back into tax-favored IRA status. If you extended your 2020 federal income return, you have until October 15, 2021, to make decisions that will determine how any CVD amount that was not already repaid last year will be taxed. CVDs from Retirement Plans If your company retirement plan allowed CVDs to be taken last year, the tax rules and implications are similar to those for CVDs taken from traditional IRAs, as explained in this article. What Happens If CVDs Aren't Recontributed Within Three Years? If you took a tax-favored coronavirus-related distribution (CVD) from a traditional IRA in 2020, you have the option of keeping all or part of it. You'll have taxable income from the CVD amount that you don't recontribute, but you won't owe the 10% early distribution penalty tax that generally applies to IRA distributions taken before age 59½. You can spread the taxable income from the CVD equally over three years under the three-year ratable income inclusion method, or you can elect to report all the CVD income in 2020. If it later turns out that you have enough cash to recontribute within the three-year window, you can always decide to recontribute and recover any related federal income tax. Bottom line: The follow-up on tax-favored CVDs taken in 2020 requires careful consideration. We can help determine the optimal strategy for you. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Payroll Protection Plan (PPP) loans were a lifeline for many small business owners during the worst of the pandemic-driven economic slowdown. In total, the Small Business Administration (SBA) approved nearly 12 million PPP loans, averaging $67,000. The PPP program stopped accepting loan applications on May 31, 2021. However, you still may need to complete the requisite forms to ensure that your loan will be forgiven. You can't afford to miss the deadlines for filing this paperwork. The most urgent deadline is for companies that received PPP loans prior to June 5, 2020. Those generally were loans with a two-year maturity. (Loans made after that date have a five-year maturity.) Borrowers need to apply for loan forgiveness within 10 months of the last day of the "covered period." Forgiveness Application Deadline The covered period refers to the eight to 24 weeks following the funding of the loan during which those funds must be used for approved purposes. For example, if your business applied early in the program, its covered period might have ended on October 30, 2020. So, you'd need to apply for forgiveness by August 30, 2021, to avoid loan repayment responsibilities. Whatever your deadline is, you probably don't want to wait until the last minute in case you encounter delays in the process. You also might discover that you won't be getting forgiveness on as much of the PPP loan as you had assumed — and finding that out early can help you plan for how to repay what's not forgiven. The basic rule for obtaining loan forgiveness is that at least 60% of the loan amount needs to have been used on qualified payroll costs, including: Cash employee compensation (capped at a $100,000 salary), State and local payroll taxes, and Employer contributions to employees' health and retirement plans. Examples of permissible uses of the remaining 40% of loan proceeds — called "nonpayroll" costs — are: Company real estate lease or mortgage interest payments for contracts signed before February 15, 2020, Supplies essential to your business, Utilities for service that began before February 15, 2020, Covered operating expenditures (such as business software, delivery, payroll processing and inventory tracking expenditures), Certain property damage not covered by insurance, and Costs incurred to protect employees and customers from COVID-19. You can download the blank forms you need to complete from the SBA website or ask your lender for a copy. Then you must give the completed forms to your lender for remittance to the SBA. Your lender will also relay the SBA's decision regarding full or partial loan forgiveness. No "Double Dipping" Determining the proper way to complete these forms is trickier if you've taken advantage of other COVID-19 relief programs, such as the employee retention credit and the credits for emergency paid sick leave and expanded family leave. A rule against "double-dipping" prevents you from counting payroll amounts that those tax credits were based on for regular payroll expense loan forgiveness amount purposes. Here's a two-step method to maximize your PPP loan forgiveness for payroll expenses: Add up all nonpayroll expenses that are eligible for forgiveness, and Multiply that figure by 1.5. The result will give you the maximum amount of eligible payroll expenses you can claim, to make the 60/40 formula work. For example, suppose your total eligible nonpayroll expense is $200,000. That amount multiplied by 1.5 is $300,000, which is the most you could claim for payroll-based loan forgiveness. For this formula to work, your loan will need to have been for no less than $500,000. Also, payroll expense can be more than 60% of the total loan, but not less. Important: If your application for loan forgiveness is rejected, then the double-dipping rule doesn't apply — and your ability to use the tax credits is no longer restricted. PPP Audit Exposure Recipients of PPP loans may have another follow-up issue to contend with: A PPP loan audit from the Small Business Administration (SBA). The purpose is to confirm that you've met the eligibility criteria. Loans of $2 million or more will automatically be audited. However, you could still face an audit if you borrowed less than $2 million. Tackling the audit process requires two basic steps. First, compile documentation that the SBA might request — such as financial statements, tax returns and payroll records — to show where the numbers on your application came from. Second, you'll need to prove that you were acting in good faith when you applied for the loan in the first place — that the loan was essential to support your ongoing operations. Proof of good faith and financial need could include: Financial statements showing a significant drop-off in revenue, Cancellation of orders, Supply chain disruptions that cost you sales, and Instructions from a local government authority to curtail your operations for public safety purposes during the pandemic. Retain this documentation after you've been told your loan is forgiven. The PPP guidance states that you're still vulnerable to an audit for up to for six years after your loan is forgiven. Warning: If an audit uncovers impropriety, the borrower may be required to immediately repay the loan, as well as possible civil penalties and prosecution under the False Claims Act. Need Help? PPP loans aren't automatically forgiven — it requires some follow-up on your part. Borrowers need to apply for forgiveness with the SBA before the statutory deadline. We can help you file the appropriate forms and determine which costs may qualify for forgiveness. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

If your company offers employees a qualified retirement plan, it's probably a 401(k). But this popular option isn't the only game in town. You may want to offer an additional retirement savings vehicle — such as a supplementary executive retirement plan (SERP) — to complement the 401(k)s of a select group of employees. Unlike 401(k)s, SERPs aren't qualified plans, so they don't have to meet all of the strict nondiscrimination requirements that often hinder qualified offerings. Of course, there's a tax cost associated with this flexibility. But SERPs can help your business attract talented executives and keep them on board for a long time. Let's take a closer look. Exclusive Club A SERP is a kind of nonqualified deferred compensation plan that doesn't have to be offered to the entire rank-and-file. It's commonly used as a perk for officers and other upper-level employees. Typically, details are negotiated as part of an overall compensation package when an executive is hired. SERPs generally are set up to pay out benefits at a future date — say, upon retirement. They may be provided in a lump sum or a series of installment payments. These payments are subject to tax when they're received, like benefits from other deferred compensation plans. One variation of a SERP requires the employer to invest in a fund that the employee will subsequently own. This type of account may be funded through the purchase of cash value life insurance on the employee. When the person retires, the employer either transfers ownership of the policy to the employee or uses the policy to pay retirement benefits. Cash value life insurance may also be used to fund other SERP variations. Key Advantages Because SERPs aren't subject to the rules that generally apply to qualified plans, they can provide several financial benefits for executives. For 2021, elective deferrals to a 401(k) plan are limited to $19,500 annually ($26,000 if you're 50 or over). But there's no dollar limit on contributions to SERPs. This can allow eligible employees to accumulate much more in retirement savings. Similarly, the rules for required minimum distributions (RMDs) don't apply to SERP funds. Currently, 401(k) holders must begin taking RMDs in the year after the year they turn age 72 and in each successive tax year. SERP distributions also aren't subject to a penalty tax for withdrawal prior to age 59½. Distributions from SERPs are taxed at ordinary income rates, but tax is deferred until the employee starts taking withdrawals. SERP holders therefore benefit from the accumulation of funds without any tax erosion. Lump-sum distributions are taxable in full, so employees may want to spread out the tax bite by taking installment payments. Potential Risks SRPs aren't without risks to participants, however. Depending on the structure of the SERP account, the amount employees receive in retirement may be based on their company's performance. The bottom line: Payments aren't guaranteed. If the company goes belly up before SERP withdrawals are made, the funds could go to creditors with superseding claims. In addition, the SERP may impose certain conditions for the employee to meet to receive a future payout. For instance, an employee may be required to work for the employer for a specified number of years. If this obligation isn't fulfilled, the employee ends up with nothing. In other words, unlike with 401(k) plans, participants won't benefit from vesting rules. What's more, SERPs can result in tax disadvantages. Many higher-level employees expect to be in a lower tax bracket in retirement. But that's not always the case, especially if the employee will be entitled to significant retirement benefits. Remember that SERP withdrawals are taxed at ordinary income tax rates that currently top out at 37% (and could be higher in the future). Plus, the executive may have to contend with high state income tax rates. Optimal Benefits at a Reasonable Cost If you decide to offer a SERP, your company may need to make some adjustments. For example, employer contributions to qualified plans are generally immediately tax-deductible. But employers aren't entitled to a tax deduction until they pay SERP benefits. For many employers, extra administration is outweighed by the benefits — notably in attracting and retaining executive talent. Also, you can customize your SERP to provide optimal benefits to select employees at a reasonable cost. Contact us for more information. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

With autumn coming up in a couple months, it's time to think about "harvesting" capital gains or losses from sales of securities. In addition, unfavorable tax law changes proposed in President Biden's American Families Plan (AFP) may create an added sense of urgency for some taxpayers. (See "Proposed Tax Law Changes" at right.) The Basics When you sell securities and other capital assets, the gains and losses are either long-term or short-term, depending on the holding period. To qualify as a long-term gain or loss, you must have owned the securities for longer than one year (absent a special exception). For these purposes, you generally count from the day after the date you acquired the securities through the date you sell the securities. When you file your tax return, you must deduct long-term losses from long-term gains. Then you must deduct short-term losses from short-term gains. Next, you must combine your net long-term gain or loss with your net short-term gain or loss. The final amount is reported on your individual tax return. If you have a net long-term capital gain , you may benefit from a preferential tax rate. On the other hand, if you show a net loss for the year, it may offset capital gains plus up to $3,000 of highly taxed ordinary income (such as W-2 wages). Understanding these basic concepts will be instrumental in your harvesting plans. Long-Term Capital Gain Rates Under current tax law, the long-term capital gains tax rate for most taxpayers is 15%. The current maximum tax rate on ordinary income is 37% (more than double the 15% long-term capital gains tax rate that most people pay). However, the 15% rate increases to 20% for taxpayers above certain income thresholds. Prior to the Tax Cuts and Jobs Act (TCJA), the capital gain rates were aligned with the ordinary income tax brackets. But, under the TCJA, the rules have been changed to reflect other income thresholds, indexed for inflation. For 2021, the 20% rate applies to single filers with taxable income above $445,850 ($501,600 for married people who file jointly). Conversely, some investors, such as your children, may benefit from a rock-bottom 0% long-term capital gain rate. The 0% rate in 2021 applies to single filers with taxable income under $40,400 ($80,800 for married people who file jointly). Certain high-income individuals (such as retirees) might also have a portion of their annual income taxed at the 0% rate if they have no or little employment income. Harvest Time To fine-tune your harvesting strategies, examine your portfolio to determine the gains and/or losses you've recognized earlier this year. Follow this basic approach: If you're showing a net gain , you can harvest capital losses from securities sales that will offset your capital gains, plus up to $3,000 of ordinary income. Any excess is carried over indefinitely. If you're showing a net loss, you can harvest capital gains from securities sales. The gains are absorbed up to the amount of the loss, so you'll pay zero tax on the gains. Any excess gain is taxed as either long-term or short-term gain, depending on how long you've held the security. In particular, you may decide to sell securities that would produce a short-term gain that can be absorbed by a loss. Normally, the gain would result in tax at your top ordinary income rate. All other things being equal, hold onto securities that will produce a long-term gain. Similarly, if you have a short-term gain, it makes sense to realize a loss that would offset the gain, to avoid tax at ordinary income rates. Important: Taxes are a major financial factor when considering securities sales. But there are other relevant reasons to buy or hold certain securities. Beyond Capital Gains and Ordinary Income Taxes There may be other tax ramifications resulting from securities sales. For example, if you're an upper-income investor, you may be liable for a 3.8% net investment income tax (NIIT) on top of your regular capital gains tax. Currently, the NIIT can push the overall federal tax rate on some gains to 40.8% in 2021 (37% + 3.8%). Depending on the tax laws in your state, you may also have to factor state income tax considerations in the mix. Some states tax laws differ from federal tax laws. Proposed Tax Law Changes The American Families Plan (AFP) is part of the Build Back Better Plan that was introduced by President Biden in April. The proposal contains several major tax law changes that may be relevant in the context of selling securities and harvesting gains and losses. For example, under the AFP, the favorable 20% long-term capital gain rate for taxpayers with income more than $1 million in a tax year would increase to 39.6% (with a corresponding increase in the top ordinary income tax rate). The AFP also retains the 3.8% net investment income tax (NIIT). This tax applies to net investment income to the extent that a taxpayer's modified adjusted gross income (MAGI) exceeds: $200,000 for single people, $250,000 for married people who file jointly, and $125,000 for married people who file separately. Biden's proposal would broaden the NIIT by applying it to all types of income greater than $400,000, rather than only investment income. On top of the hike in capital gains, these taxpayers would face a combined tax of 43.4% at the federal level. With state and local capital gains taxes added in, some high-income individuals could face an overall capital gains tax rate that tops 50%. In addition, the AFP would impose limits on stepped-up basis for inherited assets (with certain exceptions for property donated to charities and family-owned businesses and farms). Specifically, it ends the practice for gains that exceed $1 million, or $2.5 million per couple when combined with existing real estate exemptions. This change is designed to reduce the incentive to hold appreciated assets until after death, rather than subjecting them to capital gains tax. Of course, these proposals would have to be passed by Congress in order to become reality. And in today's political environment, that will be challenging. If enacted, these changes would boost the tax burden of many wealthy individuals. However, it's unclear when the proposed changes would take effect. As the parties negotiate and draft a formal bill, it's important to monitor the latest developments. For More Information Contact us to help you develop a plan for harvesting gains and losses that meets your needs. We are monitoring new tax law developments and can help you pivot as needed in the current tax year. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Nowadays, many employer retirement plans give employees the option of contributing to designated Roth accounts (DRAs). According to a 2020 survey, 75% of employer plans now offer DRAs, which are also known as Roth 401(k) accounts. If your employer offers this option and your income is too high to make annual Roth IRA contributions, contributing to a DRA is worth considering. This option also may be worthwhile if you expect to pay higher federal income tax rates during your retirement years than you're currently paying. Here's more information about DRAs. Nuts and Bolts If your company's qualified retirement plan allows you to make contributions out of your salary to a regular 401(k) account, the plan may also include the DRA option. Important: 403(b) and 457(b) plans can also offer DRAs. Contact your tax advisor for more details on DRA offerings through these plans. When you contribute to a regular 401(k) account, the contribution reduces your taxable salary. This reduces your federal income tax bill and your state income tax bill, too, if applicable. In contrast, when you contribute to a DRA, you're taxed on the contribution as if it's part of your salary. The payoff is that earnings in your DRA can accumulate free of federal income tax, and you can eventually take federal-income-tax-free qualified withdrawals from the account. In general, a qualified withdrawal means one taken after your DRA has been open for more than five years and you're at least 59½. Qualified withdrawals can also include withdrawals after becoming disabled or withdrawals taken by an account beneficiary after the original account owner has died. Your employer must keep your DRA funds in a separate account that can be rolled over into either your own Roth IRA or into another qualified plan that permits DRAs. Contribution Limits There are no income limits on the DRA contribution privilege. For 2021, you can contribute up to $19,500 ($26,000 if you'll be age 50 or older as of December 31, 2021). These are the same as the contribution limits for regular 401(k) plan contributions. (See "DRA Contributions vs. Annual Roth IRA Contributions" at right.) Your employer can make matching contributions, but any matching contributions must go into your regular 401(k) account, and later withdrawals from that account will be taxable. That said, employer matching contributions are always good because they're "free money." 2 Key Factors to Consider with DRAs The two most important factors to consider when evaluating this option are: The longer you hold funds in a DRA, the better, because you can build up a bigger federal-income-tax-free retirement fund. So, DRAs can be appealing to younger retirement savers. The higher the tax rate you expect to pay during your retirement years, the bigger the DRA advantage. For instance, suppose your DRA contributions would be taxed at a 24% federal rate for 2021, and you expect to be in the 32% tax bracket in retirement. In this situation, the privilege of taking future tax-free DRA withdrawals is worth more than the current tax cost of making DRA contributions. In-Plan Rollovers into DRAs If your company 401(k) plan allows DRAs, it may also allow you to roll over funds from your regular 401(k) account into a DRA. A so-called "in-plan rollover" is the quickest way to get more money into a DRA. But you must understand that the amount you roll over will be taxed, because it's effectively treated the same as a Roth IRA conversion transaction. Important: If you withdraw rolled-over DRA funds within the five-year period starting on the first day of the year in which you did the rollover, you can get hit with a 10% early withdrawal penalty tax unless an exception applies. DRA Rollovers into Roth IRAs When you leave the company, you can roll over your DRA balance into a Roth IRA. Then you won't have to take any annual required minimum distributions (RMDs) from the Roth IRA for as long as you live. So, you can keep earning tax-free income and line yourself up for tax-free withdrawals after reaching age 59½. If you still have a balance in your Roth IRA when you die, whoever inherits the account can take tax-free withdrawals after meeting the rules for qualified withdrawals. Key Takeaways If your company plan includes the DRA option, give it a hard look. This option may be especially beneficial if your employer would match your DRA contributions, your income is too high to make annual Roth IRA contributions, and/or you expect to pay higher tax rates in retirement than you're paying now. You should also consider making an in-plan rollover into a DRA if your company plan includes that option. But you must understand that there's a tax cost for making an in-plan rollover. Your tax advisor can help you evaluate your DRA options. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please Leave us a review here!

If you're eligible for advance child tax credit (CTC) payments provided by the American Rescue Plan Act, you might wonder whether you should spend the extra cash. Some families are incurring extra child-care costs so the parents can return to work. But others don't have any imminent child-care-related expenditures to cover. Rather than spend the money on a trip to Disney or new smartphones, you might want to invest in your child's future by starting or contributing to a tax-favored Section 529 college savings plan. Here's what you should know. CTC Basics Through 2025, eligible parents could claim a child tax credit (CTC) of up to $2,000 for each qualifying child under age 17, of which $1,400 was refundable. (That means you could collect part of the refundable amount even if you had no federal income tax liability for the year.) However, the credit was subject to a phase-out, based on modified adjusted gross income (MAGI). For 2021 only, the American Rescue Plan Act expands the child credit. The changes include the following for eligible parents: The maximum credit increases to $3,000 for a qualifying child. Plus, you can claim another $600 for each qualifying child under age six. The credit is 100% refundable. That means, if your CTC is larger than your tax liability, you're still entitled to the full credit amount. The age threshold for a qualifying child increases from 17 to 18. In addition, you don't have to wait until you file your 2021 return to benefit from the enhanced child credit. The IRS will begin distributing advance payments to eligible parents on July 15 and continue them through December of this year. There's one major downside to these changes: The modified adjusted gross income (MAGI) phase-out ranges for the child credit in 2021 are lower than they were before the new law. Filing Status 2020 MAGI phase-out range 2021 MAGI phase-out range Single $200,000 - $240,000 $75,000 Married, filing jointly $400,000 - $440,000 $150,000 However, some parents with incomes above the phase-out range for 2021 can elect to claim the child credit of up to $2,000 under the prior rules. Advance Payments In June, the IRS sent out letters about advance CTC payments. You might already be on track to receive them because the IRS is using tax return data from previous years to determine eligibility. If you haven't yet filed your taxes for 2020, the IRS will use your 2019 tax return. Checks or direct deposits for eligible parents will occur monthly, starting on July 15. How much will you receive? If your income doesn't exceed the levels listed above, your monthly payment will be: $300 a month for each child under age 6, or $250 a month for each child age 6 through 17. For example, an eligible family with a four-year-old and a six-year-old would receive $3,300 between now and year-end [($300 × 6) + ($250 × 6)]. The IRS has introduced new online tools at irs.gov that might be useful to some people eligible for those credits. One tool enables families to opt out or unenroll from receiving these advance payments and instead receive the full amount of the tax credit when they file their 2021 return next year. Access it here . Some taxpayers may want to opt out if they're concerned that the advance payments will wind up being more than what they're entitled to for various reasons. If a taxpayer receives excess payments over what they actually qualify for in 2021, they'll be required to repay the excess. Investment Opportunity If you're eligible for advance CTC payments — but you don't need the cash today — you might want to consider socking away the payments for a major child-related expenditure that may be coming down the road: college. For the 2020-2021 school year, the College Board estimates that the average annual cost of tuition and fees was $10,560 for in-state students at public four-year universities — and $37,650 for students at private not-for-profit four-year institutions. These estimates don't include room and board, books, supplies, transportation and other expenses a student may incur. Section 529 plans are special tax-favored educational savings accounts. They can be used to pay for college, as well as private K-12 school tuition. You can put in up to $15,000 per child into a Sec. 529 plan account in 2021 (or $30,000 if you and a spouse give separately). You can contribute more, but higher amounts would apply against your lifetime gift and estate tax exemption. Some states allow tax deductions for contributions to Sec. 529 plans, but you can't take a federal deduction. The major tax advantage comes on the back end: Contributed funds, plus any income and gains earned on those funds, can be withdrawn tax free if the withdrawals are used to cover eligible education-related expenses. This includes tuition, room and board, books and even computers. Many states have 529 plans that incentivize the plans' beneficiaries to attend in-state schools. However, your options aren't limited to those state-sponsored plans. Right for You? There are many ways to spend — or invest — the cash you may receive from advance CTC payments. Some options are more fiscally responsible than others. Contact your tax advisor if you have questions about the CTC, opting out of receiving advance payments or setting up a Sec. 529 college savings plan. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please Leave us a review here!

Families may be able to cash in on various tax credits to offset their tax liability on a dollar-for-dollar basis. Plus, recent legislation has enhanced some of the credits for 2021. Here's an overview of four key tax credits for families that are currently on the books. 1. Child Credit Through 2025, eligible parents could claim a child credit of up to $2,000 for each qualifying child under age 17, of which $1,400 was refundable. (That means you could collect the refundable amount even if you had no federal income tax liability for the year.) However, the credit was subject to a phase-out, based on modified adjusted gross income (MAGI). For 2021 only, the American Rescue Plan Act (ARPA) expands the child credit. The changes include the following for eligible parents: The maximum credit increases to $3,000 for a qualifying child. Plus, you can claim another $600 for each qualifying child under age six. The credit is 100% refundable. The age threshold for a qualifying child increases from 17 to 18. What's more, you don't have to wait until you file your 2021 return to benefit from the enhanced child credit. The IRS will begin distributing advance payments to eligible parents on July 15 and continue them through December of this year. There's one major downside to these changes: The phase-out ranges for the child credit in 2021 are lower than they were before the new law. Filing Status 2020 phase-out range 2021 phase-out range Single $200,000 - $240,000 $75,000 Married, filing jointly $400,000 - $440,000 $150,000 However, some parents with incomes above the phase-out range for 2021 can elect to claim the child credit of up to $2,000 under the prior rules. 2. Child and Dependent Care Credit The ARPA also includes significant changes in the child and dependent care credit for 2021. Generally, the changes are favorable to taxpayers. For starters, the dependent care credit may be claimed by parents who incur costs of caring for children under age 13 (and other eligible dependents) that allow them to be gainfully employed. This covers expenses for daycare centers, babysitters and even summer day camp. Previously, the credit was nonrefundable. The maximum credit percentage was 35% (20% for parents with an AGI above $43,000). It was available for the first $3,000 of qualified expenses for one child ($6,000 for two or more children). So, the maximum credit was usually $600 for one child ($1,200 for two or more children). Under the ARPA, the dependent care credit is fully refundable for 2021. In addition, the maximum credit rate increases to 50% for qualified expenses of up to $8,000 for one child ($16,000 for two or more children). So, the credit ultimately is worth up to $4,000 for one child ($8,000 for two or more children). However, the credit percentage is gradually reduced if your AGI exceeds $125,000. It bottoms out at 20% for an AGI above $183,000. Furthermore, if your AGI exceeds $400,000, the credit is gradually reduced until it zeroes out for an AGI above $438,000. 3. Higher Education Credits Parents with children in college may be entitled to receive one of the following higher education credits: American Opportunity Tax Credit (AOTC) . This credit is available for qualified expenses for each student in the family for up to four years. Qualified expenses include tuition, room and board, books, computer equipment and supplies. The AOTC is phased out between $80,000 and $90,000 of MAGI for single people ($160,000 and $180,000 for married people who file joint tax returns). Lifetime Learning Credit (LLC) . The maximum LLC is $2,000 per taxpayer, but it's available for all years of study. Previously, the phase-out ranges were between $59,000 and $69,000 of MAGI for single people ($118,000 and $138,000 for married people who file joint tax returns). Under the Consolidated Appropriations Act, the lower phase-out ranges for the LLC have been increased to match those for the AOTC. Typically, you can claim either the AOTC or the LLC, but not both. For most parents, the AOTC remains the optimal choice for a child completing school in four years. 4. Adoption Credit If you've adopted a child in 2021, or plan to adopt one, you may qualify for a tax credit. For 2021, the maximum credit is $14,440 of the qualified expenses incurred to adopt an eligible child who is under age 18 or one who needs special care. Qualified expenses include adoption agency fees, court costs, attorneys' fees, travel costs (including meals and lodging) and re-adoption expenses for a foreign child. The credit begins to phase out for taxpayers with a MAGI above $216,660. Once your MAGI is $256,600, you no longer qualify. The credit is generally claimed in the year that qualified expenses are paid or incurred. However, if the adoption isn't finalized by the end of the tax year, you may claim the credit in the following year or the year in which the adoption is finalized. For More Information These four credits are just the tip of the iceberg for families. Under current federal income tax law, some families may qualify for other tax credits, such as the earned income tax credit or the health care premium assistance credit. The Biden administration has proposed additional changes that would extend and expand certain tax breaks for families. However, there are no guarantees that any proposed legislation will be passed by Congress and, if it is, what form it would take and when it would become effective. If you still have questions, contact us today! We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please Leave us a review here!

The Department of Labor's Employment and Training Administration (ETA) reports "unprecedented increases in unemployment insurance (UI) claims amid the pandemic and related surges in fraudulent filing in states' systems by sophisticated criminal rings." This has caused widespread problems for states, employers and employees alike. Innocent employees have had claims filed in their names, employers are winding up with higher UI premiums, and some state UI systems have been unable to keep up with the increased work necessary to fight the fraud. In response, the ETA has issued guidance to state UI departments on stricter standards for verifying the legitimacy of claims before paying benefits. The explosion in sophisticated criminal activity is in addition to lower-level fraud perpetrated by former employees. Some laid-off workers who receive UI benefits may not report their new working status when they become reemployed. Or laid-off employees may claim they're meeting eligibility requirements for unemployment benefits, such as actively looking for work, when they aren't doing so. Note: Until recently, pandemic-related emergency unemployment provisions eased the requirement to actively look for work. That's changing fast, state by state. Also, the $300 weekly "federal pandemic unemployment compensation" benefit is due to expire September 6, 2021. Detecting Schemes How does UI fraud come to light? Here are some common scenarios: A laid-off worker applies for UI benefits and in the process discovers that a claim has already been filed in his or her name. An employed or unemployed worker receives a notice from the state's UI office that he or she has filed a UI claim, even though the worker hasn't. A worker receives a Form 1099-G with an amount of unemployment benefits the employee has allegedly received that's subject to taxation. A worker's UI account has been funded and benefits are about to be paid when the fraudster who initiated the claim contacts that employee and seeks to have the payment diverted to him or her. An employer receives a notice from the state's UI office that a current employee has filed a claim, yet when contacted, the employee knows nothing about it. Preventing Eligibility Errors What can your organization do to keep ineligible claims from being charged to your UI account? Your first line of defense is to carefully scrutinize any notifications you receive from your state employment agency when a UI claim is filed. For example, an individual might indeed have been a former employee, but if his or her employment wasn't recent enough, you might not be liable. Keeping your state employment agency up to date can help prevent such claims. If you receive a notice about a former employee, review the circumstances of the worker's departure. If the person voluntarily resigned or was terminated for "cause," that individual is likely ineligible for unemployment benefits. Given that much of the UI fraud involves identity theft, make sure that employees understand that their personal data may be at risk and provide training to prevent hacks. For example, ensure they don't click on links and attachments contained in emails from unfamiliar senders. Also, your own organization's cyber defense strategy should be continually updated to protect not only HR files, but also customer records, intellectual property and other critical data. Responding to Fraud If an employee's name is used in a false UI claim, learn as much as you can about the extent of the fraud. This will help you determine what you and your employees might be facing — whether its unemployment benefit filings or more widespread identity theft. If you determine that your organization has been hacked, be sure to notify all affected individuals and work with your IT department to take immediate steps to guard against further attacks. To help support affected workers, direct them to identity theft pages on the Federal Trade Commission website at FTC.gov. The FTC is the government's primary consumer protection agency and fraud authority. Ensure that employees have reported any false UI claim to their state and received a written response from the state acknowledging that the claim has been marked as fraudulent. You might also direct workers to regularly check their credit reports for signs of identity theft. Working with the State If UI benefits are paid to a fraudster who has used the identity of one or more of your employees and the fraudulent payments were charged to your UI account, you may have to work with the state unemployment agency to rectify the matter. Your prospects for winning this battle are better if you've kept the agency up-to-date, and perhaps even alerted the agency about potential false claims. An improving economy and falling unemployment are expected to reduce UI fraud. But it would be a mistake to assume these schemes will disappear anytime soon. Fraud perpetrators are always on the lookout for opportunities to fleece companies and individuals. If you still have questions, contact us today! We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!