Ho, Ho, Ho! The jolly month of December is here, bringing the official start of winter, Christmas and other holidays, and taxes.
Yeah, that last December item might harsh your holidays. But the tax moves you make over the next 31 days could make your 2021 and 2022 tax situations happy and bright.
Here's a look at 6 December tax moves you at least want to consider.
1. Keep an eye on Congress. Yeah, too often the men and women on Capitol Hill are far from helpful elves. But we can't ignore what they are putting together in the federal legislative workshop, otherwise known as Congress.
Right now, the House has passed President Joe Biden's Build Back Better (BBB) plan and Democrats, who hold half the Senate with Vice President Kamala Harris as the tiebreaker, are hoping to pass BBB through a process known as reconciliation. This procedure, in general, means the bill can be passed by just a simple majority as long as its provisions pass budgetary muster.
The bill, officially H.R. 5376, contains a wide variety of tax provisions to benefit certain taxpayers, as well as raise the money to pay for the spending in the bill.
Three tax breaks for individual filers that are being watched closely include:
- A one-year extension of the Child Tax Credit, which was expanded by the American Rescue Plan Act (ARPA) coronavirus relief measure back in March. Millions of families have been getting half of the 2021 amount in advance this year. BBB would continue the ARPA-authorized $3,600 per child age 5 or younger and $3,000 for each youngster age 6 through 17 through 2022. The increased refundability, meaning you get the benefit as a tax refund if you don't owe taxes, would be permanent.
- The Earned Income Tax Credit (EITC) also was enhanced, and it also would continue in its improved form through 2022. The increase in the earned income and phaseout amounts would be indexed for inflation next year.
- The limit on state and local taxes (SALT) that can be deducted on federal tax returns would be hiked. The SALT itemized cap would go from $10,000 to $80,000 ($40,000 for married taxpayers filing separately) through 2031. It would be retroactive to the 2021 tax year.
There's no guarantee that the Senate will sign off on the House-approved BBB tax (or other) provisions. That's not a surprise. For some reason, Representatives and Senators seem to like staying in Washington, D.C., through much of this month.
But it is extremely annoying, and potentially costly, for taxpayers who are trying to make year-end moves. This year, for example, the uncertainty of the SALT change is frustrating taxpayers who are trying to decide whether they need to bunch even more deductible tax expenses into 2021 so they can maximize the itemized deductions that a higher SALT amount might make more appealing.
The best we can do now, aside from calling our Senators, is stay tuned in order to make the appropriate tax moves as soon as BBB possibly, perchance, maybe becomes law this month.
2. Give to your favorite charities. One way to bulk up Schedule A itemized deductions is by donating to Internal Revenue Service-approved 501(c)(3)s, aka public charities. But this year you don't have to itemize to claim at least some charitable contributions. Donations of up to $300 for single filers or $600 for married filing jointly couples can be deducted directly on Form 1040.
3. Make end-of-year medical moves. Medical expenses are another potential itemized deduction, as long as they are more than 7.5 percent of your adjusted gross income. Double check the IRS' allowable medical itemized expenses to ensure you don't overlook any. Note, too, that due to the continuing COVID-19 pandemic, home coronavirus tests and personal protective equipment (PPE) have been added to the IRS-okayed list. Start tracking down those receipts now!
Don't forget about your medical flexible spending account, or FSA. This workplace benefit already has saved you tax dollars by paying for health costs that aren't covered by your insurance. The one big drawback of an FSA is that, unless your company allows you grace period to use the money or lets you roll it over into the next year, you'll lose what's left unused in the account
4. Tally your home office expenses. If you worked from home, you might be able to claim the home office deduction to help reduce your taxable self-employment earnings. You have to meet the home office requirement, most notably that the residential room or space was used exclusively for your job. It doesn't have to be your full-time job, though. If you supplemented your wage income with a side gig and had a home office to do that, it counts.
What doesn't count is a home office if it was for you to do your salaried job after your company closed its premises as a COVID precaution. If you were an employee working from home, you cannot claim the home office deduction.
5. Convert to a Roth IRA. A Roth IRA is a great retirement and tax break. Since your contributions to the account are money that's already been taxed, Roth IRA distributions are tax-free.
Withdrawals from traditional IRAs, on the other hand, ultimately are taxed at ordinary tax rates. Right now, that could be as high as 37 percent. But with the possibility that those rates might go up, 2021 could be the time to convert your traditional IRA to a Roth.
Yes, you'll have to pay tax on the converted traditional IRA amount, but today's rates are among the lowest we've seen in a long while. Plus, other long-term Roth IRA benefits could make the conversion worthwhile.
In addition to tax-free retirement withdrawals, you can take out Roth money when you want, not on Uncle Sam's sked. There's no required minimum distribution for Roth IRAs.
To qualify as a 2021 Roth conversion, the switch must be made before year-end. And it's best to do so via direct transfer from your traditional IRA to your new Roth IRA.
Also remember that Roth conversions no longer be reversed. The shift of funds is permanent, and you'll owe the tax on converted amounts even if your financial situation changes. So don't make the change lightly, or without first talking to your tax and/or financial advisor(s).
6. File your 2020 return. Wait. Weren't we just talking about the 2021 tax year? Yes, but some taxpayers got extra time because they live or own businesses in areas that were hit by a major disaster.
The deadlines apply, for the most part, to taxpayers who had filed for a 2020 tax return extension earlier in the year. But as that Oct. 15 due date approached, Mother Nature struck with a vengeance.
North Carolina taxpayers who dealt with remnants of Tropical Storm Fred have until Dec. 15 to get their 2020 extended returns to the IRS.
Hurricane Ida victims have even longer. All residents of Louisiana and Mississippi, as well as certain filers in Pennsylvania, New Jersey, New York, and Connecticut have until Jan. 3, 2022, to file their 2020 extended Form 1040s.
More year-end tax moves: I know. December is busy enough without adding tax tasks. But some of these moves could make a nice tax-saving present for you.
Just remember that in most cases, the tax tasks must be completed Dec. 31 in order to provide any benefit on your 2021 tax bill.
You also might want to check out a few more tax-saving ideas over in the ol' blog's right column under the December Tax Moves heading. They're just below the bright red heading of the same name, just under the countdown clock ticking off the time left in tax year 2021.