Tax situations where Dec. 31 really matters
Wednesday, December 29, 2021
For the past two years, COVID-19 has wreaked havoc on tax deadlines. In 2021, Mother Nature joined in the chaos, with major disasters changing due dates in several states.
But there's still a calendar tax constant. Dec. 31. That last day of the year remains the deadline to take care of some tasks that could affect your full year's taxes.
Here are some common end-of-year tax timing situations.
Getting married: If you say "I do" on 12/31, then the Internal Revenue Service considers you married for the whole year. That means when you file your tax return next year, it must be as married filing jointly or married filing separately.
I've heard way too many times from newlyweds who think that since they weren't married for the full year, each spouse can still file as individual taxpayers. Nope. The only filing statuses the IRS will accepted from legally married couples, even if they tied the knot on the last day of the year, is married filing jointly or married filing separately.
If taxes matter vis-à-vis your nuptials (and they did, but for other reasons, to the hubby and me lo those many years ago when wed), then postpone your vows for a few days.
Legally breaking up: The same full-year marital status rule holds true for couples who determine that they're better off apart. Your marital status on Dec. 31 still determines your tax status for the entire year.
Of course, it's not as easy to shift a legal break from your partner as it is to reschedule a wedding. You're at the mercy of the court system and when a judge issues your final divorce decree. But if it happens late in the year, even on the last day of the year, then you are a single taxpayer again.
A quick filing status note here. If you have children and are the custodial parent, you'll be able to file as head of household. That's generally a more tax advantageous filing status than single, which is how the other parent/ex-spouse must file.
Adding to your family: Biology, nature, and just plain old luck, not the tax code, largely are in charge when you welcome a new bundle of joy or older child into your family. Lots of expectant parents hope their child will be born on Jan. 1, usually because they want the publicity and presents that accompany First Baby of the Year celebrations across the country. But the tax rewards are better if your baby is born on Dec. 31. That child can be claimed as your dependent for the full preceding 364 days. And that means you get the Child Tax Credit and other child-related tax breaks for which you qualify for that tax year.
It's the same if you grow your family via adoption. You can claim an adopted child as your dependent in the tax year that the adoption is legally finalized. If that's on Dec. 31, then it's for that full year.
Be sure you get a Social Security number for your new family members. It will be required when you do file your taxes and claim credits and deductions in connection with your children.
And remember that there always are lots of familial complications, even before you get into taxes. If you have a question about what tax breaks apply to you and your child, talk with a tax professional.
Donating to charities: Are your email and snail mail boxes as full as mine with pleas from nonprofits for year-end donations? I swear I checked the don't sell my info as part of a mailing list when I gave last year.
But there's a reason for the avalanche of charitable donation requests. The organizations know that folks are doing some last-minute, back of the envelope tax calculations and have realized that deductible donations will help at filing time.
That's even more true for 2021 returns, when you don't have to itemize. A single filer can claim up to $300 in cash donations, with married filing jointly couples (noted in the marriage section earlier), can claim up to $600 as deductions without have to itemize.
For the deductions to count this tax year, either the limited ones directly on Form 1040 or larger amounts on Schedule A, they must be made by Dec. 31. The good news here is made, not received by the charity. So if you mail a check dated Dec. 31, it counts, even if the check isn't cashed until January. Ditto for donations made via debit or credit cards, as long as the transaction shows up as being made on the last day of the year.
Counting last-minute income: All of us like to get money, especially for jobs we've done. But sometimes we wish it could have arrived a tad later. That's the case when a client finally pays up late in the year. It's money you have to add to your taxable income tally when you file your return.
In these cases, the IRS looks at when you constructively received the money. This, says the tax agency, is when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it, even if you don't get it until much later.
And no, you cannot hold checks or postpone taking possession of a payment to push it into the subsequent tax year. You must report the income in the year the property is received or made available to you without restriction.
What about that payment check dated Dec. 31, but which didn't arrive until Jan. 5? This is where things get tricky. And as I noted in an earlier post on constructively received income, this is particularly problematic when the payor sends you a 1099 for the year the check was dated. If you find yourself in this situation, check out the post. Also talk with a tax pro.
And definitely discuss payment timing with that client so that you don't have to worry about a repeat this time next year.
Selling assets: Dumping bad stocks is a great way to offset any taxable gains your investments produced during the tax year. To take advantage of this process, known as tax harvesting, you need to sell the losing stock by Dec. 31.
With most financial transactions being made electronically, that shouldn't be a problem. But, not being a fan of market timing even at less hectic time periods, I suggest you don't wait too long. It always seems like computer complications show up at the worst times. And lots of folks will making very last-minute moves this week.
New Year's Eve and Day sharing: And this year, there's one other calendar consideration.
Since Jan. 1, New Year's Day, an official federal holiday, is on Saturday, it is being recognized by most government agencies, as well as many state ones and some private businesses on New Year's Eve. That's Friday, Dec. 31.
The time-shifted holiday is affecting the stock markets. They are closing early, at 2 p.m. Eastern Standard Time, on Dec. 31. Financial and other firms are following suit and calling it a day and year early on Friday.
So if you need to actually visit an office to take care of a tax-related matter by year's end, or even talk with a person about it, look into doing so on Thursday, Dec. 30. Or make sure you can conduct the relevant business early in the day or remotely on Friday, Dec. 31.
Then, when all your year-end tasks, tax and otherwise, are completed, it really will be time to celebrate.
You also might find these items of interest:
- Tax to-do's after you say 'I Do'
- 6 tax moves to make by Dec. 31
- Determining child-related tax breaks when you're divorced
- 5 tax-smart alternative ways for cool cats to contribute to charities
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