Published April 7, 2021
This is one of those weird years where 'married filing separately' may be a good deal, depending on circumstances.
This is one of those weird years where 'married filing separately' may be a good deal, depending on circumstances.
With the delayed federal filing deadline of May 17, there’s an extra month of tax season—plenty of time to capitalize on recent developments from the American Rescue Plan, the CARES Act and others. Some members of our financial planning team are here to offer their advice and break down everything you should know, including:
Taxes are always a moving target as laws change—and this lively episode equips you with the knowledge you need to take advantage of all the latest breaks available to you. Click above to listen now!
And for additional information about contribution limits, tax brackets and more, please refer to our Key Financial & Tax Planning Data reference guide here.
Filing your 2020 tax return may have been extended, but that’s not the only tax news you should be thinking about. To make sure you’re taking advantage of all the tax opportunities available to you, listen to this episode about five tax deductions we think you need to know.
Hello. This is Andrew Busa, and I’m a financial planner here at Adviser Investments. And we’re here with another Adviser You Can Talk To Podcast. And today I’m joined by two of my colleagues from the wealth management team, Diana Linn and Patrick Carlson.
Hi Andrew, How are you?
Hey Andrew. Hey Patrick.
Good. So, Patrick, he heads up our wealth services department. Has one of the sharpest tax minds around. And Diana is an account manager and certified financial planner who works directly with clients all day long. We’re very lucky to have both of you for this episode. And we’ve got over half of the financial planning team in one spot. Is this okay? Is this allowed?
I hope the other half doesn’t listen and feel left out.
That’s a good point. So, we’re knee deep in the middle of tax season. And so, today’s episode is going to focus on exactly that, taxes. Now, specifically, we’re going to cover five tax deductions that we think you need to know about. First, we’ll hit on charitable contributions. Second, the Child Tax Credit. Third, the Child and Dependent Care Credit. Fourth, some changes to unemployment benefits. And finally, we will touch on home office deductions.
And some of this information that we’re going to cover today is really new. Specifically the Child Tax Credit, the Child and Dependent Care Credit, and then the unemployment benefits. And that’s due to the recent American Rescue Plan Act of 2021, as well as the Consolidated Appropriations Act of 2021. I know those titles sound very official.
Well, Diana, that’s a great point because taxes are just such a constantly moving target as the laws change. And as the world and governments are reacting to coronavirus, we’ve seen just a lot of tax responses to it. In fact, things that are even retroactive back to 2020, that we’ll cover it a little bit later in the podcast.
Yeah. And that’s why this is a very timely episode, because of what you both just mentioned. Before we get started, let’s just define two key terms that we’ll be talking about a little bit in today’s episode. The first is a QCD, known as a qualified charitable distribution. This is a direct transfer of money from an individual retirement account to an eligible charitable organization. And you need to be at least 70 and a half to make one of these qualified charitable distributions.
The other term that you’ll see in this episode is RMD, that stands for your required minimum distribution. So, when you reach age 72, you’re required to a certain amount of money from your retirement accounts each year, and that amount is known as your RMD. So, without further ado, Patrick, I will let you lead off here, talking about some nuances to how charitable contributions are changing, and what we should know about here.
Perfect. Andrew. I’m going to start with a little bit of a very, very brief history lesson here, which is prior, to 2020, so, 2019, and before, in order to get a charitable deduction, you had to itemize. Which meant you had to… Basically, it was a little bit more complicated form on your taxes, compared to what’s called the standard deduction, which basically everybody is entitled to. So, this really only was beneficial if you made typically pretty large charitable gifts in the year. But what Congress did with the CARES Act in 2020 was, they decided to add a deduction that basically is available to everybody. Now, it’s pretty limited, it has to be a cash contribution. And cash, of course, means checks, credit card payments, electronic transfer, it doesn’t have to be literal money, to a qualified charity. And it’s available if you don’t itemize.
So, this is new. It’s really exciting. It is a bit limited. It’s up to $300 made on the return in 2020. Now, the CARES Act only made that available during 2020, but enter that Consolidated Appropriations Act of 2021, that Diana mentioned earlier, and what happened there is, they said, “You know what, we’re going to allow that to continue in 2021. We’re also going to allow married filing joint people to take $300 each. So, up to $600.” So, this is a really nice small… It’s a small benefit, but it’s a nice benefit for people who have the ability and means to give back a bit, during this global crisis.
Now, Patrick, you can also still utilize other charitable strategies, like your QCD’s as part of your RMD, right? In addition to this?
Oh, absolutely. So, that QCD, of course, remember, you’ve got to be at least 70 and a half in order to do those QCD’s. But that strategy is still around. And in fact, for those who do itemize, so, people who have the means to make even larger charitable contributions, there’s actually an expanded benefit for that available as well. So, they really wanted to make sure that people who felt like they could afford to give, certainly had a tax incentive to be able to do so.
Yeah, a really good overview of that. And I want to underline a point that you made, Patrick, is that this new, up to $600, deduction for joint filers, that’s available even if you don’t itemize, right? So, that’s a key takeaway for me. This is an above the line deduction. Yeah. So, we’ve gotten some questions about that. So, Diana, I want to kick it over to you to talk a little bit about the Child Tax Credit. Now, this one just got updated due to the American Rescue Plan, right?
It did. And I’m really excited about this change and the huge impact it could have for families with young kids. So, the American Rescue Plan made some significant changes, in terms of increasing the actual credit amount, increasing the qualifying child’s age, also increasing the refundability, and then most notably, they added a provision for these advanced payments of that credit. So, under prior law, the Child Tax Credit was $2,000 per qualifying child. And of that, $1,400 was refundable. So, what that means is, let’s say, a refundable credit… If I owed a thousand dollars on my taxes, and I had this Child Tax Credit of $1,400, it would pretty much wipe out the $1,000 that I owed, and I could also get $400 back. So, with these changes to the plan, two big things happen here, effective 2021, and for this year only, the credit has been increased from that $2,000 per qualifying child, up to $3,000 per qualifying child. And up to $3,600, if your child is under the age of six.
And Andrew, this full amount is refundable. So, not just $1,400 of that $2,000, this full $3,000 to $3,600. So, that’s a pretty big, impactful change, I think. And then the second bullet point is they’ve also increased this age limitation. So, before, it was every child, 16 years of age or under. So, up to the age of 17 as of the end of the year. And now this has been bumped up to, up to the age of 18 by the end of the year. So, meaning, all children, 17 years of age and under, now qualify for this Child Tax Credit.
So, before I dive into the third point, Andrew, I think maybe we should start to talk about here, that, unfortunately, there are some phase out limits, to be fully eligible for this credit. Do you want to talk about that?
Yeah, I’ll take that one. And this is definitely important to hit on here, Diana, because like you said, there could be a lot of money on the table here for this Child Tax Credit, for some folks, in 2021. So, understanding this is important. And we’ll give you a little bit of a storyline here, to follow along with how these phase outs work, because it can get a little bit confusing, but it’s really… If you can, sort of, imagine this continuum where at certain income levels in 2021, you’re getting this temporary increase in the Child Tax Credit due to the American Rescue Plan, before that eventually phases out. And then after those income levels, you’re now subject to the old rules that were put in place by the Tax Cuts and Jobs Act from 2017, for folks of higher income levels. So, again, let’s walk through an example here, and stick with us. I think you’ll get it as we move along.
So, all right. Imagine a married couple, filing jointly, with two kids, an eight and a 10-year-old. And we’re going to shift around their adjusted gross income four times, to show you how this continuum works. So, first, let’s imagine that their AGI is $150,000 or less, in 2021. Well, that one’s easy because they’re just going to get the full benefit. That’s $3,000 per qualifying child for 2021. Now, let’s move up their AGI, above $150,000 but less than $190,000. So, in this scenario, they’re still going to get the credit, but they’re going to get phased out of this extra money from the American Rescue Plan Credit, that extra $1,000 per kid that you mentioned, Diana.
I see. So, it seems like, for this year, Andrew, it could be in your best interest to get your AGI as low as possible so that you can qualify for this extra money. So, maybe considering making some deductible IRA contributions, or contributing to your retirement accounts. So, you could cross a threshold and get that full amount of the credit. So, it seems like this is a good opportunity to work with your adviser or your accountant to figure out if this is a situation that could work for you.
Yeah, yeah, for sure. And also, consider the impact of large capital gains as well, as that will affect your AGI. But, okay. So, two more scenarios here. Now, let’s move their AGI above $190,000, but now, less than $400,000. So, now, we’re in a very wide window here. At this point, they’re completely phased out of the American Rescue Plan Credit. They’re still going to get the $2,000, that was, again, in place by the Tax Cuts and Jobs Act. So, really, takeaway here, once the increase of the Child Tax Credit from the American Rescue Plan has phased out, that $2,000 per qualifying child from the Tax Cuts and Jobs Act still applies, under the AGI threshold of $400,000.
And then last one here, I promise. Their income now, let’s move it up between $400,000 and $480,000. Well now, of course, they’re still phased out of the ARP credit, and they’re now beginning to get phased out of the Tax Cuts and Jobs Act Credit. So, hopefully, that made sense. If you had questions about how all that works, please give us a call. We’d be happy to walk it through for your individual situation.
Absolutely, absolutely. And then the fourth bullet point item that we wanted to talk about here with this main change with the American Rescue Plan, was this final change. And, Andrew and Patrick, I really feel like this could serve as a lifeline for a lot of families out there. And that is this advanced payment. So, meaning, remember, we talked about that credit, formerly it was $2,000 per qualifying child, that has been bumped up to $3,000 per child. Well, now you can actually receive an advance payment of this credit. So, rather than having to wait until you file your taxes at the end of the year, apply the credit, you can begin to receive monthly payments. So, beginning July 1st through December 31st, you can have this credit paid out to you in a monthly basis.
So, to use that same example again, let’s say we have a family with two children, two qualifying children, ages eight and 10. So, this family would be eligible for a $3,000 credit per child or $6,000 total. They can have up to 50% of this eligible tax credit paid out to them. So, $3,000 paid out, ahead of time, on this monthly payment. That is a check of $500 a month right there, that could help put food on the table, cover other costs and expenses. So, I am really excited about this one.
Yeah, it’s a fantastic benefit, but one caveat to keep in mind about it is this refundability, or this advanced payment piece is really helpful from a cashflow to help pay the bills, put food on the table, do what you need to do. But when you file your 2021 tax return, what’s going to happen is they’re going to say, “Well, you got half of your credit already. So, in total, you’re going to get $3,000 of credit. You already got $1,500 of it. So, you’re only going to get an extra $1,500. You’ll still get the full $3,000, but you don’t get to double dip, unfortunately.”
That’s right. Yeah. So, it’s just making sure that you’re not getting paid that credit twice, but I think it’s a nice benefit if it can be helpful to you to certainly look into that.
Yeah, no, it’s a really good broad overview of how the Child Tax Credit is working. I know we spent a good bit of time on that, but I think it’s worth it because this can really affect a lot of listeners out there to a, hopefully, good effect. But let’s shift over to the Dependent and Childcare Credit. So, sounds similar to what we just talked about, but this is actually different, right, Patrick?
It is different, and I guess one piece of advice we could give Congress would be maybe they should hire some branding people to help with the names, because they sound so similar, right?
They do, they do.
Absolutely. So, this Dependent and Childcare Credit is a bit different. This has some, also, significant changes from the American Rescue Plan. Diana went over the refundable credit thing before, this is now a refundable credit, whereas in the past it wasn’t, which is a significant change. Congress also doubled the amount of the credit. So, it’s now up to $8,000, which is double what it was under prior law. Again, it does have a phase out, but the bottom line of this is that they really increased the phase out eligibility here. In the past, this was a fairly limited credit for people, but now, most families earning under $438,000 will be eligible for some amount of this credit, which is going to be very significant for helping people be able to get the… Pay for the dependent care so they can get back to work and we can continue to reopen the economy.
Yeah. Well, when I think about what this past year has been, a lot of working families out there have had to get creative with how to find care for their children, families, things like that. So, this could certainly affect a lot of people out there this year.
I agree. Well, I think we should also cover some of these updates that have been made to unemployment. Andrew, do you want to walk us through some of that?
Yeah, yeah, absolutely. This is another important one that could affect a lot of people because of what happened over the last year with the economy. Some people unexpectedly lost their jobs. So, the American Rescue Plan includes another potential benefit for those who did receive unemployment compensation for some or all of 2020. So, bottom line here is, if your AGI is less than $150,000, then up to $10,200 of unemployment compensation received in 2020 may be, obviously, the operative word there, may, be free from federal tax. And that’s also another important word there, federal. You have to check with your state because the criteria for your state return will likely vary. There’s not a general limitation there with how it’s lining up with the federal. But there are some, of course, caveats to point out here. So, that $150,000, that’s uniform to all filing statuses. So, it doesn’t matter if you’re filing jointly, single, head of household, that $150,000 is actually a cliff as well. So, as soon as you hit that 150,000-
No phase out this time.
No phase out. We don’t have to… I promise, I won’t go through another example.
No example from Andrew this time.
No, I’m done with that. This is a cliff threshold, super easy. Once you cross it, all of it is taxable in 2020. And another thing too, is that, if let’s say you’ve already filed your return for 2020, and you would have been eligible for this benefit but you didn’t know about it. Well, the good news is, you don’t have to do anything, the IRS came out and said they will automatically process refunds for those who already filed, and if you were supposed to get this benefit, but you didn’t know about it. And Diana, I’d actually want to kick it over to you, to talk about how the per person cap is working here. That, that’s how it’s set up.
Sure. So, it appears that in the case, as you mentioned, Andrew, of joint filers, each spouse can receive up to this $10,200 of unemployment compensation, tax-free. So, if one spouse has $20,000 of unemployment income and the other doesn’t have any, you can still only use the $10,200 once. So, for example, let’s say maybe my husband was furloughed for a little bit of time, collected some unemployment and he has $20,000 of unemployment. But because I wasn’t collecting unemployment, he can still only claim up to that $10,200 once. And again, that’s if you qualify under those AGI limitations.
Right. Yeah. That makes sense. So, it’s not like the standard deduction, married jointly, where you’ve got this one large amount per person. This operates differently than that.
We have a lot of caveats here, I’m noticing. A lot of, “It’s available, but…”
That’s the tax world. That’s the part where you tell us about that.
That is the tax world. The other thing that had just occurred to me too, Diana, your situation, if that were the case, this might be one of those years where it might make sense to do a strategic move in filing status. It really depends on the situation, but since that $150,000 limit appears to apply regardless of filing status, this might be one of those weird years where married filing separate, which usually is not a good deal, might actually be a good deal for some people, depending on their individual circumstances.
That’s interesting. Yeah. The IRS typically doesn’t want you to file married filing separately. That’s just how the code has been set up. But yeah, this could be a situation where, of course, check with your accountant, tax preparer, they should be able to give you the best advice for your individual situation. All right, well, let’s move on to the last one here that we want to cover, and that’s home office deductions. This has been on the minds of a lot of people out there. We’ve gotten questions about this. Patrick, I’ll let you take this one.
Huge questions about this one coming in across the board. As COVID reshaped the economy, it accelerated home-based businesses, it has countless people working from home, perhaps for the first time ever, and in an extended way. So, the question becomes, “Do I get a tax deduction for that?” And again, the answer is maybe. The home office deduction has been around for many, many years. If you file a Schedule C—so, if you have a home-based business of some kind, you might be able to qualify for this deduction. There’s a lot of rules that go in behind the scenes on this, but there are three key things you have to think about, that there has to be an area in your home that you are exclusively using for your business, it’s regularly used for your business, and it’s also the principal place where you do your business.
So, and again, there’s a lot of record keeping and other requirements, but as long as you have those three rules in place, I strongly encourage you to look into the deduction, because what it does is it lets you write off a percentage of your utilities, a percentage of your rent, if you’re a renter, if you have a mortgage, it’s a percentage of your interest and property taxes, and the depreciation on your home. So, it can be a very significant tax savings for you, if you’re eligible for it.
Right. So, if you’re a person… Let’s say you lost your job due to COVID, you start a business in your garage, maybe on Etsy, some sort of an online merchandise business, is that someone who their ears might perk up on this discussion?
Andrew, that’s exactly the kind of person that should be looking into whether they qualify for the home office deduction because they are using, presumably, part of their home to store their inventory. They may be using part of the home to maintain the records of the business, to actually create the things that they’re selling. That’s the kind of person that could save a lot of money here. The one type of person that unfortunately is not eligible to the home office deduction are people that have kept their jobs and are just working from home. That’s because the Tax Cuts and Jobs Act of 2017 got rid of the home office deduction for employees. At one point, that would have been potentially deductible as an itemized deduction. So, very few people could take it anyway, but that, it was in fact completely removed several years ago for employees. So, employees, don’t waste your time with it, but if you have started that side hustle, maybe it’s the time to look into it.
Right. So, the three of us sitting here at home, recording a podcast, this isn’t for us?
Sadly not. And the other thing that I thought was really interesting about this was, we’ve mentioned so many different law names for you today. It’s interesting that nothing has been changed on the home office deduction, as millions of people have been working from home. They didn’t touch this. They didn’t look at this. This hasn’t been part of the relief yet, in spite of all the other significant changes.
Yeah. That really is interesting to me too. I mean, who knows, maybe we’ll get some updates to this, as more laws are passed, but that’s definitely a surprise to me, I feel like a lot of people were looking for that, but it just didn’t happen. Well, Diana and Patrick, this has been an excellent conversation, dare I say fun, with taxes?
I had fun.
Well, before we leave the listeners, I want to ask the two of you. What were your biggest takeaways from this conversation?
I think one of my biggest takeaways is, there have been several significant tax bills over the last few years. So, just making sure to pay attention to the laws, pay attention to your income, making sure you’re staying on top of all the information, and really working with your adviser to take full advantage of all the opportunities that are available to you. You can always call us and let us help you figure this out because we’ve done a lot of examples here. It can get confusing, it can get tricky. There are a lot of little caveats. So, lean on the professionals if you need it.
And for me, Andrew, tax obligations, I think about this, they vary so much from person to person. So, I always recommend checking in with an accountant, a tax preparer, a tax adviser, or taking advantage of our Adviser Investments Tax Solutions, the in-house tax advisory service we have. It’s better to find out the answers and plan ahead, to the extent you can, and make the choice that’s going to minimize your tax burden. So, I always encourage you to talk to your wealth management team, talk to your tax advisers and see how we can help.
Yep. I would leave it there. I think the two of you nailed the takeaways. I guess the only one I would add is that there’s always a caveat, it seems like. But, well, this has been Andrew Busa, Diana Linn and Patrick Carlson from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you did enjoy this conversation, please subscribe and review our show. And you can always check us out at www.adviserinvestments.com/podcasts. Your feedback really is always welcome. And if you have any questions or topics that you’d like us to explore in a future episode, please, please email us at firstname.lastname@example.org. Thanks for listening.
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