2021 Tax Considerations for AFSPA Members
By John Ermer, CPA; Beers, Hamerman, Cohen & Burger, PC
For many reasons, 2020 and 2021 have had constant changes in tax laws and how to interact with the IRS and state tax agencies. Here are some tips for both that are based on my experience assisting clients with tax concerns:
Set up an online account with the IRS. An online account can help with providing a record of the amount you received in federal economic stimulus payments - the IRS calls these economic impact payments; it can give a clear record of tax payments the IRS has posted to your account; it can allow you to make payments to the IRS; and request a transcript of your tax return if needed.
Why do all of this online, you ask? An important issue on 2020 tax returns will be whether you are owed any additional credit due to an underpayment from your federal economic stimulus check. To make this determination, you must be able to verify how much you received – this can be done easily with an online account.
Since the pandemic struck, it has been much more difficult to call the IRS, and the agency acknowledges operational problems, such as mail processing delays, on its website. Therefore, it can be preferable to make payments to the IRS electronically rather than with a paper check. For example, one of my clients asked me what to do about a quarterly estimated tax check mailed to the IRS in early January. After a couple weeks, it had not been cashed, but this could have been avoided by making an electronic payment.
An online account can be a very valuable tool if you work in a foreign country, as many AFSPA members do. Setting up an account is very easy. Just go to the IRS website homepage (www.irs.gov) and click on “View Your Account.” Once you do, you will see a blue button marked, “Create or view your account” clicking this will begin the process of setting up your online account.
Apply for an Identity Protection PIN (IP PIN). If you are concerned about someone fraudulently filing a return under your tax identification or social security number, you can now apply for an IP PIN. In the past, the IRS mainly made IP PINs available to victims of identity theft, but for the first time, any taxpayer can obtain one of these six-digit numbers.
To begin this process, go to the IRS homepage (referenced above), type in the search box on the top of the page, “Get an IP PIN.” Just remember that while having an IP PIN will increase the security of your tax return filing, it will also require some diligence on your part - the IRS will mail you a CP01A notice each year with your new IP PIN. You cannot lose this notice because it will be very difficult to file your tax return without it. There are ways to retrieve a lost IP PIN, but they are not fun.
Take a charitable contributions deduction, even if you don’t itemize. If you take the standard deduction, as many people do, you may not think about taking a charitable contributions deduction. But the government is trying to incentivize people to give to charity during the pandemic, so you can now take a deduction for up to $300 of cash donations in 2020 without itemizing. This is the limit if you are single or married filing jointly. Make sure you give donation receipts to your tax preparer. For those who itemize, the limit on the size of the charitable contributions deduction for cash contributions has increased in 2020 from 60% to 100% of adjusted gross income.
Make Sure You Properly Report 2020 Retirement Distributions. There have been many changes to requirements for qualified plan and IRA distributions. Here are some considerations:
- When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020, we learned that taxpayers did not need to take required minimum distributions (RMDs) in 2020. RMDs are retirement distributions that individuals in their 70s are generally required to take (see Item B). Many taxpayers had already begun taking their 2020 RMDs when this legislation was passed. Congress came up with a mechanism that allows taxpayers to return 2020 RMDs to their qualified plans or IRAs if they want to avoid tax on the distributions and do not currently need the funds. If you are one of the taxpayers who made a recontribution of RMD funds, you should review your tax return carefully to ensure you were not taxed on the distributions returned to your plan or IRA.
- Beginning in 2020, the mandatory age to begin taking RMDs increased from 70 and one half to 72 years old. Because of the CARES Act, no one had to take an RMD in 2020, but in 2021 those aged 72 years or older will have to begin taking their RMDs. Some exceptions apply for those who continue working in their 70s.
- Under the CARES Act, there is special treatment for Corona Virus-Related Distributions (CRDs) from retirement plans or IRAs. Those who qualified for a CRD were able to withdraw up to $100,000 from their retirement plan or IRA during 2020 without incurring the 10% early distribution penalty if under age 59 and one half and without the required 20% federal income tax withholding. An individual can elect to report the CRDs for tax purposes equally over three tax years beginning with 2020. He or she can reduce or avoid tax completely by recontributing a portion or all the CRDs prior to the end of 2022. A person is only eligible for a CRD if he or she contracted COVID-19, had a spouse or dependent contract COVID-19 or experienced adverse financial consequences such as a layoff or reduced work hours due to the pandemic. If you took a retirement plan distribution in 2020, you should consider whether it meets the requirements of a CRD.
Get ready to answer new question about Cryptocurrency transactions. The question on page 1 of Form 1040 is: At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency? Many individuals have begun investing in cryptocurrency. If you are one of these people, answer this question carefully and speak with your tax advisor about any tax consequences.
Consider a home office deduction. Many people have been working at home since the beginning of the pandemic, so the question about taking a home office deduction often arises. Since 2018, an employee cannot take a home office deduction. However, the self-employed still can take a home office deduction under the right circumstances.
Determine proper state to report earnings. This is always an interesting question for a US Foreign Service professional, and it has become even more so during the COVID-19 pandemic. If your office is in one state and you have been working at home in another state, it is smart to check each state’s policy on taxing telecommuters during the pandemic. The big issue is which state will tax the wages of the employee who normally works in state X but has been working at home in state Y during the pandemic? Some states like Rhode Island have decided to play nice and not tax the wages of temporary telecommuters working in their state, while others such as Illinois decided to tax the wages of such telecommuters if they work more than 30 days at home.
Summing It All Up. This will be a busy tax season. Many of the accountants in our firm are still working remotely at least part of the time, and some all the time. We have tools to enable AFSPA members better remote communication with their accountants through Zoom teleconferencing and screen sharing. So, don’t be afraid to ask your tax advisor for either if you are person who prefers face-to-face interaction.
Here’s wishing you as little confusion and as big a refund as possible!
Filing taxes is frequently stressful and even more so while living abroad. AFSPA partners with Beers, Hamerman, Cohen & Burger, P.C. to offer our members special discounts and top-notch service. The firm offers AFSPA members:
Complimentary 20-minute consultation for tax questions (including tax requirements for members overseas)
10% discount off standard hourly rates
Dedicated secure email for members to ask questions
Letter of understanding prior to services being rendered