Your crypto transactions have tax implications, and reporting correctly to the IRS is very important in 2022.  We’ve put a quick guide together for you to get set up to help protect yourself. As always, we are happy to answer questions and work with you to maximize your return and make sure you are following the latest tax laws.

A Starter Guide to Crypto Taxes

You will notice a question on your 2021 Form 1040 about cryptocurrency.

The question reads: “At any time during 2021, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

The IRS requires you to answer with yes or no. If you check the “yes” box, the IRS will expect income, transactions or reporting from crypto on your return. If you are not sure if you need to check yes, please give us a call or schedule an appointment. You can work with us in person, on an online Zoom call, or on the phone.

Since the IRS has various tracking methods and exchanges do formal reporting, it’s not a good idea to try to avoid your crypto obligation. More audits are predicted.

How It Works

• Cryptocurrency is treated like “property” for taxes.
• When you buy, sell or exchange it, it counts as a taxable event with a capital gain (or loss).
• Earning income from cryptocurrency is taxed as ordinary income.

Since the IRS considers cryptocurrency to be property for taxes, it’s taxed the same way as stocks or gold.

You will report these capital gains and income on your tax return in different forms. The most important thing you can do to prepare is to keep records of your transactions. For some of you, this means a lot of details from your digital wallets. If possible, download that transaction activity where ever possible, and include that for your tax appointment.

Guidelines for Reporting

When you buy and hold cryptocurrency, it is not necessarily a “taxable event”. For example, you can buy Bitcoin and hold it for years and not have to pay taxes on it.

Taxes come in to play when crypto is sold or traded, as described in some of the scenarios below. Please note: these don’t apply if you trade in tax-free or tax-deferred accounts, such as IRAs (individual retirement accounts).

I purchased crypto with U.S. dollars — if you just bought Bitcoin with dollars, you do not have to report that to the IRS, according to the 1040 guidance. Same with transferring crypto to your personal wallet (a wallet you own).

I exchanged cryptocurrency — exchanging one coin for another is taxable. For example, purchasing Bitcoin (BTC) using Ethereum (ETH) is a taxable event.

I bought something with crypto — paying for goods and services using your crypto has tax implications. For example, when you buy an item with Bitcoin, it is a transaction that can result in a gain or loss. This depends on the value of Bitcoin at the time you received your BTC, and the price of BTC when you used it as payment (effectively “selling” it at the point of sale).

I sold crypto — when you place a trade, that is a taxable event. For example, you may have sold some of your Ethereum back to U.S. dollars in your FTX account for more than you originally paid, which resulted in a gain. Similar to selling shares of a stock, your taxes will consider the cost basis (what you originally paid) and what you sold it for (resulting in a gain or loss).

I traded or minted NFTs — NFTs are non-fungible tokens, created on a blockchain to prove you are the owner of a digital item. You may be buying and selling these one-of-a-kind assets in a marketplace like OpenSea. These transactions are taxable, but the guidance from the IRS on these is seemingly limited (so far). Many factors can affect your liability, such as if you are a creator or an investor, and if it’s a hobby or a business. Here are some notes and considerations, but keep in mind these conditions can be much more nuanced:

• Paying gas fees when you mint NFTs is a taxable event.
• Trading Etherum when minting NFTs can generate capital gains (short term or long term rates below).
• Minting NFTs for your business can be treated as ordinary income (ask us for help with this).
• Generally, you can deduct expenses only if it’s part of your business.
• Once you sell or exchange an NFT, this is a new taxable event.
• Royalties you earn from an NFT is taxed as income.

I invested in NFTs — taxes for these investments work much the same way as crypto trading. NFTs can be considered “collectibles” for taxes, especially for artwork. Collectibles are subject to capital gains, just like other cryptocurrencies. When you buy an NFT with Ethereum (or sell the item), what you owe will be reported based on if you made a profit and how long you held the NFT (short term or long term). You can claim losses, too.

Short Term and Long Term Capital Gains

Find your tax rates for 2021 and 2022.

How long you hold crypto before a sale or transaction plays a part in what you report.

In a simple trade example where you made money — you buy $500 of Bitcoin, and then sell it for $1,000. You will have a capital gain of $500. This is calculated as: sale price ($1,000) minus the cost basis ($500) = +$500 profit.

Similarly, in a trade you lost money — you buy $500 of Bitcoin, and then sell it for $400. You will have capital loss. This is calculated as: sale price ($400) minus the cost basis ($500) = -$100 loss.

Important note: you can adjust your cost basis (what you paid) by subtracting any fees or commissions paid to complete the transaction. Since what qualifies for this varies (adjusted cost basis and adjusted sale amount), it’s important to get the most up-to-date guidance before making your calculations.

Keep in mind: your losses can reduce the gains for tax purposes. Individual filers can deduct up to $3K of losses from taxable income if losses exceed gains.

The Difference Between Short and Long Term

Generally, you can follow these guidelines:

The tax rates for long-term and short-term are different. Your overall taxable income can vary these rates, too.

Here are the relevant tax forms:

• Form 8949 — capital gains and losses.
• Form 1040 — Schedule D.

Side note: non-business related NFT trades can also be reported on Schedule D. Code “C” in column F can designate an NFT sale as a “collectible”. We recommend working with a tax professional, please contact us.

Short-Term Tax Rates

Calculate your short-term capital gains or ordinary income earned through crypto trades bought and sold in less than a year.

Long-Term Tax Rates

Calculate your long-term capital gains for crypto held for more than one year.

Crypto Income and Other Events

Did you receive cryptocurrency as payment for work? Does your business accept Bitcoin as payment? Receiving income this way, instead of U.S. dollars, should be reported.

Likewise, mining coins or receiving tokens as a reward are included as income. The market value of that crypto at the time you receive it, will contribute to your gross income calculation.

“A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” -Source: Internal Revenue Service

If you mine cryptocurrency — miners receive cryptocurrency as a “reward”. If you earn cryptocurrency this way, it is taxable income and could be reported on a Form 1099-NEC. It should be priced at the “fair market value” on the day you received the reward. This income must be reported even if you do not receive a form 1099.

If you receive cryptocurrency as payment for goods or services — businesses that accept Bitcoin and cryptocurrency should consider those the payments as taxable income, just like cash or credit card. When reporting for taxes, the dollar value is the “fair market value” of the cryptocurrency on the day and time you received it.

If you participate in a fork or airdrop — when a crypto project sends out free tokens as an airdrop, the new coins count as a taxable event, and taxes should be factored in on these new coins. A hard fork (change in the blockchain’s protocol) doesn’t always mean new crypto is issued. If you do receive an airdrop with new virtual currency following a hard fork, this will be considered ordinary income for tax purposes. If you do not, the fork is not a taxable event for you.

If you stake cryptocurrencies — “staking” earns rewards, similar to earning interest. This money paid to you is taxable income, valued at the fair market value at the time you earn it.

If you give to charity — you can donate cryptocurrency to qualified charities, and, depending on how you itemize, get a tax deduction. Deduct the fair market value of your cryptocurrency at the time of the donation. When done correctly, you do not have to pay capital gains taxes on donations. Giving crypto to charity is considered non-cash charitable contributions. It is recommended you obtain documentation from the charity, especially for gifts over $250 in value.

If you lost crypto or it was stolen — in most cases, you cannot deduct these as losses. The two categories that the IRS recognizes for losses of capital assets include theft and casualty losses. Technically, both can apply in certain instances. For example, theft can apply if your wallet is hacked, or even if your exchange is hacked. Casualty loss could possibly apply when crypto is sent to the wrong wallet or similar “sudden” loss events (please note: there are other factors that would come in to play for these situations). Either way, you cannot deduct these kinds of losses due to new tax laws effecting tax years 2018 to 2025.

If you make a tax-free crypto transaction — transactions in a Traditional IRA (tax-deferred) or a Roth IRA (tax-free), can avoid taxation. You may also avoid taxes by holding your crypto long-term (more than 12 months) and selling it under certain filing and income scenarios. Your taxable income must be less than or equal to $40,400 (single filer), or less than or equal to $80,800 (married filing jointly). As you can see on the long-term capital gains table above, these conditions put you at 0% long-term capital gains tax.

Keeping Records and Planning for the Future

IRS guidance outlines that you should keep records, like date, time and value. If you receive Form 1099-B, that will help you with your records, and any activity on those forms should be included in your return. Looking ahead, you will see more 1099-B forms from crypto exchanges in tax year 2023, based on newly established laws in the U.S. (the American Infrastructure Bill of 2021).

It’s prudent to follow all tax regulations and report appropriate crypto activities on your tax return. While crypto has “anonymous” and decentralized qualities, the IRS has some methods of tracking, including blockchain analytics tools. Exchanges and brokerages may report transactions with Form 1099-B and/or provide information directly to federal agencies, following various laws and regulations. Mining may produce the issuance of form 1099-MISC or 1099-NEC, which reports the ordinary income you earned.

Coinbase shared millions of customer transactions to the IRS after a 2016 summons. They send out 1099-MISC for rewards, and transaction detail if you exceed the $600 minimum. In 2023, all exchanges will be required to send 1099-B forms with all transaction activity. Regardless of the forms you receive, even if documented in a 1099, you must still report taxable activity.

Keep in mind: whenever you receive a form 1099, they are also issued to the IRS.

You should consider planning in advance with one of our CPAs for:

• Large portion of your portfolio is in crypto.
• Staking or mining business.
• DeFi transactions.

Important Notes

This information is provided for educational purposes only. Please keep in mind that your taxes are unique and your personal scenario must be considered individually. Depending on your transactions, reporting your crypto may be more complicated than the guide presented here. Our aim is to get you familiar with the tax rules involved and prepare you for what to expect. We work directly with all of our clients to work out your individual tax scenarios. Questions? Call us!

The post Cryptocurrency Taxes and Reporting appeared first on Financial 1 Tax.

One of our main goals as holistic financial professionals is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component to help our clients benefit from potential tax reduction strategies.

2021 has been an unusual year and there is still major legislation being discussed that could have an effect on your taxes. It is the first year of a new administration, so investors should consider taking into consideration the impact of possible future tax strategies. This report includes information on possible tax law changes and some notable changes proposed in the Build Back Better Act that you should be aware of. The main focus of this report is on what individual taxpayers can do to potentially save money on their 2021 taxes.

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. The Tax Cuts and Jobs Act included many provisions for individuals that took effect in 2018 but are currently set to expire after 2025. One big uncertainty for all taxpayers is what will happen to the tax code after 2025.

As financial professionals, we try to be proactive when it makes sense. The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

Income Tax Rates for 2021

For 2021 there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Under current law this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2021

One of our primary goals is to help our clients try to optimize their tax situations. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Everyone’s situation is unique but it is wise for every taxpayer to begin their final year-end planning now! Choosing the appropriate tactics will depend on your income as well as a number of other personal circumstances. As you read through this report it could be helpful to note those strategies that you feel may apply to your situation so you can discuss them with your tax preparer.

Some items to consider include:

Evaluate the use of itemized deductions versus the standard deduction.

For 2021 tax returns, the standard deduction amounts will increase to $12,550 for individuals and married couples filing separately, $18,800 for heads of household, and $25,100 for married couples filing jointly and surviving spouses.

As a reminder, the Tax Cuts and Jobs Act roughly doubled the standard deduction. Its goal was to decrease tax payments for many of those who typically claim this standard deduction. Although personal exemption deductions are no longer available, the larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take itemized deductions.

The TCJA still eliminates or limits many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is still currently capped at $10,000 per year, or $5,000 for a married taxpayer filing separately.

Consider bunching charitable contributions or using a donor-advised fund.

For those taxpayers who are charitably inclined it makes sense to think about a plan. One way to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount.

Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It can be a win-win situation. ​If you are charitably inclined and need some guidance, please call us and we can assist you.

Review your home equity debt interest.

For mortgages taken out after October 13, 1987, and before December 16, 2017 (i.e. enters into a binding contract by that date), mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt. The threshold has been lowered to the first $750,000 or $375,000 (married filing separately) on homes purchased after December 15, 2017. All interest paid on any mortgage taken out before October 13, 1987 is fully deductible regardless of your mortgage amount (called “grandfathered debt”). This change under the TCJA law applies to all tax years between 2018 and 2025. Many mortgage holders refinanced for lower rates in the last few years so remember for larger mortgages, that could change your situation.

Home equity lines of credit (HELOCs) are deductible as well, but only if the funds were used to buy or substantially improve the home that secures the loan. Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible.

Revisit the use of qualified tuition plans.

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount.

Contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2021 up to $15,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above $15,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($11.7 million in 2021).

There is also an option to make a larger tax-free 529 plan contribution, if the contribution is treated as if it were spread evenly over a 5-year period. For example, a $75,000 lump sum contribution to a 529 plan can be applied as though it were $15,000 per year, as long as no other gifts are made to the same beneficiary over the next 5 years. Grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy. ​If you want to explore setting up a 529 plan, call us and we would be happy to assist you.

Maximize your qualified business income deduction (if applicable).

One of the most talked about changes from the Tax Cuts and Jobs Act enacted in 2017 is the qualified business income deduction under Section 199A. Current proposals want to change this deduction, but for 2021, taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. Please be careful because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. ​This piece of tax legislation is complicated and would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2021

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2021 and start thinking about your strategy for 2022. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits unchanged. ​The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,500. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases also to an additional $6,500 ($26,000 total). As a reminder, these contributions must be made in 2021.

IRA contribution limits unchanged.​ ​The limit on annual contributions to an Individual Retirement Account (IRA) which was increased in 2019, remains at $6,000 for 2021. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2021 can be made all the way up to the April 15, 2022, filing deadline.

Higher IRA income limits. ​The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $66,000 and $76,000 for 2021. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $105,000 to $125,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2021 as the couple’s income reaches $198,000 and completely at $208,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains at $0 to $10,000 for 2021. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs.​ The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $198,000 – $208,000 for married couples filing jointly in 2021. For singles and heads of household, the income phase-out range is $125,000 – $140,000. For a married individual filing a separate return, the phase-out range remains at $0 to $10,000. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. ​The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $66,000 for married couples filing jointly in 2021, $49,500 for heads of household and $33,000 for all other filers.

Be careful of the IRA one rollover rule. ​Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any 1-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on IRAs, please call us.

Roth IRA Conversions

There are some rule change proposals that are discussed later in this report for Roth IRA conversions, but in 2021, some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the current laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. ​Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Looking at your investment portfolio can reveal a number of different tax saving opportunities. Start by reviewing the various sales you have realized so far this year on stocks, bonds and other investments. Then review what’s left and determine whether these investments have an unrealized gain or loss. (Unrealized means you still own the investment, versus realized, which means you’ve actually sold the investment.)

Know your basis. ​In order to determine if you have unrealized gains or losses, you must know the tax basis of your investments, which is usually the cost of the investment when you bought it. However, it gets trickier with investments that allow you to reinvest your dividends and/or capital gain distributions. We will be glad to help you calculate your cost basis.

Consider loss harvesting. ​If your capital gains are larger than your losses, you might want to do some “loss harvesting.” This means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 ($1,500 if married filing separately) of net capital losses that can offset other income, such as wages, interest and dividends. Any remaining unused capital losses can be carried forward into future years indefinitely.

Be aware of the “wash sale” rule. ​If you sell an investment at a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. The deduction is also disallowed if you bought the same security within 30 days before the sale. However, while you cannot immediately buy a substantially identical security to replace the one you sold, you can buy a similar security, perhaps a different stock, in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.

Always double-check brokerage firm reports. ​If you sold a security in 2021, the brokerage firm reports the basis on an IRS Form 1099-B in early 2022. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Long-term Capital Gains Tax Rates

Tax rates on long-term capital gains and qualified dividends did not change for 2021. You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2021. In 2021, the 0% rate applies for individual taxpayers with taxable income up to $40,400 on single returns, $54,100 for head-of-household filers and $80,800 for joint returns. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

The 3.8% surtax on net investment income stays the same for 2021. It starts for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

NOTE​: The 0%, 15% and 20% long-term capital gains tax rates only apply to “capital assets” (such as marketable securities) held longer than one year. Anything held one year or less is considered a “short-term capital gain” and those are taxed at ordinary income tax rates.

Some Notable and Continuing Tax Changes for 2021

Some previous itemized deductions are still affected in 2021 under the tax laws. They include:

The floor for deductible medical expenses is still at 7.5%. ​The 2021 threshold for deducting medical expenses on Schedule A is 7.5% of your 2021 adjusted gross income (AGI). The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

State and local income, sales, and real and personal property taxes (SALT)​ ​are still limited to $10,000.

The deduction for casualty and theft losses​ ​is currently allowed only for presidentially declared disaster areas.

Alimony deductions.​ ​For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse.

Education Planning

Education benefits.​ The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit are all still available in 2021. 529 plan funds can be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, up to $10,000 in total (not annually) can now be withdrawn from 529 plans to pay off student loans.

The 2020 lifetime learning credit, which allows you to claim 20% of your out-of-pocket costs for tuition, fees and books, for a total of $2,500, phases out for couples at $160,001 and $180,000. The AGI range for singles is $80,001 and $90,000.

Charitable Giving

This is a great time of year to clean your garage or house and give your items to charity. Please remember that you can only write off donations to a charitable organization if you itemize your deductions. Sometimes your donations can be difficult to value. You can find estimated values for your donated items through a value guide offered by Goodwill.

Send cash donations to your favorite charity by December 31, 2021 and be sure to hold on to your canceled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

Do not donate investments that have lost value. It is best to sell the asset with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss. Also remember, if you give appreciated property to charity, the unrealized gain must be long-term capital gains in order for the entire fair market value to be deductible. (The amount of the charitable deduction must be reduced by any unrealized ordinary income, depreciation recapture and/or short-term gain.)

The law allowing taxpayers age 70½ and older to make a Qualified Charitable Distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, including all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by December 31, 2021. Please call us if this is a strategy you are interested in considering.

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. ​You may gift up to $15,000 tax-free to each donee in 2021. These “annual exclusion gifts” do not reduce your $11,700,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Help someone with medical or education expenses. ​There are opportunities to give unlimited tax-free gifts when you pay the provider of the services directly. The medical expenses must meet the definition of deductible medical expenses. Qualified education expenses are tuition, books, fees, and related expenses, but not room and board. You can find the detailed qualifications in IRS Publications 950 and the instructions for IRS Form 709 on the IRS website​.

Make gifts to trusts. ​These gifts often qualify as annual exclusion gifts ($15,000 in 2021) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes are another issue that proposals are trying to change. For 2021 the limits are at $11.7 million ($23.4 million for married couples), up from $11.58 million in 2020 and the income tax basis step up/down to fair market value at death is in place. Any amount over that is subject to 40% Federal taxes. This high amount provides high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, in 2026, the estate tax exclusion is due to revert to pre- 2018 levels of $5 million (adjusted for inflation).

On November 26, 2019, the Treasury Department and the Internal Revenue Service issued final regulations under IR-2019-189 confirming that individuals who take advantage of the increased gift tax exclusion or portability amounts in effect from 2018 to 2025 will not be adversely impacted when TCJA sunsets on January 1, 2026. Claiming the portable exemption will remain an important discussion topic for descendants with large estates. For those who have large estates, please call us to discuss your situation.

Tax Law Proposals

As of the early November writing of this report, tax law changes were still not finalized. Some of the noteworthy proposals as they were proposed by either President Biden or the House Ways and Means Committee in September are currently no longer being discussed. These include the restoration of the 39.6% top tax bracket and a retroactive increase of the 20% capital gains rate to 25% for individuals earning over $400,000 and married filing jointly taxpayers earning more than $450,000.

Other proposals that are currently not being pursued include changes to RothIRA conversion rules and the termination of the temporary increase in the Unified Credit (replacing the current $11.7 million estate and gift tax exemption with an exemption of approximately $6 million per person starting in 2022).

As of November 3, several proposals were still being considered starting in 2022. They include:

• Expansion of 3.8% Net Investment Income Tax (NIIT): The proposal calls for the expansion of the 3.8% tax to apply to net income derived in the ordinary course of trade or business for taxpayers with a taxable income of more than $500,000 for joint filers and $400,000 for single filers.
• A new surtax on high income earners: The current proposal calls for a new additional tax on individuals with a modified adjusted gross income of over $10,000,000 that increases for those with AGI’s over $25,000,000. Please note this does not include state taxes.

Another noteworthy item being discussed is the possible changing of the SALT tax limitations starting as early as 2021. Please remember it is uncertain as of early November writing of which tax changes, if any, will be passed into law. We only include this section in an attempt to make clients aware of any potential key proposals for tax planning purposes.

Our goal is to keep clients updated when tax laws change so that they can proactively plan. If you would like to discuss any of these potential tax law changes with us, please feel free to contact us and we’d be happy to assess your unique financial situation.

Conclusion

One of our primary goals is to keep clients aware of tax law changes and updates. This report is not a substitute for using a tax professional. Please note that many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

There are many other additional tax reduction strategies that will vary depending on your financial picture. We encourage you to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you. We will try to monitor impactful changes and as always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), registered investment advisor. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Sources: Forbes, Fortune, MarketWatch, Wall Street Journal, Oppenheimer Funds, Investopedia, Barron’s.

Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group, LLC (IFG) and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Tax laws and provisions may change at any time. Please consult a qualified tax professional to discuss tax matters. Source: irs.gov. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2021.

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