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Start Planning Now for Next Year’s Tax Return
This year’s tax deadline may have come and gone, but it’s never too early to start planning for next year. With that in mind, here are five things you can do now to make next April 15 easier for everyone.
1. Review your paycheck. Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions, and other items. These payroll adjustments can make a big difference to your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.
2. Adjust your withholding. Why wait another year for a big refund? Now is a good time to review your withholding and make adjustments for next year, especially if you’d prefer more money in each paycheck this year. If you owed money at tax time, perhaps you’d like next year’s tax payment to be smaller. Please call if you need assistance in adjusting your withholding.
3. Organize your recordkeeping. Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs, or charity receipts come tax time.
4. Store your 2020 tax return in a safe place. Put a copy of your 2020 tax return and supporting documents somewhere secure so you’ll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a guide for next year’s return. See the article, Keeping Good Tax Records is Essential, below.
5. Consult a tax professional early. Due to the ever-increasing complexity of tax laws, it pays to use a tax and accounting professional to help you strategize, plan and make financial decisions throughout the year. Doing so ensures that you will have more time when you’re not up against a deadline or anxious for your refund.
Each household’s financial circumstances are different, so it’s important to fully consider your specific situation and goals before making any major financial decisions. Don’t hesitate to contact the office at any time with questions or concerns. A competent tax professional knowledgeable about current tax law changes can help you throughout the year – not just at tax time.
A Tax Checklist for Newly Married Couples
Summer is wedding season – even during a pandemic – and newlyweds should understand how tying the knot can affect their tax situation. Marriage changes many things, and taxes is one of them. Here’s a tax checklist for newly married couples:
1. Name and address changes
- Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at the SSA. If it doesn’t, it could delay any tax refund. To update information, taxpayers should file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or at a local SSA office.
- Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, people should send the IRS Form 8822, Change of Address. Taxpayers should also notify the postal service to forward their mail by going online at USPS.com or their local post office.
- After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4, Employee’s Withholding Certificate, within ten days. If both spouses work, they may move into a higher tax bracket or be affected by the additional Medicare tax. They can use the Tax Withholding Estimator on IRS.gov to help complete a new Form W-4. Taxpayers should review Publication 505, Tax Withholding and Estimated Tax for more information.
3. Filing status
- After you say, “I do,” you’ll have two filing status options to choose from when filing your tax returns: married filing jointly or married filing separately.
- While married filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of December 31, the law says they’re married for the whole year for tax purposes.
For more information about how life changes, such as marriage, the birth of a child, or the death of a loved one, affect your tax situation, don’t hesitate to call the office.
Choosing a Payroll Services Provider
When choosing a payroll service provider to handle payroll and payroll tax, employers need to make sure they choose a trusted payroll service that can help them avoid missed deposits for employment taxes and other unpaid bills. Typically, these clients remain legally responsible for paying the taxes due, even if the employer sent funds to the payroll service provider for required deposits or payments.
Employers are encouraged to enroll in the Electronic Federal Tax Payment System (EFTPS) and make sure the payroll service provider uses EFTPS to make tax deposits. EFTPS is free and gives employers safe and easy online access to their payment history, provided they make deposits under their Employer Identification Number (EIN). Using the EFTPS enables them to monitor whether their payroll service provider meets its tax deposit responsibilities.
Employers have a couple of options when finding a trusted payroll service provider:
- A certified professional employer organization (CPEO). Typically, CPEOs are solely liable for paying the customer’s employment taxes, filing returns, and making deposits and payments for the taxes reported related to wages and other compensation. An employer enters into a service contract with a CPEO, and then Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement, is submitted to IRS. Employers can find a CPEO on the Public Listings page of IRS.gov.
- Reporting agent. A reporting agent is a payroll service provider that informs the IRS of its relationship with a client using Form 8655, Reporting Agent Authorization, that the client signs. Reporting agents must deposit a client’s taxes using the Electronic Federal Tax Payment System (EFTPS) and can exchange information with the IRS on behalf of a client in the case that issues arise. They are also required to provide clients a written statement reminding the employer that it, not the reporting agent, is ultimately responsible for the timely filing of returns and payment of taxes.
Employers should contact a tax professional about any bills or notices received, especially payments managed by a third party. They can also call the phone number on the bill, write to the IRS office that sent the bill, or contact the IRS business tax hotline at 800-829-4933.
Most payroll service providers provide quality service, but some don’t have their clients’ best interests in mind. Each year, a few payroll service providers don’t submit their client’s payroll taxes, close down abruptly, and leave employers on the hook.
Don’t get caught short. Choose a payroll service provider you can count on – and don’t hesitate to call the office with any questions about payroll and other business-related taxes.
Repaying Deferred Social Security Tax
The Coronavirus Aid, Relief, and Economic Security Act allowed self-employed individuals and household employers to defer the payment of certain Social Security taxes on their Form 1040 for tax year 2020 over the next two years. Half of the deferred Social Security tax is due by December 31, 2021, and the remainder is due by December 31, 2022.
How individuals can repay the deferred taxes
Individuals can pay the deferred tax amount any time on or before the due date. Here is how it works:
- Household employers and self-employed individuals should make payments through the Electronic Federal Tax Payment System or by credit or debit card, money order, or with a check. These payments should be separated from other tax payments to ensure they are applied to the deferred tax balance on the tax year 2020 Form 1040 since IRS systems won’t recognize the payment for deferred tax if it is with other tax payments or paid with the current Form 1040.
- Designate the payment as “deferred Social Security tax.”
- Select 1040 US Individual Income Tax Returns and deferred Social Security tax for payment type if using EFTPS. The payment must be applied to the 2020 tax year, where they deferred the payment.
What to do if you are unable to pay in full by the installment due date
Individuals who cannot pay the full deferred tax amount should pay whatever they can pay by the installment due dates to limit penalty and interest charges.
If the installment amount is not paid in full, IRS will send the taxpayer a balance due notice. Taxpayers should follow instructions on the notice to make a payment or apply for a payment plan. They can also visit the Paying Your Taxes page on IRS.gov for additional information about the various options of how they can pay, what to do when they can’t pay, and viewing their tax account.
Please call if you need assistance making deferred tax payments or have any questions about using the EFTPS.
Keeping Good Tax Records Is Essential
An important part of tax planning is keeping good records. Having an organized recordkeeping system makes it easier to file a tax return or understand a letter from the IRS. Here are some tips:
Good Recordkeeping Helps Taxpayers:
- Identify sources of income. Taxpayers may receive money or property from a variety of sources. The records can identify the sources of income and help separate business from nonbusiness income and taxable from nontaxable income.
- Keep track of expenses. Taxpayers can use records to identify expenses for which they can claim a deduction. Tax records help determine whether to itemize deductions at filing. It may also help them discover potentially overlooked deductions or credits.
- Prepare tax returns. Good records help taxpayers file their tax returns quickly and accurately. They should add tax records to their files throughout the year as they receive them to make preparing a tax return easier.
- Support information reported on tax returns. If the IRS selects the return for examination or if the taxpayer receives an IRS notice, well-organized records make it easier to provide answers.
Generally, taxpayers should keep records for three years from the date they filed the tax return. It is important to develop a system that keeps all their important information together – whether it is a software program for electronic recordkeeping or labeled folders to store paper documents.
Important Records to Keep:
Tax-related records. This includes wage and earning statements from all employers or payers, interest and dividend statements from banks, certain government payments like unemployment compensation, other income documents, and records of virtual currency transactions. Taxpayers should also keep receipts, canceled checks, and other documents – electronic or paper – that support income, a deduction, or a credit reported on their tax return.
IRS letters, notices, and prior-year tax returns. Taxpayers should keep copies of prior year tax returns and notices or letters they receive from the IRS. These include adjustment notices (where an action is taken on the taxpayer’s account), Economic Impact Payment notices, and letters about advance payments of the 2021 child tax credit. Taxpayers who receive 2021 advance child tax credit payments will receive a letter early next year that provides any payments they received in 2021. Taxpayers should refer to this letter when filing their 2021 tax returns in 2022.
Property records. Taxpayers should also keep records relating to property they dispose of or sell. They must keep these records to figure their basis for computing gain or loss.
Business income and expenses. For business taxpayers, there’s no particular method of bookkeeping they must use. However, taxpayers should find a method that clearly and accurately reflects their gross income and expenses. Taxpayers who have employees must keep all employment tax records for at least four years after the tax is due or paid, whichever is later.
Health insurance. Taxpayers should keep records of their own and their family members’ health care insurance coverage. If they’re claiming the premium tax credit, they’ll need information about any advance credit payments received through the Health Insurance Marketplace and the premiums they paid.
Need help setting up a recordkeeping system that works for you? Don’t hesitate to call.