Wednesday, June 30, 2021

Advanced Child Tax Credit Update Post

This is the post that I will use to provide details on changes to the Advanced Child Tax Credit and the IRS Update Portal (CTCUP).

The original post, with all the details of the law is HERE.

I will update this post as necessary and will let Facebook followers of my Everyday Taxes page know when I make changes. Please follow this blog to see my other posts.

8/22/2021 Update: You can now update your mailing address for checks on the Update Portal (link at bottom of this post)

7/18/2021 Update: I'm adding this because it can get confusing between the expanded Child Tax Credit where you get and EXTRA $1000 or $1600 for each child depending on their age as long as you make less than the $150,000/$112,500/$72,000 MFJ/HH/Single income limits, and the NORMAL $2000 that you get based on the old rules. The total for people making below the limits is $3000 or $3600, but $2000 of that is EXACTLY the same rules as 2020. Here's the thing: Even if you don't qualify for the extra money, you still get an advance of half of the amount you qualified for based on your 2020 (or 2019) tax return. So if you got Child Tax Credit in 2020, you WILL get six advance payments in July through December. These payments will be reconciled on your 2021 tax return, so if you didn't qualify for the extra money, and everything is the same in 2021 as in 2020, your refund will be lower by HALF of the Child Tax Credit you got (or exactly the amount of your advance payments - which is easier to figure).

7/17/21 Update: First column is month, second column is the last date to unenroll for the payment date in the 3rd column.

July6/28/20217/15/2021
August8/2/20218/13/2021
September8/30/20219/15/2021
October10/4/202110/15/2021
November11/1/202111/15/2021
December11/29/202112/15/2021

Both spouses on a joint return must unenroll or you will still get half the payment.

7/15/21 Update:

First batch of Advance payments sent to around 35 million taxpayers. 86% by direct deposit posted on 7/15. Mailed checks will be there shortly. Payments were made to those filing a 2019 or 2020 tax return, or who used the non-filer tool before 6/28. Filings after 6/28 will be reflected on the August payment. Here is the IRS news release: https://www.irs.gov/newsroom/irs-monthly-child-tax-credit-payments-begin

7/5/21 Update:

The IRS CTCUP will now allow you to update your bank account information if it has changed. It is too late to make changes to the July payment, but you can make changes for the August and later payments.

6/30/21 Update:

The IRS Child Tax Credit Update Portal is now live and has options to opt out of the advanced payments, and to see the status of any payments made. It will also tell you if you are eligible to receive advance payments. Since no payments have actually been sent, the payment status provides no results right now. The opt out function does work, though we won't know for sure until the first payment isn't made. It appears that you might need to opt out at least two weeks in advance of a payment to ensure it is stopped.

The option to update bank information will not be live until August and options for changing children and income will come later.

If you don't already have an IRS account, you will need to get one by verifying your identity using id.me. It gives you options if you can't use id.me, but they appear to be difficult and clunky. The id.me process is somewhat complicated, but doable. When I attempted to do it with my phone right after it became available, it wouldn't accept my ID information - though I was at a remote location with spotty connectivity. On 6/29 I walked a client through the process using a laptop and phone live and they were able to access it, though it took two tries to get it to accept the ID picture. 

The easiest way to go through the id.me process is using a cell phone with access to your email and texts. We used a picture of the driver's license that was taken, cropped and saved prior to using the process, but you can do it along the way. The process involves verifying your email, clicking text links to upload photos, and using video chat to scan your actual face. You end up clicking email or text links to new windows and then going back to previous windows. Since the process can vary a bit, I'm not going to go in to the step by step, but I can say that a GOOD ID picture is critical, and I suspect changes to facial hair from the picture might be problematic.

I am going to pass on information I receive from clients based on their experiences to provide best practices.

Here is a link to the IRS entry page for the update portal: IRS CTCUP

Tuesday, June 22, 2021

Master Index of Posts


I've compiled a Master List of my posts for easy reference. Not every post is included, and I have changed the order to put the most important or timely ones on top, and to group some based on categories (Military, Obamacare, Tax Software). I will try to keep this updated and just below the latest post. Please let me know in the comments if I screw up a link :) Some of the posts are OLD so be careful assuming the information is current.

If you have a Kindle, you can get a copy of my entertaining and useful book, The Short, Cheap Tax Book for Everyone for only 99 cents!

For the new tax law, there's the Coronavirus book - the one on the right side of this page.

If you like the blog, buy my other books: Kirk Taylor, EA Author Page

COVID-19 Pandemic Posts:

2021 Child Tax Credit and Advance Payments
2021 Child Tax Credits Update Post
2021 Daycare Credit Changes
Tax Changes in the $600 Stimulus COVID Relief Bill
Another Round of Stimulus Checks (Late 2020)
If You are Self Employed and Could Not Work
Updating Direct Deposit Information for Your Stimulus Check
BIG Coronavirus Post
Getting a Stimulus Check When Not Required to File
Remote Tax preparation in the Age of Coronavirus
Lots of Links!
Coronavirus Stimulus Checks Details
TWENTY Weeks for Mailed Stimulus Checks
Coronavirus COVID-19 and Getting Your Taxes Done

Important or Time Sensitive Posts

Did You Pay an Obamacare Penalty in th Past? There's Hope
Single and 0 No Longer Exist - The New W-4
Late 2019 Changes affecting 2018 Returns
Late 2019 Changes affecting Disaster Areas
The Rest of the Late 2019 Tax Changes (some big ones here)
October Tax Checkup
The $10,000 Question for Students and Parents
My Advice on IRA's
2018 Social Security Warning!
Wants and Needs and Kids
Emergency Fund Advice
Solar Credits and Solar Sales
The Dreaded CP2000 Letter from the IRS
The IRS did NOT Call You!
I Got an E-mail from the IRS!
I Want to Lower my Taxes!
10 Simple Pieces of Tax Advice
10 Things Everybody Should Do
Check Your Withholding

Trump/GOP Tax Law

Post 2018 Tax Season Thoughts on the New Law
Quick Thoughts on the New Tax Law (Post 2017 Tax Season Edition)
2018 Tax Bill Changes
What the New Tax Law Didn't Change (2018)

South Carolina

SC Gas Tax Credit Advice
SC Military Retirement Change (2016)
Obamacare in SC - Something's Fishy

Military

Military Spouses Residency Relief Act 2018 Change
Military Spouses Residency Relief Act Details and Matrix
Retiring from the Military? Tax Warnings!
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes 
2020 Military State by State Tax Guide
2019 Military State by State Tax Guide
2018 Military State Tax Guide
2017 Military State Tax Guide
2016 Military State Tax Guide
2017 Boomer Deduction Worksheet
2016 Boomer Deduction Worksheet
2015 Military State Tax Guide
2015 Boomer Deduction Worksheet

Tax Software

TurboTax Admits That Easy Is Better Than Accurate
Tax Preparation Software Sucks - An Open Letter to H&R Block

Business Guides

Sole Proprietorships are Bad
Avon, Pampered Chef, Party Lites, Amway, etc. MLM Tax Guide
UBER Driver Tax Guide
Tax Guide for Contractors - or - 1099MISC WTF?
Real Estate Agent Tax Guide
Rental Property Guide for Homeowners
Rental Property Sale Worksheet

General Posts

Getting Married? One Piece of Important Tax Advice.
The Dreaded CP2000 Letter from the IRS
Investing and Taxes - A Primer
How Much does it Cost to File Taxes?
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
Open a Roth IRA Today! And Not For the Reason You Think
Foreign Earned Income Exclusion Warnings - Update
Charity Made Simple
How Fast Can I Get my Refund?
Make Estimated Tax Payments the Easy Way
Depreciation Recapture - an inaccurate description
Don't Touch that 401K or IRA!!
What do you do with that Big Tax Refund?
It's Okay to Get a Big Refund - Really...
Common Tax Return Errors - Updated
Common Tax Return Errors
Mortgage Tax Credit Information
Lesson from the Government Shutdown - Emergency Fund
Don't Pay Capital Gains Taxes if You Don't Have To!
I got a 1099C - Now What?
Cancelled Debt and Insolvency
The IRS, email and privacy...
IRS Checking Facebook?
>$250 Donation Acknowledgement
Drop Box Donations - US Marines
Tax Scams
Taxes and Divorce
Random Thought about Books
Taking Care of the Client
Warning - Tax Resolution Scams
Foreign Earned Income Exclusion - WARNINGS!
IRS.GOV Website Update

Affordable Care Act (Obamacare) Posts

The Affordable Care Act (Obamacare) and People with Health Insurance
Affordable Care Act (Obamacare) for the 2014 Tax Filing Season
Obamacare, Affordable Care Act and Married Filing Separately - Warning
Affordable Care Act, Obamacare update and advice
Healthcare Law, Obamacare, Affordable Care Act Info
Weird Obamacare Strategies and Incentives - 1
Weird Obamacare Incentives and Strategies - 2
Weird Obamacare Incentives and Strategies - 3
Weird Obamacare Incentives and Strategies - 4
Weird Obamacare Strategies and Incentives - 5
Weird Obamacare Strategies and Incentives - 6

Saturday, June 19, 2021

The 2021 Child Tax Credit and Advance Child Tax Credit

Photo by Blogging Guide on Unsplash
If you have children who are 17 or younger you may soon receive Letter 6417 from the IRS detailing how much they are planning to send you in Advance of your 2021 Child Tax Credit. These payments will start arriving in July, and understanding how they are determined, and how they affect your 2021 taxes is vitally important. In the best case, you get some nice payments up front, with a potentially small impact on your 2021 refund. In the worst case, your income or child situation changes to the point where they advance you a bunch of money that you have to pay back out of your refund, or even creating a balance due. This LONG post is all about avoiding that.

First, lets cover the normal Child Tax Credit, but simplified, meaning it covers normal parent child relations and family situations. Seek help if you claim unusual children, though, if they qualified in 2020, they almost certainly qualify in 2021, even if they normally would be too old. So, if you got $2000 for a child in 2020, and nothing much has changed, they likely qualify for 2021.

Anyway, for children under the age of 17 at the beginning of the tax year, who you claim as a dependent, you got $2000 in Child Tax Credit in 2020. This amount was reduced by $50 for every $1000 you made above $400,000 (technically Adjusted Gross Income - but this is basically the total taxable amounts of income from your W-2's, businesses, and investments). If you weren't filing Married Filing Jointly, the threshold was $200,000 vice $400,000. Keep in mind the TOTAL Child Tax Credit is reduced by the $50, not $50 for each child - so more kids means your numbers drop slower and at effectively higher incomes. You could get up to $1400 of this amount even if your taxes were reduced to zero - meaning the $1400 was refundable, but you had to have earned income to get it, so parents with no income got nothing, even if the kids qualified.

Major changes to this for 2021 (and 2021 ONLY - it all goes back to normal in 2022) are that they raised the age by 1 year - to anyone under age 18. This is why kids who qualified in 2020 still qualify even if they normally would "age out". They also made the entire amount "refundable" regardless of income, so you can get the full amount even if you have no income, or your taxes reach zero. These changes apply regardless of income, so you get your $2000 as long as you meet the original income limits. Advance payments discussed below are also paid regardless of the lower income limits, but I'm waiting to talk about advance payments until the end.

The one big change that everyone will love - MORE MONEY has new income limits, but, again, even if you don't meet these lower numbers, you still get the original $2000 amount, but, if you meet the lower numbers, you get more money. The income limits are $150,000 if you are Married Filing Jointly, $112,500 if you file Head of Household and $75,000 if you file Single or Married Filing Separately. If you make above these amounts, your TOTAL Child Tax Credit (not per child) is reduced by $50 for every $1000 (or portion of $1000) you make above the limit, but not below the original $2000. The new, larger Child Tax Credit is $3600 for children 5 and under and $3000 for children 6 and older.

Photo by Jp Valery on Unsplash
Everything up to this point was simple, easy, and would make everyone happy when they filed their 2021 taxes and got unexpected money. So Congress had to go and mess it all up by trying to make you happier, sooner. For most people, this will be fine. You get some money up front, with a minimal impact on your 2021 refund. If the number of kids you claim is stable or increasing, and your income is steady, life should be pretty good. If you swap kids with an ex, make a lot more money in 2021, or have other weird situations, things can get dicey.

Basically, they are going to send you HALF of your expected Child Tax Credit in advance, spread over the last 6 months of 2021. They will base this on your 2020 tax return (or 2019 if 2020 not filed - updating once they process your 2020) and possibly other sources of data that aren't specified. They will send it where they sent your 2020 (or 2019) refund - so don't throw out the card you got from H&R Block or other tax company for your refund to be put on! So, if you have a kid under 6, and your income is below the above limits, they will send you $300 a month, starting on July 15 and ending on December 15th. If they are 6 or older, it will be $250. If you are above the income limits, it "should" be $166 per month - though I'm not positive on this. Those numbers are PER CHILD.

Now here is some weird math. Even if you are the perfect candidate, within the income limits and stable kid numbers, your refund is going to go down even if your 2021 return is identical to your 2020 return. Because half the new credit is more than your old credit would be. For every kid under 6, your refund (on the exact same numbers on your 2021 return as 2020 - changes will muck this up) will go down $200. For every kid 6 or over, it will go down $500. You will still have more money than 2020, you just get some in advance! Even weirder, if you only qualify for the old credit because you make too much money, your refund goes down by $1000 - because they sent you that amount in advance.

This sounds bad, but most people still win! People under the income limit get an extra $1000 or $1600 per kid. People with 16 year olds in 2020 don't lose $1500 because their kid turned 17. People who don't make a lot of money, who ordinarily only get $1400 of Child Tax Credit because they run out of taxes to offset, get the full amount. Even better, people with kids but no "earned" income, can get Child Tax Credit for the first time! If you are one of the people with kids and no earned income - you live on social security or disability for example, you might need to take action to get your credit - either file a 2020 tax return, or use the non-filer tool at irs.gov: https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool 

The IRS is going to send Letter 6417 to everyone eligible for an advance VERY SOON. This will detail how much they plan to send, and what you can do if things have changed.

EVERYONE UPDATE YOUR ADDRESS WITH THE IRS!!!! Use this form: https://www.irs.gov/pub/irs-pdf/f8822.pdf

I cannot overemphasize the importance of updating your address, even when weird crap like this isn't going on. You need to ensure the IRS can get a hold of you!

So is the payment taxable? No. Do you have to pay it back? Sort of.

If your situation changes between 2020 and 2021, such as your income goes up, your kid situation changes, or other weirdness happens, and the IRS sends you too much Child Tax Credit, it DOES come off your 2021 tax return - usually. Basically you report what they sent you in advance - keep track, or you'll have to wait for the IRS to send you Letter 6419 in January of 2022 to get the correct numbers. Then you calculate what you deserve, and you get the difference, or pay back the excess. There is a caveat based on income for people who claim fewer kids in 2021 than 2020, but it is quite complicated. You essentially get out of trouble if your income is below $60,000 filing joint, $50,000 Head of Household, and $40,000 Single or Separate. You can get some relief above those numbers, but it is very messy.

So what do you do if you expect your situation to change?

Income increasing above the thresholds: First, use traditional retirement accounts and Health Savings Account contributions to try to get below the limits. Second, use the IRS update tool (coming soon) to either opt-out of advance payments, or update your income. Even if you opt out, you will get the full amount you are entitled to on your 2021 tax return. Initially the tool will only allow you to opt out, but updating income, number of children, and marital status will come later.

Losing kids: If they die in 2021, they still count. If someone else is claiming them, use the forthcoming update tool to either opt out of advance payments, or update your children numbers.

Gaining kids or lower income: The IRS portal will allow you to update this information to increase the amount of advance payments. It's not up yet, so no link or details.

Divorced or divorcing: This is an opportunity to work with the other spouse to ensure the kids are on the return that generates the best results. Use Form 8332 to allow the non custodial parent to claim the child if their income qualifies them for more money - then split it! If you are actively divorcing, make sure what happens with advances is covered in your divorce decree by working with your lawyer AND tax professional. Stimulus payments were an unanticipated MESS for divorcing couples, so try to stay ahead of it for the Advance Child Tax Credit.

MORE ADVICE:

Watch out for SCAMS! If you filed a 2019 or 2020 tax return you shouldn't have to do anything to get your money and the only communication you should receive is Letter 6417 telling you what to expect and Letter 6419 telling you what you got. Chances are any emails, texts or phone calls are SCAMS!

When in doubt - opt out. If you aren't sure what your 2021 situation will end up being, use the soon to be published tool at irs.gov to opt out, and then get what you deserve when you file in 2021.

If you don't normally file a tax return, but have children under 18 living at home, seek advice on filing a 2020 tax return, or using the non-filer app.

Prepare for a lower refund, or, if you get a very small refund and have kids, you might owe. Either opt out, or save some money.

This is a GREAT year to pump up contributions to retirement accounts and Health Savings Accounts. This post is not the only thing affected by income. Daycare is a big deal in 2021 as well. Check it out HERE.

Report correct numbers on your 2021 tax return. The #1 cause for refund delays in 2020 was inaccurate reporting of stimulus payments.

Check out the IRS FAQ on the subject, and keep up to date on when the update portal comes available: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions

Most Important - Talk to your tax dude or dudette about YOUR situation, and discuss any changes, ESPECIALLY property or investment sales that might impact your income.

Buy my books! Everyday Taxes 2021/2022 will be out in July and is indispensable for every taxpayer!

This post is over-simplified, but should work for most people. I will learn more as the payments and letters go out. There are some esoteric rules that will cause a few people not to qualify, so don't assume anything until you have talked to a qualified professional. I answer questions at taxadvisor@email.com for free (I will ask for a donation of some sort but do not require it). I also prepare taxes 100% remotely via the same email address if you are interested.

Wednesday, April 7, 2021

The 2021 Daycare Credit (Child and Dependent Care Credit)

This change in the latest COVID stimulus bill has not gotten enough attention.

Here's a headline: A credit that was worth, at most, $1200 for most people is now worth up to $8000 for a heck of a lot more people.

Do I have your attention?

First, a bit about how the credit works:

For most people, you put your kid(s) in daycare so you (and your spouse) can go to work. You get a statement from the daycare and you put it on your tax return. With one kid, you get a credit for up to $3000 in expenses, with two or more kids, you get a credit on up to $6000 of expenses. A little understood fact is that if you have two or more qualifying kids, you get the $6000 limit even if it is all spent on one child. Remember a credit reduces taxes dollar for dollar, while a deduction reduces income. Credits are better.

Here are the details for the non-obvious cases:

1. People for whom expenses qualify are: children under the age of 13 (expenses apply right up to the day they turn 13), your spouse if he/she is unable to care for themselves, and anyone else who lives with you for more than half the year for whom you can claim as a dependent (unless the reason you can't is income over $4300, they file a joint return, or you could be claimed as a dependent) who cannot take care of themselves. 

2. Expenses have to be for you to work, look for work or go to school full-time. They have to be connected to these requirements by time (more on that later) but in reality, the main technique for determining this is to take your earned income (wages and net business income mostly), your spouses earned income, and the daycare expenses, then take the smaller of the three. In 90% of cases, this does the trick properly.

3. If you or your spouse are a full time student, for at least 5 months of the year, you can add $250 per month ($500 if you have two or more qualifying individuals) that you were a full time student, but this is where the timing thing comes in, if you have income during a month, you use the income, or the $250/$500 number, whichever is lower.

4. If you have earned income, but your spouse is disabled, you can use the $250/$500 discussed above for each month your spouse is disabled. You can't both use the disabled trick, one of you needs earned income.

5. Technically, if you and your spouse took a 3 month vacation and paid daycare so you could enjoy it, and then went back to work and had tons of earned income, only the daycare paid while you were working counts. Short, normal work breaks for vacation or illness are okay.

6. Day-camps count for the credit, but not overnight camps. Even day camps with specific activities like sports or music. School before kindergarten counts but no schooling once kindergarten starts counts, but afterschool care does. The school should separately state expenses for school/aftercare.

7. You can't get this credit if you file Married Filing Separately.

8. Only the custodial parent can get this credit. If the child doesn't live with you half the year, you get nothing.

9. There are a lot more rules about daycare centers, who you can pay, and more. Seek professional help if your situation is not obvious. This is a broad strokes overview!

Here is the 2020 calculation:

$3000 max in expenses for one child. $6000 for two children. Get a credit for 35% of expenses if income (technically AGI) is below $15,000, then it drops quickly by 1% every $2000 of income until it hits 20% of expenses, where it stays forever. You cannot use this credit once your taxes hit zero.

Here is the 2021 calculation:

$8000 in expenses for one child. $16000 for two children. Credit of 50% of expenses if income is below $125,000, then it drops to 20% as income goes up to $185,000, where it stays until income hits $400,000, where it quickly drops to zero as income gets to $440,000. Here is the BIG DEAL: You can get this credit even after your taxes hit zero.

Some additional thoughts:

1. A Daycare Flexible Spending Account looks like a bad deal this year, except that it reduces AGI for other calculations. In a year where keeping income below $75,000 Single, $112,500 Head of Household and $150,000 Married Joint is a big deal for children, reducing AGI might be nice.

2. If you are close to these income limits, hammer money into your 401k and HSA if possible to get below them.

3. Divorcing couples with kids in daycare need to have a frank talk about filing jointly rather than separately. Similarly, custodial and non-custodial parents should talk about maximizing this credit by controlling who pays what expenses.

4. If you are a stay at home parent thinking about going back to school, 2021 might be the year it makes sense.

Wednesday, January 20, 2021

Late IRS Start Date

 The IRS will not begin accepting tax returns until Feb 12th.

This does not mean you can't e-file, just that the 6 to 21 day refund clock won't start until 2/12 if you file early.

https://www.irs.gov/newsroom/2021-tax-filing-season-begins-feb-12-irs-outlines-steps-to-speed-refunds-during-pandemic

Thursday, December 31, 2020

2020 Military State Tax Guide

 State Guidelines for Military (2020 values)


I have a LOT more good information for you in The Short Cheap Tax Book for the Military.

The information here is subject to change as states update their information.  I will update at least weekly until mid January, so please check back just before you file.  The primary purpose of this is discussing the taxation of active duty pay, but I have mentioned retired pay for some states when I found the answer easily, but just because I don't mention pensions doesn't really tell you anything.

States with changes for 2020: NJ (sort of)

Military Spouses Residency Relief Act (MSRRA)
Most states have begun to treat this in a similar manner to each other. In general, the spouse of a service member has two choices for state of residency: the state they are stationed in, or the military member's state of residency. In order to claim the military members state, they must have established a domicile in that state at some time before moving to the current state. For those qualified to make the election to claim the military members state, it is important to weigh the benefits properly, for example, a spouse who works in SC married to a military resident of MI might assume that since MI does not tax the military member that they should choose this state. This would be wrong because MI will tax the non-military income of the spouse. SC is far more generous to the spouse of a service member stationed in SC. Expert assistance may be required making this determination. It can also be difficult to get the current state to stop withholding from the spouses wages. Each state Dept of Revenue has different procedures for handling this.

MAJOR UPDATE: Starting in 2018, spouses do NOT have to establish residency in order to claim the service member's state of residency!

An added twist to this is that some states, like Maine, New Jersey and New York, have a way for residents not living in the state to claim non-residency for tax purposes.  Our best minds conclude that this would allow a military spouse claiming one of these states as their state of residency could claim non-resident status and not have to pay taxes to the state.  This has not been fought or litigated to my knowledge, so it would be wise to be aware that some states might fight it.  My advice is always to go the aggressive route, but see what the difference is going the other way, and be prepared if the state fights this later.  I personally set aside the excess refund for three years, and then spend it :)

Residency
A military member normally retains residency in the state they resided in when they joined the military unless action is taken to change this. The W-2 can generally be relied upon as to the state of residence of the military member. The states in which a service member are stationed will not tax the members military income unless they are residents. They will tax any income earned from other employment or business activities conducted in the state by the member and their spouses (subject to the MSRRA discussed above.) The discussions below talk about the taxation of military income for residents of the respective state.

Filing Requirements:
Not having to file discussed below assumes there is no withholding from the given state. A member may file even if not required and should do so if they have withholding from the given state so they can get the money back. If a member would not be required to file except for the existence of withholding, they should adjust their state withholding through MyPay so no taxes are withheld from that state. They may also consider stopping withholding even if they are required to file, for states that do not tax their income (MI for example.) Many people do not file required tax returns when there is no refund or balance due. This could result in a letter from the state requesting a return but rarely any penalties – but there can be!

Death Benefits:
Many states exclude death benefits and military pay for service members killed in a combat zone or while on active duty. The specifics are not discussed here. Survivors of service members killed on active duty can obtain assistance for this from CACO personnel.

States with Blue names either require a tax return or other document to be filed by military residents, or a tax return should be prepared to determine if any refundable benefits are available from that state. 

Alabama:
Alabama treats military residents the same as all other residents.  Alabama does not tax military retirement.

Alaska:
Alaska does not have an income tax. Alaska Permanent Funds Dividends are taxable on the Federal Return.

Arizona:
Arizona does not tax active duty military pay, and does not require filing if the only AZ source income is active duty pay.

Arkansas:
Beginning in 2014, Arkansas no longer taxes active duty military pay.  A tax return is still required.

California:
California does not tax military pay of CA residents stationed outside of the state of CA. They do tax military income of their residents when stationed in CA. They also treat military spouses generously, similar to SC. Form 540NR is used to account for this. You write “MPA” to the left of column A for non-resident military income and enter the military income in column B but exclude it from column E. California has been sending letters to military members who meet the requirements for not having to file a tax return claiming they are required to file them. These letters are wrong and easy to respond to. CA should know they are wrong but I guess they are desperate for money. Don't fall for it. There is a place for military to respond on the back of the response form. RESPOND!

Colorado:
Beginning in 2016, CO will not tax active military income of military members with a home of record of Colorado IF AND ONLY IF, their home of record was Colorado when they joined, they changed to another state during service, and then changed back to CO.  Otherwise, Colorado taxes military residents the same as other residents unless the member was stationed outside the US for >305 days in the year. Colorado taxes military retirement the same as other retirement, with a partial exemption that starts at age 55 and gets slightly bigger at age 65.

Connecticut:
Connecticut allows resident military personnel stationed outside of CT to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in CT for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of CT for the entire year. 3) Spend no more than 30 days in CT for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other CT source income.
Starting in 2015, military pensions are not taxed by CT.

Delaware:
DE taxes military residents the same as all other residents. Delaware has a small military retirement pay exemption that gets bigger at age 65.

Washington DC:
DC taxes resident military personnel the same as all other residents.

Florida:
Florida does not have an income tax.

Georgia:
GA taxes military residents the same as all other residents however Reserves or National Guard called to active duty for more than 90 days may be able to take a credit against their individual income tax based on their income from the National Guard or Reserves.

Hawaii:
Hawaii taxes military residents the same as all other residents except that they do not tax the first $6076 of reserve pay or HI national guard pay. Military retirement pay is not taxed in HI.

Idaho:
ID residents stationed in ID pay taxes on all military income; however, if the member was on active duty >120 days and stationed outside of Idaho they can exclude any military income earned while stationed outside of ID. If they are stationed outside of Idaho the entire year they do not need to file an ID tax return, however Idaho has a Grocery Credit that a military member is eligible for that is refundable so it is possible to get a refund from Idaho even though their was no tax withheld.  This makes Idaho one of the States that a military member should file even when not required to. Retirement is tax free when over 65 (and possibly younger under certain conditions).

Illinois:
IL does not tax military pay; however, the member must file a tax return if they file a Federal return. Military members with children who get Federal Earned Income Credit may get up to 18% of the Federal amount even if they have no taxes due to IL (this number varies year to year). Illinois does not tax military retirement.

Indiana:
Indiana taxes military income but allows a deduction of the first $5,000 of military income for the taxpayer and/or the spouse ($10,000 for military couple.) If a military member changes state of residency to another state they must submit the DD Form 2058 with the tax return for the year they changed state of residency.  If you were active military and you and your spouse did not live in Indiana the entire year you do not owe county tax.  Use "00" as your county.  If your spouse remained in Indiana you BOTH owe county tax to the county he/she lives in.  Don't try to take the real estate tax deduction on property that's not in Indiana. Indiana has a small deduction for military retirement.

Iowa:
IA does not tax military income and military income is not used in determining filing requirements (if the only significant sources of income are military income, a tax return is not required.) Starting in 2014, Iowa no longer taxes military retirement.

Kansas:
Kansas taxes military income but allows a deduction for recruitment, sign-up and retention bonuses paid that are included in Federal taxable income (if the bonus was tax free to federal do not deduct it from KS. Kansas starts with Federal AGI so it is already excluded.)  The subtraction is made on Adjustments line A21. Kansas does not tax military retirement pay.

Kentucky:
KY does not tax military income and does not require a tax return if the only KY source income is military pay.

Louisiana:
Louisiana requires a tax return from military personnel the same as any other resident; however, LA gives an exclusion of up to $30000 of military pay if the person has been on active duty outside of Louisiana for at least 120 days during the tax year. The subtraction is taken as a Schedule E subtraction, Code 10E, by entering military pay up to $30000 on the schedule. Louisiana has a small retirement pay exclusion.

Maine:
Maine allows resident military personnel stationed outside of ME to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in ME for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of ME for the entire year. 3) Spend no more than 30 days in ME for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other ME source income. Maine calls this the General Safe Harbor Rule.  Maine no longer taxes military pensions as of 2016 but only that received by the service member. Ex-spouses receiving retirement pay based on the service member's time served must pay taxes on it.

Maryland:
Maryland taxes military residents just like other residents; however, they allow a subtraction for up to $15,000 of military pay earned outside of the U.S. (Military Overseas Income.) The deduction phases out dollar for dollar as ALL military income goes above $15,000 and there is no exclusion if the total military income exceeds $30,000. The subtraction is taken on Form 502SU and the Military Overseas Income Worksheet is used to calculate the deduction.  MD has county taxes you cannot avoid.  If you are stationed outside of MD and married to a non MD spouse, software makes it very difficult to allocate things properly.  You can exclude the non-MD income, but also need to pro-rate the deductions based on income - good luck with this - MD will catch you if you don't do it.

Massachusetts:
There are no special tax benefits for military, however, the Massachusetts Dept of Veterans Affairs will give a one time payment of $500 to any resident after they served at least 6 months active duty in the military. They also have a $1000 benefit for personnel who serve in Iraq or Afghanistan.
http://www.mass.gov/veterans/benefits-and-services/bonus/bonuses-only/
Massachusetts does not tax military retirement.

Michigan:
Michigan requires military members to file a tax return; however, they subtract active duty pay from income (Schedule 1, Line 11). Military members with children who receive Earned Income Credit on their Federal return may collect 6% of the federal amount, even if they pay no taxes to MI. (This was 20% for 2011 and prior years.)  Michigan does not tax military retirement.

Minnesota:
Minnesota subtracts Active Duty Military pay from income of MN residents. If Gross Income on Federal return other than military is less than $10,000, no MN return is required.
Minnesota pays $120 per month a military resident spends in a combat zone. This is paid separately from the tax return and is claimed on Minnesota form M99

Mississippi:
Mississippi taxes military residents the same as other residents except that they do not tax National Guard and Reserve pay up to $15000. Mississippi does not tax military retirement.

Missouri:
MO allows resident military personnel stationed outside of MO to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in MO for the entire year (a parent's house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of MO for the entire year. 3) Spend no more than 30 days in MO for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other MO source income. If your spouse works but claims MO as your state of residency through the MSRRA their income is taxable to MO and must file a tax return if they earn more than $1200. As of 2014, Missouri exempts 75% of military retirement income from tax and starting in 2016 all military retirement income will be tax exempt.  Starting in 2016, MO is allowing you to subtract your military pay, so you don't have to file as a non resident.

Montana
Montana requires military residents to file a tax return but exempts active military pay from taxation on Schedule 2, Line 8. Verification of active duty status must be attached to the return.  National Guard pay is tax exempt.

Nebraska:
Nebraska taxes military residents just like other residents. Nebraska has implemented an incredibly complicated option to exclude certain amounts of military retirement income for some years.  It's too stupid to attempt to explain, but if you are retiring or retired from the military in Nebraska you should read this immediately:
http://www.revenue.nebraska.gov/info/military_benefits.html 

Nevada:
Nevada does not have an income tax.

New Hampshire:
NH does not have an income tax but they do tax interest and dividends. Generally, these would need to exceed $2400 for an individual and $4800 for a couple.  New Hampshire has a $100 bonus for military members who get the Global War on Terrorism Medal. Not sure about expiration, but details are at: https://www.nh.gov/nhveterans/benefits/bonuses.htm

New Jersey:
2020 UPDATE: New Jersey just published a new GIT-7, which is their guide for Military Personnel and Their Families. This latest GIT directly contradicts previous guidance that a "permanent home" discussed below includes a house or apartment that you rent or pay for with military allowances or through the forfeiture of housing allowance (meaning base housing) this guidance basically said a permanent home was exactly what you would think it is, and just didn't include living in the barracks or on ship. The new GIT specifically says that living off base on a housing allowance or on base means you do not have a "permanent home" and thus remain a resident of New Jersey. Again, this directly contradicts recently updated instructions STILL PUBLISHED on the NJ website. I intend to continue following the website guidance until it is removed or revised, since the law has not changed and no technical bulletin has been issued on the subject.
NJ allows resident military personnel stationed outside of NJ to be treated as non-residents for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in NJ for the entire year (a parent's house is not a permanent place of abode.) 2) Maintain a permanent home outside of NJ for the entire year. 3) Spend no more than 30 days in NJ for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other NJ source income.(NJ does not consider barracks or the ship to be maintaining a permanent place of abode outside NJ)
New Jersey just passed a $3,000 exemption for honorably discharged Veterans which applies to tax years 2016 and beyond.

New Mexico:
New Mexico does not tax active duty military pay however; NM residents are required to file a NM return if they were required to file a Federal return.

New York:
NY allows resident military personnel stationed outside of NY to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in NY for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of NY for the entire year. 3) Spend no more than 30 days in NY for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other NY source income. NY specifically excludes barracks as an abode outside of NY for the purpose of this rule. Also, if a NY return is required to be filed to get back state taxes withheld and this exemption results in zero income (as it usually does) the return may have to be mailed in vice electronically filed.  NY does not tax military pensions.

North Carolina:
NC taxes military residents the same as other residents.

North Dakota:
ND taxes military residents the same as other residents, however, National Guard and reserve members called to active duty can exclude their active duty pay form ND income.

Ohio:
Ohio does not tax military pay of OH residents stationed outside of the state of OH. They do tax military income of their residents when stationed in OH. Ohio does not tax military retirement pay.  Ohio will give up to $1500 for military service ($500 for any service, $1000 for certain countries and $1500 for combat zones). Details here: https://veteransbonus.ohio.gov/odvs_web/

Oklahoma:
Oklahoma allows military members to exclude active duty pay. This exclusion is accomplished using Schedule 511-C. Military members are required to file an OK tax return if they were required to file a federal return.

Oregon:
Oregon allows a subtraction of all military pay earned while stationed outside of OR and up to $6000 earned while stationed in Oregon (Subtraction Code 319). OR also allows military residents to be treated as non residence if they spent less than 31 days in OR, did not have an abode in OR and had a permanent abode outside OR the entire year.

Pennsylvania:
Pennsylvania does not tax Active Duty Military Income of residents stationed outside of PA and does not require a tax return; however, they do require the service member to mail or fax a copy of their orders stationing them outside of PA and their W-2. If filing a tax return a copy of the orders must be included when mailing the return, or sent separately to the address below.
PA DEPT OF REVENUE
NO PAYMENT OR NO REFUND
2 REVENUE PLACE
HARRISBURG PA 17129-0002
May also be faxed to: (717) 772-4193
Starting in 2016, PA exempts military pay from LOCAL taxes, regardless of where you are stationed.

Rhode Island:
Rhode Island taxes military residents the same as other residents.

South Carolina:
SC taxes military residents just like regular residents except that it does not tax reservist drill pay. SC is very generous to the spouses of military (residents of another state) in that they allow you to exclude the active duty income of the non-resident military member from the calculation of what percentage of deductions to allocate to the spouse. This generally results in 100% of the deductions against only the spouses SC income. It is very difficult to get tax software to handle this correctly. Line 1 of the SCNR should have no active duty military income in the Federal column. SC is phasing in a larger deduction for military retirees.

South Dakota:
SD does not have an income tax. SD will pay military members $500 for service after 9/11/2001. Details here: https://vetaffairs.sd.gov/benefits/State/Veterans%20Bonus.aspx

Tennessee:
TN does not have an income tax but they do tax interest and dividends. Generally, these would need to exceed $1250 for an individual and $2500 for a couple.

Texas:
Texas does not have an income tax.

Utah:
Utah taxes resident service members the same as other residents.

Vermont:
Vermont does not tax military pay of VT residents stationed outside of the state of VT. They do tax military income of their residents when stationed in VT. Military pay is subtracted on line 32. A tax return is not required if the only income is military pay while stationed outside VT. 

Virginia:
Virginia taxes military residents just like other residents except that they give a subtraction of basic military pay of up to $15000. The subtraction phases out dollar for dollar as income goes from $15000 to $30000 and is completely gone at $30000 of income. (If a military member made less than $15000, it would all be subtracted. If they made $20000, they get to subtract $10000.) The subtraction code is 38.

Washington:
Washington does not have an income tax.

West Virginia:
West Virginia taxes military residents unless they spent less than 30 days in WV. In this case they file as a non-resident. WV does not tax military income of reserves or national guard called to active duty by Executive Order of the President.  Starting in 2017, West Virginia no longer taxes Military Retirement pay. WV gives a bonus of $400 for military service ($600 for combat zones). Details here: https://veterans.wv.gov/Pages/VeteransBonus.aspx

Wisconsin:
Wisconsin taxes military residents the same as other residents except that they do not tax military pay of reserves or national guard called to active duty. Rent paid by the military member in a state other than WI is allowed to be used for the School Property Tax Credit (not military housing.) If a military member is stationed outside the United States, they may take a credit of up to $300 for pay received while stationed outside the U.S.  Wisconsin does not tax military retirement.

Wyoming:
WY does not have an income tax.

Feel free to send questions to Kirk at taxadvisor@email.com

I am available to prepare taxes via mail, e-mail, fax and online approval. No fees are charged until the return is complete and you are 100% satisfied. If the fees are too high, refund too low, or we determine that a cheaper filing method is appropriate, I will return all materials and charge no fees.

I will check any individual tax return from 2017, 2018, 2019 or 2020 for free. If I find an error, I will offer to fix it for a fee if desired

I have made every effort to ensure the above information is 100% accurate, but I am human and the various governments love to change the rules. If you think something is wrong please inform me via e-mail at taxadvisor@email.com

Wednesday, December 30, 2020

The $600 Stimulus Bill Tax Changes

The New Stimulus Check:

The amounts for this are $600 for each adult individual (meaning a married couple filing jointly gets $1200) as well as dependents age 16 or under as of 2019. The rules are almost exactly the same as the previous checks, which are covered in great detail in older posts on the subject. Here I am going to cover things in a lot less detail, highlighting the major differences.

First, if the place your first stimulus went is still active, the new stimulus should go there, and you don’t need to take any action. If it is not still open, you can update it at irs.gov using the big “Get My Economic Impact Payment” button. The button doesn’t do much right now since they are still programming for the new payment, but it should be soon.

Payments are based on 2019 tax returns, social security or VA disability information for non-filers, or information you provided for the previous $1200 payments. They are tax free advances on your 2020 taxes and will be recalculated when you file your 2020 tax return, and any additional money you are due will be provided then, but no repayment is due if you would have been entitled to less.

I highly recommend e-filing a 2020 tax return, using direct deposit if possible, to make sure you get everything you are entitled to, and to keep your information with the IRS as up to date as possible. Who knows, they may want to send more money! I think this is one of the enduring tax lessons from the pandemic – file a tax return even when not required.

The income limitations for the new stimulus payments were slightly modified from the previous ones. The phaseout starts at the same point, but the payments go down faster as your income goes up. Phaseout starts at $75,000 for Single and Married Filing Separate (MFS) filers, $112,500 for Head of Household (HH), and $150,000 for Married Filing Joint and Qualified Widowers (MFJ/QW). If your income is below those numbers, you should get a full payment. Single and MFS filers get nothing once income hits $87,000 and MFJ/QW filers get nothing when income hits $174,000. HH goes away at $124,000.

The Rest of the Tax Changes (from the latest bill):

This is a broad overview of the rule changes.

1. Charity: You can deduct up to $300 in cash contributions to charity on 2020 even if you don’t normally itemize. Cash means cash/check/credit but not donation of things or time. There is a penalty of 20% of taxes for cheating on this. For 2021 the limit is $600 and the penalty 50%. You can also donate up to 100% of your Adjusted Gross Income in cash to charities in 2020 and 2021 (old limit was 50% and 60% depending on the year) 

2. Retirement Plans: The period for 401k and IRA exemption from the 10% penalty on withdrawals from these plans due to COVID was extended to 60 days after 12/27/2020 (2/25/2021 if my math is correct). This applies to up to $100,000 in withdrawals due to COVID and the rules allowing stretching taxes for three years or repaying within 3 years apply to these withdrawals. Basically, you can take money out, up to $100,000 due to needing it for COVID caused problems all the way out to late February of 2021, though you can’t pull $100,000 in 2020 AND 2021. The $100,000 limit applies to ALL Coronavirus distributions.

3. Disaster Losses: The changes to deducting disaster losses above $500 due to COVID was also extended for 60 days after December 27th, 2020. This suspended the 10% of income rule that meant that a disaster had to be ENORMOUS before it made a difference on your taxes.

4. Business Meal Deduction: I have heard this one called the “3 Martini Lunch Rule”. For 2021 and 2022, the 50% limit on meal deduction for businesses was raised to 100%. Simply put, a business owner can deduct 100% of business-related meals including those with clients.

5. Education Credits: The Tuition and Fees Deduction will be in effect for 2020, but not after. The Lifetime Learning Credit and American Opportunity Credit will have their income limits matched (The LLC limit raised to equal the AOC limit) starting in 2021.

6. Sick and Family Leave: The qualifying period for employers to claim credits for paying employees while they are out sick or taking care of family due to COVID was extended to 3/31/2021. This applies to self-employed taxpayers who are out sick or shutdown and the law allows them to calculate based on 2019 or 2020 income whichever is better.

7. Payroll Tax Holiday: For those who took advantage of not having to pay Social Security Tax in the last quarter of 2020, the payback period has been extended for all of 2021, vice just the first few months. This means paybacks will be smaller, but last longer. This mostly applies to military and some Federal employees, though some civilian employers might have allowed opting in.

8. Paycheck Protection Program: More money was made available and eligible employers can come for more money if they meet certain requirements. The law was clarified to explicitly state that even if the loan is forgiven, expenses paid by loan proceeds remain deductible if allowed by current tax law.

9. Earned Income Tax Credit (and child credits): You can use 2019 income vice 2020 income if it gets better results. This applies to EITC, Child Tax Credit and Additional Child Tax Credit. You use 2019 income for calculating all of them or none of them. You can’t pick and choose.

10. Educator Expense: The $250 deduction for teachers paying for classroom supplies includes costs for protective equipment and other COVID related supplies such as masks or disinfectants.   

11. Flexible Spending Accounts: Normally these accounts, which are usually used for childcare and health care, must be used before the end of the calendar year or the money is lost. Employers have several options for relief in this case, including allowing rollover of money to be used in 2021. Also, money for childcare normally has to be used only for children under the age of 13. This age limit was raised to under 14 for 2021 only.

Changes to Expiring Tax Provisions:

Mortgage Insurance Premiums remain deductible into 2021

Principle Residence Cancelled Debt Exclusion was extended through 2025, but the amount allowed to be excluded was reduced to $750,000 ($375,000 if MFS) starting in 2022.

The Non-Business Energy Efficient Credit was extended to 2021.

Exclusion of employer paid student loans of up to $5250 per year was extended through 2025.

The Solar Credit phaseout was modified and slightly extended. The percentage used for calculating the credit is 26% in 2021 and 2022, and 22% in 2023. The credit is not currently available for 2024 and later.

The increase in the percentage above which medical expenses were deductible was permanently changed back to 7.5%. It was supposed to go up to 10% with the passage of the Affordable Care Act but has been pushed of repeatedly and is now finally dead.