The Tax Organizers to assist in compiling the information necessary to prepare your 2021 individual income tax return(s) were mailed at the end of January 2022. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2021 Tax Organizer or if you would like a blank version.

The Tax Organizers to assist in compiling the information necessary to prepare your 2021 individual income tax return(s) were mailed at the end of January 2022. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2021 Tax Organizer or if you would like a blank version.

The Internal Revenue Service and State Taxing Authorities are matching information returns submitted by businesses, employers and financial/investment institutions with amounts reported on individual tax returns.  Negligence penalties may be assessed when income is underreported. Please be certain to mail or bring with you all of the following original unstapled forms:

Due to the current global pandemic, we require additional information and details concerning economic impact payments, advanced child tax credit payments, COVID-19, PPP loans and PPP loan forgiveness.  Please provide documentation relating to any of these items if applicable to you (i.e. proof of economic impact payments, advanced child tax credit payments, PPP loan received and PPP loan forgiveness).

1) Dependent information including names, relationship, date of birth and social security numbers (if a dependent is no longer a student please indicate).  Please remember that names and social security numbers must match exactly in order for the dependent to be allowed. 

2) All W-2 forms for wages.

3) All 1099 forms for interest, dividends, sales of securities, pension / IRA distributions, social security benefits, commissions and other income received as well as brokerage statements and realized gain/loss schedules.  If you have a foreign bank account, please list it and all applicable information.  If you took any early distributions from retirement plans, please be sure to provide the details regarding the reason and amount of the distributions.  If any of these distributions were paid back to the retirement plan in full or in part within 60 days, please provide the details.  Congress has been sharply focused on requiring taxpayer reporting of foreign bank/financial accounts and assets for the last several years.  Besides filing the Report of Foreign Bank and Financial Accounts, information may be required to be attached to the taxpayer's income tax return for those assets with aggregate values exceeding specific thresholds.  If applicable, you will be requested to provide additional information. 

NOTE: Form 114 FinCEN (previously known as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) (FBAR) must be electronically filed via the BSA E-Filing System.  Our firm can assist you with the preparation and submission of the electronic FBARs; however, the primary responsibility for this filing remains with the taxpayer.  2021 FBAR filings are due April 18, 2022 with a maximum extension for a 6- month period ending October 17, 2022 to file.

4) All notices from corporations, financial institutions or mutual funds that advise of special tax treatment for earnings.

5) Report of tax-exempt interest and dividends received with payer identification.

6) Supporting information (including 1099-K, 1099-MISC & 1099-NEC forms) for business income and expenses.  For business use of your home, please include the square footage of your home used exclusively for business as well as total square footage of your home (this is required information).

7) Copies of closing statements for any real estate, co-op or condominium purchases or sales which occurred during the year and a copy of the Form 1099-B received for gross proceeds.  Please remember to include the acquisition date of the property sold, the original cost and improvements. 

8) All 5498 forms and support for 2021 retirement contributions made to date or anticipated to be made for the 2021 tax year.  Please indicate if you want maximum contribution limits calculated.

9) All 1098 and 1099-MISC forms supporting rental income and expenses.  Please be sure to include details for all improvements made and capital assets purchased including acquisition dates.

10) All Schedule K-1 forms from partnerships, limited liability companies, S corporations, trusts and estates including all supporting literature received including state specific K-1s and transmittal/cover letters. 

11) All 1099-G forms issued/received from State Taxing Authorities.  These forms are available from Connecticut and New York online only. 

12) Adjustments to Income – please be sure to include educator expenses, alimony paid/received, health savings account contributions/distributions and student loan interest paid including all 1098-E forms.  For Health Savings Accounts, please include a statement(s) and 1099 forms that recap the 2021 activity in order to verify the beginning and ending balances of the account.

13) Real estate and personal property taxes paid – please be sure to include only taxes paid during the calendar year 2021.

14) All 1098 forms for interest expense deductions - Please identify for each 1098 form if the loan interest paid is for a home mortgage (secured by principal residence or vacation home) or investment activity.  If your total debt exceeds $1 million for home acquisition loans acquired before December 15, 2017, please include the balance of each loan at January 1, 2021 and December 31, 2021.  In addition, please supply the balance of each loan at January 1, 2021 and December 31, 2021 for new home acquisition loans acquired from December 15, 2017 and beyond if the debt exceeds $750,000. 

15) Contributions – be careful in reporting your contributions as the IRS is aggressively challenging those which appear to be excessive in dollars and valuation.  Please include supporting documentation for cash contributions with values in excess of $250 and noncash contributions with values that exceed $500.

16) Child/Dependent care expenses – Please provide the name, address and social security number and/or employer identification number of the providers as this is required.

17) Household Employment Taxes including W-2 forms for wages paid and quarterly state unemployment returns filed for the 2021 tax year.

18) A schedule of estimated taxes paid for federal and state income taxes including payments made in January 2022 for the 2021 tax year and payments made in January 2021 for the 2020 tax year.  Please be sure to include the FULL date for each payment made.

19) All W-2G forms for gambling winnings.

20) HEALTH INSURANCE: Notification received from provider documenting the existence of health insurance coverage through the Marketplace for 2021 for you, your spouse and/or dependents.  Please be sure to include Form 1095-A.

21) Copies of any notices or other communications received during the year from the Internal Revenue Service and State Taxing Authorities.

22) Identity Protection Personal Identification Number – If you have received notification that an IP PIN has been assigned to you and/or your spouse by the IRS, it is imperative that this information be provided to us with your tax documents as you cannot efile your income tax return without it and our firm has no access to this information.  IP PINs can be retrieved online through the IRS website.  If you had one in the past but did not receive a letter for Tax Year 2021 from the IRS, it is likely that you still have one so you should check the IRS website before tax filing day arrives.  Please do not wait until the last minute to retrieve this information.

Late December, 2021 Update – IMPORTANT & NEW FOR THIS FILING SEASON:

The IRS announced that it will issue information letters to Advance Child Tax Credit recipients starting in December, 2021 and to recipients of the third round of the Economic Impact Payments at the end of January, 2022.  Use of this information when preparing a tax return is very important to reduce errors and delays in processing as we cannot obtain it for you.  The IRS urged people receiving these letters to make sure they hold onto them to assist in accurately preparing their 2021 federal tax returns in 2022.

Child Tax Credit Letter:

To help reconcile and receive all of the Child Tax Credits to which they are entitled, the IRS will send Letter 6419, 2021 Advance CTC, starting late December, 2021 and continuing into January, 2022.  The letter will include the total amount of advance Child Tax Credit payments taxpayers received in 2021 and the number of qualifying children used to calculate the advance payments.  People should keep this and any other IRS letters about advance Child Tax Credit payments with their tax records.

On 2021 federal tax returns, taxpayers will need to compare the amounts received as advance Child Tax Credit payments in 2021 to the amount of the Child Tax Credit they are eligible for and can properly claim on their 2021 tax return.  Eligible families who did not receive any advance Child Tax Credit payments can claim the full amount of the Child Tax Credit on their 2021 federal tax return, filed in 2022.  This includes families who don’t normally need to file a tax return.

Taxpayers who received the advance CTC payments can also check the amount of their payments by using the CTC Update Portal available on IRS.gov website.

Economic Impact Payment Letter:

The IRS will begin issuing Letter 6475, Your Third Economic Impact Payment, to EIP recipients in late January, 2022.  This letter will help Economic Impact Payment recipients determine if they are entitled to and should claim the Recovery Rebate Credit on their tax year 2021 tax returns that they file in 2022.

Letter 6475 only applies to the third round of Economic Impact Payments that was issued starting in March, 2021 and continued through December, 2021.  The third round of Economic Impact Payments, including the “plus-up” payments, were advance payments of the 2021 Recovery Rebate Credit that would be claimed on the 2021 tax return.  “Plus-up” payments were additional payments the IRS sent to people who received a third Economic Impact Payment based on 2019 tax return or information received from SSA, RRB or VA; or to people who were eligible for a larger amount based on their 2020 tax return.

Most eligible taxpayers already received the EIP payments.  However, taxpayers who are missing stimulus payments should review the information to determine their eligibility and whether they need to claim a Recovery Rebate Credit for tax year 2020 or 2021.

Like the advance CTC letter, the Economic Impact Payment letters include important information that can help taxpayers accurately file their tax return.

Because of government enforcement regulations and fraud prevention initiatives, we are requesting that you include copies of the social security cards for yourself, spouse and dependents.  If you provided us with copies of social security cards in the past, you do not have to provide it again; however, the driver’s license and passports on file must be current.  Also, if you are a new client to the firm, include a copy of the current driver’s license for yourself and your spouse as we are required to input the current information in order to electronically file. If you have any questions, please call our office to verify your information on file.  The spelling of names must match the social security cards issued or correspondence from the IRS will be generated.  Returns cannot be filed electronically if discrepancies exist between the tax return and the Social Security Administration.  Refunds will not be issued until the matter is resolved.

When providing information related to the Sales of Stocks, Securities, Capital Assets & Installment Sales, special care should be taken in providing complete and accurate information, especially acquisition dates and cost. For re-investment programs, such as mutual funds and dividend reinvestment programs, it is necessary to provide all data since initial acquisition unless the fund/broker provides the cost information.  Taxpayers are required to complete Form 8949, Sales and Other Dispositions of Capital Assets, along with Schedule D to report this activity.  Form 8949 captures the detail data of each individual sales transaction in conjunction with cost basis information as reported by your broker/financial institution under reporting regulations.

In order to continue providing quality service on a timely basis, we urge you to collect your information as soon as possible.  If information from a “pass-through” entity such as a partnership, S corporation, limited liability company, trust or estate is the only data you are missing, please send the data you have assembled and forward the missing information as soon as it is available. Please clearly indicate which information is missing.  If we do not receive your complete information by March 25, 2022, we cannot guarantee timely completion of your tax returns for the April 18, 2022 filing deadline.  

Please be sure to include all of your contact information with your package - telephone numbers, fax numbers and email addresses, if applicable and the preferred method of contact.

If you or your spouse worked in New York with your residence outside of New York or you worked in Connecticut with your residence outside of Connecticut, please complete the enclosed allocation of wage and salary income.  If you held multiple jobs during the year, please provide a separate allocation schedule for each job.

We appreciate the opportunity to be of service to you.

COVID-19 relief bills enacted in December 2020 and March 2021 made a number of tax law changes that affect 2021 tax filings.  The American Rescue Plan (ARP) Act aimed to help individuals and businesses deal with the continued global pandemic and its ongoing economic disruption with significant changes to a number of existing tax provisions; however, many are limited in scope and only apply to the 2021 tax year.  Four full years have now passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Some of this guidance has been taxpayer friendly but not all of the regulations yield favorable results.

COVID-19 relief bills enacted in December 2020 and March 2021 made a number of tax law changes that affect 2021 tax filings.  The American Rescue Plan (ARP) Act aimed to help individuals and businesses deal with the continued global pandemic and its ongoing economic disruption with significant changes to a number of existing tax provisions; however, many are limited in scope and only apply to the 2021 tax year.  Four full years have now passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Some of this guidance has been taxpayer friendly but not all of the regulations yield favorable results. 

It should be noted the IRS will be sending out two letters to taxpayers in January 2022 which are very important for 2021 tax reporting.  We ask that you provide us with these letters, if applicable, when you submit your tax documents.  Reporting incorrect advance child tax credit or economic impact payment amounts can cause delays in tax return processing and the issuance of refunds.

        Letter 6419 - Advance Child Tax Credit Payments

        Letter 6475 - Economic Impact (Stimulus) Payment

The following is a discussion of the rules applicable to the filing of 2021 individual income taxes and 2022 at this time.

TAX RATES - For 2021 there are seven income tax brackets ranging between 10% and 37% for ordinary income.  The 37% tax bracket is imposed on taxable income over threshold amounts as follows:

• $628,300 for married taxpayers filing jointly and surviving spouses
• $314,150 for married taxpayers filing separately
• $523,600 for heads of households
• $523,600 for single taxpayers
• $13,050 for estates and trusts

For 2022, there are still seven brackets and the 37% tax bracket is imposed on taxable income over the following thresholds:

• $647,850 for married taxpayers filing jointly and surviving spouses
• $323,925 for married taxpayers filing separately
• $539,900 for heads of households
• $539,900 for single taxpayers
• $13,450 for estates and trusts

These rates apply, absent new legislation, to all years until December 31, 2025.

Besides the reduction in rates and expansion of the tax brackets, perhaps the biggest change to deductions was the elimination of the personal exemption effective 2018.  This is to be offset, in part, by the increase in the standard deduction.  For 2021, the standard deduction has essentially been doubled to $12,550 for single taxpayers and $25,100 for married couples filing jointly.  For 2022, the standard deduction is projected to be $12,950 for single taxpayers and $25,900 for married filing jointly.

LONG TERM CAPITAL GAINS AND QUALIFYING DIVIDENDS TAX RATE – The favorable rate of 0% for taxpayers in the 10% and 15% brackets remains unchanged from 2017.  In the TCJA, these rates apply at different thresholds for 2021 and 2022 as follows:

• The 0% tax rate applies to adjusted net capital gains up to $80,800 and $83,350 for joint filers and surviving spouses, $54,100 and $55,800 for heads of household, $40,400 and $41,675 for single filers and married taxpayers filing separately and $2,700 and $2,800 for estates and trusts;
• The 15% tax rate applies to adjusted net capital gains over the amount subject to the 0% rate, and up to $501,600 and $517,200 for joint filers and surviving spouses, $473,750 and $488,500 for heads of household, $445,850 and $459,750 for single filers, $250,800 and $258,600 for married taxpayers filing separately and $13,250 and $13,700 for estates and trusts; and
• The 20% tax rate applies to adjusted net capital gains over $501,600 and $517,200 for joint filers and surviving spouses, $473,750 and $488,500 for heads of household, $445,850 and $459,750 for single filers, $250,800 and $258,600 for married taxpayers filing separately and $13,250 and $13,700 for estates and trusts.

Remaining unchanged from prior years is the 25% rate for unrecaptured Code Sec. 1250 gain, the 28% rate for collectibles and the gain on qualified small business stock equal to its partial exclusion.

Qualified dividends received from domestic corporations and qualified foreign corporations continue to be taxed at the same rates that apply to capital gains.  Certain dividends do not qualify for the reduced rates, including dividends paid by credit unions, mutual insurance companies and farmers’ cooperatives.

NET INVESTMENT INCOME TAX (NIIT) – An additional Medicare surtax of 3.8% is imposed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above a specified threshold.  However, the Medicare surtax is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business.

NII includes the following investment income reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty related expenses, and state and local taxes allocable to items included in net investment income:

• Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business
• Gross income from a trade or business that is a passive activity
• Gross income from a trade or business of trading in financial instruments or commodities
• Gain from the disposition of property, other than property held in an active trade or business

Individuals are subject to the 3.8% NIIT if their MAGI exceeds the following thresholds (which are not adjusted for inflation):

• $250,000 for married taxpayers filing jointly or a qualifying widower with a dependent child
• $125,000 for married taxpayers filing separately
• $200,000 for single and head of household taxpayers

ADDITIONAL HIGHER INCOME MEDICARE TAX - Higher income (HI) individuals continue to be subject to an additional 0.9% HI (Medicare) tax, not to be confused with the 3.8% Medicare surtax on NIIT. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) is subject to a 2.35% Medicare tax rate (normal 1.45% plus additional .9%). The additional Medicare tax also applies to self-employed individuals.   

ALTERNATIVE MINIMUM TAX (AMT) – The TCJA temporarily increased the alternative minimum tax (AMT) exemption amounts for 2021 and 2022 as follows:

• $114,600 for married taxpayers filing jointly and surviving spouses for 2021 and $118,100 for 2022
• $73,600 for unmarried taxpayers and heads of household, other than surviving spouses, for 2021 and $75,900 for 2022
• $57,300 for married taxpayers filing separately for 2021 and $59,050 for 2022
• $25,700 for estates and trusts for 2021 and $26,500 for 2022

Exemptions for the AMT are phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI). Generally, the exemption amounts are phased out by an amount equal to 25% of the amount by which an individual’s AMTI exceeds a threshold level.  The threshold amounts for calculating the exemption phase-out are adjusted for inflation as follows:

• $1,047,200 in 2021 and $1,079,800 in 2022 for married taxpayers filing jointly and surviving spouses
• $523,600 in 2021 and $539,900 in 2022 for unmarried taxpayers and heads of household, other than surviving spouses
• $523,600 in 2021 and $539,900 in 2022 for married taxpayers filing separately
• $85,650 in 2021 and $88,300 in 2022 for estates and trusts

For 2021 and 2022, the AMT rates are 26% and 28% on the excess of AMTI over the applicable exemption amount. You should not ignore the possibility of being subject to the AMT as it can negate certain year-end tax strategies; however, tax planning strategies can be used to reduce its impact. As a general rule, taxpayers subject to AMT should accelerate income into AMT years and postpone deductions into non-AMT years.

STOCK LOSSES – Taxpayers should continually review their investments for return and portfolio balance.  They should monitor their investments to take steps necessary to time the recognition of capital gains and losses to minimize their net capital gains tax and maximize the benefit of capital losses.  Remember for tax purposes it is not how much your investments have gone up or down in value but rather how much gain or loss you have realized when an investment is sold since its original purchase date.  The maximum capital loss deduction available to offset ordinary income is $3,000 ($1,500 for married taxpayers filing separately) with the additional capital losses being carried forward until used.  Taxpayers also need to take “wash sale” rules into consideration when generating losses.  The wash sale rule defers use of a tax loss realized upon a sale of stock if the investor repurchases it within 30 days before or after the sale.  Worthless stock also generates an immediate capital loss; however, the rules for “worthless” stocks are very strict.  Stocks and securities must be totally worthless for a taxpayer to take a loss deduction; a mere decrease in value, no matter how great, will not trigger a loss deduction.

CRYPTOCURRENCY – The market value of Bitcoin has hit a new high, increasing attention on cryptocurrency by the public.  Holders of cryptocurrency claim it is a form of currency and fluctuations in value are not taxable.  IRS law defines it as property, like any other investment, where fluctuations in value are subject to gains and losses when reporting income.  When cryptocurrency is “spent”, exchanged for goods and services, the IRS expects the calculation of gains/losses from the original basis.  The IRS is escalating attention to this area as it suspects widespread under reporting of cryptocurrency transactions.  The 2021 Form 1040 will feature a change in wording to the prominent question right under the taxpayers’ name and address: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?” 

ROTH IRA CONVERSIONS - Modified gross income limitations applicable to Roth IRA conversions were repealed and 2010 was the first year in which a taxpayer could convert all or part of their traditional retirement accounts to a Roth account, regardless of income, age or filing status.  A conversion is a taxable transfer and is taxable in the year of conversion.  Under prior law, a taxpayer could recharacterize IRA contributions from one type of IRA to another.  TCJA provides that a recharacterization cannot be used to unwind a Roth conversion. A taxpayer may still make a contribution to a traditional IRA and convert the Traditional IRA to a Roth IRA but the change is that the Roth conversion can then not be unwound using recharacterization.

IRA & ROTH IRA CONTRIBUTIONS – The maximum contribution is $6,000 for 2021 and 2022 provided you have at least $6,000 respectively of wage, salary or net self-employment earnings.  An additional “catch-up” contribution of $1,000 is allowed for taxpayers over 50 years of age by the end of the tax year for 2021 and 2022.  Contributions to a traditional or Roth IRA may continue after age 70 1/2 (by the end of the tax year).  Remember that IRA and Roth IRA contributions for the 2021 tax year can be made up to April 18, 2022.

401K AND 403B CONTRIBUTIONS - The annual limit on employee elective deferrals to these plans for 2021 is $19,500 and $20,500 for 2022. The maximum “catch-up” contribution to a 401K and 403B plan for taxpayers over 50 years of age by the end of the tax year is an additional $6,500 for 2021 and 2022.

RETIREMENT PLANS - The SECURE Act primarily intended to encourage saving for retirement, though it’s not entirely favorable to taxpayers. Most provisions took effect January 1, 2020. Here are some of the most significant provisions:

• Elimination of the age 70½ limit for making traditional IRA contributions, so that anyone can contribute as long as they’re working, matching the existing rules for 401(k) plans and Roth IRAs,
• Increase of the age at which taxpayers must begin to take required minimum distributions (RMDs) from 70½ to 72,
• An exemption from the 10% tax penalty on early retirement account withdrawals of up to $5,000 within one year of the birth of a child or an adoption becoming final,
• Elimination of the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies,  
• Expansion of access to open multiple employer plans (MEPs), which give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties.
• Elimination of employers’ potential liability when it comes to selecting appropriate annuity plans, and
• A new requirement that employers allow participation in their retirement plans by part-time employees who’ve worked at least 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours.

CHILD TAX CREDIT (CTC) – The American Rescue Plan (ARP) made three significant changes to the CTC credit:

• The amount of the credit increases from $2,000 to $3,000 for each child up to age 17 and to $3,600 for each child under age 6.
• The increased credit is subject to phase-out at lower MAGI levels of $150,000 for joint filers, $75,000 single and $112,500 for heads of household.
• The benefit of the credit includes advance payments which began in July 2021.

The credit advanced must be reconciled with the credits actually allowable on the 2021 tax return.  If the advance payment exceeds the amount of credit actually allowed for the tax year, the 2021 tax is increased by such excess to be paid back to IRS.

CHILD DEPENDENT CARE (CDC) CREDIT – Changes were made to this credit for the 2021 tax year.  The credit is now made refundable.  For 2021, the maximum amount of qualifying expenses to which the credit may be applied is $8,000 for individuals with one qualifying child or dependent (up to a maximum $4,000 credit) or $16,000 for individuals with two or more qualifying children or dependents (up to a maximum $8,000 credit).  The credit percentage is 50% up to AGI of $125,000 subject to the maximum credit amounts.  For taxpayers with AGI between $125,000 and $400,000, the maximum 20% credit rate is reduced by 1% for each $2,000 the taxpayer’s AGI exceeds $400,000 until the credit is phased out for taxpayers with AGI over $438,000.

EDUCATION INCENTIVES – The following are education incentives which exist under current law.

American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) was made permanent by the 2015 PATH Act and was not changed by TCJA.  This $2,500 maximum credit per eligible student is subject to the higher income phase-out ranges of $80,000 to $90,000 for single filers ($160,000 to $180,000 for joint filers) and contains a 40% refundable credit component.  The eligibility extension to the first four years of post-secondary education contains an inclusion for text books and course materials as eligible expenses. The Lifetime Learning Credit was also retained.

Student Loan Interest Deduction: If your modified adjusted gross income during 2021 is less than $85,000 ($170,000 for married filing jointly), a deduction is allowed for interest paid on a student loan used for higher education up to a maximum of $2,500.  This figure will continue to be adjusted each year for inflation. 

Coverdell Education Savings Accounts (ESAs): Total contributions for the beneficiary of this account cannot exceed $2,000 in any year no matter how many accounts have been established.  Contributions to a Coverdell ESA are not deductible but amounts deposited in the account grow tax free until distributed.

Employer-Provided Education Assistance: Employees are allowed to exclude from gross income and wages up to $5,250 in annual educational assistance provided under an employer's nondiscriminatory "educational assistance plan." 

Scholarship Programs: An amount received as a qualified scholarship and used for qualified tuition and related expenses is excludable from income.  The exclusion does not apply to any portion of the amount received which represents payment for teaching, research, or other services by the student as a required condition for receiving the qualified scholarship.  However, scholarship recipients with obligatory service requirements under the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program can exclude from income qualified tuition and related expenses as well as amounts that represent payment for services.

Section 529 Accounts:  TCJA expanded potential usage of 529 plans to include elementary and secondary school tuition for public, private and religious schools up to $10,000 per year per student.  Previously, only Coverdell ESA funds could be used for primary and secondary expenses.  New York opted not to follow TCJA; therefore, for New York purposes, withdrawals for kindergarten through 12^th grade school tuition are NOT qualified withdrawals under the New York 529 college savings account program.

MEDICAL EXPENSE THRESHOLD - For 2021, a deduction is allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse and the taxpayer’s dependents to the extent the expenses exceed 7.5% of adjusted gross income.

According to the IRS, COVID-19 testing kits are an eligible medical expense along with personal protective equipment (PPE), such as masks, hand sanitizer and sanitizing wipes, if they’re used primarily for preventing the spread of COVID-19.  As eligible medical expenses, they can be paid for with money in a health flexible spending arrangement (FSA), health savings account (HSA), health reimbursement arrangement (HRA) or Archer medical savings account (Archer MSA).

CHARITABLE GIVING –

• Congress has long used the tax laws to encourage charitable giving and for many individuals, charitable giving is also a part of their year-end tax strategy. The 2015 PATH Act made permanent the popular charitable giving incentive with tax-free IRA distributions to public charities by individuals age 70 1/2 and older up to a maximum of $100,000 per qualified taxpayer per year. Individuals taking this option cannot claim a deduction for the charitable gift as the distribution is not claimed as income.
• Congress tightened the rules for substantiation requirements for charitable contributions effective August 17, 2006. The IRS will not allow charitable deductions, regardless of the amount, without proper documentation. Contributions of $250 or more must be substantiated by a written acknowledgement from the donee organization; the acknowledgement must include the date of the donation, amount of cash or a description of property donated and a description and good faith estimate of the value of any goods or services received in exchange for the contribution.  If the donor does not receive a written acknowledgment from a charitable organization, it is the donor’s responsibility to obtain it in order to claim the charitable contribution.  Contributions under $250 must be substantiated by cancelled checks, bank records or receipts from the donee organization.  If it would be impracticable to obtain a receipt, the donor must maintain reliable written records. 
• Just like the rules for cash gifts, the rules for substantiating deductions for donations of clothing and household items (i.e., furniture, furnishings, electronics, appliances) were tightened after August 17, 2006 and will only be allowed if the property is in “good used condition or better”. Donors must have a written acknowledgement from the charity documenting the donation date, description of property donated, a description and good faith estimate of the value of any goods or services received in exchange for the contribution and a valuation/qualified appraisal of the property donated, if applicable.  A deduction for the noncash goods will be allowed, without regard to condition, only if a qualified appraisal is attached to the return for each single item or group of similar items over $500.  We recommend that pictures be taken of any noncash goods that are donated as it will be helpful in supporting the deduction.

Taxpayers donating vehicles (i.e., car, truck, boat, and aircraft) to a charity valued over $500 must obtain from the charity and attach to the tax return Form 1098-C and/or a written acknowledgment of the contribution.  The donation amount is usually limited to the gross proceeds from the sale of the vehicle by the charity.

Gifting of appreciated securities for making charitable contributions continues to be a significant alternative instead of using cash.  In this manner, the appreciated value will not be taxed, low-cost basis stock is removed from your portfolio/estate and the fair-market value of the security will be used as the charitable contribution.

Individual taxpayers are allowed a deduction for cash contributions to public charities up to 100% of adjusted gross income. Donations to donor advised funds and private foundations are not eligible for the increased limit.

In 2020, taxpayers who did not itemize were allowed an above the line deduction for $300 for certain cash contributions. For 2021, the same deduction is permitted, but the $300 deduction is allowed per person, which means that a married couple can deduct up to $600 above the line for a qualifying deduction on a joint return.

IRS has been aggressively reviewing and challenging charitable donations in response to these new substantiation requirements.  It is expected that this trend will continue.  The burden of proof will be on the taxpayer so it is imperative that good records and supporting documentation is maintained.

EDUCATOR EXPENSES – The 2015 PATH Act permanently extended the teacher's classroom expense deduction that allows primary and secondary education professionals to deduct (above-the-line) qualified expenses up to $250 paid out-of-pocket during the year.  Eligible expenses in excess of the $250 limit are no longer deductible as a miscellaneous itemized deduction on Schedule A.  The $250 limit is subject to adjustment for inflation; however, it remains at $250 for 2021. The deduction is projected to be $300 for 2022. 

BONUS DEPRECIATION & SECTION 179 BUSINESS EXPENSING ELECTIONS –

Bonus Depreciation: Pursuant to TCJA for qualified purchases placed into service after September 27, 2017, 100% of the purchase price can be expensed. This 100% expensing will continue until 2022.  There is a scheduled phase-down to 80% starting in 2023 and ending at 20% in 2026, after which the provision is set to expire.  Unlike regular depreciation, where half-year and mid-quarter conventions may apply, a taxpayer is entitled to the full 100% bonus depreciation based on when the asset is purchased. Therefore, year-end placed in service strategies provide immediate “cash discount” for qualifying purchases, even when considering finance costs.

Bonus depreciation under old law is available only for new property (i.e., property whose original use begins with the taxpayer) depreciable under MACRS that (a) has a recovery period of 20 years or less, (b) is MACRS water utility property, (c) is computer software depreciable over three years, or (d) is qualified leasehold improvement property. An enticing provision under the new law whereby qualified property includes property that has been used (i.e., the original use does not have to originate with the purchaser).  A taxpayer may elect out of bonus depreciation with respect to any class of property placed in service during the tax year. Although this election may be factored into a year-end strategy, a final decision on making it is not required until the tax return is filed. Bonus depreciation is not a preference item for alternative minimum tax.

Code Sec. 179 Expensing: The PATH Act’s provisions made the enhanced Section 179 expense deduction permanent for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (generally defined as depreciable tangible property that is purchased for use in an active trade or business) as an expense rather than a capital expenditure. Thus, the current Section 179-dollar cap for 2021 and 2022 is $1,050,000 and $1,080,000 with an overall investment limitation of $2,620,000 and $2,700,000.

AUTOMOBILE MILEAGE RATE - Many taxpayers use the standard mileage rates to help simplify their recordkeeping. Using the business standard mileage rate takes the place of deducting the applicable business percentage of the actual costs of your vehicle such as maintenance, repairs, gas, insurance, license and registration fees.  If you choose to use the actual expense method to calculate your business vehicle deduction, you must maintain very careful records by keeping track of the actual costs during the year to maintain and run your vehicle.  One of the most important tools is a mileage log book that details date, miles driven, location and purpose for the vehicle during the calendar year.  Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

Business standard mileage rate: The business standard mileage rate for 2021 is 56.00 cents per mile and 58.50 cents per mile for 2022.

Medical/Moving standard mileage rate: The medical/moving standard mileage rate for 2021 is 16.00 cents per mile and 18.00 cents per mile for 2022.

Charitable standard mileage rate:   Taxpayers who itemize deductions may be able to claim a deduction for miles driven in service of a charitable organization. The standard mileage rate for charitable miles as determined by IRS for 2021and 2022 is 14.00 cents per mile.

COLLEGE SAVINGS PROGRAMS/PLANS – Connecticut allows a deduction from federal adjusted gross income for contributions made into a CT higher education trust fund (CHET).  New York allows a deduction from federal adjusted gross income for contributions into a New York 529 college savings plan.  The maximum deduction in each state is $5,000 for a single taxpayer and $10,000 for married filing joint.  However, Connecticut allows contributions in excess of these limits to be carried forward for five years while New York does not allow for any carry forward. 

RESIDENTIAL ENERGY CREDIT – The tax credit for making qualified energy improvements to your principal residence, including windows, energy-saving exterior doors, insulation, and certain metal roofs expired in 2016.  Individual taxpayers are still allowed a personal tax credit for expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property and qualified geothermal heat pump property.  The credit for these property expenditures was extended through 2023.  The credit rate for property placed in service in 2021 and 2022 is 26% and drops to 22% in 2023.

HEALTH CARE REFORM - The Affordable Care Act (ACA) brought a sea of change to our traditional image of health insurance.  Taxpayers and employers will continue to weigh the benefits and costs of obtaining coverage in a public marketplace or a private insurance exchange for themselves and their employees.  Small businesses may be eligible for a tax credit to help pay for health insurance.  Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage.  Those who obtained insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which will explain their coverage and detail any premium tax credit they received in advance.

Individuals with flexible spending accounts (FSAs) and similar arrangements should take a look at their annual spending habits and project how they will use these tax favored funds in the future.  The maximum salary reduction contribution to a FSA is $2,750 for 2021 and $2,850 for 2022.  Adjusted for inflation, the annual limitation on deductible contributions to health savings accounts (HSAs) for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,600 for 2021 and $3,650 for 2022; $7,200 for 2021 and $7,300 in 2022 for family coverage. The HSA catch up contributions for age 55 or older is $1,000 for 2021 and 2022 for both single and family coverage.

GIFT TAXES – Slow and steady estate planning can yield dramatic results - take advantage of the annual gift giving limits to reduce your income and estate tax liabilities. For 2021, the annual exclusion is $15,000 ($30,000 per person for couple).  For 2022, the annual exclusion is $16,000 ($32,000 for couple.)  Remember that if you gift stock, the recipient of the gift takes over the donor’s cost basis and holding period for the security; therefore, the donor needs to provide the recipient with this information.  Effective January 1, 2005, Connecticut laws changed and no gift tax was due by a donor until their cumulative gifts from this date forward added up to $2,000,000; however, a gift tax return has to be filed annually declaring all federal taxable gifts that are made in a tax year.  Current Connecticut legislation has the estate and gift tax thresholds at $7,100,000 for 2021, $9,100,000 for 2022 and an amount equal to the federal basic exclusion amount for 2023 and thereafter.  Direct payments of educational expenses to a qualified institution for family members, or other beneficiaries, is not treated as a gift for tax purposes and does not count against the annual exclusion amount or the lifetime exemption.

ESTATE TAX REFORM – While TCJA retains the estate tax rate at 40% for 2021 and 2022, the estate tax exemption moves up $11,700,000 and $12,060,000 respectively. TCJA did not repeal the death tax as had been a goal and also did not make the above changes permanent as they expire after 2025. The portability election remains as part of the tax law. Portability allows the second spouse to have the benefit of the deceased spouse’s unused portion of the $11,700,000 exemption even if the second spouse dies when a lower exemption is in effect, possibly after 2025.  No changes were made in TCJA with respect to step up in basis despite the increase in the exemption.

AUTOMATIC REFUND REDUCTIONS - With the number of information sharing acts signed by federal and state taxing authorities as well as other organizations, please be aware that refunds will be automatically reduced for the following matters: delinquent federal taxes, delinquent state taxes, back spousal and/or child support and delinquent non-tax federal debts such as student loans.  If the Department of Treasury’s Financial Management System (FMS), which disburses IRS refunds, offsets the refund for a delinquent amount (correctly or incorrectly), they will send a letter to the taxpayer explaining the reduction and giving the taxpayer the right to challenge the offset.

MAILING & RECORDKEEPING OF TAX PAYMENTS AND TAX RETURNS - When mailing tax returns or payments to federal and state taxing authorities, we advise the use of registered or certified mail to prove timely filing.  We also recommend that you make copies of the checks before mailing for your records.  The IRS has stated that other than direct proof of actual delivery, a mail receipt would be the only evidence of the timely delivery of tax documents.  It is also a good practice to make sure that you have good copies of the front and the back of the check images (where available) once your payments clear the bank in case you have to present this information at a later date.  The IRS, as well as many state taxing authorities, are providing options to make direct payments electronically via direct links and established account log ins; therefore, you may want to consider making estimated tax payments and paying notices via these methods in the future.  Please keep in mind that as electronic systems of filing continue to be required, manpower at the federal and state taxing authorities will continue to decline causing longer delays in resolution of matters and placing the burden of proof on the taxpayer.  With the current pandemic situation and staff shortages, these delays have only increased.

INCREASED REPORTING PROVISIONS ARE IN EFFECT AIMED AT COMPLIANCE AND REVENUE GENERATION - Banks and other processors of merchant payment cards are required to report a merchant’s annual gross payment card receipts to the IRS along with the merchant’s EIN #.  The law also requires reporting of third-party network transactions such as ones used by online retailers.  Expanded information reporting will continue to assist the IRS in increasing the compliance among merchants.  The IRS plans to compare the merchant’s overall volume of payment card sales in relation to expenses claimed and cash transactions reported, estimating to raise more than $9.5 billion over 10 years as a result of the increased reporting and monitoring.

We have also seen an increased emphasis by IRS and state taxing authorities on enforcement of tax provisions.  Some of this has occurred through changes in reporting requirements established by the IRS which affected 2020 and later years.  Additionally, several pieces of legislation provided increased resources for enforcement activities by the IRS, which may affect more than the wealthy.  The Treasury Department has stated that increased enforcement through additional staff and information reporting systems could raise revenue.

As of 2013, new rules were fully implemented that required brokers to file information returns that not only provided the IRS and customers with details on the sales proceeds from each trade executed during the year, but also the customer's adjusted basis in the security and whether any realized gain/loss is short or long term. These information reporting requirements effect business customers as well. Securities subject to the reporting requirements include stocks, bonds, debentures, commodities, derivatives and other financial instruments designated by Treasury.  Brokers notified customers in 2011 regarding elections to make in their accounts concerning the methods to be used for reporting cost basis.  This provision was estimated to raise $6.7 billion over 10 years.

In response to broker reporting changes, the IRS introduced Form 8949 Sales and other Dispositions of Capital Assets in 2011.  Form 8949 is used to list all capital gain and loss transactions previously reported on Schedule D of Form 1040.  The subtotals from Form 8949 are then carried over to Schedule D where realized gain or loss is calculated in the aggregate.  Accurate reporting and matching of data from taxpayer returns to that reported by the brokers directly to the IRS is the key compliance focus and purpose of this form.

Foreign Compliance Activities:  Foreign Account Tax Compliance Act (FATCA) dominated international news beginning in 2014 and continues today.  Along with FACTA, the U.S. has been expanding its tax treaties and information agreements with foreign jurisdictions to encourage greater transparency and authorities are getting tighter with compliance efforts.  FinCen Report 114, Report of Foreign Bank and Financial Accounts (FBAR), reporting for tax year 2021 is due by April 18, 2022 with an automatic 6-month extension available until October 17, 2022.

Identity Theft:  Tax fraud and identity theft have become a growing problem over the years.  Further initiatives continue to be taken by the industry to combat identity theft issues for taxpayers throughout the country.  IRS has joint efforts with various state taxing authorities and tax preparation software companies to create a security plan to safeguard taxpayer information.  Tax preparers are required to input the current driver’s license state identification number, issue date and expiration date for ALL taxpayers prior to e-filing without exception.

CONNECTICUT DEPARTMENT OF REVENUE NEWS –

Connecticut Income Tax Exemption for Teacher Pensions: For 2021 Connecticut residents are allowed a subtraction modification of 50% of the income received from the State Teachers’ Retirement System.  This modification applies to the extent such income is properly included in the taxpayer’s federal AGI for the taxable year.  

Limitation of Property Tax Credit: For 2021, the property tax credit may only be claimed by Connecticut residents who attain the age of 65 before the end of the year or who claim one or more dependents on their federal income tax return.  The maximum income tax credit remains at $200 per tax return.

Exemption of Social Security Benefits from Connecticut Income Tax:  For 2021, adjusted gross income thresholds for determining the amount of Social Security benefits excluded from Connecticut income tax have stayed the same as 2020.

Pension and Annuity Income Modification:  The Connecticut income tax on pension and annuity income for taxpayers with AGIs below specified thresholds is scheduled to phase out by 2025.  For taxable years beginning January 1, 2021, an individual with the federal filing status of single, married filing separately or head of household with federal adjusted gross income (AGI) of less than $75,000 or married filing jointly with federal AGI of less than $100,000 will be allowed to subtract 42% of any pension or annuity income received when calculating Connecticut AGI.  This applies to the extent that the pension and annuity income has been properly included in federal AGI.

NEW YORK DEPARTMENT OF TAXATION NEWS –

On December 28, 2018 New York State Department of Taxation issued a Technical Memorandum stating that they decoupled from certain personal income tax IRS changes implemented by TCJA for tax years 2018 and thereafter.  These items include certain itemized deductions, alimony or separate maintenance payments, qualified moving expenses reimbursement and moving expenses, Empire State child tax credit and New York 529 college savings account withdrawals.

Effective 2021, two new tax brackets were introduced for New York’s top income taxpayers.

New York tax authorities are focusing on auditing 2020 income tax returns filed by non-residents who work for New York employers, and have started issuing desk audit notices in an effort to claw back missed tax revenue. 

NEXUS

As many states continue to face substantial budgetary restraints for 2021 and beyond, they are aggressively pursuing revenue collections from residents and nonresidents.  States have continued to expand the definition of nexus – creating activity leading to many taxpayers being required to file state taxes in more states.  With telecommuting becoming the norm, especially due to the current pandemic, many individuals find themselves working in states other than their pre-COVID primary office locations.  Taxpayers need to consider whether their income will be taxed in the state in which they are working as well as the state in which their primary office is located.  Certain states impose a “convenience” rule that sources income to the employer’s office location if an employee is working remotely out of convenience and not out of necessity for the employer.  With telecommuting comes the flexibility to work from any location, not just the state where the individual resides potentially creating a change of residence on a domicile and/or statutory basis. 

Remote work is likely here to stay for the foreseeable future.  As a “hot topic”, it is expected that regulations and guidance will continue to develop and change as both taxpayers and preparers will be looking for additional guidance as released.  The tax impact of remote work and the potential for increased scrutiny and auditing exists.  Analyzing all facts and maintaining detailed records and documentation is critical.  As of the release of this letter, here are some notable announcements for 2021 from Connecticut and New York:

Connecticut:

On March 4, 2021, Governor Lamont signed H.B. No.6516, which provided that any Connecticut resident who paid tax to a state that uses a convenience of the employer rule will be allowed a credit against their Connecticut income tax for the paid to the other state on income earned while working remotely from Connecticut. Connecticut explained that these credits only apply to the 2020 tax.  For tax year 2021, Connecticut has not released a position on this matter yet.  Guidance is expected in January, 2022 so it is unclear if there might possibly be double taxation of state taxes in 2021 absent further guidance.  Like New York, Connecticut has been sending out notices challenging credits for taxes paid to other states as well as modifications.

New York:

New York has remained in defense of its “convenience of the employer rule” during the COVID-19 pandemic.  The Department of Taxation and Finance posted an FAQ with the position that the convenience rule continues to apply regardless of any imposed COVID restrictions.  An employee whose primary work location is in New York is subject to New York taxes unless a bona fide office has been established in the employee’s remote location (specific requirements for this as specified by New York have to be fulfilled to qualify).  In 2021, New York has been sending out notices and auditing tax returns of nonresident filers that showed a substantial change of income source to New York.  New York has also increased audit focus on resident taxpayers who are taking credit for taxes paid to other states.

As 2022 begins we can once again say there is a great deal of uncertainty.  Our economic, regulatory and political sectors remain in great flux.  Inflation is at its highest level in over a decade, persistent supply chain disruptions exist, shortages of critical materials and workforce exist and we are still dealing with the coronavirus pandemic.  The potential for tax changes again is looming as Congress debates proposals in President Biden’s “Build Back Better” agenda. 

We appreciate the opportunity to be of service to you.

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

Today, with the increase in catalog and online shopping, many taxpayers are buying items out of state, as well as goods that are being imported, that would be subject to tax if they were purchased in their resident state.  The state tax authorities, especially Connecticut and New York, are actively pursuing the collection of this use tax in order to meet budgetary constraints.  In fact, the states, along with the Internal Revenue Service and U.S. Customs, have signed information sharing agreements to help each other collect all outstanding tax money.  Working together, the authorities have many resources available to gather their information.

Keep in mind that the taxing authorities are specifically targeting the purchase of items such as automobiles (and parts), appliances, furniture, jewelry, cameras, computers, electronics, cigarettes and other tobacco products, alcohol, boats, art and antiques.  However, they are also seeking out those taxpayers who are steady catalog and online shoppers not paying sales tax. 

The individual use tax is declared and paid when you file your resident state individual income tax return. 

If all the goods purchased and brought into Connecticut at one time total $25 or less, you do not have to pay Connecticut use tax.  The $25 exemption does not apply to goods shipped or mailed to you.  Connecticut requires that taxpayers separately list any individual item with a purchase price of $300 or more.  When listing this information, you must provide the date of purchase, a description of goods or service, the retailer or service provider and the purchase price.  Items with an individual purchase price under $300 do not have to be listed separately; instead the total combined purchases must be given to calculate the use tax due.  The general Connecticut sales and use tax rate for 2021 was 6.35%; however, there are categories with different tax rates from the general rates.  There are too many categories to list for the purposes of this letter; however, there are a few that need to be highlighted.  Specifically a use tax rate of 7.75% applies to the following: the sale of most motor vehicles exceeding $50,000, the sale of each piece of jewelry exceeding $5,000, the sale of each piece of clothing or pair of footwear exceeding $1,000 and a handbag, luggage, umbrella, wallet or watch exceeding $1,000.

New York provides two options for calculating the use tax due on purchases of less than $1,000 (excluding shipping and handling) each that are not related to a business, rental real estate or royalty activities - the exact calculation method or the sales and use tax chart.  For the exact calculation method, the taxpayer must provide the purchase price, purchase date and jurisdiction of purchase.  The sales and use tax chart is a simple, time-saving method whereby the taxpayer pays use tax based on their federal adjusted gross income according to the chart established by the state.  The exact calculation method must be used on each purchase of $1,000 or more.  For individual items subject to use tax greater than $25,000, the following information must be provided: date item was purchased, description of item purchased, seller’s name and address, delivery address/address of use and purchase price.

Failure to pay use tax may result in the imposition of penalties and interest.  The states are requiring taxpayers to declare an obligation for use tax on their individual income tax returns.  Zero is a valid declaration if you do not have a liability.  If you do not make an entry on the individual use tax line of your resident tax return, you are considered to not have filed a use tax return.

Therefore, when providing your information for payment of use tax, please be sure to specify the following complete information:

• Details of purchase information as specified by the state thresholds for reporting individual purchases
• Details of purchase information as specified by the special categories in Connecticut

If you have any questions regarding sales and use tax, please give us a call.  Information is also published on each state's website regarding this subject.

Internal Revenue Service regulations along with the tax authorities of Connecticut, New York and Massachusetts mandate that tax preparers electronically file individual, fiduciary and business income tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2021 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Internal Revenue Service regulations along with the tax authorities of Connecticut, New York and Massachusetts mandate that tax preparers electronically file individual, fiduciary and business income tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2021 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Our firm has informed you of the regulations and mandates for electronic filing.  However, the decision as to whether your income tax returns will be electronically filed or not rests with you, the taxpayer.  If you choose not to file electronically, we will inform you of the necessary procedures that need to be followed for opting out.

Electronic filing offers the following benefits:

1. Allows the Revenue Departments to process returns quickly and accurately, saving tax dollars.
2. Taxpayers who have a return with a balance due can file their return early and choose to make payment anytime on or before April 18, 2022.
3. Taxpayers who file returns with refunds receive those refunds faster especially if the refund is directly deposited into their bank account.
4. Electronically filed returns receive an acknowledgment of receipt from the Internal Revenue Service and the applicable State Tax Authority and are verified to be mathematically correct, eliminating data entry errors and lost or misplaced mail.

If we did not prepare your returns for 2020, we will need copies of your driver’s licenses and social security cards or passports. 

How does this affect the process of preparing your 2021 income tax returns?

The actual preparation process of your return does not change.  However, the administration, review process and completion of the returns will be effected.  The following is an overview of how the electronic filing process will work.

1) Taxpayers should forward complete information for the preparation of their 2021 income tax returns including all supporting documentation.  Regulations for electronic filing require that our firm maintain copies of the social security cards and driver's licenses for yourself, your spouse and all dependents claimed on the 2021 tax return.  NOTE:  If you provided this information to us last year regarding the preparation of your 2020 tax return, you do not have to provide it again.  However, the driver’s license and passports on file must be current.  Please call our office to verify your information on file if you have any questions.

2) Electronic filing provides various methods for payment and receipt of your refunds.  Payments can be made by 1) paper check, 2) credit card (a convenience fee will be charged by the processing company used by tax authorities) and 3) direct debit out of a designated account.  Refunds can be issued by 1) paper check, 2) application of all or a portion to the 2022 tax year and 3) direct deposit into designated account(s) – see NOTE below.  Returns filed electronically can be filed early but payment not made until a later date designated by you whether payment is by check, credit card or direct debit until April 18, 2022.  After that date, payment is due with filing.  When submitting the information to prepare your tax return, please indicate to us how you would like to handle payments and/or refunds and return it with the information to prepare your tax return.  If you desire to use direct deposit or direct debit, please enclose a voided check so we have complete account information and the financial institution routing transit number.  It is the taxpayer’s responsibility to provide proper banking information and to verify that the payments have been withdrawn from the designated account.  Please allow enough time when scheduling payments to be made directly from accounts.  If problems with payment by direct debit are encountered, taxpayers need to have enough time available for a paper check to be submitted on a timely basis.

NOTE:  Generally, if you do not elect direct deposit, the State of Connecticut will issue refunds by paper check; however, they are encouraging direct deposit.  Direct deposit will NOT be available for first time Connecticut filers.  IRS and the State of New York are offering the option for receipt of refunds by direct deposit or paper check.    

WARNING: It is suggested that refunds on joint tax returns should only be directly deposited into joint bank accounts.  The federal banking regulations, as applied by each bank, may not accept a joint refund into an individual account; our firm has no knowledge of how your bank will handle this matter.  Also, be aware that refunds will be retained, not issued or decreased for any of the following: 1) delinquent federal taxes, 2) delinquent state taxes, 3) delinquent student loans, 4) delinquent spousal and/or child support, 5) delinquent state unemployment compensation debts and 6) debts owed to other state and/or federal agencies.

3) Once your return has been prepared, our firm will forward a "Review Copy" to you.  This review copy can be sent electronically using access through a portal system for your protection or by hard copy (either mail or you can pick it up at our office).  Please let us know the delivery method for the "Review Copy" on the bottom of the enclosed engagement letter which should be submitted with your tax information.

4) If you review the return and are in agreement with the return as prepared, the taxpayer(s) will need to sign Form 8879, IRS e-file Signature Authorization, Form TR-579-IT New York State e-file Signature Authorization, Form FTB 8879 California e-file Signature Authorization, Form M-8453, Massachusetts e-file Signature Authorization, as applicable, and any additional efile form(s) as necessary and included in your "Review Copy" package.  Connecticut and New Jersey accept the federal signature on Form 8879.  Tax returns cannot be filed electronically until our firm is in receipt of the signature authorization forms signed by the taxpayer(s).  We can accept the signed forms electronically.

5) If you review the return and are NOT in agreement with the return as prepared, please call our office to discuss the questions/issues.  If necessary, a new "Review Copy" and signature authorization forms will be prepared.  Please remember that the only way electronically filed tax returns can be changed is by amending the returns.  Therefore, it is imperative that you are in complete agreement with the returns before returning the signature authorization forms to us.

6) Once we receive your completed signature authorization forms, our firm will electronically submit your Federal, Connecticut, Massachusetts, New York, New Jersey and/or California income tax returns.  Income tax returns for all other states will be filed on paper at this time unless we deem it appropriate to electronically file in the other state(s).  Once we receive acknowledgement that your electronically filed returns have been accepted by the taxing authorities, we will forward a complete package to you which will include the following documents: 1) your original information if it has not already been returned with your review copy, 2) 2021 payment vouchers to taxing authorities, if necessary, 3) 2021 income tax returns for other states to be filed by paper, if necessary, 4) 2022 estimated tax payments, if necessary, 5) a copy of the 2021 individual return electronic transmission history and acceptance notification, and 6) a final signed copy of your electronically filed 2021 Federal and state income tax returns, if requested.  Please include on the bottom of the enclosed engagement letter how you would like to receive this complete package.

Some extensions for filing 2021 tax returns must be filed electronically as paper is no longer an acceptable filing method.  Therefore, taxpayers must allow enough time for completing this process.  Please contact our office by Friday, March 25, 2022 if you will need to file extensions for the 2021 tax year.

We ask for your continued cooperation in implementing these income tax return preparation and filing requirements.  If you have any questions, please give us a call.

The IRS has updated its simplified procedure for estates requesting an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The updated procedure replaces that provided in Rev. Proc. 2017-34. If the portability election is made, a decedent’s unused exclusion amount (the deceased spousal unused exclusion (DSUE) amount) is available to a surviving spouse to apply to transfers made during life or at death.

The IRS has updated its simplified procedure for estates requesting an extension of time to make a portability election under Code Sec. 2010(c)(5)(A). The updated procedure replaces that provided in Rev. Proc. 2017-34. If the portability election is made, a decedent’s unused exclusion amount (the deceased spousal unused exclusion (DSUE) amount) is available to a surviving spouse to apply to transfers made during life or at death. The simplified method is to be used instead of the letter ruling process. No user fee is due for submissions filed in accordance with the revenue procedure.

A simplified method to obtain an extension of time was available to decedents dying after December 31, 2010, if the estate was only required to file an estate tax return for the purpose of electing portability. However, that method was only available on or before December 31, 2014. Since December 31, 2014, the IRS has issued numerous letter rulings under Reg. §301.9100-3 granting extensions of time to elect portability in situations in which the estate was not required to file a return under Code Sec. 6018(a). The number of ruling requests that were received after December 31, 2014, and the related burden imposed on the IRS, prompted the continued relief for estates that have no filing requirement under Code Sec. 6018(a). Rev. Proc. 2017-34 provided a simplified method to obtain an extension of time to elect portability that is available to the estates of decedents having no filing obligation under Code Sec. 6018(a) for a period the last day of which is the later of January 2, 2018, or the second anniversary of the decedent’s death. An estate seeking relief after the second anniversary of the decedent’s death could do so by requesting a letter ruling in accordance with Reg. §301.9100-3.

Despite this simplified procedure, there remained a significant number of estates seeking relief through letter ruling requests in which the decedent died within five years of the date of the request. The number of these requests has placed a continuing burden on the IRS. Therefore, the updated procedure extends the period within which the estate of a decedent may make the portability election under that simplified method to on or before the fifth anniversary of the decedent’s date of death.

Section 3 provides that the simplified procedure is only available if certain criteria are met. The taxpayer must be the executor of the estate of a decedent who: (1) was survived by a spouse; (2) died after December 31, 2010; and (3) was a U.S. citizen or resident at the time of death. In addition, the estate must not be required to file an estate tax return under Code Sec. 6018(a) and did not file an estate tax return within the time prescribed by Reg. §20.2010-2(a)(1) for filing a return required to elect portability. Finally, all requirements of section 4.01 of the revenue procedure must be met.

The revenue procedure does not apply to estates that filed an estate tax return within the time prescribed by Reg. §20.2010-2(a)(1) to elect portability. For taxpayers that do not qualify for relief because the requirements of section 4.01 are not met, the estate can request an extension of time to file the estate tax return to make the portability election by requesting a letter ruling.

Under Section 4.01, the requirements for relief are: (1) a person permitted to make the election on behalf of a decedent must file a complete and properly-prepared Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (as provided in Reg. §20.2010-2(a)(7)) on or before the fifth annual anniversary of the decedent’s date of death; and (2) "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)" must be written at the top of the Form 706. If the requirements of sections 3.01 and 4.01 are met, the estate will be deemed to meet the requirements for relief under Reg. §301.9100-3 and relief will be granted to extend the time to elect portability. If relief is granted pursuant to the revenue procedure and it is later determined that the estate was required to file a federal estate tax return, based on the value of the gross estate, plus any adjusted taxable gifts, the extension of time granted to make the portability election is deemed null and void.

If a decedent’s estate is granted relief under this revenue procedure so that the estate tax return is considered timely for electing portability, the decedent’s deceased spousal unused exclusion amount that is available to the surviving spouse or the surviving spouse’s estate for application to the transfers made by the surviving spouse on or after the decedent’s date of death. If the increase in the surviving spouse’s applicable exclusion amount attributable to the addition of the decedent’s deceased spousal unused exclusion amount as of the date of the decedent’s death result in an overpayment of gift or estate tax by the surviving spouse or his or her estate, no claim for credit or refund may be made if the limitations period for filing a claim for credit or refund with respect to that transfer has expired. A surviving spouse will be deemed to have filed a protective claim for refund or credit of tax if such a claim is filed within the time prescribed in Code Sec. 6511(a) in anticipation of a Form 706 being filed to elect portability pursuant to the revenue procedure.

The revenue procedure is effective July 8, 2022. Through the fifth anniversary of a decedent’s date of death, the procedure described in section 4.01 of this revenue procedure is the exclusive procedure for obtaining an extension of time to make portability election if the decedent and the executor meet the requirements of section 3.01 of this revenue procedure. If a letter ruling request is pending on July 8, 2022, and the estate is within the scope of the revenue procedure, the file on the ruling request will be closed and the user fee will be refunded. The estate may obtain relief as outlined in the revenue procedure by complying with section 4.01. Rev. Proc. 2017-34, I.R.B. 2017-26, 1282, is superceded.

The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2025.

The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2025.

Background

Final BEAT regulations adopted with T.D. 9885 include rules under Code Secs. 59A and 6038A addressing the reporting of QDPs, which are not treated as base erosion payments for BEAT purposes. The final regulations generally apply to tax years ending on or after December 17, 2018.

In general, a payment qualifies for the QDP exception if the taxpayer satisfies certain reporting requirements. Reg. §1.6038A-2(b)(7)(ix) requires a taxpayer subject to the BEAT to report on Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts, the aggregate amount of QDPs for the tax year, and make a representation that all payments satisfy the reporting requirements of Reg. §1.59A-6(b)(2). If a taxpayer fails to satisfy these reporting requirements with respect to any payments, those payments are not eligible for the QDP exception and are treated as base erosion payments, unless another exception applies.

The QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) apply to tax years beginning on or after June 7, 2021. Before these rules are applicable (the transition period), a taxpayer is treated as satisfying the QDP reporting requirements to the extent that the taxpayer reports the aggregate amount of QDPs on Form 8991, Schedule A, provided that the taxpayer reports this amount in good faith ( Reg. §1.59A-6(b)(2)(iv); Reg. §1.6038A-2(g)).

In Notice 2021-36, I.R.B. 2021-26, 1227, the IRS announced the intention to extend the transition period through tax years beginning before January 1, 2023, while the IRS studies the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(vi), and the QDP reporting requirements. The IRS has not yet issued regulations amending the applicability date of Reg. §1.6038A-2(g). The IRS continue to study these provisions and has determined that it is appropriate to further extend the transition period.

Deferred Applicability Date of QDP Reporting and Taxpayer Reliance

The IRS intends to amend Reg. §1.6038A-2(g) to provide that the QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after January 1, 2025. Until these rules apply, the transition period rules described above will continue to apply. Taxpayers may rely on this Notice before the amendments to the final regulations are issued.

John Hinman, Director, IRS Whistleblower Office highlighted the importance of whistleblower information in identifying noncompliance and reducing the tax gap in an executive column published by the IRS. Each year, the IRS receives thousands of award claims from individuals who identify taxpayers who may not be abiding by U.S. tax laws. The IRS Whistleblower Office ensures that award claims are reviewed by the appropriate IRS business unit, determines whether an award should be paid and the percentage of any award and ensures that approved awards are paid. The IRS has paid over $1.05 billion in over 2,500 awards to whistleblowers since 2007.

John Hinman, Director, IRS Whistleblower Office highlighted the importance of whistleblower information in identifying noncompliance and reducing the tax gap in an executive column published by the IRS. Each year, the IRS receives thousands of award claims from individuals who identify taxpayers who may not be abiding by U.S. tax laws. The IRS Whistleblower Office ensures that award claims are reviewed by the appropriate IRS business unit, determines whether an award should be paid and the percentage of any award and ensures that approved awards are paid. The IRS has paid over $1.05 billion in over 2,500 awards to whistleblowers since 2007.

Further, Hinman stated that according to the IRS’s Large Business and International (LB&I) division, whistleblowers have provided invaluable insights into violations perpetuated by large corporations, wealthy individuals and their planners. Further, since the inception of the Whistleblower Office, information from whistleblowers has resulted in over 900 criminal tax cases. Hinman stated that individuals can file a Form 211, Application for Award for Original Information, to be considered for an award. Specific, credible and timely claims are most likely to be accepted for additional consideration and referred to one of IRS’s operating divisions. A subject matter expert may contact the whistleblower to ensure the IRS fully understands the information submitted. The IRS will notify whistleblowers when a case for which they provided information is referred for audit or examination.

Further, Hinman noted that the IRS takes the protection of whistleblower identity very seriously.The IRS prevents the disclosure of a whistleblower’s identity, and even the fact that they have provided information, to the maximum extent that the law allows. Additionally, whistleblowers are protected from retaliation by their employers under a law passed in 2019. Finally, Hinman noted that going forward, the Whistleblower Office team will continue to make improvements to this important program, raise awareness about the program for potential whistleblowers and look for ways to gain internal efficiencies to move cases forward as quickly as possible.

A group of Senate Democrats is calling on the IRS to extend the filing deadline for those unable to file for and receive the advanced child tax credit (CTC) due to the processing backlog of individual taxpayer identification number (ITIN) applications.

A group of Senate Democrats is calling on the IRS to extend the filing deadline for those unable to file for and receive the advanced child tax credit (CTC) due to the processing backlog of individual taxpayer identification number (ITIN) applications.

In a July 14, 2022, letter to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, the Senators, led by Robert Menendez (D-N.J.), called on the IRS to "allow families who applied for an ITIN or ITIN renewal prior to April 15, 2022, to file for and receive the advanced CTC if they file a return before or on October 15, 2022."

An ITIN is needed for taxpayers who do not have and are not eligible to receive a Social Security number but still have a U.S. tax filing requirement. This includes individuals who are nonresident aliens; U.S. resident aliens; dependents or spouses of U.S. citizen/resident alien; dependent or spouse of a nonresident alien visa holder; nonresident alien claiming a tax treaty benefit; or nonresident alien student, professor, or researcher filing a U.S. tax return claiming an exception.

The senators cite figures from the Treasury Inspector General of Tax Administration stating that prior to COVID-19 pandemic, it generally took between seven and 11 weeks to process an ITIN application (depending on if it was filed during tax season).

"But, as reported by TIGTA and the IRS’ own website, processing times have increased—with ITIN application processing averaging three to four months and renewal times doubling to 41 days," the letter states.

"Given that the Protecting Americans from Tax Hikes (PATH) Act required that an ITIN had to be issued on or before the due date of the return in order to file for the CTC, many families may not have received their ITIN prior to April 15, 2022," the letter adds, preventing access to the benefit.

The IRS has released a Fact Sheet to help taxpayers understand how and why agency representatives may contact them and how to identify them and avoid scams. Generally, the IRS sends a letter or written notice to a taxpayer in advance, but not always.

The IRS has released a Fact Sheet to help taxpayers understand how and why agency representatives may contact them and how to identify them and avoid scams. Generally, the IRS sends a letter or written notice to a taxpayer in advance, but not always. Depending on the situation, IRS employees may first call or visit with a taxpayer. Further, the IRS clarified that other than IRS Secure Access, the agency does not use text messages to discuss personal tax issues, such as those involving bills or refunds. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS initiates most contacts through regular mail. Taxpayers can report fraudulent emails and text messages by sending an email to phishing@irs.gov.

Further, taxpayers will generally first receive several letters from the IRS in the mail before receiving a phone call. However, the IRS may call taxpayers if they have an overdue tax bill, a delinquent or unfiled tax return or have not made an employment tax deposit. The IRS does not leave pre-recorded, urgent or threatening voice messages and will never call to demand immediate payment using a specific payment method, threaten to immediately bring in law enforcement groups, demand tax payment without giving the taxpayer an opportunity or ask for credit or debit cards over the phone.

Additionally, IRS revenue officers generally make unannounced visits to a taxpayers home or place of business to discuss taxes owed or tax returns due. However, taxpayers would have first been notified by mail of their balance due or missing return. Taxpayers should always ask for credentials or identification when visited by IRS personnel. Finally, the IRS clarified that taxpayers who have filed a petition with the U.S. Tax Court may receive a call or voicemail message from an Appeals Officer. However, the Appeals Officer will provide self-identifying information such as their name, title, badge number and contact information.

The American Institute of CPAs offered the Internal Revenue Service a series of recommendations related to proposed regulations for required minimum distributions from individual retirement accounts.

The American Institute of CPAs offered the Internal Revenue Service a series of recommendations related to proposed regulations for required minimum distributions from individual retirement accounts.

The July 1, 2022, comment letter to the agency covered two specific areas: minimum distribution requirements for designated beneficiaries when death of the employee or IRA owner occurs after the required beginning date, and the definition of employer and guidance for multiple arrangements.

Regarding the minimum distribution requirements, AICPA recommended in the letter that the agency "eliminate the requirement … mandating that a designated beneficiary who is not an eligible designated beneficiary take distribution in each of the 10 years following the death of an employee."

AICPA also recommended that "the final regulations follow the rule … requiring only that the entire interest is to be distributed no later than by the end of the tenth year following the death of the employee/IRA owner."

Regarding the definition of employer and guidance related to multiple employer agreements, AICPA recommended "defining the retirement requirement in section 401 (a)(9)-2(b)(1)(ii) as met at the plan level in reference to MEPs [multiple employer plans] and PEPs [pooled employer plans]; when an employee terminates employment with the employer after attaining age 72 and is reemployed with either the same employer or another employer sponsoring the same MEP or PEP prior to attaining their RBD of April 1 the following year."

The Government Accountability Office (GAO) issued a report on stimulus checks during the Coronavirus 2019 (COVID-19) pandemic. From April 2020 to December 2021, the federal government made direct payments to taxpayers totaling $931 billion to address pandemic-related financial stress.

The Government Accountability Office (GAO) issued a report on stimulus checks during the Coronavirus 2019 (COVID-19) pandemic. From April 2020 to December 2021, the federal government made direct payments to taxpayers totaling $931 billion to address pandemic-related financial stress.

Report Findings

Some eligible taxpayers never received payments. Eligible taxpayers can still claim their payments through October 17. There were challenges for the Service and Treasury to get payments especially to nonfilers, or those who were not required to file tax returns. Taxpayers who think they may be eligible but did not receive the third economic impact payment (EIP) or child tax credit (CTC) can request an extension and file a simplified return at https://www.childtaxcredit.gov/. Although no new EIP and advance CTC payments are underway, the Treasury and Service could learn to manage other refundable tax credits such as the earned income tax credit (EITC). Further, the IRS’s new Taxpayer Experience Office could help improve outreach and improve taxpayer experience.

Recommendations

GAO made two recommendations. First, the Treasury and IRS could use available data to update their estimate of eligible taxpayers to better tailor and redirect their ongoing outreach and communications efforts for similar tax credits. Second, both agencies could focus on improving interagency collaboration. They could use data to assess their efforts to educate more taxpayers about refundable tax credits and eligibility requirements.

The Organisation for Economic Co-operations and Development (OECD) is delaying the implementation of Pillar One of the landmark agreement on international tax reform.

The Organisation for Economic Co-operations and Development (OECD) is delaying the implementation of Pillar One of the landmark agreement on international tax reform.

A new Progress Report on Pillar One, which includes "a comprehensive draft of the technical model rules to implement a new taxing right that will allow market jurisdictions to tax profits from some of the largest multinational enterprises," will be open to stakeholder comment through August 19, 2022, OECD said in a statement.

That report notes that the plan is to finalize Pillar One by mid-2023, with the more than 135 countries and jurisdictions that are a part of the agreement able to put the framework into operation in 2024.

The revised timeline "is designed to allow greater engagement with citizens, businesses, and parliamentary bodies which will ultimately have to ratify the agreement," OECD said.

The Department of the Treasury welcomed the delay.

"Treasury welcomes the additional year agreed to at the OECD to allow further time for negotiations among governments and consultations with stakeholders on implementation of the Pillar One agreement, which will make the international tax system more stable and fair for businesses and workers in the United States and globally," a spokesperson for the agency said. "Tremendous progress has been made, and additional time will ensure we all get this historic agreement right."

OECD also noted that technical work under Pillar Two, which will introduce the 15 percent global minimum corporate tax rate, "is largely complete." The implementation framework is expected to be released later this year.