Why You Might Want to Seek Out Accounting Help in 2021

It goes without saying that 2020 has been a wild ride in almost every respect. The COVID-19 pandemic and presidential election definitely made tax and accounting matters no exception. Permanent and temporary legislative changes already in effect, as well as those proposed and dependent on the Senate run-offs in January, have given taxpayers a lot to consider. In addition to the many other year-end planning matters we typically discuss with clients around this time, there are some considerations that might warrant accounting help in 2021. 

Withholding Adjustments

Form W-4 is used to determine and set the amount of income tax to be withheld by your employer from your paychecks, and you are permitted to update Form W-4 throughout the year. Many taxpayers learned about withholding changes resulting from the TCJA the hard way when it came to filing their 2018 tax return. Taxpayers may want to review their withholdings as part of their tax planning strategy. You will have more to think about in terms of withholding if you and your spouse both work, you have more than one job, or if you do freelance sidework. Your withholdings from any one source may not reflect your tax bracket, meaning that you’re underwithholding and would owe taxes in April. 

Working Remotely

With government-mandated office closures and social distancing requirements, many of us found ourselves working remotely in 2020, and we are likely to continue to do so in 2021. For some of us, that remote work crosses state lines. When it does, income earned where you are working remotely may also be subject to taxation where you live. Most states offer a credit to offset the double tax; however, state credits are limited to the lesser of your tax where you work or your tax where you live.

Some states have passed temporary legislation since the onset of COVID-19, and that has given us even more to think about. It’s important to understand where you fall in terms of tax liability, based on the specifics of your living and working situation, the timeline, and associated state laws.    

People who live in neighboring states but work in Massachusetts are generally subject to MA tax liability. However, the Commonwealth temporarily waived income tax liability on income earned by taxpayers who temporarily moved here due to the pandemic. For New Hampshire residents who commuted to Massachusetts for work before the pandemic, and who are now working remotely, the Commonwealth passed an emergency order to keep these individuals temporarily among those subject to collection of income tax. New Hampshire is currently bringing Massachusetts to court over this matter, but resolution isn’t likely before April 15th. Until the courts decide on this issue, we recommend proceeding as you normally would. 

Retirement Income 

A number of pandemic-related legislative changes affect retirement income. If you took coronavirus-related distributions under the CARES Act legislation, that income may either be included ratably over tax years 2020, 2021 & 2022 or as a single distribution in your 2020 income. We can help you determine the best option. If during 2021 or 2022 you are able to recontribute any distributions taken under the CARES Act, you have the option to do so and to amend your past filings without counting it as income.

If you're looking for guidance, my team can help you determine whether converting some or all of your Traditional IRA into a Roth IRA would be beneficial. If you received less income in 2020 than you generally do, it may place you in a lower tax bracket and make a conversion less costly. Since the CARES Act waived the required minimum distribution (RMD) for 2020, choosing to convert would not result in an RMD needing to be paid ahead of the conversion, as it would in any other year. Determining the best option for you requires significant planning. Consult with your tax advisor on the necessary projections and planning efforts ahead of making any decisions. 

Estate and Gift Tax 

The TCJA legislation contained a provision allowing for substantially higher lifetime estate and gift tax exemptions through 2025. The current lifetime estate tax and gift tax exemptions are both $11.58 million, and they will rise to $11.7 million in 2021. Under Biden’s proposed tax plan, however, the lifetime estate exemption may be reduced to $3.5 million, the lifetime gift tax exemption may be reduced to $1 million, and these reductions could occur before 2025. For high-net-worth individuals, these changes could have significant effects. Having an estate and gifting plan can help you take advantage of the current, higher exemptions. 

Contact Abbott & Company

This year has given taxpayers a great deal of food for thought. Heading into 2021, there may be lingering questions and a number of things you haven’t encountered. If you need your questions answered, and some sound guidance along the way, we’re here to help. Contact us today to get started on your 2021 tax plan.

Check out some of our other accounting help articles.   

by Mellinda Abbott, CPA

As a CPA and small business owner with experience in corporate America, Mellinda Abbott is a distinguished, invaluable personal and business tax advisor. She understands the everyday issues, compliance matters, best practices, and operational concerns of her clients. Mellinda prides herself on fostering personal client relationships while providing year-round, customized services to her clients designed to maximize savings, limit tax exposure, and, most importantly, to help her clients attain their financial goals.