Employer education assistance provided to repay student loans remains tax-free through 2025.  NEW: Most student loans forgiven during 2021 through 2025 are excluded from federal cancelation of debt (COD) income.

Mortgage insurance premiums remain deductible through 2021; the maximum deduction is $1K if Adjusted Gross Income (AGI) is less than $100K.

Charitable contributions to public charities may still be claimed up to 100% of the taxpayer’s AGI in 2021; rather than the customary 60% limitation.  CAVEAT:  While such deductions serve to reduce taxable income, they do not reduce AGI for purposes of computing other AGI-limited thresholds such as ROTH contributions and the Net Investment Income (NII) surtax.

Business meals consumed in 2021 and 2022 remain fully deductible if food or beverages are provided by a restaurant.  To be deductible (1) the meals cannot be lavish or extravagant, and (2) the business owner or an employee must be present when meals are served.  If food or beverages are provided during an entertainment activity, they must be purchased or itemized separately from the cost of entertainment, which is nondeductible.  STATE: California (CA) allows restaurants to temporarily maintain outdoor dining areas and to offer cocktails-to-go (through 2026), which will surely be much-appreciated at newly authorized virtual marriage ceremonies!

Economic Impact Payments (EIP) – a total of three were issued by the federal government during 2020 and 2021.  Eligible taxpayers may have received as much as $1,200 (Spring ’20), $600 (January ’21), and $1,400 (late Spring ’21).  To provide COVID assistance to low- and moderate-income taxpayers as soon as possible, checks and debit cards were issued in advance of tax credits that would later be claimed on TY’20 and TY’21 tax returns.  While not considered to be taxable income, taxpayers were nevertheless asked to reconcile the amounts of stimulus payments received against the credits to which they were entitled.  If individuals had already received their full entitlements in 2020 and early 2021, no further reductions would be available on the TY’20 return.  On the other hand, taxpayers who did not receive the full $1,800 of EIP, could make up the difference by receiving a Recovery Rebate Credit for 2020, which could then be used to reduce their federal tax liability or refunded if no tax was due.  Similarly, EIP #3 must be reconciled against the credit available on the 2021 return. STATE: CA issued its own version of COVID relief in the form of Golden State Stimulus Payments I (Spring ’21) and II (Fall ’21) to taxpayers who claimed CA’s Earned Income Tax Credit (EITC) on their TY’20 returns and Golden State Grants to recipients of certain public benefits (e.g., CalWORKs and CalFresh).  These payments are not taxable for state purposes and likely (?) will be excludable on the federal return although the IRS has not yet confirmed this position.

NEW: As if intended to confuse taxpayers further, the IRS began issuing Advance Child Tax Credit payments beginning in July 2021.  The key here is “advance.”  Taxpayers who previously qualified for the Child Tax Credit in the prior year, were automatically issued monthly payments representing a pro-rated portion of the credit they would likely be entitled to claim on the TY’21 return.  The sum of these payments will now have to be reconciled with the actual credit on the return and may ultimately reduce anticipated tax refunds if the advance was greater than the allowable credit.  NOTE:  The IRS expects to provide affected taxpayers with a detail of total payments received by January 31st.  STATE:  CA offers a Young Child Tax Credit (up to $1,000) to taxpayers who qualify for the Earned Income Tax Credit (EITC) and have a child under age 6.  Taxpayers may use an online tool to estimate the amount of credit for which they are elgibile.

The Penalty Relief Initiative is intended to assist taxpayers affected by COVID by making it easier for qualified taxpayers to benefit from such long-established programs as short-term extensions, installment agreements, and offers in compromise, as well as reasonable-cause and first-time penalty abatement.  On the IRS website, Deputy Commissioner Guillot encourages taxpayers struggling with a tax bill to “reach out to us” and promises “our people can help you.”  STATE: With comparable compassion, CA county tax collectors have been authorized to cancel late property tax penalties if the delay is due to a shelter-in-place order.

Beginning with 2021 tax year, taxpayers may only deduct business losses up to an annual inflation-adjusted threshold:  $262,000 (Single) and $524,000 (Married-Filing Jointly).  Excess business losses must be carried forward as a Net Operating Loss (NOL) into a future year.  NOTE:  Excess losses resulting from the flow-through of partnership and S-Corp income and expenses are determined at the individual (not entity) level.

Business expenses paid with the proceeds of Payment Protection Program (PPP) loans are tax-deductible on federal returns, even if loan proceeds are later forgiven.  STATE:  CA taxpayers, however, must reduce business expenses by the amount of PPP loan forgiveness on the state return unless the amount of the forgiven loan is included in state taxable income.    Loans that were approved in April, May and June of 2021 are not eligible for the income exclusion.  As a result, business expenses paid with these loan proceeds are fully deductible, just as they are on the federal return.

Since CA does not conform, taxpayers who claimed federal adjustments for the Employee Retention, Paid Sick & Family Leave, and COBRA Subsidy credits will have to reverse these adjustments on their state returns.  As a result, state taxable income will be less than the federal income in most cases.

SALT:  Since 2018, the federal deduction for state and local taxes (SALT) has been limited to $10K.  As a result, high-income taxpayers have been unable to deduct but a small fraction of their state tax withholdings, state estimated tax payments, and property taxes.  Creative legislators have since proposed innumerable workarounds; the IRS has just given limited approval to one such plan that allows pass-through entities such as partnerships and S-corporations to pay taxes directly imposed upon them.  The partner or shareholder would, of course, not be entitled to these state tax deductions but would nevertheless benefit because the entity’s net income passed through on Schedule K-1 would now be reduced.  Eighteen states (including CA) have so far enacted enabling legislation.  CAVEAT:  With rumblings on the Hill that the SALT cap will be increased or even eliminated in its entirety before the midterm elections, along with many other complications, limitations, and restrictions, it may well be too soon to create a pass-through entity just for the purpose of circumventing the SALT cap.

Property Taxes:  STATE:  CA’s Proposition 19 has expanded the rule transferring base-year valuations to senior (over age 55) and disabled residents who purchase a replacement primary residence of any value in any county after April 1, 2021.  If the replacement dwelling is of equal or lesser value, its assessed value will be the assessed value of the original property which generally is far less than its sales price.  If the replacement property is of greater value, its assessed value will be the assessed value of the original property plus the difference in fair market values between the old and new properties.  If, for example, the old home had an assessed value of $400K but was sold for $650K, and a replacement home is purchased for $750K, the new assessed value will be $500K (= 400 + {750 – 650}).  Assessments due to parent-child transfers have, on the other hand, become less favorable for properties valued in excess of $1 million.  Rather than inheriting the parent’s assessed value, the assessed value of the transferred property must be stepped up-based on a complicated formula.

IRS Backlog: Although the IRS is making progress, the tax authority reports that it still has not processed 6.5 million individual and 2.6 million amended returns.  Estimated processing times for original returns may be as long as 12-16 weeks and more than 20 weeks for amended returns.  Updates and anticipated wait times for other matters are published online.  Individual filers may also use Where’s my Refund? and Where’s my Amended Return? to receive status reports.  1040 filers may set up an IRS account that will offer users the ability to check balances due, make online payments or set up an Online Payment Agreement, verify past payments, and obtain transcripts.  A step-by-step guide to setting up an account is available on the How to… page of my website.  STATE:  To set up an account with the CA tax authority, go to MyFTB Account.

Address Changes:  In an effort to streamline its operations, the IRS has closed several of its processing centers throughout the country. CA taxpayers who previously filed their federal tax returns with Fresno, must now submit paper returns to:  Department of the Treasury – Internal Revenue Service, Ogden, UT  84201.  If enclosing a payment, Form 1040 should be mailed to:  Internal Revenue Service, P.O. Box 802501, Cincinnati, OH  45280.  CAVEAT:   Be sure to discard old pre-addressed mailing envelopes that you may have saved from prior years.  Better yet, submit your return electronically for faster and safer processing.

Identity Theft:  In an ongoing effort to combat fraud, the IRS recently unveiled a new online identity verification process.  Taxpayers will be asked to sign into some IRS applications and online tools with an ID.me account.  Unregistered users and taxpayers who already have a previously established username may continue to use the old login credential until summer but are encouraged to establish a new ID.me account as soon as possible.  Users will be required to upload a driver’s license or passport, as well as a selfie taken with a smartphone or webcam.  Additional information and instructions are available at ID.me IRS Help Site.

IP-PIN:  The IRS Identity Protection PIN program is now available to anyone who chooses to apply.  A 6-digit number will be assigned annually.  Once assigned, the IP-PIN must be used when e-filing a tax return.  To obtain an IP-PIN, a taxpayer may use the online Get an IP-PIN tool or submit Form 15227 to the IRS.

The IRS will likely begin processing returns as early as January 24th, 2022.  Due dates for TY’21 tax returns are:

Foreign Account Reporting:  Taxpayers who had authority over foreign financial accounts with a combined value in excess of $10,000 at any time during 2021 must e-file FinCEN 114 by April 18, 2022; taxpayers who need additional time to file receive an automatic 6-month extension.  CAVEAT: Individual taxpayers, as well as corporations and partnerships, may also be required to file Form 8938 and attach it to their income tax return if the aggregate value of foreign financial assets exceeds $50K.  Certain taxpayers may have additional filing requirements, including Form 3520 (if transacting with a foreign trust or receiving an inheritance from abroad) and Form 8621 (if invested in passive foreign investment companies), amongst many others.  STATE:  CA conforms to FATCA reporting requirements.  Failure to attach the federal Form 8938 to the state return will result in a $10,000 state penalty in addition to any applicable federal penalties.

Information Returns:  Copies of W-2s issued to employees and 1099-NECs issued to independent contractors must be submitted with the accompanying Forms W-3 and 1096 by January 31, 2022. Most other 1099s may be filed with the IRS on paper by February 28th or submitted electronically by March 31st.  CAVEAT:  Payers reporting non-employee compensation paid to independent contractors may no longer use Form 1099-MISC and must instead submit the new Form 1099-NEC.

STATE:  CA now presumes that most workers are employees unless the hiring entity can satisfy each of the following three criteria under the A-B-C Test:  A) The employer may not control or direct the worker’s performance; B) The worker performs work outside the usual course of the employer’s business; and C) The worker must be customarily engaged in an independently established trade or business that is of the same nature as the work performed for the employer.  The new absolute standard eliminates the flexibility of the old Borello (1989) standard that weighted multiple factors with regards to how the work was performed.  NOTE:  The following professions are generally exempt from CA’s A-B-C Test: App-based drivers, architects, attorneys. engineers, insurance agents, investment advisors, physicians, and veterinarians.  Newspaper distributors and carriers were previously exempt but are now subject to the A-B_C Test begging in 2022.

CAVEAT:  Worker classification may differ for federal and state purposes.  Under federal law, a worker will be treated as an employee if the employer controls and directs the worker’s job performance, along with other factors including expense reimbursements, permanence of the employment relationship, and the worker’s ability to work for someone else.  In some circumstances, a worker may be classified as an employee for state purposes and as an independent contractor for federal purposes.  As a result, unreimbursed employee expenses which are no longer deductible as miscellaneous itemized deductions, could instead be claimed as allowable business deductions on the federal Schedule C.

Local Business Tax:  Most cities require that businesses be registered; the attendant tax may sometimes be waived if registration forms are timely filed (February 28, 2022 for Los Angeles).  NOTE:  Independent contractors (workers paid via 1099 rather than W-2) are deemed to be “in business” for licensing purposes.  Links to licensing departments in Los Angeles, Culver City, West Hollywood and Santa Monica, information for small business owners and much more can be found on a specialty page of my website dedicated to business matters.  CAVEAT:  Some localities may require AirBnB and other short-term rental hosts to submit Business Property Statements for the purpose of assessing an annual tax on the value of personal property and fixtures used in the business.

Taxpayers should note that new lines and checkboxes have been added to Form 1040 to capture information that was “lost” when Congress foolheartedly demanded that the IRS create a postcard-sized return in 2018.

The cyber currency compliance question on Form 1040 must be answered by all taxpayers.  “Yes” is required if taxpayers have received, sold, exchanged, or otherwise disposed of virtual currency during the tax year.  However, taxpayers may answer “no” if they have merely purchased virtual currency in exchange for fiat currency (e.g., US dollars).  NOTE:  Failure to report cryptocurrency transactions can lead to civil and criminal penalties.

Other Income previously aggregated and reported on Line 8 of Schedule 1, must now be specifically identified on 17 sub-lines.  Entries for such items as gambling winnings, COD income, jury duty pay, even Olympic prize money must be entered on Lines a through p, with Line z still reserved as a catch-all for items not otherwise listed.

Charitable contributions may be claimed on Line 12b as an above-the-line deduction, allowing taxpayers who do not itemize deductions on Schedule A to claim up to $300.   REMINDER: Seniors over the age of 70½ may elect to make a direct IRA-to-charity transfer, thereby avoiding the inclusion of their Required Minimum Distribution (RMD) in taxable income, minimizing the taxability of Social Security benefits, and potentially avoiding Medicare Surtaxes.  Although the RMD starting age from is now 72, the Qualifying Charitable Distribution (QCD) starting age which remains at 70½.

Under-age filers who were not yet 19 at the end of 2021, must check the box on Line 27.

STATE:  CA requires taxpayers wishing to claim the Head of Household (HoH) status to attach Form 3532 to the state return to allow the Franchise Tax Board (FTB) to determine the taxpayer’s eligibility for the preferential tax filing status.  Failure to submit the form will result in the automatic issuance of a Notice of Tax Return Change denying the HoH status and assessing additional tax.

STATE:  CA now requires that all taxpayers maintain qualifying healthcare coverage.  Failure to maintain minimum essential insurance will trigger the Individual Shared Responsibility Penalty equal to the greater of either $750/adult and $375/minor or 2.5% of excess gross income over the filing threshold for the applicable filing status; computed on Form 3853.  To reconcile advance premium assistance subsidy payments, Taxpayers must use Form 3849.  The FTB offers an online estimator to calculate the applicable penalty.  Information about coverages, exemptions and financial assistance are available through Covered California.  REMINDER:  The federal Shared Responsibility Penalty assessed on taxpayers who fail to maintain minimum essential healthcare coverage was repealed in 2019.

STATE:  Several months ago, the FTB began to send a new Form 3912 to CA taxpayers who have active powers of attorney (POA) on file with the tax authority.  The form lists all representative relationships – whether limited or full – as well as the expiration date of each.  NOTE:  Taxpayers may use Form 3920-RVK to revoke any unwanted PoA.

The Christmas Price Index, published annually by PNC Wealth Management, is up 5.7% this year (the largest increase since 2013). By comparison, Social Security’s cost of living adjustment (COLA) is up 5.9%.  PNC’s index estimates that it currently costs $41,206 to buy your “true love” all gifts listed in The Twelve Days of Christmas, including drummers, pipers, dancing ladies, milkmaids, swans, geese, calling birds, French hens, turtle doves, and the infamous partridge in a pear tree, along with five golden rings.  The gal who has done the shopping for 36 years of the index’s 38-year span explains that the partridge and doves came from a national bird supplier, hens and swans from hatcheries, geese from a waterfowl farm, and canaries from a national pet chain.  The pear tree came from a New Jersey nursery, the five 14-carat gold rings from a national jewelry chain, the dancing ladies from a modern dance company in Philadelphia, and the leaping lords from the Philadelphia Ballet.  Because maids-a-milking are unskilled laborers, their cost was determined by the federal minimum wage ($7.25, unchanged since 2009).

Adding to my collection of dumb laws, here are this year’s winners:
•   Arrow shafts will henceforth be subject to a 55-cent per arrow tax.
•   And CA manufacturers must now identify pre-moistened disposable wipes as “non-flushable.”