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Taxes: 2021 Year-end Tax Issues

By James W. Rinier, CPA, EA, and Anthony P. Curatola, Ph.D.
December 1, 2021

Federal tax changes and U.S. Department of the Treasury notices can impact 2021 taxes for individuals and businesses.

 

With 2021 drawing to a close, many tax advisors are gearing up for the upcoming 2021 tax filing season for individuals and businesses. The U.S. Department of the Treasury issued final regulations on taxpayers’ life expectancy, the Internal Revenue Service (IRS) expanded the Identity Protection (IP) PIN program to all taxpayers, and Congress made another change to the employee retention credit. Keeping informed on these changes is a full-time job. Here are some details on a few of the business and individual changes that might be overlooked that apply to the 2021 tax filings.

 

NEW RMD TABLES

 

The Treasury Department had issued proposed regulations (REG-132210-18) that were due to impact all taxpayers taking required minimum distributions (RMDs) beginning with tax year 2021. These regulations updated the life expectancy tables to reflect longer life expectancies. Such a change would allow taxpayers to take smaller RMDs over time and thereby extend their available funds over a longer period. Of course, this assumes the taxpayer has adequate savings to take advantage of the smaller RMDs.

 

The Treasury Department, however, issued the final regulations in November 2020 (TD 9930) that delayed the effective date of the regulations to 2022 (instead of 2021). Consequently, taxpayers need to take their 2021 RMD based on the old life expectancy tables, which translates into a larger distribution amount. Thus, the smaller RMDs are coming, but not until 2022. The importance of this issue is to ensure that taxpayers took the correct RMD for 2021, which is a larger amount than it would have been under the updated tables.

 

IP PIN OPT-IN PROGRAM

 

The IRS has expanded its IP PIN opt-in program to all taxpayers who can pass a rigorous identity verification process (IRS News Release 2021-09). The IP PIN is a six-digit code that only the taxpayer and the IRS know to help prevent someone from filing fraudulent tax returns using a taxpayer’s personally identifiable information such as a Social Security number.

 

The IP PIN program isn’t new: It started about 10 years ago to protect confirmed victims of identity theft from ongoing tax fraud. The IRS expanded the program to specific states where taxpayers could voluntarily obtain the IP PIN, and now the program will be available nationwide. The IRS provides key information about the IP PIN opt-in program in News Release 2021-09:

 

  • The program is voluntary.
  • The taxpayer must pass a rigorous identity verification process, and spouses and dependents are eligible for an IP PIN if they can verify their identities. An IP PIN is valid for a calendar year, and a taxpayer must obtain a new IP PIN each filing season (yes, you need to get one every year).
  • The online IP PIN tool is unavailable between November and mid-January each year.
  • Correct IP PINs must be entered on electronic and paper tax returns to avoid rejections and delays.
  • Taxpayers should never share their IP PIN with anyone but their trusted tax provider. The IRS says it will never call, text, or email a taxpayer requesting their IP PIN and urges taxpayers to be aware of scams to steal their IP PIN.
  • Perhaps most importantly, there is currently no opt-out option for taxpayers once they opt in, but the IRS is working on one for 2022.

 

To obtain the IP PIN for 2021, a taxpayer should go to the IRS website and follow the instructions. If the taxpayer doesn’t have an IRS account, the online process will require the individual to verify their identity using the Secure Access authentication process. Once a taxpayer authenticates their identity, the 2021 IP PIN will be immediately available. The IP PIN must be used when prompted as the taxpayer prepares electronic tax returns, or it should be entered by hand near the signature line on paper tax returns.

 

EMPLOYEE RETENTION CREDIT

 

Another important change applies to eligible employers who can take a 70% tax credit of wages paid after March 12, 2020, and before January 1, 2021, against applicable employment taxes for each calendar quarter. The American Rescue Plan Act of 2021 extended the employee retention credit for businesses through December 2021, so there’s still some time left to claim this credit for the third and fourth quarters of 2021.

 

The credit is available to businesses that have seen revenues decline or had to temporarily shut down operations due to government orders related to COVID-19. Businesses that qualify can take a 70% credit on $10,000 of an employee’s wages per quarter, which amounts to a credit of $7,000 ($10,000 x 70%).

 

In addition, a separate credit is provided to new start-up businesses that meet the criteria of a “recovery startup business” that began operations after February 15, 2020. These qualified businesses are eligible to claim up to $50,000 total credit for each of the third and fourth quarters of 2021.

 

Self-employed individuals may be able to claim the credit for the wages they paid to their employees, but they don’t qualify for their own self-employment earnings for this tax credit.

 

For guidance on the employee retention credit, consult Notice 2021-20, Notice 2021-23, Notice 2021-49, and Revenue Procedure 2021-33. The IRS also provides additional guidance on its website, but it may not be up to date.

 

PER DIEM RATES

 

The IRS issued its annual notice (Notice 2021-52) updating the special per diem rates for taxpayers to use in substantiating the amount of business expenses incurred while traveling away from home. The notice is applicable for the period October 1, 2021, to September 30, 2022, and thereby modifies the rates provided in Notice 2020-71 that were applicable for the period.

 

The new high-low substantiation per diem rates are $296 (previously $292) for travel to any high-cost locality (the key cities, counties, or other defined locations where costs are higher for per diem purposes) and $202 (previously $198) for travel to any other locality within the continental United States (CONUS). The new per diem rates for meals and incidental expenses only are $74 (previously $71) for travel to a high-cost locality and $64 (previously $60) for travel to any other locality within CONUS. There were a few changes in the high-cost locations. Hilton Head, S.C., was added; Rhode Island cities Jamestown, Middletown, and Newport were added for part of the year; and Gulf Breeze, Fla., was removed.

 

The 2021 tax year continues to be a challenging time for all taxpayers. It’s vital that taxpayers and tax preparers keep up with business and individual tax law changes, as the number of changes could lead to something being overlooked for 2021 tax filings. Being aware of some of these key announcements and notices should be helpful for taxpayers as they prepare for the 2021 tax season.

 

© 2021 A.P. Curatola

 

James W. Rinier, CPA, EA, is the Vertex Fellow at Drexel University. He can be reached at jwr29@drexel.edu.
Anthony P. Curatola, Ph.D., is editor of the Taxes column for Strategic Finance, the Joseph F. Ford Professor of Accounting at Drexel University, and a member of IMA’s Greater Philadelphia Chapter. You can reach Tony at (215) 895-1453 or curatola@drexel.edu.  
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