Your 2021 Return: Notable Tax Code Changes to Consider

Your 2021 Return: Notable Tax Code Changes to Consider


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In this episode, Colton Lawrence, the Trucker CFO, will continue our look at a number of key considerations that can have an impact on trucking professionals as you begin the process of working toward filing tax returns for 2021. As you’ll hear, we’ll go into some depth exploring tax considerations related to unreimbursed medical expenses, retirement account disbursements, child tax credits and donations to charity.

TRANSCRIPT

Announcer:
Coming up next on PodWheels, you'll hear our second Trucker CFO Podcast of 2022.  Here's a preview featuring Colton Lawrence, The Trucker CFO on retirement accounts as part of our look at tax code changes that could potentially impact 2021 tax filings...

Colton Lawrence:
Congress, with some of the changes they made to taxes with Covid, they temporarily allowed for 2020 tax purposes a waiver on the 10% penalty for un allowed distributions from retirement accounts.  That made a big difference. There were a lot of folks who had access to funds in their retirement accounts and perhaps needed access to those funds to help get them through some of the difficult times that came with Covid.  Whether it was because they were sick or because they saw a downturn in their business related to Covid.  As we sit currently, Congress has not renewed that exemption for 2021.  So if you took distributions out of retirement accounts early, they are going to be subject to the 10% penalty for 2021 and those 10% penalties can add up.

Announcer:
Welcome back to The Trucker CFO Podcast and thanks for connecting with us here again on PodWheels.  The second episode of the podcast for 2022 will continue our look at a number of key considerations that can have an impact on trucking professionals as you begin the process of working towards filing tax returns for 2021.  As you'll hear, we'll go into some depth exploring tax considerations related to unreimbursed medical expenses, retirement account disbursements, child tax credits, and donations to charity.

As always on the podcast, The Trucker CFOColton Lawrence will be covering these topics and more with Greg Thompson, the Executive Producer of PodWheels. Before we take you to our conversation with Colton, Trucker CFO and PodWheels would like to remind our listeners to please keep in mind that every tax and business situation is unique.  In addition, the perspective shared on this podcast should not be considered as tax advice.  If you have questions regarding your specific tax situation, you should consult a qualified tax professional.

Later in the podcast, we'll share some information on how you can connect with Trucker CFO to discuss your specific tax, accounting, and business advisory needs.  Now let's hand it off to Greg Thompson in the PodWheels studios.  As you'll hear, Greg connected with Colton through Zoom audio.

Greg Thompson:
Hello again, everybody and thanks for joining us for another edition of The Trucker CFO Podcast.  Greg Thompson alongside Colton Lawrence.  And as you guys heard in the opening, we're going to follow up our first podcast that we released this year by talking about the notable changes to the tax law that will apply to our 2021 filings.  As always, our focus is going to be on how these changes could impact owner-operators and independent contractors.  Now folks, as our regular listeners know, we spent some time in the final minutes of our first podcast of 2022 talking specifically about the changes to the per diem allowance and how that will impact your tax filings.  If you missed that discussion on per diem or you haven't had a chance to listen to our first podcast of 2022, we would encourage you to check it out.  And now it's time to bring Colton Lawrence into our conversation and Colton, there are a number of changes beyond per diem that could have an impact on the 2021 filings of professional drivers.

Colton Lawrence:
Well Greg as you may know, there are literally tens of thousands of pages of tax code that Congress has been so gracious to come up with.  And in any given year, there are changes that come about.  And there have been more changes over the last few years because of Covid that as tax preparers, we have had to stay up on and relay to our clients and make sure they understand how it is impacting them.

 

Greg Thompson:
It is so complex and you, as a tax preparer, as a CPA, you have to be up on that.  You have to know it and you have to know it in particular for your clients for the owner-operators, independent contractors and how it applies to the trucking industry.  How do you stay up on all that stuff?

Colton Lawrence:
Greg, it is very difficult.  My opinion is that there is no one tax preparer who can understand all of the tax code.  It’s just not possible for somebody to understand everything.  And as a result, you have tax preparers who will generalize in certain types of practice.  They may work with your basic taxpayer, where all they have are W-2s, some simple type returns that can go through.  Then you have tax preparers who will be industry specific.  In the case of Trucker CFO, we work with truckers.  You then may have tax preparers who work with doctors and attorneys or perhaps who work with construction companies.  Maybe they do a couple different industries, but the fact is, is that there are so much tax code out there that it is impossible to stay up on everything.  What we do, by focusing on trucking and transportation, is we spend time analyzing the changes and knowing what to look for and where to look for it and how that's going to impact our clients.

Greg Thompson:
Tax law is always evolving, always changing.  What's new and what applies to the trucking industry in particular?

Colton Lawrence:
Yeah, let's take a few minutes to talk about that.  There are numerous changes.  There's no way in this podcast we can sit and talk about all of them, but we're going to highlight some of the changes that will have a more direct impact on our average clients.  

Greg Thompson:
One that I know that we want to dive into here is unreimbursed medical expenses.

Colton Lawrence:
That's correct.  With unreimbursed medical expenses, it has changed throughout the years.  One thing that folks may not understand is that for these medical expenses, first of all, as the title indicates, unreimbursed, these are for expenses that are not being covered by your insurance.  It has to be a qualified insurance plan.  But if they're not covered by that insurance plan, then they can perhaps count as a tax deduction for you.  That depends on the amount of money that you've spent.  And for 2021, there's going to be a floor of 7.5%.  What that means is if you have spent an amount that equals or exceeds 7.5% of your adjusted gross income, any amount above that 7.5% will be deductible.  If for example, your adjusted gross income is $50,000, your floor for unreimbursed medical expenses is going to be $3750.  Every dollar above that amount will now count as a deduction for you if you itemize on your tax return.  That may be getting into the weeds a little bit, but just understand that that's the number you're looking at.   And then from a tax perspective, as we prepare your tax return, we will know if you're itemizing, we will be able to explain to you whether or not it's going to apply.  If you're just taking a standard deduction, it's not going to apply.  A number of different factors, you need to consult a tax professional to know whether or not it's going to apply to you or not.  But that's a basic explanation of how that works.

Greg Thompson:
When we talk about that, depending on somebody's medical plan, we're talking about a potential significant event.  Maybe somebody broke their leg and they had to have therapies and all of that.  So you're talking about again, your out of pocket expenses in your example is exceeding $3,300 based on the $50,000 gross income.  That's one of those things where when you're looking at everything universally, you guys can say, you might not have itemized last year, but this may give us a good reason to itemize because it's to your benefit.  Is that something you probably look at?

Colton Lawrence:
Yeah, we are always looking at whether or not they are qualified to itemize their deductions.  And it's a pretty simple thing.  We just look at all of those items that qualify as an itemized deduction, including unreimbursed medical expenses, and if in total, they surpass the standard deduction, well then we go with the itemized deduction.  One other thing to point out about this is that amounts paid for insurance premiums and deductibles do not count as unreimbursed medical expenses.  So these truly are going to be expenses outside of those insurance costs, outside of those other types of expenses. These really are going to be the types of expenses that are not covered by insurance or perhaps for folks who don't have insurance.  If somebody is hospitalized with Covid or some other ailments and they don't have insurance, they're going to very quickly exceed that 7.5% floor.  And as a result, we're probably going to be talking to them about how to take advantage of that.

Greg Thompson:
And I'm glad you brought up Covid because again, a lot of the things that we're looking at today, have been impacted by Covid and hospitalization.  And that out of pocket cost is a great example.  Let's talk a little bit about child credits because that's always evolving.  What's happening in this area? 

Colton Lawrence:
The child tax credit for this year, there's a number of things happening.  And frankly, it has the potential to really end up kind of being a disaster for tax preparation purposes and let me go into why.  First of all, the child tax credit has increased from 2020 to 2021.  That's the good thing.  It's gone from $2000 per child 16 and under, to $3000 per child 17 and under, and $3600 for children five and under.  So that's a pretty significant increase.  And for folks who have multiple children, it's going to make a big difference.  Keep in mind, these are credits, it's a dollar for dollar reduction to tax liability and it can take you below zero.  So if you've got $1000 tax liability, but you've got a couple of children, it can result in you getting a pretty significant refund.  That being the case.  One thing that the federal government did throughout 2021, as most folks who have children will know about, is that the federal government advanced this child tax credit.  So there were payments throughout the year. Most of them came on a monthly basis and most who have children will have received this payment.  Because it's an advance, they are not able to take the deduction on their tax return again.  As a tax preparer, we need to know how much you received for your child tax credits throughout the year.  If that is not properly reported, let's assume you have one child that is 15 years old and you qualify for that $3600 tax credit and you receive that payment throughout the year in 2020.  If you don't report that to your tax preparer, you're going to get an additional $3600 credit on your tax return in error.  So as a result, you're going to show a tax liability that is understated by $3600.  And in a few months after you file your tax return, you're going to get a nasty gram from the IRS.  Or perhaps they're going to hold on to your refund if that is the case and you're gonna be left wondering what's going on.  We saw this a lot for the 2020 tax preparation season where folks were improperly reporting how much they had received for their stimulus payments and because the IRS knows how much you are supposed to receive.  If it's reported in error, it is going to result in a longer period of time for you to get your refund.  The IRS is going to manually adjust that.  And like I said, it's got the potential to really cause some problems when it comes to the tax preparation process.

Greg Thompson:
So in those cases, and I know you guys spend time asking people, new clients, current clients.  How many children do you have?  What are their ages?  What other questions do you ask in that process to make sure that what you just detailed doesn't happen?

Colton Lawrence:
Well the main question we're gonna be asking is how much did they receive on the advance.  And as I mentioned, that these are often times monthly payments that people have been receiving.  And so it's going to be very important for taxpayers to go back and really look at their bank accounts, look at how much they received from the IRS on those deposits and make sure that they properly report them to their tax preparer.

Greg Thompson:
Colton as always, as we get into these details, it's interesting to know the conversations that you have with your clients.  The things that folks need to be aware of as we head into this time of year.  I know there are a few other highlights that you want to hit here on changes that have happened related to 2021 and the return that folks are going to be filing.

 

Colton Lawrence:
There's a couple other quick ones we can hit on.  First of all, standard deductions.  We talked a little bit about itemized deductions and some of the benefits that can come with that.  But for folks that don't have those types of expenses that can qualify for the itemized deduction, there is the standard deduction.  The standard deduction is one that has seen some pretty significant change over recent years.  It is the amount that is automatically used to decrease your total income and results in getting to your taxable income.  So these standard deductions have increased depending on what your filing status is, whether you're single, head of household, married filing joint, that is going to determine which amount of standard deduction you get. But it's a good thing because what will happen is less of your overall income is going to be subject to income tax.  Another thing that's happened is tax brackets were adjusted for inflation.  So the tax rates themselves did not change.  However, because of the adjustment for inflation, it means that more of your overall income will be subject to lower income tax rates, which is a good thing.

Greg Thompson:
One of the things that often comes up during tax season, filing your taxes, is donations to charity.  Have there been changes there?

Colton Lawrence:
What Congress has done, is they have told the IRS to allow taxpayers that are not eligible for itemized deductions to be able to take a $300 charitable deduction if they are single filers and the $600 deduction if they are married filing joint.  Those deductions will come directly after their standard deduction. So it's just additional money that can be used to reduce your taxable income and will result in a lower tax liability.

Greg Thompson:
Well Colton, as our listeners have heard, we spent a lot in this last section discussing the impacts of Covid and changes to what's happening with tax filings in 2021.  I know a lot of things have been relaxed around retirement funds the last couple of years.  What's the latest on that related to our 2021 returns?

Colton Lawrence:
Yeah as you mentioned, Congress with some of the changes they made to taxes with Covid, they temporarily allowed for 2020 tax purposes, a waiver on the 10% penalty for un allowed distributions from retirement accounts.  That made a big difference.  There were a lot of folks who had access to funds in their retirement accounts and perhaps needed access to those funds to help get them through some of the difficult times that came with Covid, whether it was because they were sick or because they saw a downturn in their business related to Covid.  As we sit currently, Congress has not renewed that exemption for 2021.  So if you took distributions out of retirement accounts early, they are going to be subject to the 10% penalty for 2021.  And those 10% penalties can add up.  And unfortunately some folks expected Congress to renew this waiver and perhaps they will.  As we sit here on January 7th, it has not been renewed.  I would just recommend that folks talk to their tax preparers about it.  We are staying up on this and we are waiting to see if it is something that will be renewed.  But the best I can say right now is that folks be aware of that and know how to ask the proper questions.

Greg Thompson:
Well, as I hear what you're relating, the waiver has not been extended and you did have to take a distribution for whatever reason in 2021.  If you're not up on this and you don't pay what you're supposed to, you could really compound your problems I would think.

Colton Lawrence:
That's correct.  It's something that could definitely catch you by surprise. Maybe not.  There's frankly not a whole lot of people that even knew about this exemption at least at the taxpayer level.  Most tax preparers are definitely aware of it.  But again, the thing I can most recommend for folks who are listening to this podcast is that they take this information and use it to know which questions to ask their tax preparers.  If you're coming to Trucker CFO and we're doing these tax returns for you, obviously we're gonna be aware of it. But just make sure you use the knowledge to ask the proper questions when it comes time to file your tax return.

Greg Thompson:
And getting back to this time of year.  It's your time of year.  So what are you guys doing?  How are you getting ready and what can people do to keep things moving forward for themselves?   To keep everything on schedule, to be filed properly, to take advantage of the time that we have right now, and be ready for a good year in 2022? 

Colton Lawrence:
Well, we definitely invite everybody that's listening to this podcast to give us a call.  We're happy to help them in their tax preparation process.  The earlier they get with us, the sooner their tax return will get done.  We have commitments to our clients that we will file tax returns in a timely manner ahead of the deadline if they get their information to us prior to certain dates. Those dates depend on what our workload looks like and those dates will be published.  But again, act now, act quick, and get your tax returns done.  That's much better than needing to file extensions and drag this process out. So get with us, give us a call and we're happy to help out.

Announcer:
That's The Trucker CFO Colton Lawrence closing out this edition of the podcast.  The Trucker CFO Podcast is produced by PodWheels in collaboration with Trucker CFO.  As we noted at the top of the podcast, please keep in mind that every tax situation is unique and the perspective shared on this podcast should not be considered as tax advice.  If you have questions regarding your specific tax situation, you should consult a qualified tax professional.

Before we close the podcast, we'd like to talk to you about Trucker CFO.  Do you have a team of tax, accounting, and business advisory professionals who understand the complexities of the trucking industry?  There are a number of ways you can connect with the team at Trucker CFO.  Visit the company's website at TruckerCFO.com.  From the homepage, you can fill out the contact us form which will send an email to a Trucker CFO representative.  Also through the Trucker CFO website, you can connect to the company through the find time to talk button to set up an appointment or you can use the chat feature.  If you would rather email Trucker CFO directly, you can reach out to the company through the following address, [email protected].  That's [email protected]. You can also call Trucker CFO toll free at 1-800-533-4230 and hit option two for sales.  That toll free number again, 1-800-533-4230 and choose option two.

Thanks again for joining us on The Trucker CFO Podcast.  Just as a reminder, you can find and subscribe to our podcast through all major podcast platforms.  If you do become a subscriber, we'd like to ask you to take a moment and rate The Trucker CFO Podcast.

Beginning in January and throughout 2022, Colton will be making regular appearances and taking calls from professional drivers on the Dave Nemo Radio Show, Nemo Weekends, and the Tim Ridley Show.  All of these programs are part of RadioNemo and they can be heard through SiriusXM Road Dog Trucking Radio.  All of the programs from RadioNemo can be heard in the mornings on SiriusXM channel 146 or through the SiriusXM app.  To learn more about RadioNemo visit RadioNemo.com.  That's N-E-M-O RadioNemo.com.

As always. Colton Lawrence and the entire Trucker CFO team wish you the best for continued safe travels and good health as you work to keep the American economy on the move.

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