Crypto-and offshore compliance

For the IRS, cryptocurrency compliance is a priority for 2021. In 2019 the IRS started by mailing letters to taxpayers who might not have reported their virtual currency transactions or did so incorrectly.

The IRS also added a checkbox on Schedule 1 of Form 1040, where they ask taxpayers to confirm any financial interests in virtual currency, a checkbox reminiscent of questions about offshore accounts on Schedule B (which also remains a compliance target for the IRS).

If you neglect to answer these questions or do so incorrectly, you might become liable for severe criminal and civil penalties.

Develop good data security habits

The security of your financial data has to be a priority every day of the year.  This is especially critical when you update software and operating systems or change internet providers or purchased a new computer.  Tax professionals are required, by law, to create and follow a written information security plan to protect client data.  The same goes for taxpayers, who should make it a priority to protect themselves from identity theft and related tax fraud. The creation of strong passwords, avoidance of public Wi-Fi connections during the transmission of sensitive financial data, and due care when you discuss financial and tax matters can go a long way towards achieving this goal.

Review estate planning

The trifecta of well-designed estate planning documents, beneficiary designations and other non-probate assets must be reviewed annually irrespective of whether you as a taxpayer have been impacted by increased federal estate tax exemption amounts in terms of the TCJA.

Family and marital trusts might have become redundant, or might now require increased flexibility; Trusts designed to coincide with stretch IRA provisions may need some attention.  If you went through any significant life changes, you should confirm that your erstwhile strategies still conform with your overall estate and tax planning goals (e.g., If you converted a second home to a business).

Revisit beneficiary designations

At the beginning of a cycle, for example, when you begin a new career or start with a wealth-creating strategy, you were most likely looking at beneficiary designations for retirement accounts, life insurance, and other non-probate assets.  Later on, this changes and we often forget all about them. With recent changes in the law including the SECURE Act under the Further Consolidated Appropriations Act of 2020, you might be impacted in respect of how you and your beneficiaries contribute to and benefit from retirement and other accounts.  It makes sense to revisit those beneficiary designations for a change, just to make sure they still hold up.

Withholding check-up

It is always wise to start your thinking about the coming tax year by revisiting your tax withholding.  If you were impacted by the TCJA or expect significant life changes (getting married, buying a house), the more so.

An audit of your withholding will help you predetermine that you are not withholding too little or too much in tax. Knowing this from day one, will show you if you have to make changes on the new Form W-4, Employee’s Withholding Certificate. To do your audit – or check up – use the IRS’ Tax Withholding Estimator on the IRS website.

Tax planning and compliance is a marathon and not a race. You have to go at it all year round.  If you start early in the year, you will have the heads up on any surprises during the year.

A New Year Means a Fresh Look at Finances

The beginning of a new year presents an opportunity to, “ …begin the year with a fresh plan”, says PFP Executive Committee member Lisa Featherngill, CPA/PFS.  This is important because updating your balance sheet creates a clear starting point from which you can then set your financial goals, such as reducing debt, increasing investments, or a similar financial aim, for the year.  Lisa goes on to say, “It’s that simple, but you have to know where you are now in order to determine where you want to be.”

Take Stock of Automatic Payment Subscriptions and Renewals

The guidance from another key PFP Executive Committee member, Brooke Salvini, (CPA/PFS), is that automatic payments and subscriptions set up in previous years should be reviewed at the start of every new year.  These would include gym memberships, entertainment streaming services or magazine subscriptions.  Budgets, lifestyles and financial priorities change, and all these items need to be looked at closely to ensure they don’t place an unnecessary drain on finances. Brooke Salvini says finding and patching those leaks should “be part of your general new year clean-up, which feels so good and refreshing!”

Taxes – Calculate As Early As Possible

According to David Stolz, an esteemed member of the PFS Credential Committee and a CPA/PFS, the Tax Cuts and Jobs Act does not only have an impact on withholding.  Taxpayers will also be affected by other important ramifications.  It is most likely that the new tax bill has made significant changes to tax opportunities you might consider, and David’s advice is to ensure that you have a keen understanding of what those opportunities are well before April.  The types of changes you may need to make in the light of these tax amendments could be anything from adjusting your withholding amount, reconsidering your strategy related to charitable giving, or taking advantage of new depreciation rules and tax brackets.  Being familiar with your opportunities as early as possible allows you the most beneficial impact on your finances.

The Best Time for IRA Contributions is NOW

David Desmarais brings to light a unique perspective on Roth and IRA contributions that may benefit taxpayers.  In David’s trusted capacity as a CPA/PFS and PFP Executive Committee member, taxpayers should take note of the fact that direct Roth contributions cannot be made by married couples with modified adjusted gross income that exceeds $203,000.  There is, however, no income limitations on doing a non-deductible IRA contribution or Roth conversion.  Making a non-deductible IRA contribution may be followed immediately by a roll-over to a Roth, otherwise known as a ‘backdoor Roth contribution’.

The immediate roll-over is to ensure that no earnings are gained on the IRA before it rolls over into the Roth, so that no income can be identified on the conversion at assessment.  This can only benefit you, however, if you don’t have other traditional IRAs with untaxed earnings, whether from prior deductible IRA contributions or unrealized gains, because an aggregate has to be calculated on all of the IRAs in the process of determining the amount of taxable conversion.

Review your Current Allocation

Michael Landsberg further advises that taxpayers check their portfolios and ensure these are still allocated according to their financial plan.  2018 showed increased market volatility, which may have caused various asset classes to drift out of balance.  According to Michael, the beginning of January is the best time to analyze these material shifts from 2018’s market performance.  This is where diversification shows its value in managing portfolio risk, and this is what makes rebalancing necessary.

Now is The Time to Make Annual Exclusion Gifts to Heirs

If you are considering making an exclusion gift to an heir, the beginning of the year would be the best time to do so.  Early gifting, according to Robert Westley, may enhance the value of the gifts.  Gifts to beneficiaries at the beginning of the year benefit those looking to reduce their estate’s tax exposure.  Gifts of up to $15,000, given by individuals to an unlimited number of beneficiaries annually, do not impact on the lifetime estate tax exclusion amount or incur a gift tax.  The benefit to your beneficiaries in gifting them early in the year is that they receive a few extra months of potential appreciation from the early gift.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.