If you’re paying back college loans for yourself or your children, you may wonder if you can deduct the interest you pay on the loans. The answer is yes, subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. Unfortunately, the deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, and as explained below, the levels aren’t very high.

The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain postgraduate programs also qualify. Therefore, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital or health care facility offering postgraduate training can qualify.

It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

Phase-out amounts

For 2021, the deduction is phased out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 ($70,000 and $85,000 for single filers). Thus, the deduction is unavailable for taxpayers with AGI of $170,000 ($85,000 for single filers) or more.

For 2022, the deduction will be phased out for taxpayers who are married filing jointly with AGI between $145,000 and $175,000 ($70,000 and $85,000 for single filers). That means the deduction is unavailable for taxpayers with AGI of $175,000 ($85,000 for single filers) or more.

Married taxpayers must file jointly to claim this deduction.

No deduction is allowed to a taxpayer who can be claimed as a dependent on another’s return. For example, let’s say parents are paying for the college education of a child whom the parents are claiming as a dependent on their tax return. The interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child-student may pay on a loan he or she may have taken out. The child will be able to deduct interest that is paid in a later year when he or she is no longer a dependent.

The deduction is taken “above the line.” In other words, it’s subtracted from gross income to determine AGI. Thus, it’s available even to taxpayers who don’t itemize deductions.

Other requirements

The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his or her spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

Taxpayers should keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem. However, care should be taken to document other qualifying education-related expenditures such as for books, equipment, fees and transportation.

Documenting room and board expenses should be straightforward for students living and dining on campus. Students who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.

We can help determine whether you qualify for this deduction or answer any questions you may have about it.

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Year-end is a good time to plan to save taxes by carefully structuring your capital gains and losses.

Consider some possibilities if you have losses on certain investments to date. For example, suppose you lost money this year on some stock and have other stock that has appreciated. Consider selling appreciated assets before December 31 (if you think their value has peaked) and offsetting gains with losses.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. You may use up to $3,000 ($1,500 for married filing separately) of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income (AGI).

Individuals are subject to federal tax at a rate as high as 37% on short-term capital gains and ordinary income. But long-term capital gains on most investments receive favorable treatment. They’re taxed at rates ranging from zero to 20% depending on your taxable income (inclusive of the gains). High-income taxpayers pay an additional 3.8% net investment income tax on their net gain and certain other investment income.

This means you should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they’re used to offset short-term capital gains or up to $3,000 per year of ordinary income. This requires making sure that the long-term capital losses aren’t taken in the same year as the long-term capital gains.

However, this isn’t just a tax issue. Investment factors must also be considered. You don’t want to defer recognizing gain until next year if there’s too much risk that the investment’s value will decline before it can be sold. Similarly, you wouldn’t want to risk increasing a loss on investments you expect to decline in value by deferring a sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, take steps to prevent those losses from offsetting those gains.

If you’ve yet to realize net capital losses for 2021 but expect to realize net capital losses next year well in excess of the $3,000 ceiling, consider accelerating some excess losses into this year. The losses can offset current gains and up to $3,000 of any excess loss will become deductible against ordinary income this year.

For the reasons outlined above, paper losses or gains on stocks may be worth recognizing this year. But suppose the stock is also an investment worth holding for the long term. You can’t sell stock to establish a tax loss and buy it back the next day. The “wash sale” rule precludes recognition of a loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale).

However, you may be able to realize a tax loss by:

• Selling the original holding and then buying the same securities at least 31 days later. The risk is interim upward price movement.
• Buying more of the same stock, then selling the original holding at least 31 days later. The risk is interim downward price movement.
• Selling the original holding and buying similar securities in different companies in the same line of business. This trades on the prospects of the industry, rather than the particular stock.
• Selling an original holding of mutual fund shares and buying shares in another fund with a similar investment strategy.

Careful handling of capital gains and losses can save tax. Contact us if you have questions about these strategies.

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Awards and settlements are routinely provided for a variety of reasons. For example, a person could receive compensatory and punitive damage payments for personal injury, discrimination or harassment. Some of this money is taxed by the federal government, and perhaps state governments. Hopefully, you’ll never need to know how payments for personal injuries are taxed. But here are the basic rules — just in case you or a loved one does need to understand them.

Under tax law, individuals are permitted to exclude from gross income damages that are received on account of a personal physical injury or a physical sickness. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it’s paid in a lump sum or installments.

Emotional distress

For purposes of this exclusion, emotional distress is not considered a physical injury or physical sickness. So, for example, an award under state law that’s meant to compensate for emotional distress caused by age discrimination or harassment would have to be included in gross income. However, if you require medical care for treatment of the consequences of emotional distress, then the amount of damages not exceeding those expenses would be excludable from gross income.

Punitive damages for any personal injury claim, whether or not physical, aren’t excludable from gross income unless awarded under certain state wrongful death statutes that provide for only punitive damages.

The law doesn’t consider back pay and liquidated damages received under the Age Discrimination in Employment Act (ADEA) to be paid in compensation for personal injuries. Thus, an award for back pay and liquidated damages under the ADEA must be included in gross income.

Attorney’s fees

You can’t deduct attorney’s fees incurred to collect a tax-free award or settlement for physical injury or sickness. However, to a limited extent, attorney’s fees (whether contingent or non-contingent) or court costs paid by, or on behalf of, a taxpayer in connection with an action involving a claim under the ADEA, are deductible from gross income to determine adjusted gross income. Specifically, the amount of this above-the-line deduction is limited to the amount includible in your gross income for the tax year on account of a judgment or settlement resulting from the ADEA claim, whether by suit or agreement, and whether as lump sum or periodic payments.

Best possible tax result

Keep in mind that while you want the best tax result possible from any settlement, lawsuit or discrimination action you’re considering, non-tax legal factors together with the tax factors will determine the amount of your after-tax recovery. Consult with your attorney as to the best way to proceed, and we can provide any tax guidance that you may need.

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If you’re starting to worry about your 2021 tax bill, there’s good news — you may still have time to reduce your liability. Here are three quick strategies that may help you trim your taxes before year-end.

1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2022 payment in December, you can deduct the interest portion on your 2021 tax return (assuming you itemize).

Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2022.

You shouldn’t pursue this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.

2. Maximize your retirement contributions. What could be better than paying yourself? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.

For 2021, you generally can contribute as much as $19,500 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $58,000) to a SEP IRA.

3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.

If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.

There’s still time

The ideas described above are only a few of the strategies that still may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2021.

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The Infrastructure Investment and Jobs Act (IIJA) was signed into law on November 15, 2021. It includes new information reporting requirements that will generally apply to digital asset transactions starting in 2023. Cryptocurrency exchanges will be required to perform intermediary Form 1099 reporting for cryptocurrency transactions.

Existing reporting rules

If you have a stock brokerage account, whenever you sell stock or other securities, you receive a Form 1099-B after the end of the year. Your broker uses the form to report transaction details such as sale proceeds, relevant dates, your tax basis and the character of gains or losses. In addition, if you transfer stock from one broker to another broker, the old broker must furnish a statement with relevant information, such as tax basis, to the new broker.

Digital asset broker reporting

The IIJA expands the definition of brokers who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person (“crypto exchanges”). Thus, any platform on which you can buy and sell cryptocurrency will be required to report digital asset transactions to you and the IRS after the end of each year.

Transfer reporting

Sometimes you may have a transfer transaction that isn’t a sale or exchange. For example, if you transfer cryptocurrency from your wallet at one crypto exchange to your wallet at another crypto exchange, the transaction isn’t a sale or exchange. For that transfer, as with stock, the old crypto exchange will be required to furnish relevant digital asset information to the new crypto exchange. Additionally, if the transfer is to an account maintained by a party that isn’t a crypto exchange (or broker), the IIJA requires the old crypto exchange to file a return with the IRS. It’s anticipated that such a return will include generally the same information that’s furnished in a broker-to-broker transfer.

Digital asset definition

For the reporting requirements, a “digital asset” is any digital representation of value that’s recorded on a cryptographically secured distributed ledger or similar technology. (The IRS can modify this definition.) As it stands, the definition will capture most cryptocurrencies as well as potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting

You may know that when a business receives $10,000 or more in cash in a transaction, it is required to report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. The IIJA will require businesses to treat digital assets like cash for purposes of this requirement.

When reporting begins

These reporting rules will apply to information reporting that’s due after December 31, 2023. For Form 1099-B reporting, this means that applicable transactions occurring after January 1, 2023, will be reported. Whether the IRS will refine the form for digital assets, or come up with a new form, is not known yet. Form 8300 reporting of cash transactions will presumably follow the same effective dates.

More details

If you use a crypto exchange, and it hasn’t already collected a Form W-9 from you seeking your taxpayer identification number, expect it to do so. The transactions subject to the reporting will include not only selling cryptocurrencies for fiat currencies (like U.S. dollars), but also exchanging cryptocurrencies for other cryptocurrencies. And keep in mind that a reporting intermediary doesn’t always have accurate information, especially with a new type of reporting. Contact us with any questions.

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Do you have a tax-saving flexible spending account (FSA) with your employer to help pay for health or dependent care expenses? As the end of 2021 nears, there are some rules and reminders to keep in mind.

An account for health expenses 

A pre-tax contribution of $2,750 to a health FSA is permitted in 2021. This amount is increasing to $2,850 for 2022. You save taxes in these accounts because you use pre-tax dollars to pay for medical expenses that might not be deductible. For example, they wouldn’t be deductible if you don’t itemize deductions on your tax return. Even if you do itemize, medical expenses must exceed a certain percentage of your adjusted gross income in order to be deductible. Additionally, the amounts that you contribute to a health FSA aren’t subject to FICA taxes.

Your employer’s plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get reimbursed for these items.

FSAs generally have a “use-it-or-lose-it” rule, which means you must incur qualifying medical expenditures by the last day of the plan year (December 31 for a calendar year plan) — unless the plan allows an optional grace period. A grace period can’t extend beyond the 15th day of the third month following the close of the plan year (March 15 for a calendar year plan). What if you don’t spend the money before the last day allowed? You forfeit it.

An additional exception to the use-it-or-lose-it rule permits health FSAs to allow a carryover of a participant’s unused health FSA funds of up to $550. Amounts carried forward under this rule are added to the up-to-$2,750 amount that you elect to contribute to the health FSA for 2021. An employer may allow a carryover or a grace period for an FSA, but not both features.

Take a look at your year-to-date expenditures now. It will show you what you still need to spend and will also help you to determine how much to set aside for next year if there’s still time. Don’t forget to reflect any changed circumstances in making your calculation.

What are some ways to use up the money? Before year end (or the extended date, if permitted), schedule certain elective medical procedures, visit the dentist or buy new eyeglasses.

An account for dependent care expenses 

Some employers also allow employees to set aside funds on a pre-tax basis in dependent care FSAs. A $5,000 maximum annual contribution is permitted ($2,500 for a married couple filing separately).

These FSAs are for a dependent-qualifying child who is under age 13, or a dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the tax year.

Like health FSAs, dependent care FSAs are subject to a use-it-or-lose-it rule, but only the grace period relief applies, not the up-to-$550 forfeiture exception. Therefore, it’s a good time to review your expenses to date and project amounts to be set aside for 2022.

Other rules and exceptions may apply. Your HR department can answer any questions about your specific plan. We can answer any questions you have about the tax implications.

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