Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer member, FINRA/SIPC, investment advisor, representative Cambridge Investment Research Advisors Incorporated. A registered investment advisor, Cambridge and NelsonCorp Wealth Management, are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. Well, this is Nate, joined this morning by Andy Ferguson, third Wednesday of every month. Time to have a little tax talk this morning, right?
Andy Fergurson:
Yeah. Excited to be here.
Nate Kreinbrink:
No, I see that big smile on your face. And normally this time of the year is kind of that a smile gets a little bit wider as you pass that initial tax deadline.
Andy Fergurson:
Yeah.
Nate Kreinbrink:
But as we’ve seen over the past 12 months or so, nothing is really normal at this point in time. And why not have the tax deadline be not normal again as well with it being extended again this year?
Andy Fergurson:
Yeah. Last year was the tax season that never ended. So why not? Why not just keep it going? We’ll just do perpetual tax season. We’ll just always have taxes due.
Nate Kreinbrink:
Just always have them due. And I know they extended it about a month or whatever to May 17th, I believe.
Andy Fergurson:
Yep, May 17th this year. May 17th is the deadline for tax filing and tax payment. What’s interesting about that though is they didn’t extend the other deadlines. So if you have estimated payments due, those estimated payments are still, or were still due on April 15th. So just tax filing and the tax payment for tax due in 2020.
Nate Kreinbrink:
So essentially for those people who were paying estimates, their estimate was essentially due prior to what the tax deadline was for that. So just-
Andy Fergurson:
Yeah, the first estimate of 2021 was due before your tax bill for 2020 was due.
Nate Kreinbrink:
Craziness, but again, understanding those dates is obviously always important. And we talked a little bit too, obviously we were talking snow yesterday, and you never know what you’re going to get Midwest this time of year with weather. Tax code constantly changing, constantly evolving. Close your eyes and it’s probably going to change again. There’s a lot of changes that, again, some of them we talked about last month when we were on, as far as some of the changes that we thought were going to happen. Well, fast forward 30 days to today, some of those changes did happen. And one of the most ones was the unemployment tax and how that was credited.
Andy Fergurson:
Yeah. Big changes to the tax code. Middle of the season changes, which are always exciting and fun to deal with.
Nate Kreinbrink:
You’re on the fly, right?
Andy Fergurson:
Yeah. Why not? Why not? We’re going to do tax season longer. We might as well mix it up a little bit and throw some curve balls in there. So yeah, the big one was unemployment and the change to the unemployment law and the taxation against your unemployment compensation. And so, the federal government exempted $10,200 per individual for unemployment compensation. And so, there that’s $10,000 that’s not taxed of your unemployment. And so, what that causes is a difference in your taxation.
Andy Fergurson:
One of the things that happens with that is there’s a lot of people who filed before the change was made. As we started to hear about this change, in our practice, we kind of pulled people back and said, “Hey, let’s wait and see what happens.” But still, there were hundreds of thousands of people that filed before they made this change, or before they even talked about making this change. And so, the IRS has come out and said, “Those people that have already filed do not need to amend their returns.” The IRS is going to make an adjustment internally to recalculate their tax and get them the extra money back.
Andy Fergurson:
Illinois and Iowa have said the same thing. They’re going to do that internally. So if you had filed before they made the change, you don’t necessarily have to do an amendment. They’re actually saying not to do an amendment. Your tax preparer could tell you, or should be able to tell you, what your refund changed to or what your balance due changed.
Andy Fergurson:
I talked to a client the other day, who we filed super early in the season, and they were getting ready to mail off their voucher, but they had unemployment. And so, they were like, “well, do I still mail this voucher?” And we had to tell them, “Hold on, let me look.” And we got in there and said, “No, you’re not going to mail this voucher because now instead of owing three or $400, you’re going to get $500 back.” So we told them, “Don’t mail that one. Just wait. They’re going to send you some money.” So it’s something where you’re going to, if you’re in that situation, you need to talk to your tax preparer and let them help you understand what your specific situation is. But that’s a big change, that unemployment compensation.
Nate Kreinbrink:
That obviously is. And understanding again, you already filed and then obviously these amendments to the code comes out and now what do you do? And that’s where, again, having somebody in your corner to be able to help navigate you through some of those changes and how it applies, and if it does even apply to you and what you should be doing is obviously always helpful. Another one you continue to bring up is the child tax credit and how that has evolved over, since the last time we talked and during this tax season, and maybe spend a little bit of time and talk about that a little while.
Andy Fergurson:
So this one is really interesting. The child tax credit is going through a big change for just one year. So for the tax year 2021, the child tax credit is significantly changed. Kids that are six to 17 will get a $3,000 tax credit, and kids that are below six, so zero to five, are going to get a $3,600 tax credit. So that’s a big difference. Normally it’s kids zero to 16 get $2,000. In 2021 and 2021 only, they’re going to get kids, like I said, six to 17, so that’s one extra year added on there, are going to get a $3,000 credit, and kids that are below six are going to get 3,600. So that’s significant.
Andy Fergurson:
The other thing that is significant about that as the IRS is going to begin making payments on that child tax credit in July, which is going to be helpful to a lot of people that receive that child tax credit. And the IRS expects to pay half of your child tax credit before you get to the end of the year. So July through December, six payments. If you qualify for the full credit, all this, there’s all kinds of qualifications and things that are involved in that. But lots of moving pieces there.
Andy Fergurson:
Where that comes into play as far as planning is concerned, is how that impacts your tax return next year. So there are a lot of people who rely on the child tax credit and/or the earned income credit to fund the majority of their tax return. Well, if you get some of that money ahead of time, you may not get the same return you’re used to. So let’s say you’re somebody who gets a thousand dollars normally in your tax return, and that’s from the earned income credit and the child tax credit. Well, if the child tax credit is, half of it is distributed before you get to your refund, you may not get a thousand dollars. You may have to pay money.
Andy Fergurson:
So it’s just something to be aware of, something to watch for. If you’re somebody that’s in that situation where you’re not sure what to expect, again, talk to your tax accountant, talk to your preparer, let them help you plan for what’s going to happen. There’s some good tools out there where we can see pretty closely what’s going to happen. We can make some pretty good estimates and then plug those numbers into a tax return and say, “Okay, based on what we know, this is what’s going to happen.”
Andy Fergurson:
The other thing that I would add to that is it’s still moving. The IRS says these things are going to happen, and we don’t know when or how or exactly what they’re going to do for those things to happen.
Nate Kreinbrink:
So essentially with that child tax credit, you’re going to get a little bit more back per child if, depending on what ages they fall into. But instead of getting it basically in one lump sum as that credit when you file your taxes, they’re just going to basically prepay that to you every month starting in July, essentially. Correct?
Andy Fergurson:
They’re going to prepay half of it starting in July. And the other thing to consider is not everybody’s going to get the full credit. So it’s going to have this phase out that was attached to the stimulus, right? So if you didn’t get the stimulus, you’re probably not going to get the additional credit. But the IRS is going to pay you part of your child tax credit in that situation. So there’s just a lot of moving pieces and there’s a lot of, if you’re this, then this is going to happen type of stuff. There’s a lot of ifs and thens. And so, you just want to make sure that you’re not making any assumptions, that you either go online and figure out what your numbers are, or talk to your preparer and let them help you plan so that you’re not left holding the bag in April next year, in April ’22, when you’re left sitting there with a tax bill that you weren’t expecting.
Nate Kreinbrink:
Obviously great stuff again. Lastly, want to talk a little bit of RMDs, required minimum distributions. And this has to do with having to take a certain amount out of tax deferred accounts once you hit that magical age of 72. Now, obviously last year, again, was a little bit of anomalies as far as them saying that you did not have to take out money because of an RMD in 2020. However, that has ended. That has not been extended. So those people that are 72 or above, or if you were, prior to that change being done, 70 and a half and have those tax deferred accounts, it is important imperative that you take that certain amount out in 2021 because that forgiveness wasn’t extended again.
Andy Fergurson:
Exactly.,Yeah. And that’s caused a lot of change to people’s tax return. Some people’s RMDs are significant. And if you have to take that, if you didn’t take it in 2020, it changed your tax return for the better. And if you’re expecting to not have to take it in 2021, you need to change your mind because that’s going to happen again. You’re going to be back into that RMD. Make sure that you are planning for that accordingly, again, because we’re adding income to our tax return by taking that money out of those tax deferred accounts. And by adding income, we add tax. And so, we don’t want to get any shocks in April.
Nate Kreinbrink:
Not at all. And I think just the moral of all of this that we went over too today is if you have questions, give you guys a call because, again, you have a little bit of time now, but always, again, have willingness to sit down with people and to say, “Okay, these changes down the pipeline. This is what I had. Is it going to affect me?” And that’s important for that tax preparation versus tax planning that we always talk about. And we’re getting closer to that tax planning section, especially with some of these changes coming.
Andy Fergurson:
Yeah. 2021 is not a good year to guess. This is the year to have somebody look at it and run some numbers and make sure you’re on track.
Nate Kreinbrink:
Andy, again, as always, I appreciate you joining me. Monthly tax talk here. Goes by quick, but it’s always great stuff and great insights into what’s happening. Did want to mention real quick that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of April will be donated to the Make-A-Wish of Clinton County. Again, Nate Kreinbrink with NelsonCorp Wealth Management, Andy Ferguson, with NelsonCorp Tax Solutions, bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer member, FINRA/SIPC, investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.