Now that fall is officially here, it’s a good time to start taking steps that may lower your tax bill for this year and next.
One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2022. Many taxpayers won’t itemize because of the high 2022 standard deduction amounts ($25,900 for joint filers, $12,950 for singles and married couples filing separately and $19,400 for heads of household). Also, many itemized deductions have been reduced or abolished under current law.
If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction.
Bunching, pushing, pulling
Some taxpayers may be able to work around these deduction restrictions by applying a “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the year where they’ll do some tax good. For example, if you’ll be able to itemize deductions this year but not next, you may want to make two years’ worth of charitable contributions this year.
Here are some other ideas to consider:
These are just some of the year-end steps that may save taxes. Contact us to tailor a plan that will work best for you. https://www.schroedercocpas.com/contact
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have businesses in federally declared disaster areas.
Monday, October 3
The last day you can initially set up a SIMPLE IRA plan, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that comes into existence after October 1 of the year, you can establish a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence.
Monday, October 17
Monday, October 31
Thursday, November 10
Thursday, December 15
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines. https://www.schroedercocpas.com/contact
Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business.
Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.
However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.
Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.
The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.
Estate planning options
Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.
Handling the transaction
The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.
Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner's other assets (including the interest in the business) could be in jeopardy.
An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.
An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.
Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits. https://www.schroedercocpas.com/contact
In its latest report, the National Association of Realtors (NAR) announced that July 2022 existing home sales were down but prices were up nationwide, compared with last year. “The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June,” said NAR Chief Economist Lawrence Yun. However, he added that “home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers.”
If you’re buying a home, or you just bought one, you may wonder if you can deduct mortgage points paid on your behalf by the seller. The answer is “yes,” subject to some important limitations described below.
Basics of points
Points are upfront fees charged by a mortgage lender, expressed as a percentage of the loan principal. Points, which may be deductible if you itemize deductions, are normally the buyer’s obligation. But a seller will sometimes sweeten a deal by agreeing to pay the points on the buyer’s mortgage loan.
In most cases, points that a buyer pays are a deductible interest expense. And seller-paid points may also be deductible.
Suppose, for example, that you bought a home for $600,000. In connection with a $500,000 mortgage loan, your bank charged two points, or $10,000. The seller agreed to pay the points in order to close the sale.
You can deduct the $10,000 in the year of sale. The only disadvantage is that your tax basis is reduced to $590,000, which will mean more gain if — and when — you sell the home for more than that amount. But that may not happen until many years later, and the gain may not be taxable anyway. You may qualify for an exclusion for up to $250,000 ($500,000 for a married couple filing jointly) of gain on the sale of a principal residence.
There are some important limitations on the rule allowing a deduction for seller-paid points. The rule doesn’t apply:
Tax aspects of the transaction
We can review with you in more detail whether the points in your home purchase are deductible, as well as discuss other tax aspects of your transaction.https://www.schroedercocpas.com/contact
Now that Labor Day has passed, it’s a good time to think about making moves that may help lower your small business taxes for this year and next. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will likely produce the best results for most businesses, as will bunching deductible expenses into this year or next to maximize their tax value.
If you expect to be in a higher tax bracket next year, opposite strategies may produce better results. For example, you could pull income into 2022 to be taxed at lower rates, and defer deductible expenses until 2023, when they can be claimed to offset higher-taxed income.
Here are some other ideas that may help you save tax dollars if you act before year-end.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2022, if taxable income exceeds $340,100 for married couples filing jointly (half that amount for others), the deduction may be limited based on: whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.
Taxpayers may be able to salvage some or all of the QBI deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout). You also may be able increase the deduction by increasing W-2 wages before year-end. The rules are complex, so consult us before acting.
Cash vs. accrual accounting
More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2022, it’s satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that long ago, it was only $5 million. Cash method taxpayers may find it easier to defer income by holding off billings until next year, paying bills early or making certain prepayments.
Section 179 deduction
Consider making expenditures that qualify for the Section 179 expensing option. For 2022, the expensing limit is $1.08 million, and the investment ceiling limit is $2.7 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.
The high dollar ceilings mean that many small- and medium-sized businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Just place eligible property in service by the last days of 2022 and you can claim a full deduction for the year.
Businesses also can generally claim a 100% bonus first year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. Again, the full write-off is available even if qualifying assets are in service for only a few days in 2022.
Consult with us for more ideas
These are just some year-end strategies that may help you save taxes. Contact us to tailor a plan that works for you. https://www.schroedercocpas.com/contact
Are you a partner in a business? You may have come across a situation that’s puzzling. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.
Why does this happen? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his or her share of a partnership’s loss to offset other income.)
Pass through your share
While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.
An information return must be filed by a partnership. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.
Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.
Two people each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his or her partnership interest from $50,000 to $10,000.
More rules and limits
The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions and other matters. Contact us if you’d like to discuss how a partner is taxed. https://www.schroedercocpas.com/contact
The Inflation Reduction Act (IRA), signed into law by President Biden on August 16, contains many provisions related to climate, energy and taxes. There has been a lot of media coverage about the law’s impact on large corporations. For example, the IRA contains a new 15% alternative minimum tax on large, profitable corporations. And the law adds a 1% excise tax on stock buybacks of more than $1 million by publicly traded U.S. corporations.
But there are also provisions that provide tax relief for small businesses. Here are two:
A payroll tax credit for research
Under current law, qualified small businesses can elect to claim a portion of their research credit as a payroll tax credit against their employer Social Security tax liability, rather than against their income tax liability. This became effective for tax years that begin after December 31, 2015.
Qualified small businesses that elect to claim the research credit as a payroll tax credit do so on IRS Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” Currently, a qualified small business can claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer's share of Social Security tax.
The IRA makes changes to the credit, beginning next year. It allows for qualified small businesses to apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This provision will take effect for tax years beginning after December 31, 2022.
A qualified small business must meet certain requirements, including having gross receipts under a certain amount.
Extension of the limit on excess business losses of noncorporate taxpayers
Another provision in the new law extends the limit on excess business losses for noncorporate taxpayers. Under prior law, there was a cap set on business loss deductions by noncorporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships and S corporations to $250,000 ($500,000 for joint filers). Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.
Although another law (the CARES Act) suspended the limit for the 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the IRA. Businesses with significant losses should consult with us to discuss the impact of this change on their tax planning strategies.
We can help
These are only two of the many provisions in the IRA. There may be other tax benefits to your small business if you’re buying electric vehicles or green energy products. Contact us if you have questions about the new law and your situation. https://www.schroedercocpas.com/contact
You may have heard that the Inflation Reduction Act (IRA) was signed into law recently. While experts have varying opinions about whether it will reduce inflation in the near future, it contains, extends and modifies many climate and energy-related tax credits that may be of interest to individuals.
Nonbusiness energy property
Before the IRA was enacted, you were allowed a personal tax credit for certain nonbusiness energy property expenses. The credit applied only to property placed in service before January 1, 2022. The credit is now extended for energy-efficient property placed in service before January 1, 2033.
The new law also increases the credit for a tax year to an amount equal to 30% of:
The credit is further increased for amounts spent for a home energy audit (up to $150).
In addition, the IRA repeals the lifetime credit limitation, and instead limits the credit to $1,200 per taxpayer, per year. There are also annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). A $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters and biomass stoves/boilers.
The residential clean-energy credit
Prior to the IRA being enacted, you were allowed a personal tax credit, known as the Residential Energy Efficient Property (REEP) Credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump and biomass fuel property installed in homes before 2024.
The new law makes the credit available for property installed before 2035. It also makes the credit available for qualified battery storage technology expenses.
New Clean Vehicle Credit
Before the enactment of the law, you could claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year.
The law renames the credit the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. Also, final assembly of the vehicle must now take place in North America.
Beginning in 2023, there will be income limitations. No Clean Vehicle Credit is allowed if your modified adjusted gross income (MAGI) for the year of purchase or the preceding year exceeds $300,000 for a married couple filing jointly, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer’s suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).
Finally, the way the credit is calculated is changing. The rules are complicated, but they place more emphasis on where the battery components (and critical minerals used in the battery) are sourced.
The IRS provides more information about the Clean Vehicle Credit here: https://bit.ly/3ATxEA9
Credit for used clean vehicles
A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 is allowed a tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. No credit is allowed if your MAGI for the year of purchase or the preceding year exceeds $150,000 for married couples filing jointly, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
We can answer your questions
Contact us if you have questions about taking advantage of these new and revised tax credits. https://www.schroedercocpas.com/contact
This strategy is geared toward self-employed individuals including sole proprietors, owners of single-member limited liability companies and other one-person businesses.
Go it alone
With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.
For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25%.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:
Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business.
Pros and cons
Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.
Bottom line: For a one-person business, a solo 401(k) can be a smart retirement plan choice if:
Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation. https://www.schroedercocpas.com/contact
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Adding a new partner in a partnership has several financial and legal implications. Let’s say you and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to it. Let’s further assume that your bases in your partnership interests are sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your bases to zero.
Not as simple as it seems
Although the entry of a new partner appears to be a simple matter, it’s necessary to plan the new person’s entry properly in order to avoid various tax problems. Here are two issues to consider:
First, if there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change is treated as a sale of those items, with the result that the current partners will recognize gain. For this purpose, unrealized receivables include not only accounts receivable, but also depreciation recapture and certain other ordinary income items. In order to avoid gain recognition on those items, it’s necessary that they be allocated to the current partners even after the entry of the new partner.
Second, the tax code requires that the “built-in gain or loss” on assets that were held by the partnership before the new partner was admitted be allocated to the current partners and not to the entering partner. Generally speaking, “built-in gain or loss” is the difference between the fair market value and basis of the partnership property at the time the new partner is admitted.
The most important effect of these rules is that the new partner must be allocated a portion of the depreciation equal to his share of the depreciable property based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other effect is that the built-in gain or loss on the partnership assets must be allocated to the current partners when partnership assets are sold. The rules that apply here are complex and the partnership may have to adopt special accounting procedures to cope with the relevant requirements.
Keep track of your basis
When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s imperative to keep proper track of your basis because it can have an impact in several areas: gain or loss on the sale of your interest, how partnership distributions to you are taxed and the maximum amount of partnership loss you can deduct.
Contact us if you’d like help in dealing with these issues or any other issues that may arise in connection with your partnership. https://www.schroedercocpas.com/contact
If you don’t have enough federal tax withheld from your paychecks and other payments, you may have to make estimated tax payments. This is the case if you receive interest, dividends, self-employment income, capital gains or other income. Here are the applicable rules for paying estimated tax without triggering the penalty for underpayment.
When are the payments due?
Individuals must pay 25% of a “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.
So the third installment for 2022 is due on Wednesday, September 15. Payments are made using Form 1040-ES.
How much should you pay?
The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year’s return was more than $150,000 ($75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employers from their paychecks. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, divide that number by four and make four equal payments by the due dates.
But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business operated in a resort area during June, July, and August, no estimated payment is required before September 15.
Who owes the penalty for underpaying?
If you don’t make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by the IRS on deficiencies, times the amount of the underpayment for the period of the underpayment.
However, the underpayment penalty doesn’t apply to you if:
In addition, the IRS may waive the penalty if the failure was due to casualty, disaster or other unusual circumstances and it would be inequitable to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (and reach age 62) or become disabled.
Do you have more questions?
Contact us if you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have other questions about how the estimated tax rules apply to you. https://www.schroedercocpas.com/contact
The business entity you choose can affect your taxes, your personal liability and other issues. A limited liability company (LLC) is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide you with the best of both worlds.
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Thus, they can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
LLC owners can elect under the check-the-box rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to them. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and are taxed only once. To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Section 199A pass-through deduction, subject to various limitations.
In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.
Explore the options
In summary, an LLC would give you corporate-like protection from creditors while providing you with the benefits of taxation as a partnership. Be aware that the LLC structure is allowed by state statute and states may use different regulations. Contact us to discuss in more detail how use of an LLC might benefit you and the other owners. https://www.schroedercocpas.com/contact
As you’re aware, certain employers are required to report information related to their employees’ health coverage. Does your business have to comply, and if so, what must be done?
Certain employers with 50 or more full-time employees (called “applicable large employers” or ALEs) must use Forms 1094-C and 1095-C to report the information about offers of health coverage and enrollment in health coverage for their employees. Specifically, an ALE uses Form 1094-C to report summary information for each employee and to transmit Forms 1095-C to the IRS. A separate Form 1095-C is used to report information about each employee. In addition, Forms 1094-C and 1095-C are used to determine whether an employer owes payments under the employer shared responsibility provisions (sometimes referred to as the “employer mandate”).
Under the mandate, an employer can be subject to a penalty if it doesn’t offer affordable minimum essential coverage that provides minimum value to substantially all full-time employees and their dependents. Form 1095-C is also used in determining eligibility of employees for premium tax credits.
On Form 1095-C, ALEs must report the following for each employee who was a full-time employee for any month of the calendar year:
If an ALE offers health coverage through an employer’s self-insured plan, the ALE also must report more information on Form 1095-C. For this purpose, a self-insured plan also includes one that offers some enrollment options as insured arrangements and other options as self-insured.
If an employer provides health coverage in another manner, such as through an insured health plan or a multiemployer health plan, the insurance issuer or the plan sponsor making the coverage available will provide the information about health coverage to enrolled employees. An employer that provides employer-sponsored self-insured health coverage but isn’t subject to the employer mandate, isn’t required to file Forms 1094-C and 1095-C and reports instead on Forms 1094-B and 1095-B for employees who enrolled in the employer-sponsored self-insured health coverage.
On Form 1094-C, an employer can also indicate whether any certifications of eligibility for relief from the employer mandate apply.
Be aware that these reporting requirements may be more complex if your business is a member of an aggregated ALE group or if the coverage is provided through a multiemployer plan.
Note: Employers also report certain information about health coverage on employees’ W-2 forms. But it’s not the same information as what’s reported on 1095-C. The information on either form doesn’t cause excludable employer-provided coverage to become taxable to employees. It’s for informational purposes only.
The above is a simplified explanation of the reporting requirements. Contact us with questions or for assistance in complying with the requirements. https://www.schroedercocpas.com/contact
When you filed your federal tax return this year, were you surprised to find you owed money? You might want to change your withholding so that this doesn’t happen again next year. You might even want to adjust your withholding if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan.
Adjust if necessary
Taxpayers should periodically review their tax situations and adjust withholding, if appropriate.
The IRS has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the child credit, the dependent credit and the repeal of dependent exemptions. You can access the IRS calculator here: https://bit.ly/33iBcZV
There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:
You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payments for 2022 are due on September 15, 2022, and January 16, 2023.)
Plan ahead now
There’s still time to remedy any shortfalls to minimize taxes due for 2022, as well as any penalties and interest. Contact us if you have any questions or need assistance. We can help you determine if you need to adjust your withholding. https://www.schroedercocpas.com/contact
There are many rules that can potentially apply to the sale of business property. Thus, to simplify discussion, let’s assume that the property you want to sell is land or depreciable property used in your business, and has been held by you for more than a year. (There are different rules for property held primarily for sale to customers in the ordinary course of business; intellectual property; low-income housing; property that involves farming or livestock; and other types of property.)
Under the Internal Revenue Code, your gains and losses from sales of business property are netted against each other. The net gain or loss qualifies for tax treatment as follows:
1) If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable than ordinary income treatment.
2) If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income (in other words, none of the rules that limit the deductibility of capital losses apply).
The availability of long-term capital gain treatment for business property net gain is limited by “recapture” rules — that is, rules under which amounts are treated as ordinary income rather than capital gain because of previous ordinary loss or deduction treatment for these amounts.
There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income instead of as long-term capital gain.
Section 1245 Property
“Section 1245 Property” consists of all depreciable personal property, whether tangible or intangible, and certain depreciable real property (usually, real property that performs specific functions). If you sell Section 1245 Property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.
Section 1250 Property
“Section 1250 Property” consists, generally, of buildings and their structural components. If you sell Section 1250 Property that was placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions, to the extent it doesn’t exceed business property net gain, will (as reduced by the business property recapture rule above) be taxed at a rate of no more than 28.8% (25% as adjusted for the 3.8% net investment income tax) rather than the maximum 23.8% rate (20% as adjusted for the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.
Other rules may apply to Section 1250 Property, depending on when it was placed in service.
As you can see, even with the simplifying assumptions in this article, the tax treatment of the sale of business assets can be complex. Contact us if you’d like to determine the tax consequences of specific transactions or if you have any additional questions. https://www.schroedercocpas.com/contact
The downturn in the stock market may have caused the value of your retirement account to decrease. But if you have a traditional IRA, this decline may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.
Traditional vs. Roth
Here’s what makes a traditional IRA different from a Roth IRA:
Traditional IRA. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax deferred.
On the downside, you generally must pay income tax on withdrawals. In addition, you’ll face a penalty if you withdraw funds before age 59½ — unless you qualify for a handful of exceptions — and you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 72.
Roth IRA. Roth IRA contributions are never deductible. But withdrawals — including earnings — are tax free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free. You also don’t have to begin taking RMDs after you reach age 72.
However, the ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount converted.
Your tax hit may be reduced
This is where the “benefit” of a stock market downturn comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market goes back up.
It’s important to think through the details before you convert. Here are some of the issues to consider when deciding whether to make a conversion:
Having enough money to pay the tax bill. If you don’t have the cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. This will erode your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.
Your retirement plans. Your stage of life may also affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expect to retire soon and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.
Keep in mind that converting a traditional IRA to a Roth isn’t an all-or-nothing deal. You can convert as much or as little of the money from your traditional IRA account as you like. So, you might decide to gradually convert your account to spread out the tax hit over several years.
There are also other issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact us to discuss whether a conversion is right for you. https://www.schroedercocpas.com/contact
Sometimes, bigger isn’t better: Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.
1. QBI deduction
For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts and estates. But it’s not available to C corporations or their shareholders.
The QBI deduction can be up to 20% of:
Pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction can be phased out at higher income levels.
2. Eligibility for cash-method accounting
Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.
Under the cash method, you generally don’t have to recognize taxable income until you’re paid in cash. And you can generally write off deductible expenses when you pay them in cash or with a credit card.
Only “small” businesses are potentially eligible for the cash method. For this purpose under current law, a small business includes one that has no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2022, the limit is $27 million.
3. Section 179 deduction
The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service. It's available for both new and used property.
For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:
Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.
Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction begins to be phased out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.
The phase-out rule kicks in only if your additions of assets that are eligible for the deduction for the year exceed the threshold for that year. If they exceed the threshold, your maximum deduction is reduced dollar-for-dollar by the excess. Sec. 179 deductions are also subject to other limitations.
While Sec. 179 deductions may be limited, those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets placed in service in 2022, 100% first-year bonus depreciation is available. After this year, the first-year bonus depreciation percentages are scheduled to start going down to 80% for qualified assets placed in service in 2023. They will continue to be reduced until they reach 0% for 2028 and later years.
Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike. https://www.schroedercocpas.com/contact
When you take withdrawals from your traditional IRA, you probably know that they’re taxable. But there may be a penalty tax on early withdrawals depending on how old you are when you take them and what you do with the money.
Important: Once you reach a certain age, you must start taking required minimum distributions from your traditional IRAs to avoid a different tax penalty. Previously, the required beginning date (RBD) was April 1 of the year after the year in which you turn 70½. However, a 2019 law changed the RBD to 72 for individuals who reach age 70½ after 2019.
But what if you want to take an “early” withdrawal, defined as one taken before age 59½? You’ll be hit with a 10% penalty tax unless an exception applies. This 10% early withdrawal penalty tax is on top of the regular income tax you’ll owe on the distribution.
Exceptions to the general rule
Fortunately, there are several exceptions to the early withdrawal penalty tax if you use the money for certain things. Common examples include:
There’s also an exception to the early withdrawal penalty tax if you take annuity-like annual withdrawals under IRS guidelines. If distributions are made as part of a series of “substantially equal periodic payments” over your life expectancy or the life expectancies of you and your designated beneficiary, the tax doesn’t apply.
Be careful with rollovers
Be aware that the early withdrawal penalty may come into play if you’re moving funds out of an account. You can roll over funds from one IRA to another tax-free so long as you complete the rollover within 60 days. What if you miss the deadline? You may owe tax and the early withdrawal penalty if you’re younger than age 59½. (The IRS may waive the penalty if there are extenuating circumstances.)
We can help
We can tell you if you’re eligible for the exceptions described above or other exceptions to the 10% early withdrawal penalty tax. Be sure to keep good records so you can prove your eligibility. https://www.schroedercocpas.com/contact
Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children.
While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if:
The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial.
If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax.
Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates.
Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.
Possible saving vehicles
The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:
Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as:
A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.
If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return.
Two reporting options
Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax. https://www.schroedercocpas.com/contact
Sales and registrations of electric vehicles (EVs) have increased dramatically in the U.S. in 2022, according to several sources. However, while they’re still a small percentage of the cars on the road today, they’re increasing in popularity all the time.
If you buy one, you may be eligible for a federal tax break. The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.
Be aware that not all EVs are eligible for the tax break, as we’ll describe below.
The EV definition
For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.
The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit. And Toyota is the latest auto manufacturer to sell enough plug-in EVs to trigger a gradual phase out of federal tax incentives for certain models sold in the U.S.
Several automakers are telling Congress to eliminate the limit. In a letter, GM, Ford, Chrysler and Toyota asked Congressional leaders to give all electric car and light truck buyers a tax credit of up to $7,500. The group says that lifting the limit would give buyers more choices, encourage greater EV adoption and provide stability to autoworkers.
The IRS provides a list of qualifying vehicles on its website and it recently added some eligible models. You can access the list here: https://bit.ly/2DJVArE .
Here are some additional points about the plug-in electric vehicle tax credit:
These are only the basic rules. There may be additional incentives provided by your state. If you want more information about the federal plug-in electric vehicle tax break, contact us. https://www.schroedercocpas.com/contact
A business or individual might be able to dispose of appreciated real property without being taxed on the gain by exchanging it rather than selling it. You can defer tax on your gain through a “like-kind” or Section 1031 exchange.
A like-kind exchange is a swap of real property held for investment or for productive use in your trade or business for like-kind investment real property or business real property. For these purposes, “like-kind” is very broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale. If you’re unsure whether the property involved in your exchange is eligible for a like-kind exchange, contact us to discuss the matter.
Here’s how the tax rules work
If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still have to report the exchange on a form that is attached to your tax return.
However, the properties often aren’t equal in value, so some cash or other (non-like-kind) property is thrown into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.
Here’s an example
Let’s say you exchange land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain: the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000, which is your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.
Note: No matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.
If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to him or her giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).
Like-kind exchanges can be complex but they’re a good tax-deferred way to dispose of investment or trade or business assets. We can answer any additional questions you have or assist with the transaction. https://www.schroedercocpas.com/contact
It’s not just businesses that can deduct vehicle-related expenses on their tax returns. Individuals also can deduct them in certain circumstances. Unfortunately, under current law, you may not be able to deduct as much as you could years ago.
For years prior to 2018, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. The changes were a result of the Tax Cuts and Jobs Act (TCJA), which could also affect your tax benefit from medical and charitable miles.
Fortunately, if you’re eligible to deduct driving costs, the IRS just increased the standard amounts for the second half of 2022 due to the high price of gas.
Current vs. past limits
Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. But the deduction was subject to a 2% of adjusted gross income (AGI) floor, which meant that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. However, for 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends miscellaneous itemized deductions subject to the 2% floor.
If you’re self-employed, business mileage can be deducted from self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.
Miles driven for a work-related move prior to 2018 were generally deductible “above the line” (that is, itemizing wasn’t required to claim the deduction). But for 2018 through 2025, under the TCJA, moving expenses are deductible only for active-duty members of the military.
Miles driven for health-care-related purposes are deductible as part of the medical expense itemized deduction. For example, you can include in medical expenses the amounts paid when you use a car to travel to doctors’ appointments. For 2022, medical expenses are deductible to the extent they exceed 7.5% of your AGI.
The limits for deducting expenses for charitable miles driven haven’t changed, but keep in mind that the charitable driving deduction can only be claimed if you itemize. For 2018 through 2025, the standard deduction has been nearly doubled so not as many taxpayers are itemizing. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).
Different mileage rates
Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The 2022 rates vary depending on the purpose:
In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.
Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your tax planning. https://www.schroedercocpas.com/contact
Like many people, you may have dreamed of turning a hobby into a regular business. You won’t have any tax headaches if your new business is profitable. But what if the new enterprise consistently generates losses (your deductions exceed income) and you claim them on your tax return? You can generally deduct losses for expenses incurred in a bona fide business. However, the IRS may step in and say the venture is a hobby — an activity not engaged in for profit — rather than a business. Then you’ll be unable to deduct losses.
By contrast, if the new enterprise isn’t affected by the hobby loss rules because it’s profitable, all otherwise allowable expenses are deductible on Schedule C, even if they exceed income from the enterprise.
Note: Before 2018, deductible hobby expenses had to be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” However, because miscellaneous deductions aren’t allowed from 2018 through 2025, deductible hobby expenses are effectively wiped out from 2018 through 2025.
Avoiding a hobby designation
There are two ways to avoid the hobby loss rules:
How can you prove you have a profit-making objective? You should run the venture in a businesslike manner. The IRS and the courts will look at the following factors:
Recent court case
In one U.S. Tax Court case, a married couple’s miniature donkey breeding activity was found to be conducted with a profit motive. The IRS had earlier determined it was a hobby and the couple was liable for taxes and penalties for the two tax years in which they claimed losses of more than $130,000. However, the court found the couple had a business plan, kept separate records and conducted the activity in a businesslike manner. The court stated they were “engaged in the breeding activity with an actual and honest objective of making a profit.” (TC Memo 2021-140)
Contact us for more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do to avoid a tax challenge. https://www.schroedercocpas.com/contact
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. https://www.schroedercocpas.com/contact
Business owners are aware that the price of gas is historically high, which has made their vehicle costs soar. The average nationwide price of a gallon of unleaded regular gas on June 17 was $5, compared with $3.08 a year earlier, according to the AAA Gas Prices website. A gallon of diesel averaged $5.78 a gallon, compared with $3.21 a year earlier.
Fortunately, the IRS is providing some relief. The tax agency announced an increase in the optional standard mileage rate for the last six months of 2022. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business.
For the second half of 2022 (July 1–December 31), the standard mileage rate for business travel will be 62.5 cents per mile, up from 58.5 cents per mile for the first half of the year (January 1–June 30). There are different standard mileage rates for charitable and medical driving.
Raising the standard mileage rate in the middle of the year is unusual. Normally, the IRS updates the mileage rates once a year at the end of the year for the next calendar year. However, the tax agency explained that “in recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022.” But while the move is uncommon, it’s not without precedent. The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices rose significantly.
While fuel costs are a significant factor in the mileage figure, the IRS notes that “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.”
The optional standard mileage rate is one of two methods a business can use to compute the deductible costs of operating an automobile for business puroses. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate. This may include expenses such as gas, oil, tires, insurance, repairs, licenses, vehicle registration fees and a depreciation allowance for the vehicle.
From a tax standpoint, you may get a larger deduction by tracking the actual expense method than you would with the standard mileage rate. But many taxpayers don’t want to spend time tracking actual costs. Be aware that there are rules that may prevent you from using one method or the other. For example, if a business wants to use the standard mileage rate for a car it leases, the business must use this rate for the entire lease period. Consult with us about your particular circumstances to determine the best course of action. https://www.schroedercocpas.com/contact
As a result of the current estate tax exemption amount ($12.06 million in 2022), many people no longer need to be concerned with federal estate tax. Before 2011, a much smaller amount resulted in estate plans attempting to avoid it. Now, because many estates won’t be subject to estate tax, more planning can be devoted to saving income taxes for your heirs.
Note: The federal estate tax exclusion amount is scheduled to sunset at the end of 2025. Beginning on January 1, 2026, the amount is due to be reduced to $5 million, adjusted for inflation. Of course, Congress could act to extend the higher amount or institute a new amount.
Here are some strategies to consider in light of the current large exemption amount.
Gifts that use the annual exclusion
One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor’s estate.
As mentioned, estate tax savings may not be an issue because of the large estate exemption amount. Further, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the recipient receives the donor’s basis upon transfer. Thus, the recipient could face income tax, in the form of capital gains tax, on the sale of the gifted property in the future. If there’s no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then the decision to make a gift should be based on other factors.
For example, gifts may be made to help a relative buy a home or start a business. But a donor shouldn’t gift appreciated property because of the capital gains that could be realized on a future sale by the recipient. If the appreciated property is held until the donor’s death, under current law, the heir will get a step-up in basis that will wipe out the capital gains tax on any pre-death appreciation in the property’s value.
Years ago, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. Generally, a two-trust plan was established to minimize estate tax. “Portability,” or the ability to apply the decedent’s unused exclusion amount to the surviving spouse’s transfers during life and at death, became effective for estates of decedents dying after 2010. As long as the election is made, portability allows the surviving spouse to apply the unused portion of a decedent’s applicable exclusion amount (the deceased spousal unused exclusion amount) as calculated in the year of the decedent’s death. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts.
Estate or valuation discounts
Be aware that some estate exclusion or valuation discount strategies to avoid inclusion of property in an estate may no longer be worth pursuing. It may be better to have the property included in the estate or not qualify for valuation discounts so that the property receives a step-up in basis. For example, the special use valuation — the valuation of qualified real property used for farming or in a business on the basis of the property’s actual use, rather than on its highest and best use — may not save enough, or any, estate tax to justify giving up the step-up in basis that would otherwise occur for the property.
Contact us if you want to discuss these strategies and how they relate to your estate plan. https://www.schroedercocpas.com/contact
Some people who begin claiming Social Security benefits are surprised to find out they’re taxed by the federal government on the amounts they receive. If you’re wondering whether you’ll be taxed on your Social Security benefits, the answer is: It depends.
The taxation of Social Security benefits depends on your other income. If your income is high enough, between 50% and 85% of your benefits could be taxed. (This doesn’t mean you pay 85% of your benefits back to the federal government in taxes. It merely means that you’d include 85% of them in your income subject to your regular tax rates.)
Figuring your income
To determine how much of your benefits are taxed, first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse if you file a joint tax return. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:
An example to illustrate
Let’s say you and your spouse have $20,000 in taxable dividends, $2,400 of tax-exempt interest and combined Social Security benefits of $21,000. So, your income plus half your benefits is $32,900 ($20,000 + $2,400 +½ of $21,000). You must include $450 of the benefits in gross income (½ ($32,900 − $32,000)). (If your combined Social Security benefits were $5,000, and your income plus half your benefits were $40,000, you would include $2,500 of the benefits in income: ½ ($40,000 − $32,000) equals $4,000, but half the $5,000 of benefits ($2,500) is lower, and the lower figure is used.)
Note: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You’ll have to pay tax on the additional income, you’ll have to pay tax on (or on more of) your Social Security benefits (since the higher your income the more of your Social Security benefits are taxed), and you may get pushed into a higher marginal tax bracket.
For example, this situation might arise if you receive a large distribution from an IRA during the year or you have large capital gains. Careful planning might avoid this negative tax result. You might be able to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock with gain that can be offset by a capital loss on other shares.
If you know your Social Security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make quarterly estimated tax payments. Keep in mind that most states do not tax Social Security benefits, but 12 states do tax them. Contact us for assistance or more information. https://www.schroedercocpas.com/contact
Summer is just around the corner. If you’re fortunate enough to own a vacation home, you may wonder about the tax consequences of renting it out for part of the year.
The tax treatment depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent isn’t charged.
If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial). On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)
If you rent the property out for more than 14 days, you must include the rent you receive in income. However, you can deduct part of your operating expenses and depreciation, subject to several rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc., costs to rental. You would allocate 75% of your depreciation allowance, interest, and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible if the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.
If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house personally.
Here’s the test: if you use it personally for more than the greater of 1) 14 days, or 2) 10% of the rental days, you’re using it “too much,” and you can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t go beyond that to create a loss. Any unused deductions are carried forward and may be usable in future years. If you’re limited to using deductions only up to the amount of rental income, you must use the deductions allocated to the rental portion in the following order: 1) interest and taxes, 2) operating costs, 3) depreciation.
If you “pass” the personal use test (i.e., you don’t use the property personally more than the greater of the figures listed above), you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under the passive loss rules.)
As you can see, the rules are complex. Contact us if you have questions or would like to plan ahead to maximize deductions in your situation. https://www.schroedercocpas.com/contact
The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021).
So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges.
Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)
To help struggling restaurants during the pandemic, the Consolidated Appropriations Act doubled the business meal deduction temporarily for 2021 and 2022. Unless Congress acts to extend this tax break, it will expire on December 31, 2022.
Currently, the deduction for business meals is allowed if the following requirements are met:
In the event that food and beverages are provided during an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.
So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there’s a business purpose to the meal or a reasonable expectation that a benefit to the business will result.
Provided by a restaurant
IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sells food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out and delivery meals.
However, a “restaurant” doesn’t include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales are excluded from businesses including:
The restriction also applies to an eating facility located on the employer’s business premises that provides meals excluded from an employee’s taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn’t matter if a third party is operating the facility under a contract with the business.
Keep good records
It’s important to keep track of expenses to maximize tax benefits for business meal expenses.
You should record the:
In addition, ask establishments to divvy up the tab between any entertainment costs and food/ beverages. For additional information, contact https://www.schroedercocpas.com/contact
Many people own Series E and Series EE bonds that were bought many years ago. They may rarely look at them or think about them except on occasional trips to a file cabinet or safe deposit box.
One of the main reasons for buying U.S. savings bonds (such as Series EE bonds) is the fact that interest can build up without the need to currently report or pay tax on it. The accrued interest is added to the redemption value of the bond and is paid when the bond is eventually cashed in. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. The difference between the bond’s purchase price and its redemption value is taxable interest.
Series EE bonds, which have a maturity period of 30 years, were first offered in January 1980. They replaced the earlier Series E bonds.
Currently, Series EE bonds are only issued electronically. They’re issued at face value, and the face value plus accrued interest is payable at maturity.
Before January 1, 2012, Series EE bonds could be purchased on paper. Those paper bonds were issued at a discount, and their face value is payable at maturity. Owners of paper Series EE bonds can convert them to electronic bonds, posted at their purchase price (with accrued interest).
Here’s an example of how Series EE bonds are taxed. Bonds issued in January 1990 reached final maturity after 30 years, in January of 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest was taxable in 2020.
A $1,000 Series EE bond (paper) bought in January 1990 for $500 was worth about $2,073.60 in January of 2020. It won’t increase in value after that. The entire difference of $1,573.60 ($2,073.60 − $500) was taxable as interest in 2020. This interest is exempt from state and local income taxes.
Note: Using the money from EE bonds for higher education may keep you from paying federal income tax on the interest.
If you own bonds (paper or electronic) that are reaching final maturity this year, action is needed to assure that there’s no loss of interest or unanticipated current tax consequences. Check the issue dates on your bonds. One possible place to reinvest the money is in Series I savings bonds, which are currently attractive due to rising inflation resulting in a higher interest rate.
The next quarterly estimated tax payment deadline is June 15 for individuals and businesses so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated taxes without triggering the penalty for underpayment of estimated tax.
The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under each of the following four methods:
Also, note that a corporation can switch among the four methods during a given tax year.
We can examine whether your corporation’s estimated tax bill can be reduced. Contact us if you’d like to discuss this matter further. https://www.schroedercocpas.com/contact
Businesses should be aware that they may be responsible for issuing more information reporting forms for 2022 because more workers may fall into the required range of income to be reported. Beginning this year, the threshold has dropped significantly for the filing of Form 1099-K, “Payment Card and Third-Party Network Transactions.” Businesses and workers in certain industries may receive more of these forms and some people may even get them based on personal transactions.
Background of the change
Banks and online payment networks — payment settlement entities (PSEs) or third-party settlement organizations (TPSOs) — must report payments in a trade or business to the IRS and recipients. This is done on Form 1099-K. These entities include Venmo and CashApp, as well as gig economy facilitators such as Uber and TaskRabbit.
A 2021 law dropped the minimum threshold for PSEs to file Form 1099-K for a taxpayer from $20,000 of reportable payments made to the taxpayer and 200 transactions to $600 (the same threshold applicable to other Forms 1099) starting in 2022. The lower threshold for filing 1099-K forms means many participants in the gig economy will be getting the forms for the first time.
Members of Congress have introduced bills to raise the threshold back to $20,000 and 200 transactions, but there’s no guarantee that they’ll pass. In addition, taxpayers should generally be reporting income from their side employment engagements, whether it’s reported to the IRS or not. For example, freelancers who make money creating products for an Etsy business or driving for Uber should have been paying taxes all along. However, Congress and the IRS have said this responsibility is often ignored. In some cases, taxpayers may not even be aware that income from these sources is taxable.
Some taxpayers may first notice this change when they receive their Forms 1099-K in January 2023. However, businesses should be preparing during 2022 to minimize the tax consequences of the gross amount of Form 1099-K reportable payments.
What to do now
Taxpayers should be reviewing gig and other reportable activities. Make sure payments are being recorded accurately. Payments received in a trade or business should be reported in full so that workers can withhold and pay taxes accordingly.
If you receive income from certain activities, you may want to increase your tax withholding or, if necessary, make estimated tax payments or larger payments to avoid penalties.
Separate personal payments and track deductions
Taxpayers should separate taxable gross receipts received through a PSE that are income from personal expenses, such as splitting the check at a restaurant or giving a gift. PSEs can’t necessarily distinguish between personal expenses and business payments, so taxpayers should maintain separate accounts for each type of payment.
Keep in mind that taxpayers who haven’t been reporting all income from gig work may not have been documenting all deductions. They should start doing so now to minimize the taxable income recognized due to the gross receipts reported on Form 1099-K. The IRS is likely to take the position that all of a taxpayer’s gross receipts reported on Form 1099-K are income and won’t allow deductions unless the taxpayer substantiates them. Deductions will vary based on the nature of the taxpayer’s work.
Contact us if you have questions about your Form 1099-K responsibilities. https://www.schroedercocpas.com/contact
Are you a charitably minded individual who is also taking distributions from a traditional IRA? You may want to consider the tax advantages of making a cash donation to an IRS-approved charity out of your IRA.
When distributions are taken directly out of traditional IRAs, federal income tax of up to 37% in 2022 will have to be paid. State income taxes may also be owed.
Qualified charitable distributions
One popular way to transfer IRA assets to charity is via a tax provision that allows IRA owners who are age 70½ or older to direct up to $100,000 per year of their IRA distributions to charity. These distributions are known as qualified charitable distributions (QCDs). The money given to charity counts toward your required minimum distributions (RMDs) but doesn’t increase your adjusted gross income (AGI) or generate a tax bill.
Keeping the donation out of your AGI may be important for several reasons. Here are some of them:
It can help you qualify for other tax breaks. For example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 7.5% of AGI.
You can avoid rules that can cause some or all of your Social Security benefits to be taxed and some or all of your investment income to be hit with the 3.8% net investment income tax.
It can help you avoid a high-income surcharge for Medicare Part B and Part D premiums, which kick in if AGI is over certain levels.
The distributions going to the charity won’t be subject to federal estate tax and generally won’t be subject to state death taxes.
Important points: You can’t claim a charitable contribution deduction for a QCD not included in your income. Also keep in mind that the age after which you must begin taking RMDs is 72, but the age you can begin making QCDs is 70½.
To benefit from a QCD for 2022, you must arrange for a distribution to be paid directly from the IRA to a qualified charity by December 31, 2022. You can use QCDs to satisfy all or part of the amount of your RMDs from your IRA. For example, if your 2022 RMDs are $10,000, and you make a $5,000 QCD for 2022, you have to withdraw another $5,000 to satisfy your 2022 RMDs.
Other rules and limits may apply. Want more information? Contact us to see whether this strategy would be beneficial in your situation. https://www.schroedercocpas.com/contact
The IRS recently released guidance providing the 2023 inflation-adjusted amounts for Health Savings Accounts (HSAs). High inflation rates will result in next year’s amounts being increased more than they have been in recent years.
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage, and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for next year
In Revenue Procedure 2022-24, the IRS released the 2023 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2023, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $3,850. For an individual with family coverage, the amount will be $7,750. This is up from $3,650 and $7,300, respectively, for 2022.
In addition, for both 2022 and 2023, there’s a $1,000 catch-up contribution amount for those who are age 55 and older at the end of the tax year.
High deductible health plan defined. For calendar year 2023, an HDHP will be a health plan with an annual deductible that isn’t less than $1,500 for self-only coverage or $3,000 for family coverage (these amounts are $1,400 and $2,800 for 2022). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, for 2022).
Reap the rewards
There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.
Taking care of an elderly parent or grandparent may provide more than just personal satisfaction. You could also be eligible for tax breaks. Here’s a rundown of some of them.
1. Medical expenses. If the individual qualifies as your “medical dependent,” and you itemize deductions on your tax return, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. The test for determining whether an individual qualifies as your “medical dependent” is less stringent than that used to determine whether an individual is your “dependent,” which is discussed below. In general, an individual qualifies as a medical dependent if you provide over 50% of his or her support, including medical costs.
However, bear in mind that medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI).
The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There’s an annual cap on the amount of premiums that can be deducted. The cap is based on age, going as high as $5,640 for 2022 for an individual over 70.
2. Filing status. If you aren’t married, you may qualify for “head of household” status by virtue of the individual you’re caring for. You can claim this status if:
If the person you’re caring for is your parent, the person doesn’t need to live with you, so long as you provide more than half of the person’s household costs and the person qualifies as your dependent. A head of household has a higher standard deduction and lower tax rates than a single filer.
3. Tests for determining whether your loved one is a “dependent.” Dependency exemptions are suspended (or disallowed) for 2018–2025. Even though the dependency exemption is currently suspended, the dependency tests still apply when it comes to determining whether a taxpayer is entitled to various other tax benefits, such as head-of-household filing status.
For an individual to qualify as your “dependent,” the following must be true for the tax year at issue:
4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally can’t take care of him- or herself, you may qualify for the dependent care credit for costs you incur for the individual’s care to enable you and your spouse to go to work.
Contact us if you’d like to further discuss the tax aspects of financially supporting and caring for an elderly relative. https://www.schroedercocpas.com/contact
If you donate valuable items to charity, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply certain information to prove their right to deduct charitable contributions. If you donate an item of property (or a group of similar items) worth more than $5,000, certain appraisal requirements apply. You must:
Keep these definitions in mind. A qualified appraisal is a complex and detailed document. It must be prepared and signed by a qualified appraiser. An appraisal summary is a summary of a qualified appraisal made on Form 8283 and attached to the donor’s return.
While courts have allowed taxpayers some latitude in meeting the “qualified appraisal” rules, you should aim for exact compliance.
The qualified appraisal isn’t submitted separately to the IRS in most cases. Instead, the appraisal summary, which is a separate statement prepared on an IRS form, is attached to the donor’s tax return. However, a copy of the appraisal must be attached for gifts of art valued at $20,000 or more and for all gifts of property valued at more than $500,000, other than inventory, publicly traded stock and intellectual property. If an item has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value” that can be used to substantiate the value.
Failure to comply with the requirements
The penalty for failing to get a qualified appraisal and attach an appraisal summary to the return is denial of the charitable deduction. The deduction may be lost even if the property was valued correctly. There may be relief if the failure was due to reasonable cause.
Exceptions to the requirement
A qualified appraisal isn’t required for contributions of:
Also, only a partially completed appraisal summary must be attached to the tax return for contributions of:
More than one gift
If you make gifts of two or more items during a tax year, even to multiple charitable organizations, the claimed values of all property of the same category or type (such as stamps, paintings, books, stock that isn’t publicly traded, land, jewelry, furniture or toys) are added together in determining whether the $5,000 or $10,000 limits are exceeded.
The bottom line is you must be careful to comply with the appraisal requirements or risk disallowance of your charitable deduction. Contact us if you have any further questions or want to discuss your contribution planning. https://www.schroedercocpas.com/contact
The IRS has begun mailing notices to businesses, financial institutions and other payers that filed certain returns with information that doesn’t match the agency’s records.
These CP2100 and CP2100A notices are sent by the IRS twice a year to payers who filed information returns that are missing a Taxpayer Identification Number (TIN), have an incorrect name or have a combination of both.
Each notice has a list of persons who received payments from the business with identified TIN issues.
If you receive one of these notices, you need to compare the accounts listed on the notice with your records and correct or update your records, if necessary. This can also include correcting backup withholding on payments made to payees.
Which returns are involved?
Businesses, financial institutions and other payers are required to file with the IRS various information returns reporting certain payments they make to independent contractors, customers and others. These information returns include:
Do you have backup withholding responsibilities?
The CP2100 and CP2100A notices also inform recipients that they’re responsible for backup withholding. Payments reported on the information returns listed above are subject to backup withholding if:
Do you have to report payments to independent contractors?
By January first of the following year, payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report certain payments made to recipients. If the following four conditions are met, you must generally report payments as nonemployee compensation:
Contact us if you receive a CP2100 or CP2100A notice from the IRS or if you have questions about filing Form 1099-NEC. We can help you stay in compliance with all rules. https://www.schroedercocpas.com/contact
In some cases, homeowners decide to move to new residences, but keep their present homes and rent them out. If you’re thinking of doing this, you’re probably aware of the financial risks and rewards. However, you also should know that renting out your home carries potential tax benefits and pitfalls.
You’re generally treated as a regular real estate landlord once you begin renting your home. That means you must report rental income on your tax return, but also are entitled to offsetting landlord deductions for the money you spend on utilities, operating expenses, incidental repairs and maintenance (for example, fixing a leak in the roof). Additionally, you can claim depreciation deductions for the home. You can fully offset rental income with otherwise allowable landlord deductions.
Passive activity rules
However, under the passive activity loss (PAL) rules, you may not be able to currently claim the rent-related deductions that exceed your rental income unless an exception applies. Under the most widely applicable exception, the PAL rules won’t affect your converted property for a tax year in which your adjusted gross income doesn’t exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don’t exceed $25,000.
You should also be aware that potential tax pitfalls may arise from renting your residence. Unless your rentals are strictly temporary and are made necessary by adverse market conditions, you could forfeit an important tax break for home sellers if you finally sell the home at a profit. In general, you can escape tax on up to $250,000 ($500,000 for married couples filing jointly) of gain on the sale of your principal home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. So renting your home out for an extended time could jeopardize a big tax break.
Even if you don’t rent out your home so long as to jeopardize your principal residence exclusion, the tax break you would have gotten on the sale (the $250,000/$500,000 exclusion) won’t apply to the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997, or to any gain allocable to a period of nonqualified use (any period during which the property isn’t used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse) after December 31, 2008. A maximum tax rate of 25% will apply to this gain (attributable to depreciation deductions).
Selling at a loss
Some homeowners who bought at the height of a market may ultimately sell at a loss someday. In such situations, the loss is available for tax purposes only if the owner can establish that the home was in fact converted permanently into income-producing property. Here, a longer lease period helps an owner. However, if you’re in this situation, be aware that you may not wind up with much of a loss for tax purposes. That’s because basis (the cost for tax purposes) is equal to the lesser of actual cost or the property’s fair market value when it’s converted to rental property. So if a home was bought for $300,000, converted to a rental when it’s worth $250,000, and ultimately sold for $225,000, the loss would be only $25,000.
The question of whether to turn a principal residence into rental property isn’t easy. Contact us to review your situation and help you make a decision. https://www.schroedercocpas.com/contact
The tax filing deadline for 2021 tax returns is April 18 this year. After your 2021 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations:
1. You can throw some tax records away now
You should hang onto tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return. So you can generally get rid of most records related to tax returns for 2018 and earlier years. (If you filed an extension for your 2018 return, hold on to your records until at least three years from when you filed the extended return.)
However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.
You should keep certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)
What about your retirement account paperwork? Keep records associated with a retirement account until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)
2. Waiting for your refund? You can check on it
The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.
3. If you forgot to report something, you can file an amended return
In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2021 tax return that you file on April 15, 2022, you can generally file an amended return until April 15, 2025.
However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.
We’re here year round
If you have questions about tax record retention, your refund or filing an amended return, contact us. We’re not just available at tax filing time — we’re here all year! https://www.schroedercocpas.com/contact
If you’re married, you may wonder whether you should file joint or separate tax returns. The answer depends on your individual tax situation.
In general, it depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. That means that the IRS can come after either of you to collect the full amount.
Although there are “innocent spouse” provisions in the law that may offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.
In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,499 on their 2021 taxes, when they file this year.
Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.
However, there are cases when people save tax by filing separately. For example:
One spouse has significant medical expenses. Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.
Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. And you can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.
Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return, but zero on separate returns (or $25,000 if the spouses didn’t live together for the whole year).
The decision you make on filing your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately. Contact us to prepare your return or if you have any questions. https://www.schroedercocpas.com/contact
If you’re getting ready to file your 2021 tax return, and your tax bill is more than you’d like, there might still be a way to lower it. If you’re eligible, you can make a deductible contribution to a traditional IRA right up until the April 18, 2022, filing date and benefit from the tax savings on your 2021 return.
Do you qualify?
You can make a deductible contribution to a traditional IRA if:
For 2021, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $105,000 to $125,000 of modified AGI. If you’re single or a head of household, the phaseout range is $66,000 to $76,000 for 2021. For married filing separately, the phaseout range is $0 to $10,000. For 2021, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $198,000 and $208,000.
Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59½, unless one of several exceptions apply).
IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 18 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59½ or older. (There are also income limits to contribute to a Roth IRA.)
Another IRA strategy that may help you save tax is to make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you’re a homemaker. In this case, you may be able to take advantage of a spousal IRA.
How much can you contribute?
For 2021, if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).
In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2021, the maximum contribution you can make to a SEP is $58,000.
Contact us if you want more information about IRAs or SEPs. Or ask about them when we’re preparing your return. We can help you save the maximum tax-advantaged amount for retirement. https://www.schroedercocpas.com/contact
If you own your own company and travel for business, you may wonder whether you can deduct the costs of having your spouse accompany you on trips.
The rules for deducting a spouse’s travel costs are very restrictive. First of all, to qualify, your spouse must be your employee. This means you can’t deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose, unless the spouse is a bona fide employee of your business. This requirement prevents tax deductibility in most cases.
If your spouse is your employee, then you can deduct his or her travel costs if his or her presence on the trip serves a bona fide business purpose. Merely having your spouse perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. In general, it isn’t sufficient for his or her presence to be “helpful” to your business pursuits — it must be necessary.
In most cases, a spouse’s participation in social functions, for example as a host or hostess, isn’t enough to establish a business purpose. That is, if his or her purpose is to establish general goodwill for customers or associates, this is usually insufficient. Further, if there’s a vacation element to the trip (for example, if your spouse spends time sightseeing), it will be more difficult to establish a business purpose for his or her presence on the trip. On the other hand, a bona fide business purpose exists if your spouse’s presence is necessary to care for a serious medical condition that you have.
If your spouse’s travel satisfies these tests, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.
A non-employee spouse
Even if your spouse’s travel doesn’t satisfy the requirements, however, you may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your spouse. You need only allocate any additional costs you incur for him or her. For example, in many hotels the cost of a single room isn’t that much lower than the cost of a double. If a single would cost you $150 a night and a double would cost you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. In other words, you can write off the cost of what you would have paid traveling alone. To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you’re staying.
And if you drive your own car or rent one, the whole cost will be fully deductible even if your spouse is along. Of course, if public transportation is used, and for meals, any separate costs incurred by your spouse wouldn’t be deductible.
Contact us if you have questions about this or other tax-related topics. https://www.schroedercocpas.com/contact
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.
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.
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. https://www.schroedercocpas.com/contact
If you’re in business for yourself as a sole proprietor, or you’re planning to start a business, you need to know about the tax aspects of your venture. Here are eight important issues to consider:
1. You report income and expenses on Schedule C of Form 1040. The net income is taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have any losses, they’re generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
2. You may be eligible for the pass-through deduction. To the extent your business generates qualified business income, you’re eligible to take the 20% pass-through deduction, subject to various limitations. The deduction is taken “below the line,” so it reduces taxable income, rather than being taken “above the line” against gross income. You can take the deduction even if you don’t itemize and instead take the standard deduction.
3. You might be able to deduct home office expenses. If you work from home, perform management or administrative tasks from a home office or store product samples or inventory at home, you may be entitled to deduct an allocable portion of certain costs. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
4. You must pay self-employment taxes. For 2022, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your self-employment net earnings of up to $147,000 and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits your medical expense deduction to amounts in excess of 7.5% of your adjusted gross income.
6. You must make quarterly estimated tax payments. For 2022, these are due April 18, June 15, September 15 and January 17, 2023.
7. You should keep complete records of your income and expenses. Carefully record expenses in order to claim all of the deductions to which you are entitled. Certain expenses, such as automobile, travel, meals and home office expenses, require special attention because they’re subject to special recordkeeping requirements or limits on deductibility.
8. If you hire employees, you need a taxpayer identification number and you must withhold and pay over employment taxes.
We can help
Contact us if you’d like more information or assistance with the tax or recordkeeping aspects of your business. https://www.schroedercocpas.com/contact
If you donated to charity last year, letters from the charities may have appeared in your mailbox recently acknowledging the donations. But what happens if you haven’t received such a letter — can you still claim a deduction for the gift on your 2021 income tax return? It depends.
To prove a charitable donation for which you claim a tax deduction, you need to comply with IRS substantiation requirements. For a donation of $250 or more, this includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation and the value of any such goods or services.
“Contemporaneous” means the earlier of:
Therefore, if you made a donation in 2021 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2021 return. Contact the charity now and request a written acknowledgment.
Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.
Temporary deduction for nonitemizers is gone
In general, taxpayers who don’t itemize their deductions (and instead claim the standard deduction) can’t claim a charitable deduction. Under the COVID-19 relief laws, individuals who don’t itemize deductions can claim a federal income tax write-off for up to $300 of cash contributions to IRS-approved charities for the 2021 tax year. This deduction is $600 for married joint filers for cash contributions made in 2021. Unfortunately, the deduction for nonitemizers isn’t available for 2022 unless Congress acts to extend it.
Additional substantiation requirements apply to some types of donations. For example, if you donate property valued at more than $500, a completed Form 8283 (Noncash Charitable Contributions) must be attached to your return or the deduction isn’t allowed.
And for donated property with a value of more than $5,000, you’re generally required to obtain a qualified appraisal and to attach an appraisal summary to your tax return.
We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2021 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2022 return. https://www.schroedercocpas.com/contact
Traditional IRAs and Roth IRAs have been around for decades and the rules surrounding them have changed many times. What hasn’t changed is that they can help you save for retirement on a tax-favored basis. Here’s an overview.
You can make an annual deductible contribution to a traditional IRA if:
For example, in 2022, if you’re a joint return filer covered by an employer plan, your deductible IRA contribution phases out over $109,000 to $129,000 of MAGI ($68,000 to $78,000 for singles).
Deductible IRA contributions reduce your current tax bill, and earnings are tax-deferred. However, withdrawals are taxed in full (and subject to a 10% penalty if taken before age 59½, unless one of several exceptions apply). You must begin making minimum withdrawals by April 1 of the year following the year you turn age 72.
You can make an annual nondeductible IRA contribution without regard to employer plan coverage and your MAGI. The earnings in a nondeductible IRA are tax-deferred but taxed when distributed (and subject to a 10% penalty if taken early, unless an exception applies).
You must begin making minimum withdrawals by April 1 of the year after the year you reach age 72. Nondeductible contributions aren’t taxed when withdrawn. If you’ve made deductible and nondeductible IRA contributions, a portion of each distribution is treated as coming from nontaxable IRA contributions (and the rest is taxed).
The maximum annual IRA contribution (deductible or nondeductible, or a combination) is $6,000 for 2022 and 2021 ($7,000 if age 50 or over). Additionally, your contribution can’t exceed the amount of your compensation includible in income for that year. There’s no age limit for making contributions, as long as you have compensation income (before 2021, traditional IRA contributions weren’t allowed after age 70½).
You can make an annual contribution to a Roth IRA if your income doesn’t exceed certain levels based on filing status. For example, in 2022, if you’re a joint return filer, the maximum annual Roth IRA contribution phases out between $204,000 and $214,000 of MAGI ($129,000 to $144,000 for singles). Annual Roth contributions can be made up to the amount allowed as a contribution to a traditional IRA, reduced by the amount you contribute for the year to non-Roth IRAs, but not reduced by contributions to a SEP or SIMPLE plan.
Roth IRA contributions aren’t deductible. However, earnings are tax-deferred and (unlike a traditional IRA) withdrawals are tax-free if paid out:
You can make Roth IRA contributions even after reaching age 72 (if you have compensation income), and you don’t have to take required minimum distributions from a Roth. You can “roll over” (or convert) a traditional IRA to a Roth regardless of your income. The amount taken out of the traditional IRA and rolled into the Roth is treated for tax purposes as a regular withdrawal (but not subject to the 10% early withdrawal penalty).
Contact us for more information about how you may be able to benefit from IRAs. https://www.schroedercocpas.com/contact
While some businesses have closed since the start of the COVID-19 crisis, many new ventures have launched. Entrepreneurs have cited a number of reasons why they decided to start a business in the midst of a pandemic. For example, they had more time, wanted to take advantage of new opportunities or they needed money due to being laid off. Whatever the reason, if you’ve recently started a new business, or you’re contemplating starting one, be aware of the tax implications.
As you know, before you even open the doors in a start-up business, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.
Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. Keep in mind that the way you handle some of your initial expenses can make a large difference in your tax bill.
Essential tax points
When starting or planning a new enterprise, keep these factors in mind:
Types of expenses
Start-up expenses generally include all expenses that are incurred to:
To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.
To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.
An important decision
Time may be of the essence if you have start-up expenses that you’d like to deduct for this year. You need to decide whether to take the election described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture. https://www.schroedercocpas.com/contact
Many tax limits that affect businesses are annually indexed for inflation, and a number of them have increased for 2022. Here’s a rundown of those that may be important to you and your business.
Social Security tax
The amount of an employee’s earnings that is subject to Social Security tax is capped for 2022 at $147,000 (up from $142,800 in 2021).
In 2022 and 2021, the deduction for eligible business-related food and beverage expenses provided by a restaurant is 100% (up from 50% in 2020).
Other employee benefits
These are only some of the tax limits that may affect your business and additional rules may apply. Contact us if you have questions. https://www.schroedercocpas.com/contact
The IRS announced it is opening the 2021 individual income tax return filing season on January 24. (Business returns are already being accepted.) Even if you typically don’t file until much closer to the April deadline (or you file for an extension until October), consider filing earlier this year. Why? You can potentially protect yourself from tax identity theft — and there may be other benefits, too.
How tax identity theft occurs
In a tax identity theft scheme, a thief uses another individual’s personal information to file a bogus tax return early in the filing season and claim a fraudulent refund.
The actual taxpayer discovers the fraud when he or she files a return and is told by the IRS that it is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund.
Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.
Note: You can still get your individual tax return prepared by us before January 24 if you have all the required documents. But processing of the return will begin after IRS systems open on that date.
Your W-2s and 1099s
To file your tax return, you need all of your W-2s and 1099s. January 31 is the deadline for employers to issue 2021 W-2 forms to employees and, generally, for businesses to issue Form 1099s to recipients for any 2021 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).
If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.
Other benefits of filing early
In addition to protecting yourself from tax identity theft, another advantage of early filing is that, if you’re getting a refund, you’ll get it sooner. The IRS expects most refunds to be issued within 21 days. However, the IRS has been experiencing delays during the pandemic in processing some returns. Keep in mind that the time to receive a refund is typically shorter if you file electronically and receive a refund by direct deposit into a bank account.
Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.
If you were eligible for an Economic Impact Payment (EIP) or advance Child Tax Credit (CTC) payments, and you didn’t receive them or you didn’t receive the full amount due, filing early will help you to receive the money sooner. In 2021, the third round of EIPs were paid by the federal government to eligible individuals to help mitigate the financial effects of COVID-19. Advance CTC payments were made monthly in 2021 to eligible families from July through December. EIP and CTC payments due that weren’t made to eligible taxpayers can be claimed on your 2021 return.
We can help
Contact us If you have questions or would like an appointment to prepare your tax return. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you. https://www.schroedercocpas.com/contact
If you’re like most people, you’re probably more concerned about your 2021 tax bill right now than you are about your 2022 tax situation. That’s understandable because your 2021 individual tax return is generally due to be filed by April 18 (unless you file an extension).
However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2022. Below are some Q&As about tax amounts for this year.
I have a 401(k) plan through my job. How much can I contribute to it?
For 2022, you can contribute up to $20,500 (up from $19,500 in 2021) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.
How much can I contribute to an IRA for 2022?
If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, or up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch-up” contribution. (These amounts were the same for 2021.)
I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?
In 2022, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,400 (up from $2,300 in 2021).
How much do I have to earn in 2022 before I can stop paying Social Security on my salary?
The Social Security tax wage base is $147,000 for this year (up from $142,800 in 2021). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)
I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2022?
A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2022, the standard deduction amount is $25,900 for married couples filing jointly (up from $25,100). For single filers, the amount is $12,950 (up from $12,550) and for heads of households, it’s $19,400 (up from $18,800). If your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize.
If I don’t itemize, can I claim charitable deductions on my 2022 return?
Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to two COVID-19-relief laws, non-itemizers could claim a limited charitable contribution deduction for the past two years (for 2021, this deduction is $300 for single taxpayers and $600 for married couples filing jointly). Unfortunately, unless Congress acts to extend this tax break, it has expired for 2022.
How much can I give to one person without triggering a gift tax return in 2022?
The annual gift exclusion for 2022 is $16,000 (up from $15,000 in 2021). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.
More to your tax picture
These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions. https://www.schroedercocpas.com/contact
If you’re an employer with a business where tipping is customary for providing food and beverages, you may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.
Basics of the credit
The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.
You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.
Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.
An example to illustrate
Example: Let’s say a waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.
The waiter’s $2-an-hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.
While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Claim your credit
If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. If you have any questions, don’t hesitate to contact us. https://www.schroedercocpas.com/contact
You may pay out a bundle in out-of-pocket medical costs each year. But can you deduct them on your tax return? It’s possible but not easy. Medical expenses can be claimed as a deduction only to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income. Plus, medical expenses are deductible only if you itemize, which means that your itemized deductions must exceed your standard deduction.
Qualifying costs include many items other than hospital and doctor bills. Here are some items to take into account in determining a possible deduction:
Insurance premiums. The cost of health insurance is a medical expense that can total thousands of dollars a year. Even if your employer provides you with coverage, you can deduct the portion of the premiums you pay. Long-term care insurance premiums also qualify, subject to dollar limits based on age.
Transportation. The cost of getting to and from medical treatment is an eligible expense. This includes taxi fares, public transportation or using your own car. Car costs can be calculated at 18 cents a mile for miles driven in 2022 (up from 16 cents in 2021), plus tolls and parking. Alternatively, you can deduct your actual costs, including gas and oil, but not general costs such as insurance, depreciation or maintenance.
Therapists and nurses. Services provided by individuals other than physicians can qualify if they relate to a medical condition and aren’t for general health. For example, the cost of physical therapy after knee surgery would qualify, but the costs of a personal trainer to tone you up wouldn’t. Also qualifying are amounts paid to a psychologist for medical care and certain long-term care services required by chronically ill individuals.
Eyeglasses, hearing aids, dental work and prescriptions. Deductible expenses include the cost of glasses, contacts, hearing aids and most dental work. Purely cosmetic expenses (such as tooth whitening) don’t qualify, but certain medically necessary cosmetic surgery is deductible. Prescription drugs qualify, but nonprescription drugs such as aspirin don’t even if a physician recommends them. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if permitted under state law.
Smoking-cessation programs. Amounts paid to participate in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible expenses. However, nonprescription gum and certain nicotine patches aren’t.
Weight-loss programs. A weight-loss program is a deductible expense if undertaken as treatment for a disease diagnosed by a physician. This can be obesity or another disease, such as hypertension, for which a doctor directs you to lose weight. It’s a good idea to get a written diagnosis. Deductible expenses include fees paid to join a program and attend meetings. However, the cost of low-calorie food that you eat in place of a regular diet isn’t deductible.
Dependents and others. You can deduct the medical expenses you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as a parent or grandparent, who would qualify as your dependent except that he or she has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them.
In summation, medical costs are fairly broadly defined for deduction purposes. We can assess if you qualify for a deduction or answer any questions you have. https://www.schroedercocpas.com/contact
The number of people engaged in the “gig” or sharing economy has grown in recent years. In an August 2021 survey, the Pew Research Center found that 16% of Americans have earned money at some time through online gig platforms. This includes providing car rides, shopping for groceries, walking dogs, performing household tasks, running errands and making deliveries from a restaurant or store.
There are tax consequences for the people who perform these jobs. Basically, if you receive income from an online platform offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.
Traits of gig workers
Gig workers are those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb, Angi, Instacart and DoorDash.
Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other protections of federal laws, aren’t part of states’ unemployment insurance systems, and are on their own when it comes to training, retirement savings and taxes.
If you’re part of the gig or sharing economy, here are some considerations.
It’s critical to keep good records tracking income and expenses in case you are audited by the IRS or a state/local tax authority. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an expensive surprise when you file your tax return next year. https://www.schroedercocpas.com/contact
Do you want to sell commercial or investment real estate that has appreciated significantly? One way to defer a tax bill on the gain is with a Section 1031 “like-kind” exchange where you exchange the property rather than sell it. With real estate prices up in some markets (and higher resulting tax bills), the like-kind exchange strategy may be attractive.
A like-kind exchange is any exchange of real property held for investment or for productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).
For these purposes, like-kind is broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.
Under the Tax Cuts and Jobs Act, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property — such as equipment and certain personal property building components — that are completed after December 31, 2017.
If you’re unsure if the property involved in your exchange is eligible for like-kind treatment, please contact us to discuss the matter.
Assuming the exchange qualifies, here’s how the tax rules work. If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still must report it on Form 8824, “Like-Kind Exchanges.”
Frequently, however, the properties aren’t equal in value, so some cash or other property is tossed into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.
An example to illustrate
Let’s say you exchange land (business property) with a basis of $100,000 for a building (business property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain. That’s the amount of cash (boot) you received. Your basis in your new building (the replacement property) will be $100,000: your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.
Note that no matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.
If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to the person giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).
Great tax-deferral vehicle
Like-kind exchanges can be a great tax-deferred way to dispose of investment, trade or business real property. Contact us if you have questions or would like to discuss the strategy further. https://www.schroedercocpas.com/contact
After two years of no increases, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2022 by 2.5 cents per mile. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 58.5 cents (up from 56 cents for 2021).
The increased tax deduction partly reflects the price of gasoline. On December 21, 2021, the national average price of a gallon of regular gas was $3.29, compared with $2.22 a year earlier, according to AAA Gas Prices.
Don’t want to keep track of actual expenses?
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.
How is the rate calculated?
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear.
When can the cents-per-mile method not be used?
There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2022 — or claiming 2021 expenses on your 2021 income tax return. https://www.schroedercocpas.com/contact
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.https://www.schroedercocpas.com/contact
January 17 (The usual deadline of January 15 is a Saturday)
The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefit of getting a company car.) Plus, current tax law and IRS rules make the benefit even better than it was in the past.
The rules in action
Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new $55,000 luxury sedan.
Your cost for personal use of the vehicle is equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.
Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).
In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.
And finally, the purchase of the car by your corporation will have no effect on your credit rating.
Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.
Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.https://www.schroedercocpas.com/contact
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. https://www.schroedercocpas.com/contact
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.
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.
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.https://www.schroedercocpas.com/contact
Are you planning to launch a business or thinking about changing your business entity? If so, you need to determine which entity will work best for you — a C corporation or a pass-through entity such as a sole-proprietorship, partnership, limited liability company (LLC) or S corporation. There are many factors to consider and proposed federal tax law changes being considered by Congress may affect your decision.
The corporate federal income tax is currently imposed at a flat 21% rate, while the current individual federal income tax rates begin at 10% and go up to 37%. The difference in rates can be mitigated by the qualified business income (QBI) deduction that’s available to eligible pass-through entity owners that are individuals, estates and trusts.
Note that noncorporate taxpayers with modified adjusted gross income above certain levels are subject to an additional 3.8% tax on net investment income.
Organizing a business as a C corporation instead of as a pass-through entity can reduce the current federal income tax on the business’s income. The corporation can still pay reasonable compensation to the shareholders and pay interest on loans from the shareholders. That income will be taxed at higher individual rates, but the overall rate on the corporation’s income can be lower than if the business was operated as a pass-through entity.
Other tax-related factors should also be considered. For example:
If substantially all the business profits will be distributed to the owners, it may be preferable that the business be operated as a pass-through entity rather than as a C corporation, since the shareholders will be taxed on dividend distributions from the corporation (double taxation). In contrast, owners of a pass-through entity will only be taxed once, at the personal level, on business income. However, the impact of double taxation must be evaluated based on projected income levels for both the business and its owners.
If the value of the business’s assets is likely to appreciate, it’s generally preferable to conduct it as a pass-through entity to avoid a corporate tax if the assets are sold or the business is liquidated. Although corporate level tax will be avoided if the corporation’s shares, rather than its assets, are sold, the buyer may insist on a lower price because the tax basis of appreciated business assets cannot be stepped up to reflect the purchase price. That can result in much lower post-purchase depreciation and amortization deductions for the buyer.
If the entity is a pass-through entity, the owners’ bases in their interests in the entity are stepped-up by the entity income that’s allocated to them. That can result in less taxable gain for the owners when their interests in the entity are sold.
If the business is expected to incur tax losses for a while, consideration should be given to structuring it as a pass-through entity so the owners can deduct the losses against their other income. Conversely, if the owners of the business have insufficient other income or the losses aren’t usable (for example, because they’re limited by the passive loss rules), it may be preferable for the business to be a C corporation, since it’ll be able to offset future income with the losses.
If the owners of the business are subject to the alternative minimum tax (AMT), it may be preferable to organize as a C corporation, since corporations aren’t subject to the AMT. Affected individuals are subject to the AMT at 26% or 28% rates.
These are only some of the many factors involved in operating a business as a certain type of legal entity. For details about how to proceed in your situation, consult with us. https://www.schroedercocpas.com/contact
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. https://www.schroedercocpas.com/contact
With Thanksgiving just around the corner, the holiday season will soon be here. At this time of year, your business may want to show its gratitude to employees and customers by giving them gifts or hosting holiday parties again after a year of forgoing them due to the pandemic. It’s a good time to brush up on the tax rules associated with these expenses. Are they tax deductible by your business and is the value taxable to the recipients?
Gifts to customers
If you give gifts to customers and clients, they’re deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value. These costs include engraving, gift wrapping, packaging and shipping. Also excluded from the $25 limit is branded marketing items — such as those imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as the costs are “reasonable.”
Gifts to employees
In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.
These are items that are small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys, hams, gift baskets, occasional sports or theater tickets (but not season tickets) and other low-cost merchandise.
De minimis fringe benefits aren’t included in an employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
Throw a holiday party
In general, holiday parties are fully deductible (and excludible from recipients’ income). And for calendar years 2021 and 2022, a COVID-19 relief law provides a temporary 100% deduction for expenses of food or beverages “provided by” a restaurant to your workplace. Previously, these expenses were only 50% deductible. Entertainment expenses are still not deductible.
The use of the words “provided by” a restaurant clarifies that the tax break for 2021 and 2022 isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also generally 100% deductible. So you can treat your on-premises staff to some holiday meals this year and get a full deduction.
Show your holiday spirit
Contact us if you have questions about the tax implications of giving holiday gifts or throwing a holiday party. https://www.schroedercocpas.com/contact
Are you considering a move to another state when you retire? Perhaps you want to relocate to an area where your loved ones live or where the weather is more pleasant. But while you’re thinking about how many square feet you’ll need in a retirement home, don’t forget to factor in state and local taxes. Establishing residency for state tax purposes may be more complicated than it initially appears to be.
What are all applicable taxes?
It may seem like a good option to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.
If the state you’re considering has an income tax, look at what types of income it taxes. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.
Is there a state estate tax?
The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million ($23.4 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.
How do you establish domicile?
If you make a permanent move to a new state and want to make sure you’re not taxed in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.
The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state are to:
Change your mailing address at the post office,
Change your address on passports, insurance policies, will or living trust documents, and other important documents,
Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party),
Register to vote, get a driver’s license and register your vehicle in the new state, and
Open and use bank accounts in the new state and close accounts in the old one.
If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. We can help file these returns.
Before deciding where you want to live in retirement, do some research and contact us. We can help you avoid unpleasant tax surprises. https://www.schroedercocpas.com/contact
As we approach the holidays, many people plan to donate to their favorite charities or give money or assets to their loved ones. Here are the basic tax rules involved in these transactions.
Donating to charity
Normally, if you take the standard deduction and don’t itemize, you can’t claim a deduction for charitable contributions. But for 2021 under a COVID-19 relief law, you’re allowed to claim a limited deduction on your tax return for cash contributions made to qualifying charitable organizations. You can claim a deduction of up to $300 for cash contributions made during this year. This deduction increases to $600 for a married couple filing jointly in 2021.
What if you want to give gifts of investments to your favorite charities? There are a couple of points to keep in mind.
First, don’t give away investments in taxable brokerage accounts that are currently worth less than what you paid for them. Instead, sell the shares and claim the resulting capital loss on your tax return. Then, give the cash proceeds from the sale to charity. In addition, if you itemize, you can claim a full tax-saving charitable deduction.
The second point applies to securities that have appreciated in value. These should be donated directly to charity. The reason: If you itemize, donations of publicly traded shares that you’ve owned for over a year result in charitable deductions equal to the full current market value of the shares at the time the gift is made. In addition, if you donate appreciated stock, you escape any capital gains tax on those shares. Meanwhile, the tax-exempt charity can sell the donated shares without owing any federal income tax.
Donating from your IRA
IRA owners and beneficiaries who’ve reached age 70½ are allowed to make cash donations of up to $100,000 a year to qualified charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. Contact your tax advisor if you’re interested in this type of gift.
Gifting assets to family and other loved ones
The principles for tax-smart gifts to charities also apply to gifts to relatives. That is, you should sell investments that are currently worth less than what you paid for them and claim the resulting tax-saving capital losses. Then, give the cash proceeds from the sale to your children, grandchildren or other loved ones.
Likewise, you should give appreciated stock directly to those to whom you want to give gifts. When they sell the shares, they’ll pay a lower tax rate than you would if they’re in a lower tax bracket.
In 2021, the amount you can give to one person without gift tax implications is $15,000 per recipient. The annual gift exclusion is available to each taxpayer. So if you’re married and make a joint gift with your spouse, the exclusion amount is doubled to $30,000 per recipient for 2021.
Make gifts wisely
Whether you’re giving to charity or loved ones this holiday season (or both), it’s important to understand the tax implications of gifts. Contact us if you have questions about the tax consequences of any gifts you’d like to make. https://www.schroedercocpas.com/contact
Employers offer 401(k) plans for many reasons, including to attract and retain talent. These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about participating in a plan at work, here are some of the features.
Under a 401(k) plan, you have the option of setting aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income, and defer tax on the amount until the cash (adjusted by earnings) is distributed to you. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.
Your wages or other compensation will be reduced by the amount of pre-tax contributions that you make — saving you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis (these are Roth 401(k) contributions). With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.
Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. For 2021, the maximum amount permitted is $19,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. For 2021, that additional amount is $6,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2021 is $26,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2021, $58,000, whichever is less.
Typically, you’ll be permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.
Getting money out
Another important aspect of these plans is the limitation on distributions while you’re working. First, amounts in the plan attributable to elective contributions aren’t available to you before one of the following events: retirement (or other separation from service), disability, reaching age 59½, hardship, or plan termination. And eligibility rules for a hardship withdrawal are very stringent. A hardship distribution must be necessary to satisfy an immediate and heavy financial need.
As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s 401(k) plan may allow you to receive a plan loan, which you pay back to your account, with interest. Any distribution that you do take can be rolled into another employer’s plan (if that plan permits) or to an IRA. This allows you to continue deferral of tax on the amount rolled over. Taxable distributions are generally subject to 20% federal tax withholding, if not rolled over.
Employers may opt to match contributions up to a certain amount. If your employer matches contributions, you should make sure to contribute enough to receive the full match. Otherwise, you’ll miss out on free money!
These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have. https://www.schroedercocpas.com/contact
With the increasing cost of employee health care benefits, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the important tax benefits:
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2021, a “high deductible health plan” is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. (These amounts will remain the same for 2022.) For self-only coverage, the 2021 limit on deductible contributions is $3,600 (increasing to $3,650 for 2022). For family coverage, the 2021 limit on deductible contributions is $7,200 (increasing to $7,300 for 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2021 cannot exceed $7,000 for self-only coverage or $14,000 for family coverage (increasing to $7,050 and $14,100, respectively, for 2022).
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 and 2022 of up to $1,000.
Contributions from an employer
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSA distributions can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.
HSAs offer a flexible option for providing health care coverage and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you’d like to discuss offering HSAs to your employees. https://www.schroedercocpas.com/contact
Studies have found that more people are engaging in online gambling and sports betting since the pandemic began. And there are still more traditional ways to gamble and play the lottery. If you’re lucky enough to win, be aware that tax consequences go along with your good fortune.
Review the tax rules
Whether you win online, at a casino, a bingo hall, a fantasy sports event or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.
You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. Therefore, you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.
Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.
Hitting a lottery jackpot
The odds of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.
Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.
You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.
If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.
Since the federal tax rate can currently be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.
Talk with us
If you’re fortunate enough to win a sizable amount of money, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements. https://www.schroedercocpas.com/contact
The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $147,000 for 2022 (up from $142,800 for 2021). Wages and self-employment income above this threshold aren’t subject to Social Security tax.
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.
There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2022, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2021).
For 2022, an employee will pay:
For 2022, the self-employment tax imposed on self-employed people is:
More than one employer
What happens if an employee works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.
We can help
Contact us if you have questions about payroll tax filing or payments. We can help ensure you stay in compliance. https://www.schroedercocpas.com/contact
If you use an automobile in your trade or business, you may wonder how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.
Cents-per-mile vs. actual expenses
First, note that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (56 cents per business mile driven for 2021), a depreciation allowance is built into the rate.
If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.
For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually.
For a passenger auto placed in service in 2021 that cost more than $59,000, the Year 1 depreciation ceiling is $18,200 if you choose to deduct $8,000 of first-year bonus depreciation. The annual ceilings for later years are: Year 2, $16,400; Year 3, $9,800; and for all later years, $5,860 until the vehicle is fully depreciated.
For a passenger auto placed in service in 2021 that cost more than $51,000, the Year 1 depreciation ceiling is $10,200 if you don’t choose to deduct $8,000 of first-year bonus depreciation. The annual ceilings for later years are: Year 2, $16,400; Year 3, $9,800; and for all later years, $5,860 until the vehicle is fully depreciated.
These ceilings are proportionately reduced for any nonbusiness use. And if a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions.
Heavy SUVs, pickups, and vans
Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.
After-tax cost is what counts
What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.
The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information. https://www.schroedercocpas.com/contact
If you’re fortunate enough to own a vacation home, you may want to rent it out for part of the year. What are the tax consequences?
The tax treatment can be complex. It depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by you, your relatives (even if you charge them market rent) and use by nonrelatives if a market rent isn’t charged.
Less than 15 days
If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce revenue and significant tax benefits. Any rent you receive isn’t included in your income for tax purposes. On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs or depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)
If you rent the property out for more than 14 days, you must include the rent received in income. However, you can deduct part of your operating expenses and depreciation, subject to certain rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, 75% of the use is rental (90 out of 120 total use days). You’d allocate 75% of your costs such as maintenance, utilities and insurance to rental. You’d also allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. The personal use part of interest on a second home is also deductible (if eligible) where the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.
Claiming a loss
If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes.
Here’s the test: if you use it personally for more than the greater of a) 14 days, or b) 10% of the rental days, you’re using it “too much” and can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t create a loss. Deductions you can’t use are carried forward and may be usable in future years. If you’re limited to using deductions only up to the rental income amount, you must use the deductions allocated to the rental portion in this order: 1) interest and taxes, 2) operating costs and 3) depreciation.
If you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under passive loss rules.)
These are only the basic rules. There may be other rules if you’re considered a small landlord or real estate professional. Contact us if you have questions. We can help plan your vacation home use to achieve optimal tax results. https://www.schroedercocpas.com/contact
If you own a valuable piece of art, or other property, you may wonder how much of a tax deduction you could get by donating it to charity.
The answer to that question can be complex because several different tax rules may come into play with such contributions. A charitable contribution of a work of art is subject to reduction if the charity’s use of the work of art is unrelated to the purpose or function that’s the basis for its qualification as a tax-exempt organization. The reduction equals the amount of capital gain you’d have realized had you sold the property instead of giving it to charity.
For example, let’s say you bought a painting years ago for $10,000 that’s now worth $20,000. You contribute it to a hospital. Your deduction is limited to $10,000 because the hospital’s use of the painting is unrelated to its charitable function, and you’d have a $10,000 long-term capital gain if you sold it. What if you donate the painting to an art museum? In that case, your deduction is $20,000.
One or more substantiation rules may apply when donating art. First, if you claim a deduction of less than $250, you must get and keep a receipt from the organization and keep written records for each item contributed.
If you claim a deduction of $250 to $500, you must get and keep an acknowledgment of your contribution from the charity. It must state whether the organization gave you any goods or services in return for your contribution and include a description and good faith estimate of the value of any goods or services given.
If you claim a deduction in excess of $500, but not over $5,000, in addition to getting an acknowledgment, you must maintain written records that include information about how and when you obtained the property and its cost basis. You must also complete an IRS form and attach it to your tax return.
If the claimed value of the property exceeds $5,000, in addition to an acknowledgment, you must also have a qualified appraisal of the property. This is an appraisal that was done by a qualified appraiser no more than 60 days before the contribution date and meets numerous other requirements. You include information about these donations on an IRS form filed with your tax return.
If your total deduction for art is $20,000 or more, you must attach a copy of the signed appraisal. If an item is valued at $20,000 or more, the IRS may request a photo. If an art item has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value” that can be used to substantiate the value.
In addition, your deduction may be limited to 20%, 30%, 50%, or 60% of your contribution base, which usually is your adjusted gross income. The percentage varies depending on the year the contribution is made, the type of organization, and whether the deduction of the artwork had to be reduced because of the unrelated use rule explained above. The amount not deductible on account of a ceiling may be deductible in a later year under carryover rules.
Other rules may apply
Donors sometimes make gifts of partial interests in a work of art. Special requirements apply to these donations. If you’d like to discuss any of these rules, please contact us. https://www.schroedercocpas.com/contact
Are employees at your business traveling again after months of virtual meetings? In Notice 2021-52, the IRS announced the fiscal 2022 “per diem” rates that became effective October 1, 2021. Taxpayers can use these rates to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home. (Taxpayers in the transportation industry can use a special transportation industry rate.)
A simplified alternative to tracking actual business travel expenses is to use the high-low per diem method. This method provides fixed travel per diems. The amounts are based on rates set by the IRS that vary from locality to locality.
Under the high-low method, the IRS establishes an annual flat rate for certain areas with higher costs of living. All locations within the continental United States that aren’t listed as “high-cost” are automatically considered “low-cost.” The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include Boston, San Francisco and Seattle.
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There’s also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.
If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by the IRS. Receipts of expenses generally aren’t required under the per diem method. But employees still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on an employee’s Form W-2.
The FY2022 rates
For travel after September 30, 2021, the per diem rate for all high-cost areas within the continental United States is $296. This consists of $222 for lodging and $74 for meals and incidental expenses. For all other areas within the continental United States, the per diem rate is $202 for travel after September 30, 2021 ($138 for lodging and $64 for meals and incidental expenses). Compared to the FY2021 per diems, both the high and low-cost area per diems increased $4.
Important: This method is subject to various rules and restrictions. For example, companies that use the high-low method for an employee must continue using it for all reimbursement of business travel expenses within the continental United States during the calendar year. However, the company may use any permissible method to reimburse that employee for any travel outside the continental United States.
For travel during the last three months of a calendar year, employers must continue to use the same method (per diem or high-low method) for an employee as they used during the first nine months of the calendar year. Also, note that per diem rates can’t be paid to individuals who own 10% or more of the business.
If your employees are traveling, it may be a good time to review the rates and consider switching to the high-low method. It can reduce the time and frustration associated with traditional travel reimbursement. Contact us for more information. https://www.schroedercocpas.com/contact
Given the escalating cost of health care, there may be a more cost-effective way to pay for it. For eligible individuals, a Health Savings Account (HSA) offers a tax-favorable way to set aside funds (or have an employer do so) to meet future medical needs. Here are the main tax benefits:
To be eligible for an HSA, you must be covered by a “high deductible health plan.” For 2021, a high deductible health plan is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For self-only coverage, the 2021 limit on deductible contributions is $3,600. For family coverage, the 2021 limit on deductible contributions is $7,200. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits can’t exceed $7,000 for self-only coverage or $14,000 for family coverage.
An individual (and the individual’s covered spouse) who has reached age 55 before the close of the year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2021 of up to $1,000.
HSAs may be established by, or on behalf of, any eligible individual.
You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2021, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,600. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,200. Thus, deductible contributions aren’t limited by the amount of the annual deductible under the high deductible health plan.
Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.
However, if an individual is enrolled in Medicare, he or she is no longer eligible under the HSA rules and contributions to an HSA can no longer be made.
On a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the transfer time. The amount transferred is excluded from gross income and isn’t subject to the 10% early withdrawal penalty.
HSA Distributions to cover an eligible individual’s qualified medical expenses, or those of his spouse or dependents, aren’t taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65 or in the event of death or disability.
As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat complex. Contact us if you have questions. https://www.schroedercocpas.com/contact
As we approach the holidays and the end of the year, many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2021 is $15,000.
The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).
Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.
Gift-splitting by married taxpayers
If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).
If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $15,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $30,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $15,000 is being given to a single individual in any year.)
“Unified” credit for taxable gifts
Even gifts that aren’t covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11.7 million for 2021. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.
Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $15,000 as a gift.
Annual gifts help reduce the taxable value of your estate. There have been proposals in Washington to reduce the estate and gift tax exemption amount, as well as make other changes to the estate tax laws. Making large tax-free gifts may be one way to recognize and address this potential threat. It could help insulate you against any later reduction in the unified federal estate and gift tax exemption.
Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July of 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South and $508,300 in the West.
Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).
If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.
To qualify for the exclusion, you must meet these tests:
You must have owned the property for at least two years during the five-year period ending on the sale date.
You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)
In addition, you can’t use the exclusion more than once every two years.
Gain above the exclusion amount
What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.
If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.
How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.
However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.
The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.
Two other tax considerations
Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.
As you can see, depending on your home sale profit and your income, some or all of the gain may be tax free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales. https://www.schroedercocpas.com/contact
Many businesses use independent contractors to help keep their costs down. If you’re among them, make sure that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be a costly error.
It can be complex to determine whether a worker is an independent contractor or an employee for federal income and employment tax purposes. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations. On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more).
What are the factors the IRS considers? Who is an “employee?” Unfortunately, there’s no uniform definition of the term. The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors. But other factors are also taken into account including who provides tools and who pays expenses. Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Section 530. This protection generally applies only if an employer meets certain requirements. For example, the employer must file all federal returns consistent with its treatment of a worker as a contractor and it must treat all similarly situated workers as contractors. Note: Section 530 doesn’t apply to certain types of workers.
Should you ask the IRS to decide? Be aware that you can ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors. Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and it may unintentionally trigger an employment tax audit. It may be better to properly treat a worker as an independent contractor so that the relationship complies with the tax rules. Workers who want an official determination of their status can also file Form SS-8.
Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities. If a worker files Form SS-8, the IRS will notify the business with a letter. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.
These are the basic tax rules. In addition, the U.S. Labor Department has recently withdrawn a non-tax rule introduced under the Trump administration that would make it easier for businesses to classify workers as independent contractors.
Contact us, if you’d like to discuss how to classify workers at your business. We can help make sure that your workers are properly classified. https://www.schroedercocpas.com/contact
In recent weeks, some Americans have been victimized by hurricanes, severe storms, flooding, wildfires and other disasters. No matter where you live, unexpected disasters may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But there are now restrictions that make these deductions harder to take.
What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or a terrorist attack.
More difficult to qualify
For losses incurred through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during the summer of 2021, there have been presidential declarations of major disasters in parts of Tennessee, New York state, Florida and California after severe storms, flooding and wildfires. So victims in affected areas would be eligible for casualty loss deductions.
Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.
Special election to claim a refund
If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can potentially help you get extra cash when you need it.
This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.
How to calculate the deduction
You must take the following three steps to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:
Important: Another factor that now makes it harder to claim a casualty loss than it used to be years ago is that you must itemize deductions to claim one. Through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2021, they’re $12,550 for single filers, $18,800 for heads of households, and $25,100 for married joint-filing couples.
So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.
These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. (It’s easier to get a deduction for business property casualty losses.) If you are a victim of a disaster, we can help you understand the complex rules. https://www.schroedercocpas.com/contact
When you file your tax return, you must check one of the following filing statuses: Single, married filing jointly, married filing separately, head of household or qualifying widow(er). Who qualifies to use the head of household tax filing status, which is more favorable than single?
To qualify, you must maintain a household, which for more than half the year, is the principal home of a “qualifying child” or other relative of yours whom you can claim as a dependent (unless you only qualify due to the multiple support rules).
A qualifying child?
A child is considered qualifying if he or she:
Lives in your home for more than half the year,
Is your child, stepchild, adopted child, foster child, sibling stepsibling (or a descendant of any of these),
Is under age 19 (or a student under 24), and
Doesn’t provide over half of his or her own support for the year.
If a child’s parents are divorced, the child will qualify if he meets these tests for the custodial parent — even if that parent released his or her right to a dependency exemption for the child to the noncustodial parent.
A person isn’t a “qualifying child” if he or she is married and can’t be claimed by you as a dependent because he or she filed jointly or isn’t a U.S. citizen or resident. Special “tie-breaking” rules apply if the individual can be a qualifying child of (and is claimed as such by) more than one taxpayer.
Maintaining a household
You’re considered to “maintain a household” if you live in the home for the tax year and pay over half the cost of running it. In measuring the cost, include house-related expenses incurred for the mutual benefit of household members, including property taxes, mortgage interest, rent, utilities, insurance on the property, repairs and upkeep, and food consumed in the home. Don’t include items such as medical care, clothing, education, life insurance or transportation.
Special rule for parents
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify under this rule, you must be able to claim the parent as your dependent.
You must be unmarried to claim head of household status. If you’re unmarried because you’re widowed, you can use the married filing jointly rates as a “surviving spouse” for two years after the year of your spouse’s death if your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household. The joint rates are more favorable than the head of household rates.
If you’re married, you must file either as married filing jointly or separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household, you’re treated as unmarried. If this is the case, you can use the head of household tax filing status.
Head of household tax filing status: We can help you decide
We can answer questions if you’d like to discuss whether you can use the head of household tax filing status or would like additional information about whether someone qualifies as your dependent. https://www.schroedercocpas.com/contact
Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.
However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.
Determining reasonable compensation
There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.
There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us. https://www.schroedercocpas.com/contact
There may be a tax-advantaged way for people to save for the needs of family members with disabilities — without having them lose eligibility for government benefits to which they’re entitled. It can be done though an Achieving a Better Life Experience (ABLE) account, which is a tax-free account that can be used for disability-related expenses.
Who is eligible?
ABLE accounts can be created by eligible individuals to support themselves, by family members to support their dependents, or by guardians for the benefit of the individuals for whom they’re responsible. Anyone can contribute to an ABLE account. While contributions aren’t tax-deductible, the funds in the account are invested and grow free of tax.
Eligible individuals must be blind or disabled — and must have become so before turning age 26. They also must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate is filed with the IRS for him or her.
Distributions from an ABLE account are tax-free if used to pay for expenses that maintain or improve the beneficiary’s health, independence or quality of life. These expenses include education, housing, transportation, employment support, health and wellness costs, assistive technology, personal support services, and other IRS-approved expenses.
If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax — plus a 10% penalty.
Here are some other key factors:
An eligible individual can have only one ABLE account. Contributions up to the annual gift-tax exclusion amount, currently $15,000, may be made to an ABLE account each year for the benefit of an eligible person. If the beneficiary works, the beneficiary can also contribute part, or all, of their income to their account. (This additional contribution is limited to the poverty-line amount for a one-person household.)
There’s also a limit on the total account balance. This limit, which varies from state to state, is equal to the limit imposed by that state on qualified tuition (Section 529) plans.
ABLE accounts have no impact on an individual’s Medicaid eligibility. However, ABLE account balances in excess of $100,000 are counted toward the SSI program’s $2,000 individual resource limit. Therefore, an individual’s SSI benefits are suspended, but not terminated, when his or her ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account to pay housing expenses count toward the SSI income limit.
For contributions made before 2026, the designated beneficiary can claim the saver’s credit for contributions made to his or her ABLE account.
States establish programs
There are many choices. ABLE accounts are established under state programs. An account may be opened under any state’s program (if the state allows out-of-state participants). The funds in an account can be invested in a variety of options and the account’s investment directions can be changed up to twice a year. Contact us if you’d like more details about setting up or maintaining an ABLE account. https://www.schroedercocpas.com/contact
If your child is fortunate enough to be awarded a scholarship, you may wonder about the tax implications. Fortunately, scholarships (and fellowships) are generally tax free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.
Requirements for tax-free treatment
However, scholarships are not always tax free. Certain conditions must be satisfied. A scholarship is tax free only to the extent it’s used to pay for:
For example, expenses that don’t qualify include the cost of room and board, travel, research and clerical help.
To the extent a scholarship award isn’t used for qualifying items, it’s taxable. The recipient is responsible for establishing how much of an award is used to pay for tuition and eligible expenses. Maintain records (such as copies of bills, receipts and cancelled checks) that reflect the use of the scholarship money.
Payment for services doesn’t qualify
Subject to limited exceptions, a scholarship isn’t tax free if the payments are linked to services that your child performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research or other services is taxable, even if the child uses the money for tuition or related expenses.
What if you, or a family member, are an employee of an education institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse or your dependents by the school at which you work isn’t included in your income and isn’t subject to tax.
What is reported on a tax return?
If a scholarship is tax free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax. Your child should receive a Form W-2 showing the amount of these “wages” and the amount of tax withheld, and any portion of the award that’s taxable must be reported, even if no Form W-2 is received.
These are just the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled. As we approach the new academic year, best wishes for your child’s success in school. Contact us if you’d like to discuss these or other tax matters further. https://www.schroedercocpas.com/contact
If you have a parent entering a nursing home, you may not be thinking about taxes. But there are a number of possible tax implications. Here are five.
1. Long-term medical care
The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI).
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that is provided under care administered by a licensed healthcare practitioner.
To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.
2. Long-term care insurance
Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.
Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2021 limit on deductible long-term care insurance premiums is $4,520, and for those over 70, the 2021 limit is $5,640.
3. Nursing home payments
Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.
If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.
4. Head-of-household filing status
If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.
5. The sale of your parent’s home.
If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In order to qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale, and used the home as a principal residence for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.
These are only some of the tax issues you may deal with when your parent moves into a nursing home. Contact us if you need more information or assistance. https://www.schroedercocpas.com/contact
Perhaps you operate your small business as a sole proprietorship and want to form a limited liability company (LLC) to protect your assets. Or maybe you are launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be appropriate for your business.
An LLC is somewhat of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds.
Personal asset protection
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and are taxed only once.
To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Code Section 199A pass-through deduction, subject to various limitations. In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you and your spouse may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.
Review your situation
In summary, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you should consider operating your business as an LLC. Contact us to discuss in more detail how an LLC might benefit you and the other owners. https://www.schroedercocpas.com/contact
Do you play a major role in a closely held corporation and sometimes spend money on corporate expenses personally? These costs may wind up being nondeductible both by an officer and the corporation unless proper steps are taken. This issue is more likely to arise in connection with a financially troubled corporation.
Deductible vs. nondeductible expenses
In general, you can’t deduct an expense you incur on behalf of your corporation, even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation’s legal existence as a separate entity must be respected, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.
What’s more, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.
When expenses may be deductible
On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing for payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.
Contact us if you’d like assistance or would like to discuss these issues further. https://www.schroedercocpas.com/contact
More than 43 million student borrowers are in debt with an average of $39,351 each, according to the research group EducationData.org. If you have student loan debt, you may wonder if you can deduct the interest you pay. The answer is yes, subject to certain limits. However, the deduction is phased out if your adjusted gross income exceeds certain levels — and they aren’t as high as the income levels for many other deductions.
Basics of the deduction
The maximum amount of student loan interest you can deduct each year is $2,500. 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. Post-graduate programs may also qualify. For example, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or health care facility offering post-graduate 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.
For 2021, the deduction is phased out for single taxpayers with AGI between $70,000 and $85,000 ($140,000 and $170,000 for married couples filing jointly). The deduction is unavailable for single taxpayers with AGI of more than $85,000 ($170,000 or married couples filing jointly).
Married taxpayers must file jointly to claim this deduction.
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.
No deduction is allowed to a taxpayer who can be claimed as a dependent on another tax return. For example, let’s say a parent is paying for the college education of a child whom the parent is claiming as a dependent. In this case, the interest deduction is only available for interest the parent pays on a qualifying loan, not for any of the interest the child may pay on a loan the student may have taken out. The child will be able to deduct interest that is paid in later years when he or she is no longer a dependent.
The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his 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 must 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 expenses including books, equipment, fees, and transportation.
Documenting room and board expenses should be straightforward for students living and dining on campus. Student who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.
Contact us if you’d like help in determining whether you qualify for this deduction or if you have questions about it. https://www.schroedercocpas.com/contact
As many of you know, the monthly child tax payments began arriving July 15. Every dollar you receive from July to December will reduce the amount of credit you'll claim on your 2021 return. If you don't need the money this year, you may be better off taking the full credit on your 2021 tax return to lower next year's tax bill or increase the amount of your tax refund. Taxpayers need to remember that the child tax credit offset the amount of taxes owed on your annual federal tax return. By receiving the advance child tax credit, some taxpayers may end up owing taxes when they file their 2021 returns because their child tax credit will be reduced by the amount of advances received.
For example, a family with 3 dependents between the ages of 7-17 would normally have a credit of $6,000 on their tax return. in 2021, the total credit would be $9,000. However, they will receive 50% of the credit in advance leaving a credit of $4,500 to offset any taxes owed instead of the normal $6,000 reported in prior years. This is a $1,500 swing in taxes owed or refunded when compared to prior years.
If you want to stop advance payments of the 2021 child tax credit, you have to opt-out using the IRS online tool before the monthly deadline. To access the online tool, go to www.irs.gov and then click on "Get Details on the Advance Child Tax Credit". You will then click on "Manage Payments" to unenroll and to stop future payments.
There are monthly opt-out deadlines if you want to cut off payments before the next one arrives. To Opt-out before you receive a certain monthly payment, you must unenroll by at least three days before the first Thursday of the month in which that payment is scheduled to arrive. The full list of opt-out deadlines can be found in the table below (note that the deadline for opting out of the first payment has already passed).
OPT-OUT DEADLINES FOR MONTHLY CHILD TAX CREDIT PAYMENTS
JULY 15, 2021 JUNE 28, 2021
AUGUST 13, 2021 AUGUST 2, 2021
SEPTEMBER 15, 2021 AUGUST 30, 2021
OCTOBER 15, 2021 OCTOBER 4, 2021
NOVEMBER 15, 2021 NOVEMBER 1, 2021
DECEMBER 15, 2021 NOVEMBER 29, 2021
If you miss the deadline and you're eligible for a monthly payment, you'll continue to get scheduled payments until the IRS processes a request from you to unenroll from the monthly payment process. If you do not opt-out of the monthly payments now, you won't be able to re-enroll until at least September 2021.
If you're married and file a joint tax return, your spouse also needs to opt-out since unenrolling only applies on an individual basis. If your spouse doesn't unenroll, you'll still get half of the joint payment you were supposed to received with your spouse.
For those that are starting to receive your advanced child tax credit payments, please keep track of what you receive each month as your tax preparer will need that amount when they prepare your return next year as it will reduce your child tax credit on your 2021 Tax Return.
If you have any questions, do not hesitate to call or email
If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.
The current rules
Under the current fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandmother bought stock in 1935 for $500 and it’s worth $1 million at her death, the basis is stepped up to $1 million in the hands of your grandmother’s heirs — and all of that gain escapes federal income tax.
The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, and those rules also apply to property inherited from foreign persons who aren’t subject to U.S. estate tax. It doesn’t matter if a federal estate tax return is filed. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.
Gifting before death
It’s crucial to understand the current fair market value basis rules so that you don’t pay more tax than you’re legally required to.
For example, in the above example, if your grandmother decides to make a gift of the stock during her lifetime (rather than passing it on when she dies), the “step-up” in basis (from $500 to $1 million) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift.
A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.
Change on the horizon?
Be aware that President Biden has proposed ending the ability to step-up the basis for gains in excess of $1 million. There would be exemptions for family-owned businesses and farms. Of course, any proposal must be approved by Congress in order to be enacted.
These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning or after receiving an inheritance. We’ll keep you up to date on any tax law changes. https://www.schroedercocpas.com/contact
Despite the COVID-19 pandemic, government officials are seeing a large increase in the number of new businesses being launched. From June 2020 through June 2021, the U.S. Census Bureau reports that business applications are up 18.6%. The Bureau measures this by the number of businesses applying for an Employer Identification Number.
Entrepreneurs often don’t know that many of the expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.
How to treat expenses for tax purposes
If you’re starting or planning to launch a new business, keep these three rules in mind:
In general, start-up expenses are those you make to:
To qualify for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.
To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.
If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business. https://www.schroedercocpas.com/contact
Are you age 65 and older and have basic Medicare insurance? You may need to pay additional premiums to get the level of coverage you want. The premiums can be expensive, especially if you’re married and both you and your spouse are paying them. But there may be a bright side: You may qualify for a tax break for paying the premiums.
Medicare premiums are medical expenses
You can combine premiums for Medicare health insurance with other qualifying medical expenses for purposes of claiming an itemized deduction for medical expenses on your tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, coinsurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.
Itemizing versus the standard deduction
Qualifying for a medical expense deduction is hard for many people for a couple of reasons. For 2021, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI.
The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. As a result, fewer individuals are claiming itemized deductions. For 2021, the standard deduction amounts are $12,550 for single filers, $25,100 for married couples filing jointly and $18,800 for heads of household. (For 2020, these amounts were $12,400, $24,800 and $18,650, respectively.)
However, if you have significant medical expenses, including Medicare health insurance premiums, you may itemize and collect some tax savings.
Note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.
Medical expense deduction basics
In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatment, ambulance services, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines and others.
There are also many items that Medicare doesn’t cover that can be deducted for tax purposes, if you qualify. In addition, you can deduct transportation expenses to get to medical appointments. If you go by car, you can deduct a flat 16-cents-per-mile rate for 2021 (down from 17 cents for 2020), or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs.
Claim all eligible deductions
Contact us if you have additional questions about claiming medical expense deductions on your tax return. https://www.schroedercocpas.com/contact
here’s a harsh tax penalty that you could be at risk for paying personally if you own or manage a business with employees. It’s called the “Trust Fund Recovery Penalty” and it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.
Because taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is aggressive in enforcing the penalty.
The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.
Here are some answers to questions about the penalty so you can safely avoid it.
What actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.
Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under some circumstances. In some cases, responsibility has even been extended to family members close to the business, and to attorneys and accountants.
According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.
Although a taxpayer held liable can sue other responsible people for contribution, this action must be taken entirely on his or her own after the penalty is paid. It isn’t part of the IRS collection process.
What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.
Never borrow from taxes
Under no circumstances should you fail to withhold taxes or “borrow” from withheld amounts. All funds withheld should be paid over to the government on time. Contact us with any questions about making tax payments. https://www.schroedercocpas.com/contact
The IRS just released its audit statistics for the 2020 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audit these days, that will be little consolation if yours is one of them.
Overall, just 0.5% of individual tax returns were audited in 2020. However, as in the past, those with higher incomes were audited at higher rates. For example, in 2020, 2.2% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited. Among the richest taxpayers, those with AGIs of $10 million and more, 7% of returns were audited in 2020.
These are among the lowest percentages of audits conducted in recent years. However, the Biden administration has announced it would like to raise revenue by increasing tax compliance and enforcement. In other words, audits may be on the rise in coming years.
Prepare in advance
Even though fewer audits were performed in 2020, the IRS will still examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unlucky ones.
The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.
It’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.
Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.
The government generally has three years within which to conduct an audit, and often the exam won’t begin until a year or more after you file your return.
Complex vs. simple returns
The scope of an audit depends on the tax return’s complexity. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income.
An audit may be conducted by mail or through an in-person interview and review of records. The interview may be conducted at an IRS office or may be a “field audit” at the taxpayer’s home, business, or accountant’s office.
Important: Even if your chosen for audit, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.
Don’t go it alone
It’s advisable to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.
If you receive an IRS audit letter or simply want to improve your recordkeeping, we’re here to help. Contact us to discuss this or any other aspect of your taxes. https://www.schroedercocpas.com/contact
Are you eligible to take the deduction for qualified business income (QBI)? Here are 10 facts about this valuable tax break, referred to as the pass-through deduction, QBI deduction or Section 199A deduction.
As you can see, this substantial deduction is complex, especially if your taxable income exceeds the thresholds discussed above. Other rules apply. Contact us if you have questions about your situation. https://www.schroedercocpas.com/contact
The Employee Retention Tax Credit (ERTC) is a valuable tax break that was extended and modified by the American Rescue Plan Act (ARPA), enacted in March of 2021. Here’s a rundown of the rules.
Back in March of 2020, Congress originally enacted the ERTC in the CARES Act to encourage employers to hire and retain employees during the pandemic. At that time, the ERTC applied to wages paid after March 12, 2020, and before January 1, 2021. However, Congress later modified and extended the ERTC to apply to wages paid before July 1, 2021.
The ARPA again extended and modified the ERTC to apply to wages paid after June 30, 2021, and before January 1, 2022. Thus, an eligible employer can claim the refundable ERTC against “applicable employment taxes” equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021. Except as discussed below, qualified wages are generally limited to $10,000 per employee per 2021 calendar quarter. Thus, the maximum ERTC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.
For purposes of the ERTC, a qualified employer is eligible if it experiences a significant decline in gross receipts or a full or partial suspension of business due to a government order. Employers with up to 500 full-time employees can claim the credit without regard to whether the employees for whom the credit is claimed actually perform services. But, except as explained below, employers with more than 500 full-time employees can only claim the ERTC with respect to employees that don’t perform services.
Employers who got a Payroll Protection Program loan in 2020 can still claim the ERTC. But the same wages can’t be used both for seeking loan forgiveness or satisfying conditions of other COVID relief programs (such as the Restaurant Revitalization Fund program) in calculating the ERTC.
Beginning in the third quarter of 2021, the following modifications apply to the ERTC:
Contact us if you have any questions related to your business claiming the ERTC. https://www.schroedercocpas.com/contact
As we continue to come out of the COVID-19 pandemic, you may be traveling again for business. Under tax law, there are a number of rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.
Note that under the Tax Cuts and Jobs Act, employees can’t deduct their unreimbursed travel expenses through 2025 on their own tax returns. That’s because unreimbursed employee business expenses are “miscellaneous itemized deductions” that aren’t deductible through 2025.
However, self-employed individuals can continue to deduct business expenses, including away-from-home travel expenses.
Here are some of the rules that come into play.
Transportation and meals
The actual costs of travel (for example, plane fare and cabs to the airport) are deductible for out-of-town business trips. You’re also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they’re not connected to a business conversation or other business function. The Consolidated Appropriations Act includes a provision that removes the 50% limit on deducting eligible business meals for 2021 and 2022. The law allows a 100% deduction for food and beverages provided by a restaurant. Takeout and delivery meals provided by a restaurant are also fully deductible.
Keep in mind that no deduction is allowed for meal or lodging expenses that are “lavish or extravagant,” a term that’s been interpreted to mean “unreasonable.”
Personal entertainment costs on the trip aren’t deductible, but business-related costs such as those for dry cleaning, phone calls and computer rentals can be written off.
Combining business and pleasure
Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional period of vacation. Only the cost of meals, lodging, etc., incurred for the business days are deductible — not those incurred for the personal vacation days.
On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if the trip is “primarily” business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. An important factor in determining if the trip is primarily business or personal is the amount of time spent on each (although this isn'’t the sole factor).
If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., the IRS may check the nature of the meetings carefully to make sure they aren’t vacations in disguise. Retain all material helpful in establishing the business or professional nature of this travel.
The rules for deducting the costs of a spouse who accompanies you on a business trip are very restrictive. No deduction is allowed unless the spouse is an employee of you or your company, and the spouse’s travel is also for a business purpose.
Finally, note that personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, the cost of boarding a pet while you’re away isn’t deductible. Contact us if you have questions about your small business deductions. https://www.schroedercocpas.com/contact
Married couples may not be able to save as much as they need for retirement when one spouse doesn’t work outside the home — perhaps so that spouse can take care of children or elderly parents. In general, an IRA contribution is allowed only if a taxpayer earns compensation. However, there’s an exception involving a “spousal” IRA. It allows contributions to be made for nonworking spouses.
For 2021, the amount that an eligible married couple can contribute to an IRA for a nonworking spouse is $6,000, which is the same limit that applies for the working spouse.
As you may know, IRAs offer two types of advantages for taxpayers who make contributions to them.
As long as the couple together has at least $12,000 of earned income, $6,000 can be contributed to an IRA for each, for a total of $12,000. (The contributions for both spouses can be made to either a regular IRA or a Roth IRA, or split between them, as long as the combined contributions don’t exceed the $12,000 limit.)
Boost contributions if 50 or older
In addition, individuals who are age 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000. Therefore, for 2021, for a taxpayer and his or her spouse, both of whom will have reached age 50 by the end of the year, the combined limit of the deductible contributions to an IRA for each spouse is $7,000, for a combined deductible limit of $14,000.
There’s one catch, however. If, in 2021, the working spouse is an active participant in either of several types of retirement plans, a deductible contribution of up to $6,000 (or $7,000 for a spouse who will be 50 by the end of the year) can be made to the IRA of the nonparticipant spouse only if the couple’s AGI doesn’t exceed $125,000. This limit is phased out for AGI between $198,000 and $208,000.
Contact us if you’d like more information about IRAs or you’d like to discuss retirement planning. https://www.schroedercocpas.com/contact
If you’re a parent with a college-bound child, you may be concerned about being able to fund future tuition and other higher education costs. You want to take maximum advantage of tax benefits to minimize your expenses. Here are some possible options.
Series EE U.S. savings bonds offer two tax-saving opportunities for eligible families when used to finance college:
To qualify for the tax exemption for college use, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees and certain other expenses — not room and board. If only part of the proceeds is used for qualified expenses, only that part of the interest is exempt.
The exemption is phased out if your adjusted gross income (AGI) exceeds certain amounts.
A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. Qualified tuition programs are established by state governments or private education institutions.
Contributions aren’t deductible. The contributions are treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($15,000 for 2021). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.
The earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses.” Distributions of earnings that aren’t used for qualified expenses will be subject to income tax plus a 10% penalty tax.
Coverdell education savings accounts (ESAs)
You can establish a Coverdell ESA and make contributions of up to $2,000 annually for each child under age 18.
The right to make contributions begins to phase out once your AGI is over a certain amount. If the income limitation is a problem, a child can contribute to his or her own account.
Although the contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if used on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when he or she turns 30, and any earnings will be subject to tax and penalty. But unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. (Some ESA requirements don’t apply to individuals with special needs.)
These are just some of the tax-favored ways to build up a college fund for your children. Once your child is in college, you may qualify for tax breaks such as the American Opportunity Tax Credit or the Lifetime Learning Credit. Contact us if you’d like to discuss any of the options. https://www.schroedercocpas.com/contact
If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the strict substantiation requirements set forth under tax law. Tax auditors are adept at rooting out inconsistencies, omissions and errors in taxpayers’ records, as illustrated by one recent U.S. Tax Court case.
Facts of the case
In the case, the taxpayer ran a notary and paralegal business. She deducted business meals and vehicle expenses that she allegedly incurred in connection with her business.
The deductions were denied by the IRS and the court. Tax law “establishes higher substantiation requirements” for these and certain other expenses, the court noted. No deduction is generally allowed “unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer of the person receiving the benefit” for each expense with adequate records or sufficient evidence.
The taxpayer in this case didn’t provide adequate records or other sufficient evidence to prove the business purpose of her meal expenses. She gave vague testimony that she deducted expenses for meals where she “talked strategies” with people who “wanted her to do some work.” The court found this was insufficient to show the connection between the meals and her business.
When it came to the taxpayer’s vehicle expense deductions, she failed to offer credible evidence showing where she drove her vehicle, the purpose of each trip and her business relationship to the places visited. She also conceded that she used her car for both business and personal activities. (TC Memo 2021-50)
Best practices for business expenses
This case is an example of why it’s critical to maintain meticulous records to support business expenses for meals and vehicle deductions. Here’s a list of “DOs and DON'Ts” to help meet the strict IRS and tax law substantiation requirements for these items:
DO keep detailed, accurate records. For each expense, record the amount, the time and place, the business purpose, and the business relationship of any person to whom you provided a meal. If you have employees who you reimburse for meals and auto expenses, make sure they’re complying with all the rules.
DON’T reconstruct expense logs at year end or wait until you receive a notice from the IRS. Take a moment to record the details in a log or diary or on a receipt at the time of the event or soon after. Require employees to submit monthly expense reports.
DO respect the fine line between personal and business expenses. Be careful about combining business and pleasure. Your business checking account shouldn’t be used for personal expenses.
DON’T be surprised if the IRS asks you to prove your deductions. Meal and auto expenses are a magnet for attention. Be prepared for a challenge.
With organization and guidance from us, your tax records can stand up to scrutiny from the IRS. There may be ways to substantiate your deductions that you haven’t thought of, and there may be a way to estimate certain deductions (“the Cohan rule”), if your records are lost due to a fire, theft, flood or other disaster. If you have any questions regarding this, please contact us. https://www.schroedercocpas.com/contact
High-income taxpayers face a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some steps you may be able to take to reduce its impact.
The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds:
The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you.
Net investment income includes interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from a business trading in financial instruments or commodities.
There are many types of income that are exempt from the NIIT. For example, tax-exempt interest and the excluded gain from the sale of your main home aren’t subject to the tax. Distributions from qualified retirement plans aren’t subject to the NIIT. Wages and self-employment income also aren’t subject to the NIIT, though they may be subject to a different Medicare surtax.
It’s important to remember the NIIT applies only if you have net investment income and your MAGI exceeds the applicable thresholds above. But by following strategies, you may be able to minimize net investment income.
If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT.
Dividend-paying stocks are taxed more heavily as a result of the NIIT. The maximum income tax rate on qualified dividends is 20%, but the rate becomes 23.8% with the NIIT.
As a result, you may want to consider rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks. While the capital gain from these investments will be included in net investment income, there are two potential benefits: 1) the tax will be deferred because the capital gain won’t be subject to the NIIT until the stock is sold and 2) capital gains can be offset by capital losses, which isn’t the case with dividends.
Because distributions from qualified retirement plans are exempt from the NIIT, upper-income taxpayers with some control over their situations (such as small business owners) might want to make greater use of qualified plans.
These are only a couple of strategies you may be able to employ. You also may be able to make moves related to charitable donations, passive activities and rental income that may allow you to minimize the NIIT. If you’re subject to the tax, you should include it in your tax planning. Consult with us for tax-planning strategies. https://www.schroedercocpas.com/contact
Are you wondering whether alternative energy technologies can help you manage energy costs in your business? If so, there’s a valuable federal income tax benefit (the business energy credit) that applies to the acquisition of many types of alternative energy property.
The credit is intended primarily for business users of alternative energy (other energy tax breaks apply if you use alternative energy in your home or produce energy for sale).
The business energy credit equals 30% of the basis of the following:
The credit equals 10% of the basis of the following:
Pluses and minuses
However, there are several restrictions. For example, the credit isn’t available for property acquired with certain non-recourse financing. Additionally, if the credit is allowable for property, the “basis” is reduced by 50% of the allowable credit.
On the other hand, a favorable aspect is that, for the same property, the credit can sometimes be used in combination with other benefits — for example, federal income tax expensing, state tax credits or utility rebates.
There are business considerations unrelated to the tax and non-tax benefits that may influence your decision to use alternative energy. And even if you choose to use it, you might do so without owning the equipment, which would mean forgoing the business energy credit.
As you can see, there are many issues to consider. We can help you address these alternative energy considerations. https://www.schroedercocpas.com/contact
As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.
Here are some considerations.
Shifting business earnings
You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.
Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.
Income tax withholding
Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.
However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.
Social Security tax savings
If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.
A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.
Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.
Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).
Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too. https://www.schroedercocpas.com/contact
The IRS recently released guidance providing the 2022 inflation-adjusted amounts for Health Savings Accounts (HSAs).
Fundamentals of HSAs
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage, and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for next year
In Revenue Procedure 2021-25, the IRS released the 2022 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2022, the annual contribution limitation for an individual with self-only coverage under a HDHP will be $3,650. For an individual with family coverage, the amount will be $7,300. This is up from $3,600 and $7,200, respectively, for 2021.
High deductible health plan defined. For calendar year 2022, an HDHP will be a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2021). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,050 for self-only coverage or $14,100 for family coverage (up from $7,000 and $14,000, respectively, for 2021).
There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and be can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors. You may also contact us for any questions we may be able to answer. https://www.schroedercocpas.com/contact
If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.
Fundamentals of self-employment tax
The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.
What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.
An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.
Keep your salary “reasonable”
Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.
There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.
Converting from a C corporation
There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.
Many factors to consider
Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation. https://www.schroedercocpas.com/client-login
Even after your 2020 tax return has been successfully filed with the IRS, you may still have some questions about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.
Are you wondering when you will receive your refund?
The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.
Which tax records can you throw away now?
At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2017 and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.)
However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.
You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)
When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)
If you overlooked claiming a tax break, can you still collect a refund for it?
In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.
However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.
Year-round tax help
Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re available all year long. https://www.schroedercocpas.com/contact
Are you considering buying or replacing a vehicle that you’ll use in your business? If you choose a heavy sport utility vehicle (SUV), you may be able to benefit from lucrative tax rules for those vehicles.
Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in a calendar year. New and pre-owned heavy SUVs, pickups and vans acquired and put to business use in 2021 are eligible for 100% first-year bonus depreciation. The only requirement is that you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This generous tax break is available for qualifying vehicles that are acquired and placed in service through December 31, 2022.
The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction, too.
This option is available only if the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.
Note: These tax benefits are subject to adjustment for non-business use. And if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.
Detailed, contemporaneous expense records are essential — in case the IRS questions your heavy vehicle’s claimed business-use percentage.
That means you’ll need to keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Recordkeeping is much simpler today, now that there are apps and mobile technology you can use. Or simply keep a small calendar or mileage log in your car and record details as business trips occur.
If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on your 2021 tax return. Before signing a sales contract, consult with us to help evaluate the right tax moves for your business. https://www.schroedercocpas.com/contact
If you have a life insurance policy, you may want to ensure that the benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to federal estate tax.
Current exemption amounts
For 2021, the federal estate and gift tax exemption is $11.7 million ($23.4 million for married couples). That’s generous by historical standards but in 2026, the exemption is set to fall to about $6 million ($12 million for married couples) after inflation adjustments — unless Congress changes the law.
In or out of your estate
Under the estate tax rules, insurance on your life will be included in your taxable estate if:
It’s easy to avoid the first situation by making sure your estate isn’t designated as the policy beneficiary.
The second rule is more complicated. Just having someone else possess legal title to the policy won’t prevent the proceeds from being included in your estate if you keep “incidents of ownership.” Rights that, if held by you, will cause the proceeds to be taxed in your estate include:
Be aware that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise them.
Buy-sell agreements and trusts
Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement won’t be taxed in your estate (unless the estate is the beneficiary).
An irrevocable life insurance trust (ILIT) is another effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured’s estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance with funds contributed by the insured. As long as the trust agreement doesn’t give the insured the ownership rights described above, the proceeds won’t be included in the insured’s estate.
The three-year rule
If you’re considering setting up a life insurance trust with a policy you own currently or simply assigning away your ownership rights in such a policy, consult with us to ensure you achieve your goals. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. (For policies in which you never held incidents of ownership, the three-year rule doesn’t apply.)
Contact us if you have questions or would like assistance with estate planning and taxation. https://www.schroedercocpas.com/contact
In recent months, there have been a number of tax changes that may affect your individual tax bill. Many of these changes were enacted to help mitigate the financial damage caused by COVID-19.
Here are two changes that may result in tax savings for you on your 2020 or 2021 tax returns. The 2020 return is due on May 17, 2021 (because the IRS extended many due dates from the usual April 15 this year). If you can’t file by that date, you can request an extra five months to file your 2020 tax return by October 15, 2021. Your 2021 return will be due in April of 2022.
1. Some unemployment compensation from last year is tax free.
Many people lost their jobs last year due to pandemic shutdowns. Generally, unemployment compensation is included in gross income for federal tax purposes. But thanks to the American Rescue Plan Act (ARPA), enacted on March 11, 2021, up to $10,200 of unemployment compensation can be excluded from federal gross income on 2020 federal returns for taxpayers with an adjusted gross income (AGI) under $150,000. In the case of a joint return, the first $10,200 per spouse isn’t included in gross income. That means if both spouses lost their jobs and collected unemployment last year, they’re eligible for up to a $20,400 exclusion.
However, keep in mind that some states tax unemployment compensation that is exempt from federal income tax under the ARPA.
The IRS has announced that taxpayers who already filed their 2020 individual tax returns without taking advantage of the 2020 unemployment benefit exclusion, don’t need to file an amended return to take advantage of it. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed.
The IRS will take steps in the spring and summer to make the appropriate change to the returns, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer.
2. More taxpayers may qualify for a tax credit for buying health insurance.
The premium tax credit (PTC) is a refundable credit that assists individuals and families in paying for health insurance obtained through a Marketplace established under the Affordable Care Act. The ARPA made several significant enhancements to this credit.
For example, under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) weren’t eligible for the PTC. But under the new law, for 2021 and 2022, the premium tax credit is available to taxpayers with household incomes that exceed 400% of the FPL. This change increases the number of people who are eligible for the credit.
Let’s say a 45-year-old unmarried man has income of $58,000 (450% of FPL) in 2021. He wouldn’t have been eligible for the PTC before ARPA was enacted. But under the ARPA, he’s eligible for a premium tax credit of about $1,250.
Other favorable changes were also made to the premium tax credit.
Many more changes
The 2020 unemployment benefit exclusion and the enhanced premium tax credit are just two of the many recent tax changes that may be beneficial to you. Contact us if you have questions about your situation. https://www.schroedercocpas.com/contact
Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).
SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.
If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.
There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.
Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.
For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.
Contact us for more information or to discuss any other aspect of your retirement planning. https://www.schroedercocpas.com/contact
The new American Rescue Plan Act (ARPA) provides eligible families with an enhanced child and dependent care credit for 2021. This is the credit available for expenses a taxpayer pays for the care of qualifying children under the age of 13 so that the taxpayer can be gainfully employed.
Note that a credit reduces your tax bill dollar for dollar.
For care to qualify for the credit, the expenses must be “employment-related.” In other words, they must enable you and your spouse to work. In addition, they must be for the care of your child, stepchild, foster child, brother, sister or step-sibling (or a descendant of any of these), who’s under 13, lives in your home for over half the year, and doesn’t provide over half of his or her own support for the year. The expenses can also be for the care of your spouse or dependent who’s handicapped and lives with you for over half the year.
The typical expenses that qualify for the credit are payments to a day care center, nanny or nursery school. Sleep-away camp doesn’t qualify. The cost of kindergarten or higher grades doesn’t qualify because it’s an education expense. However, the cost of before and after school programs may qualify.
To claim the credit, married couples must file a joint return. You must also provide the caregiver’s name, address and Social Security number (or tax ID number for a day care center or nursery school). You also must include on the return the Social Security number(s) of the children receiving the care.
The 2021 credit is refundable as long as either you or your spouse has a principal residence in the U.S. for more than half of the tax year.
What are the limits?
When calculating the credit, several limits apply. First, qualifying expenses are limited to the income you or your spouse earn from work, self-employment, or certain disability and retirement benefits — using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you aren’t entitled to any credit. However, in some cases, if one spouse has no actual earned income and that spouse is a full-time student or disabled, the spouse is considered to have monthly income of $250 (for one qualifying individual) or $500 (for two or more qualifying individuals).
For 2021, the first $8,000 of care expenses generally qualifies for the credit if you have one qualifying individual, or $16,000 if you have two or more. (These amounts have increased significantly from $3,000 and $6,000, respectively.) However, if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the qualifying expense limits ($8,000 or $16,000) are reduced by the excludable amounts you receive.
How much is the credit worth?
If your AGI is $125,000 or less, the maximum credit amount is $4,000 for taxpayers with one qualifying individual and $8,000 for taxpayers with two or more qualifying individuals. The credit phases out under a complicated formula. For taxpayers with an AGI greater than $440,000, it’s phased out completely.
These are the essential elements of the enhanced child and dependent care credit in 2021 under the new law. Contact us if you have questions. https://www.schroedercocpas.com/contact
Are you thinking about launching a business with some partners and wondering what type of entity to form? An S corporation may be the most suitable form of business for your new venture. Here’s an explanation of the reasons why.
The biggest advantage of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that the corporation be adequately financed, that the existence of the corporation as a separate entity be maintained and that various formalities required by your state be observed (for example, filing articles of incorporation, adopting by-laws, electing a board of directors and holding organizational meetings).
If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of these losses on your personal tax returns to the extent of your basis in the stock and in any loans you make to the entity. Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.
Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. To the extent the income is passed through to you as qualified business income, you’ll be eligible to take the 20% pass-through deduction, subject to various limitations. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security taxes.
Are you planning to provide fringe benefits such as health and life insurance? If so, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.
Be careful with S status
Also be aware that the S corporation could inadvertently lose its S status if you or your partners transfers stock to an ineligible shareholder such as another corporation, a partnership or a nonresident alien. If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect you against this risk, it’s a good idea for each of you to sign an agreement promising not to make any transfers that would jeopardize the S election.
Consult with us before finalizing your choice of entity. We can answer any questions you have and assist in launching your new venture. https://www.schroedercocpas.com/contact
The American Rescue Plan Act, signed into law on March 11, provides a variety of tax and financial relief to help mitigate the effects of the COVID-19 pandemic. Among the many initiatives are direct payments that will be made to eligible individuals. And parents under certain income thresholds will also receive additional payments in the coming months through a greatly revised Child Tax Credit.
Here are some answers to questions about these payments.
What are the two types of payments?
Under the new law, eligible individuals will receive advance direct payments of a tax credit. The law calls these payments “recovery rebates.” The law also includes advance Child Tax Credit payments to eligible parents later this year.
How much are the recovery rebates?
An eligible individual is allowed a 2021 income tax credit, which will generally be paid in advance through direct bank deposit or a paper check. The full amount is $1,400 ($2,800 for eligible married joint filers) plus $1,400 for each dependent.
Who is eligible?
There are several requirements but the most important is income on your most recently filed tax return. Full payments are available to those with adjusted gross incomes (AGIs) of less than $75,000 ($150,000 for married joint filers and $112,500 for heads of households). Your AGI can be found on page 1 of Form 1040.
The credit phases out and is no longer available to taxpayers with AGIs of more than $80,000 ($160,000 for married joint filers and $120,000 for heads of households).
Who isn’t eligible?
Among those who aren’t eligible are nonresident aliens, individuals who are the dependents of other taxpayers, estates and trusts.
How has the Child Tax Credit changed?
Before the new law, the Child Tax Credit was $2,000 per “qualifying child.” Under the new law, the credit is increased to $3,000 per child ($3,600 for children under age 6 as of the end of the year). But the increased 2021 credit amounts are phased out at modified AGIs of over $75,000 for singles ($150,000 for joint filers and $112,500 for heads of households).
A qualifying child before the new law was defined as an under-age-17 child, whom the taxpayer could claim as a dependent. The $2,000 Child Tax Credit was phased out for taxpayers with modified AGIs of over $400,000 for joint filers, and $200,000 for other filers.
Under the new law, for 2021, the definition of a qualifying child for purposes of the Child Tax Credit includes one who hasn’t turned 18 by the end of this year. So 17-year-olds qualify for the credit for 2021 only.
How are parents going to receive direct payments of the Child Tax Credit this year?
Unlike in the past, you don’t have to wait to file your tax return to fully benefit from the credit. The new law directs the IRS to establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 Child Tax Credits. These payments will be made from July through December 2021.
What if my income is above the amounts listed above?
Taxpayers who aren’t eligible to claim an increased Child Tax Credit, because their incomes are too high, may be able to claim a regular credit of up to $2,000 on their 2021 tax returns, subject to the existing phaseout rules.
There are other rules and requirements involving these payments. This article only describes the basics. Stay tuned for additional details about other tax breaks in the new law. Contact us: https://www.schroedercocpas.com/contact
While many businesses have been forced to close due to the COVID-19 pandemic, some entrepreneurs have started new small businesses. Many of these people start out operating as sole proprietors. Here are some tax rules and considerations involved in operating with that entity.
The pass-through deduction
To the extent your business generates qualified business income (QBI), you’re eligible to claim the pass-through or QBI deduction, subject to limitations. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. You can take the deduction even if you don’t itemize deductions on your tax return and instead claim the standard deduction.
As a sole proprietor, you’ll file Schedule C with your Form 1040. Your business expenses are deductible against gross income. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.
For 2021, you pay Social Security on your net self-employment earnings up to $142,800, and Medicare tax on all earnings. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 on joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
Quarterly estimated payments
As a sole proprietor, you generally have to make estimated tax payments. For 2021, these are due on April 15, June 15, September 15 and January 17, 2022.
Home office deductions
If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home.
Health insurance expenses
You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.
Retain complete records of your income and expenses so you can claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.
Saving for retirement
Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re withdrawn. A SEP plan requires less paperwork than many qualified plans. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.
We can help
Contact us if you want additional information about the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements. https://www.schroedercocpas.com/contact
If you’re getting ready to file your 2020 tax return, and your tax bill is higher than you’d like, there might still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the April 15, 2021 filing date and benefit from the tax savings on your 2020 return.
Who is eligible?
You can make a deductible contribution to a traditional IRA if:
You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.
For 2020, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $104,000 to $124,000 of modified AGI. If you’re single or a head of household, the phaseout range is $65,000 to $75,000 for 2020. For married filing separately, the phaseout range is $0 to $10,000. For 2020, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $196,000 and $206,000.
Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).
IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older. (There are also income limits to contribute to a Roth IRA.)
Here are two other IRA strategies that may help you save tax.
1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2020? That may help you in the future when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn a Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.
2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you are a homemaker. In this case, you may be able to take advantage of a spousal IRA.
What’s the contribution limit?
For 2020 if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).
In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2020, the maximum contribution you can make to a SEP is $57,000.
If you want more information about IRAs or SEPs, contact us or ask about it when we’re preparing your return. We can help you save the maximum tax-advantaged amount for retirement. https://www.schroedercocpas.com/contact
During the COVID-19 pandemic, many people are working from home. If you’re self-employed and run your business from your home or perform certain functions there, you might be able to claim deductions for home office expenses against your business income. There are two methods for claiming this tax break: the actual expenses method and the simplified method.
In general, you qualify for home office deductions if part of your home is used “regularly and exclusively” as your principal place of business.
If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for business.
What can you deduct?
Many eligible taxpayers deduct actual expenses when they claim home office deductions. Deductible home office expenses may include:
Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
A proportionate share of indirect expenses, including mortgage interest, rent, property taxes, utilities, repairs and insurance, and
But keeping track of actual expenses can take time and require organization.
How does the simpler method work?
Fortunately, there’s a simplified method: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.
The cap can make the simplified method less valuable for larger home office spaces. But even for small spaces, taxpayers may qualify for bigger deductions using the actual expense method. So, tracking your actual expenses can be worth it.
Can I switch?
When claiming home office deductions, you’re not stuck with a particular method. For instance, you might choose the actual expense method on your 2020 return, use the simplified method when you file your 2021 return next year and then switch back to the actual expense method for 2022. The choice is yours.
What if I sell the home?
If you sell — at a profit — a home that contains (or contained) a home office, there may be tax implications. We can explain them to you.
Also be aware that the amount of your home office deductions is subject to limitations based on the income attributable to your use of the office. Other rules and limitations may apply. But any home office expenses that can’t be deducted because of these limitations can be carried over and deducted in later years.
Do employees qualify?
Unfortunately, the Tax Cuts and Jobs Act suspended the business use of home office deductions from 2018 through 2025 for employees. Those who receive a paycheck or a W-2 exclusively from their employers aren’t eligible for deductions, even if they’re currently working from home.
We can help you determine if you’re eligible for home office deductions and how to proceed in your situation. https://www.schroedercocpas.com/contact
You may be able to deduct some of your medical expenses, including prescription drugs, on your federal tax return. However, the rules make it hard for many people to qualify. But with proper planning, you may be able to time discretionary medical expenses to your advantage for tax purposes.
Itemizers must meet a threshold
For 2020, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income (AGI). This threshold amount is scheduled to increase to 10% of AGI for 2021. You also must itemize deductions on your return in order to claim a deduction.
If your total itemized deductions for 2020 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2020 may allow you to exceed the 7.5% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.
In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:
Costs for dependents
You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. Contact us if you have questions about medical expense deductions. https://www.schroedercocpas.com/contact
If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.
The QBI deduction:
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. These include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.
The limitations are phased in. For example, the phase-in for 2020 applies to single filers with taxable income between $163,300 and $213,300 and joint filers with taxable income between $326,600 and $426,600.
For tax years beginning in 2021, the inflation-adjusted threshold amounts will be $164,900 for single taxpayers, and $329,800 for married couples filing jointly.
Year-end planning tip
Some taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions at year end so that they come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year end. The rules are quite complex, so contact us with questions and consult with us before taking steps. https://www.schroedercocpas.com/contact
S corporations can provide tax advantages over C corporations in the right circumstances. This is true if you expect that the business will incur losses in its early years because shareholders in a C corporation generally get no tax benefit from such losses. Conversely, as an S corporation shareholder, you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and any loans you personally make to the entity.
Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.
Therefore, your ability to use losses that pass through from an S corporation depends on your basis in the corporation’s stock and debt. And, basis is important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation and the corporation’s income or loss.
Adjustments to basis
However, you may not be aware that several elections are available to an S corporation or its shareholders that can affect the basis adjustments caused by distributions and other events. Here is some information about four elections:
An S corporation shareholder may elect to reverse the normal order of basis reductions and have the corporation’s deductible losses reduce basis before basis is reduced by nondeductible, noncapital expenses. Making this election may permit the shareholder to deduct more pass-through losses.
An election that can help eliminate the corporation’s accumulated earnings and profits from C corporation years is the “deemed dividend election.” This election can be useful if the corporation isn’t able to, or doesn’t want to, make an actual dividend distribution.
If a shareholder’s interest in the corporation terminates during the year, the corporation and all affected shareholders can agree to elect to treat the corporation’s tax year as having closed on the date the shareholder’s interest terminated. This election affords flexibility in the allocation of the corporation’s income or loss to the shareholders and it may affect the category of accumulated income out of which a distribution is made.
An election to terminate the S corporation’s tax year may also be available if there has been a disposition by a shareholder of 20% or more of the corporation’s stock within a 30-day period.
Contact us if you would like to go over how these elections, as well as other S corporation planning strategies, can help maximize the tax benefits of operating as an S corporation.
Many employees take advantage of the opportunity to save taxes by placing funds in their employer’s health or dependent care flexible spending arrangements (FSAs). As the end of 2020 nears, here are some rules and reminders to keep in mind.
A pre-tax contribution of $2,750 to a health FSA is permitted in both 2020 and 2021. You save taxes 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 plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for these items.
To avoid any forfeiture of your health FSA funds because of the “use-it-or-lose-it” rule, you must incur qualifying medical expenditures by the last day of the plan year (Dec. 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).
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.
Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don’t forget to reflect any changed circumstances in making your calculation.
Dependent care FSAs
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 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 the taxpayer 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. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.
Note: Because of COVID-19, the IRS has temporarily allowed employees to take certain actions in 2020 related to their health care and dependent care FSAs. For example, employees may be permitted to make prospective mid-year elections and changes. Ask your HR department if your plan allows these actions if you believe they would be beneficial in your situation. Other rules and exceptions may apply.
Contact us if you’d like to discuss FSAs in greater detail. https://www.schroedercocpas.com/contact
Small business owners are well aware of the increasing cost of employee health care benefits. As a result, your business may be interested in providing some of these benefits through an employer-sponsored Health Savings Account (HSA). Or perhaps you already have an HSA. It’s a good time to review how these accounts work since the IRS recently announced the relevant inflation-adjusted amounts for 2021.
The basics of HSAs
For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:
Contributions that participants make to an HSA are deductible, within limits.
Contributions that employers make aren’t taxed to participants.
Earnings on the funds within an HSA aren’t taxed, so the money can accumulate year after year tax free.
HSA distributions to cover qualified medical expenses aren’t taxed.
Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.
Key 2020 and 2021 amounts
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2020, a “high deductible health plan” is one with an annual deductible of at least $1,400 for self-only coverage, or at least $2,800 for family coverage. For 2021, these amounts are staying the same.
For self-only coverage, the 2020 limit on deductible contributions is $3,550. For family coverage, the 2020 limit on deductible contributions is $7,100. For 2021, these amounts are increasing to $3,600 and $7,200, respectively. Additionally, for 2020, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,900 for self-only coverage or $13,800 for family coverage. For 2021, these amounts are increasing to $7,000 and $14,000.
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2020 and 2021 of up to $1,000.
Contributing on an employee’s behalf
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can be built up for years. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
Paying for eligible expenses
HSA distributions can be made to pay for qualified medical expenses. This generally means those expenses that would qualify for the medical expense itemized deduction. They include expenses such as doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.
If funds are withdrawn from the HSA for any other reason, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.
As you can see, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact us with questions or if you’d like to discuss offering this benefit to your employees. https://www.schroedercocpas.com/contact
Many people have Series EE savings bonds that were purchased many years ago. Perhaps they were given to your children as gifts or maybe you bought them yourself and put them away in a file cabinet or safe deposit box. You may wonder: How is the interest you earn on EE bonds taxed? And if they reach final maturity, what action do you need to take to ensure there’s no loss of interest or unanticipated tax consequences?
Fixed or variable interest
Series EE Bonds dated May 2005, and after, earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.
Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it matures. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.
The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.
Interest generally accrues until redemption
Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.
The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.
If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there’s a procedure under which the election can be canceled.
If the election isn’t made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.
Note: Interest on EE bonds isn’t subject to state income tax. And using the money for higher education may keep you from paying federal income tax on your interest.
Reaching final maturity
One of the main reasons for buying EE bonds is the fact that interest can build up without having to currently report or pay tax on it. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. When the bonds reach final maturity, they stop earning interest.
Series EE bonds issued in January 1990 reached final maturity after 30 years, in January 2020. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest is taxable in 2020.
If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more profitable. Contact us if you have any questions about savings bond taxation, including Series HH and Series I bonds. https://www.schroedercocpas.com/contact
Many Americans receive disability income. You may wonder if — and how — it’s taxed. As is often the case with tax questions, the answer is … it depends.
The key factor is who paid for the benefit. If the income is paid directly to you by your employer, it’s taxable to you as ordinary salary would be. (Taxable benefits are also subject to federal income tax withholding, although depending on the employer’s disability plan, in some cases aren’t subject to the Social Security tax.)
Frequently, the payments aren’t made by the employer but by an insurance company under a policy providing disability coverage or, under an arrangement having the effect of accident or health insurance. If this is the case, the tax treatment depends on who paid for the coverage. If your employer paid for it, then the income is taxed to you just as if paid directly to you by the employer. On the other hand, if it’s a policy you paid for, the payments you receive under it aren’t taxable.
Even if your employer arranges for the coverage, (in other words, it’s a policy made available to you at work), the benefits aren’t taxed to you if you pay the premiums. For these purposes, if the premiums are paid by the employer but the amount paid is included as part of your taxable income from work, the premiums are treated as paid by you.
A couple of examples
Let’s say your salary is $1,000 a week ($52,000 a year). Additionally, under a disability insurance arrangement made available to you by your employer, $10 a week ($520 for the year) is paid on your behalf by your employer to an insurance company. You include $52,520 in income as your wages for the year: the $52,000 paid to you plus the $520 in disability insurance premiums. In this case, the insurance is treated as paid for by you. If you become disabled and receive benefits, they aren’t taxable income to you.
Now, let’s look at an example with the same facts as above. Except in this case, you include only $52,000 in income as your wages for the year because the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, the insurance is treated as paid for by your employer. If you become disabled and receive benefits, they are taxable income to you.
Note: There are special rules in the case of a permanent loss (or loss of the use) of a part or function of the body, or a permanent disfigurement.
Social Security benefits
This discussion doesn’t cover the tax treatment of Social Security disability benefits. These benefits may be taxed to you under different rules.
How much coverage is needed?
In deciding how much disability coverage you need to protect yourself and your family, take the tax treatment into consideration. If you’re buying the policy yourself, you only have to replace your after tax, “take-home” income because your benefits won’t be taxed. On the other hand, if your employer pays for the benefit, you’ll lose a percentage to taxes. If your current coverage is insufficient, you may wish to supplement an employer benefit with a policy you take out.
Contact us if you’d like to discuss this in more detail.