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Welcome to our monthly update. In this issue of our newsletter, we cover some important tax and business topics, including tax credit changes for EVs, tax benefits for parents, gig work best practices, some insightful business advice from Henry Ford, and much more.
March is here which means the business deadline is rapidly approaching. If you are a business client of ours, please make sure you are communicating with your tax professional and not waiting until the last minute.
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|Wow! You Can Now Get a Tax Credit For Buying a Used Electric Vehicle
- Income Limit
- Credit Amount
- Previously Owned Clean Vehicle
- Qualified Sale
- Qualified Buyer
- Dealer Report
- Transfer of Credit to the Dealer
- Vehicle Identification Number
- Non-refundable Credit
2023 brings with it a whole new set of rules related to qualifying for a tax credit for purchasing a used electric vehicle. This is the first time that used electric vehicles have qualified for a tax credit, and although considerably less than the credit for purchasing a new electric vehicle, it does provide an incentive for lower income taxpayers to acquire an electric vehicle. However, this new credit — officially termed the Previously-Owned Clean Vehicle Credit in the tax code — also comes with some rules that limit the vehicles that qualify, and essentially bars the credit to higher income taxpayers. Here are the details.
Income Limit — Congress chose to limit this credit to lower income individuals. Thus,no credit is allowed for any tax year if the lesser of the individual's modified adjusted gross income (MAGI) for the:
- Current tax year, or
- The preceding tax year
exceeds the threshold amount as indicated below. There is no phaseout and just one dollar over the limit means no credit will be allowed. Thus, Congress has essentially eliminated the credit for higher income taxpayers.
- Married Filing Joint or Surviving Spouse $150,000
- Head of Household $112,500
- Others $75,000
MAGI is the buyer's adjusted gross income increased by any foreign earned income and housing exclusions and excluded income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico.
Credit Amount - A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 and before 2033 is allowed an income tax credit equal to the lesser of:
- $4,000 or
- 30% of the vehicle's sale price.
The credit applies to the year that the taxpayer takes delivery (referred to in tax lingo as the year the "vehicle is placed in service").
Previously Owned Clean Vehicle - A previously owned clean vehicle is a motor vehicle:
- The model year of which is at least two years earlier than the calendar year in which the taxpayer acquires it,
- Original use of which starts with a person other than the taxpayer,
- Is acquired in a qualified sale, and
- Generally meets the requirements applicable to vehicles eligible for the clean vehicle credit for new vehicles (must be made by a qualified manufacturer, be treated as a motor vehicle under the Clean Air Act, have a GVWR of less than 14,000 pounds, and have a rechargeable battery with a capacity of at least seven kilowatt hours) or is a clean fuel-cell vehicle with a gross weight rating of less than 14,000 pounds.
- The IRS provides a list of qualifying vehicles.
Note that a qualified used clean vehicle isn't required to satisfy the domestic assembly and mineral content of batteries requirements that apply to a new clean vehicle.
Qualified Sale - A qualified sale is a sale of a previously owned motor vehicle:
- By a dealer,
- For a price of $25,000 or less, and
- Which is the first transfer after August 16, 2022 to a qualified buyer other than the original buyer of the vehicle.
Qualified Buyer- A qualified buyer is an individual who:
- Purchases the vehicle for use and not for resale,
- Meets the MAGI limits previously discussed,
- Is not a dependent of another taxpayer*, and
- Has not been allowed a credit for a previously owned clean vehicle during the three-year period ending on the sale date.
* Makes no difference if the buyer chooses not to claim the dependent, since the dependency deduction is still "allowable" to the buyer.
Dealer Report - A dealer must provide the following information on a report to the taxpayer and to the IRS:
- Name and taxpayer identification number of the dealer,
- Name and taxpayer identification number of the taxpayer,
- Vehicle identification number of the vehicle,
- Battery capacity of the vehicle,
- The date of the sale and the sales price of the vehicle,
- Maximum credit allowable for the vehicle being sold,
- For sales after December 31, 2023, the amount of any transfer credit applied to the purchase, and
- A declaration under penalties of perjury from the dealer.
Transfer of Credit to the Dealer — After 2023, the taxpayer purchasing the vehicle, on or before the purchase date, can elect to transfer the previously-owned clean vehicle credit to the dealer from whom the vehicle is being purchased in return for a reduction in purchase price equal to the credit amount.
A buyer who has elected to transfer the credit for a used clean vehicle to the dealer and has received a payment from the dealer in return, but whose MAGI exceeds the applicable limit, is required to recapture the amount of the payment on their tax return for the year the vehicle was placed in service.
The vehicle identification number of the previously owned clean vehicle is required to be included on Form 8936 (the form the buyer uses to claim the credit).
Be aware the credit is nonrefundable and can only be used to the extent of an individual's tax liability for the year of the credit and any excess credit will be lost.
If you have questions about these new rules of the used clean vehicle credit, please give this office a call.
|Tax Benefits for Parents
- Child Tax Credit
- Earned Income Tax Credit
- Head of Household Filing Status
- Child Care
- Education Savings Plans
- Education Tax Credit
- Education Loan Interest
- Child's Medical Expenses
If you are a parent, whether single, married or divorced, there are a significant number of tax benefits available to you, including deductions, credits, and filing status that can help put a dent in your tax liability.
Child Tax Credit —You may be entitled to a nonrefundable tax credit of $2,000 for each child under the age of 17 at the close of the year, provided the child qualifies as your tax dependent. The term "nonrefundable" means the credit can only be used to offset any tax liability you may have, and the balance of the credit is lost. If you are not filing jointly with the child's other parent and have released the child's tax dependency to that parent, then you will not qualify for the child tax credit for that child. In addition, this credit phases out for higher income taxpayers. For lower income parents, a portion of the child tax credit, which is normally nonrefundable, can become refundable.
Earned Income Tax Credit — The earned income credit benefits lower income parents based upon your earned income, filing status (either married filing jointly or unmarried) and the number of qualifying children you have up to three. The credit for 2023 can be as much as $7,430 and better yet, the amount not used to offset your tax liability is fully refundable. This credit is phased out for higher income filers, and those with investment income of more than $11,000 for 2023 aren't eligible.
Head of Household Filing Status — The tax code provides a special filing status — head of household — for unmarried and separated taxpayers. The benefit of head of household filing status is that it provides lower tax rates and a higher standard deduction than the single status ($20,800 as opposed to $13,850 for a single individual in 2023). If you are an unmarried parent and you pay more than one-half the cost of the household for yourself and your child, you qualify for this filing status. Even if you are married, if you lived apart from your spouse the last six months of the year and pay more than one-half the cost of the household for yourself and your child, you qualify for this filing status.
Childcare —Manyparents who work or are looking for work must arrange for care of their children. If this is your situation, and your children requiring care are under 13 years of age, you may qualify fora nonrefundable tax credit that can reduce your federal income taxes.
The childcare credit is an income-based percentage of up to $3,000 of qualifying care expenses for one child and up to $6,000 of qualifying care expenses for two or more children. The allowable expenses are also limited to your earned income, and if you are married, both you and your spouse must work and the limit is based upon the earned income of the spouse with the lower earnings. The credit percentages range from a maximum of 35% if your adjusted gross income (AGI) is $15,000 or less to 20% for an AGI of over $43,000.
If your employer provides dependent care benefits under a qualified plan that pays your child care provider either directly or by reimbursing you for the expenses, or your employer provides a day care facility, you may be able to exclude these benefits from your income. Of course, the same expenses aren't eligible for both tax-free income and the child care credit.
Education Savings Plans — The tax code provides two plans to save for your children's future education. The first is the Coverdell Education Savings Account, which allows non-deductible contributions of up to $2,000 per year. The earnings on these accounts are tax-free provided the amounts withdrawn from the accounts are used to pay qualified expenses for kindergarten and above. Coverdell contributions will phase out for higher income taxpayers beginning at an AGI of $190,000 for married taxpayers filing jointly and half that amount for other taxpayers.
A second plan, called a Qualified Tuition Plan (sometimes referred to as a Sec 529 plan), allows individuals to gift large sums of money for a family member's college education while continuing to maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for college tuition and related expenses.
Contributions to these plans are not limited to the child's parents and can be made by virtually anyone, although if not the parents, then typically it is the grandparents who fund the accounts.
Education Credits — If you are a parent with a child or children in college, don't overlook the American Opportunity Tax Credit (AOTC). It provides a tax credit equal to 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000 for each child who was enrolled at least half time. Better yet, 40% of the credit is refundable. This credit is good for the first four years of post-secondary education.
There is a second education credit called the Lifetime Learning Credit (LLC) that provides a nonrefundable tax credit equal to 20% of up to $10,000 of qualified tuition and related expenses. Unlike the AOTC, which is allowed per student, the LLC is calculated on a per-family basis with a maximum credit of $2,000 but is not limited to the first four years of post-secondary education.
You don't even have to pay the expenses to get the credits. The credits are allowed to the person claiming the child as a dependent. So if the child's grandparent, uncle, aunt or even an ex-spouse or the child's other parent pays the tuition, you still get the credit as long you claim the child as your dependent.
Student Loan Interest - Generally, personal interest you pay, other than certain mortgage interest, isn't deductible on your tax return. However,there is a special deduction, up to $2,500 per year, allowed for interest paid on a student loan (also known as an education loan) used for higher education. You don't have to itemize deductions to take advantage of this deduction, but you must have paid the interest on a loan taken out for your own or your spouse's education or that of a dependent.So if you were legally obligated to pay the loan for one of your children who was your dependent when the loan was taken out, you may be able to claim this deduction, even if the child is no longer your dependent.
The student must have been enrolled at least half-time, andthe loanmust have been taken out solely to pay qualified higher education expenses. The lender can't be a related person. This deduction phases out if your AGI for 2023 is more than $75,000 ($155,000 if filing a joint return) and isn't allowed if you use the married filing separate status.
Child's Medical Expenses — If you itemize deductions, the unreimbursed medical expenses you pay for your dependents are counted for figuring your total medical expenses. This is true for both parents even if they do not file together as long as one of them is able to claim the child as a dependent.
If you have questions related to any of these tax benefits, please give this office a call.
|Best Practices to Help Guarantee Success for Your Gig Enterprise
According to one recent study, workers who make up the "gig economy" contributed roughly 5.7% to the gross domestic product of the United States in 2021 alone. If you needed a single statistic to help underline what a significant shift this has become in the way that we all collectively think about employment, let it be that one.
Of course, eschewing the potential challenges of "traditional" employment brings with it new ones in the form of gig-based work. This is especially true when it comes to the financial side of the conversation, as going out on your own with a gig enterprise is an entirely different animal compared to getting a job with a more straightforward employer.
Based on that, if you truly want to help set your gig enterprise up for success, there are a number of important things you'll want to keep in mind.
Harnessing the Gig Economy to Your Advantage: Breaking Things Down
By far, the most important thing to understand about your gig enterprise is that any income you generate will be taxable - the same as money coming in from a more traditional job.
When you file your taxes every year, you need to report ALL income on your tax returns unless it is specifically excluded by law. This is true regardless of whether you receive a Form 1099 in the mail.
One thing that may come as a shift to many people is the idea that the IRS also wants you to make quarterly estimated tax payments throughout the year. This is true for both income tax and self-employment tax that you are subject to. The latter includes Social Security and Medicare taxes, for the record.
This is always important, as if you wait to make any payments at all until you formally file your taxes in April, you are almost certainly going to get hit with a significant bill. You can take the burden off of this by making estimated payments on what you think you owe periodically throughout the year. You'll still likely owe at the end of the year, but it will be far less than it otherwise would have.
Note that this requires you to estimate those payments based on what you think you'll be earning during a particular calendar year. This can be difficult, as the gig economy is nothing if not uncertain. You could do exceptionally well during one month and see a dramatic slowdown in your income the next. Still, you should try to average everything together and pay whatever is necessary via those estimated payments.
To help things go as smoothly as possible, you'll also want to keep adequate records and other financial documents throughout the year. This is critical, as it helps you keep an eye on the overall progress of your business. These records will help you not only learn more about your various sources of income but can also be invaluable towards keeping track of any deductions that are owed to you, and more.
While the law doesn't require you to keep any special type of record, just a few examples of documents that you should compile throughout the year include but are not limited to things like:
- Receipts for expenses.
- Any 1099-MISC forms that you receive.
- Gross receipts that help show the true income you are receiving from your business.
- Canceled checks or other documents that show proof of payment for business-related purchases and expenses.
- Receipts pertaining to business-related travel, transportation, or gifts.
- Financial documents pertaining to any assets that you need for the business, like machinery or furniture for an office.
- Employment-related tax records.
Making an effort to properly keep all of these documents will not only give you a better picture of how you're actually doing, but it will also make it far easier to make estimated payments and file your taxes as well.
Additional Considerations About Your Gig Enterprise
Beyond the financial side of the conversation, there are a number of things you need to consider about running your own business, too.
For most people, the major appeal of gig-based work is the flexibility. Not only are they their own boss, but they make their own hours and generate their own income, too. This can be great for many people - but you also need to understand that you're in control of everything that happens.
If you want to take a day off to relax, that's great - but understand that you won't be making any money that day. If you get burned out, you don't have paid vacation time to fall back on. There are far more options regarding how, where, and even why you're making money with a gig enterprise than you would have with a traditional "9-to-5" job, but understand that there are more potential obstacles, too.
Likewise, you need to start thinking about a gig enterprise as more than just a "side hustle" if it is your primary source of income. You need to consider it a career in every sense of the term. That is to say, word of mouth will quickly begin to play a big role in your ability to attract new clients and income sources. Because of that, you need to pay attention to any online reviews that people are leaving you, for example. Not every job will be a complete success and sometimes you will encounter issues with a client or customer. Do what you can to resolve them to help preserve your reputation as much as possible. In a lot of ways, the strength of your reputation is the most valuable asset you have in this context so you need to do whatever is necessary to protect it.
Beyond that, make sure that you have a backup plan in place to help deal with the uncertain nature of certain types of work. If you're getting the majority of your customers or clients from one platform, for example, what happens if that platform dries up? What happens if they experience their own issues and suddenly close up shop overnight?
Proactively answering questions like these can help you remain on your feet should anything negative happen that could potentially impact your income. Remember that even though you're far more in control of a gig enterprise than you would be in traditional employment, there are still things that can and often will happen that you have no say in. Sometimes you'll see these issues coming - other times they happen suddenly in ways you can't predict. Having a backup plan in place will help mitigate risk from these situations as much as possible.
In the end, it's beyond clear that the gig economy is one that brings with it benefits to a wide range of different people. Having said that, it can also be a complicated world to navigate - especially when it comes to things like taxes and other financial matters. Because of that, if you have any questions, it's always important to consult the help of a seasoned financial professional. They'll be able to put you on the right path, making sure that you're able to enjoy all of the benefits of this process with as few of the potential downsides as possible.
If you'd like to find out more information about setting your gig enterprise up for the best chance of success, or if you'd just like to speak to someone about your own needs in a bit more detail, please don't hesitate to contact us today.
|Many Taxpayers Will See Smaller Refunds This Year
- Child Tax Credit
- Dependent Care Benefits
- Recovery Rebates
- Employee Retention Credit
Congress has for years used the tax return as a means of providing benefits to taxpayers in need and incentives to stimulate activities in business, as well as addressing environmental issues. So when COVID-19 hit, Congress and many state governments provided tax benefits to help citizens through the pandemic. Because the COVID pandemic-related benefits have come to an end, your tax refunds may be smaller this year, and substantially smaller for many. The following is a rundown of some areas where decreases in federal tax benefits will affect taxpayers’ 2022 tax refunds.
Child Tax Credit:
- 2021 - Taxpayers with children enjoyed an enhanced and refundable tax credit of $3,000 per child under the age of 18 ($3,600 if under age 6) per child in 2021.
- 2022 – The credit has reverted to 2020 levels and the maximum credit for 2022 is $2,000 per qualifying child, of which the maximum refundable amount is $1,500 per child in certain situations. In addition, the credit only applies to children under the age of 17.
Non-refundable tax credits can only be used to offset tax liability and any excess is lost. On the other hand, a refundable credit offsets tax liability and any excess is refundable.
In addition, the child tax credit has always phased out for higher income taxpayers. For 2021 the phaseout thresholds were substantially increased as illustrated in the table. However, that increase was for 2021 only and the thresholds have reverted to 2020 levels for 2022.
CHILD & DEPENDENT TAX CREDITS PHASEOUT THRESHOLDS
|Married Joint or Qualifying Widow
|Head of Household
Dependent Care Benefits: The tax code provides a tax credit to help working taxpayers that pay care expenses for their children and other qualifying individuals. The credit is a percentage of the dependent care expenses incurred, but those expenses are limited to specific amounts and the taxpayer’s income from working. The credit percentage also declines for higher income taxpayers.
2021 – The credit was fully refundable, and the credit was a flat 50% of the allowable expenses up to $8,000 for one and $16,000 for two or more qualified individuals. Thus the credit could be as much $4,000 for one and $8,000 for two or more qualified individuals.The 50% credit rate began to phase out when the taxpayer’s AGI reached $125,000, but the rate wasn’t reduced below 20%.
2022 – The credit is not refundable, and the credit rate ranges from a high of 35% to a low of 20% (see table) of the allowable expenses up to $3,000 for one and $6,000 for two or more qualified individuals.
AGI Adjusted Applicable Percentage (Other Than 2021)
Recovery Rebates - As a means of providing financial assistance to individuals during the COVID pandemic, Congress authorized Recovery Rebate Credits (also referred to as economic impact payments) for the 2020 and 2021 tax years.
- 2021 - The rebates, which generally were issued by the federal government during the year but which may have been claimed on the 2021 tax return, were:
o $1,400 ($2,800 for joint filers)
o $1,400 per dependent
- 2022 – There were no rebates
Employee Retention Credit – As the title implies, this is a credit whose purpose was to help employers retain employees on payroll even though the employer’s business was in decline because of COVID.
- 2021 – The payroll credit was 70%of qualified wages up to $10,000 per employee for any quarter 1/1/21 through 9/30/21 or 12/31/21 for Recovery Start-Ups.
- 2022 – There is no longer a credit for years after 2021.
As you can see there have been some significant reductions of tax benefits that can have a substantial impact on your refund for 2022. Please contact this office if you have questions or would like to adjust your withholding to alter your refund for 2023.
|What You Can Learn About Running a Business From Henry Ford
If you had to make a list of people who changed the world essentially just by existing, Henry Ford's name would likely be on it.
Most people know him from history as the founder of the (appropriately named) Ford Motor Company. Here, he developed the assembly line method of mass production. Not only did this help cut costs enormously, creating the first automobile that average Americans could afford to buy, but it also revolutionized the manufacturing industry. The computer or mobile device that you're reading this on would have cost a significantly larger amount of money (than it already does) had the assembly line not been invented.
He also introduced the Ford Model T automobile, which revolutionized transportation in this country. He quickly became one of the richest and most famous people on the planet... and it's safe to say, he definitely earned it.
But it's important to note that Ford's impact on history didn't end with those two ideas. A lot of people don't realize that he also had a hand in revolutionizing many aspects of how businesses are run in the first place. His processes - not to mention his ideas - should absolutely be learned about and applied to today's modern world.
Long-Term Lessons From Henry Ford: An Overview
One of Henry Ford's most important quotes that can be applied to today's modern business world is as follows:
"The short successes that can be gained in a brief time and without difficulty are not worth as much."
What he's essentially saying here is that while most entrepreneurs do dream of being an overnight success (who doesn't?), nobody wants to be the "one-hit wonder" equivalent of a business. You don't just want to create a company that people are briefly enamored with and then soon forget, regardless of how successful it makes you. What you should want is to create something that you can then build upon and turn into a legitimate legacy.
This will take time. This will see you face numerous challenges. This will see your career littered with failure along the way. But it doesn't matter, because the end result of successfully playing the long-game will be worth it for you (and, if you're half as successful as Ford was, for future generations of your family as well).
On the subject of the failures that you are likely to encounter during your time as an entrepreneur, Henry Ford had this to say:
"Most people think that faith means believing in something; more often it means trying something, giving it a chance to prove itself."
What he means here is that small companies in particular are founded on two things: a vision and risk. When you have an idea for a product or service, regardless of how much you believe in it, it may not work out as originally intended. What you thought was a good idea will have to be scrapped entirely. Others will have to be adjusted.
Nobody is guaranteed a 100% success rate. But the good news is that this includes your competitors as well. They'll be facing the same challenges you are, particularly when it comes to the market. So don't be afraid to take big risks, learn from big failures, and make adjustments that will see you come out all the better for it. It may not feel great initially, but it, too, will be worth it.
Indeed, the life of an entrepreneur is one that is fraught with decisions. All day, every day, people will be looking to you for guidance. But it won't just be on critically important matters - it will be on the little things, too. This makes "time" one of the most precious commodities you have because, as the old saying goes, there are only so many hours in a day.
On that topic, Henry Ford had this to say:
"It has been my observation that most people get ahead during the time that others waste."
What this means, quite simply, is to "use your time wisely" in whatever context you're working on. Don't get distracted by something shiny and new just because it's more fun to think about or interact with than the real, essential problems you have to solve. Try not to lose track of time because every minute that ticks by when you aren't accomplishing your goal is a minute you're not getting back.
In other words, to paraphrase Henry Ford, "go get out there and do something."
|Home Energy Improvement Credit Is Enhanced
- Credit History
- Credit Percentage and Annual Credit Limit
- Per Item Credit Limit
- Home Energy Audit
- Identification Number Requirement
- Other Credit Issues
- Tip To Maximize The Credit
This credit goes all the way back to 2006, providing a tax credit for making energy-saving improvements to a taxpayer’s home. This tax benefit was supposed to expire after 2021 but a law change has given the credit renewed life and substantially enhanced it beginning with 2023.
Prior to 2023, the credit had a lifetime cap of $500, which many taxpayers had taken advantage of in the previous 16 years, while others could not remember if they had used the entire lifetime credit during those years. As a result, with a lifetime tax benefit of only $500, and a small credit rate of only 10%, the credit had become less of a motivator for taxpayers to make energy saving improvements to their homes and was frequently disregarded.
Now this credit once again becomes a meaningful incentive for taxpayers to make energy-saving improvements to their homes. Beginning in 2023 the minimal $500 lifetime limit is replaced with a $1,200 annual limit and the credit rate is increased to 30%.
The following are the annual credit limits by improvement item.
- Energy Property: $600 if the property meets the most recent International Energy Conservation Code standard in effect as of the beginning of the calendar year which is 2 years prior to the calendar year in which such component is placed in service. This type of property includes:
- An electric or natural gas heat pump water heater.
- An electric or natural gas heat pump.
- A central air conditioner.
- A natural gas, propane, or oil water heater.
- A natural gas, propane, or oil furnace or hot water boiler.
- Biomass stoves and boilers
- Any insulation material or system, including air sealing material or system, which is specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on that dwelling
- Doors: $250 in the case of any exterior door, and $500 in the aggregate with respect to all exterior doors meeting the applicable Energy Star requirements. For example, if a new front door costs $1,000, the credit will be $250 since $300 (30% of $1,000)exceeds the $250 limit.
- Windows: $600 for the aggregate of all windows and skylights that meet Energy Star most efficient certification requirements.
- Heat Pumps: $2,000 for the aggregate of heat pumps, heat pump water heaters, biomass stoves and boilers.
- Home Energy Audit:$150 (one time). “Home energy audit” means an inspection and written report that identifies the most significant and cost-effective energy efficiency improvements with respect to the dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and is conducted and prepared by a home energy auditor that meets the certification or other requirements specified by the Secretary of the Treasury.
The one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.
Identification Number Requirement - The credit is not allowed unless the energy-saving item is produced by a qualified manufacturer, and the taxpayer includes the qualified product identification number of the item on their tax return for the tax year the credit is claimed. However that requirement does not take effect until after December 31, 2024, giving qualified manufacturers time to comply.
Other Credit Issues:
Tip To Maximize the Credit: Because this credit now has an annual credit limit instead of a lifetime credit limit, a taxpayer can spread the expenditures over multiple years to avoid the annual and per item credit limits. For example, say a taxpayer wishes to replace all the windows in their home. If all the work is completed in one year the taxpayer’s credit would be limited to the per item $600 credit for windows and skylights. However, if the taxpayer spreads the replacements out over multiple years the taxpayer would get a credit of $600 per year.
- Improvements include only those installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer, and originally placed in service by the taxpayer.
- The components must have a life expectancy of at least 5 years.
- The credit can apply to manufactured homes.
- Expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property qualify.
- The credit is claimed on the return for the year the property is installed, even if paid for in a prior year.
- It is a nonrefundable personal tax credit and allowed against the alternative minimum tax (AMT) if the taxpayer is subject to the AMT.
- There are no credit carryover provisions if the credit is not fully utilized in the year of the home energy improvements.
- Unlike the credit for solar installations, this credit doesn't have any specific prohibitions against swimming pools or hot tubs.
If you have questions related to how you might benefit from the enhanced and extended tax credit for making energy-saving improvements to your home, please give this office a call.
|Who Claims the Children's Tax Benefits You or Your Ex-Spouse?
- Custodial Parent
- Dependency Release
- Joint Custody
- Tiebreaker Rules
- Child's Exemption
- Head of Household Filing Status
- Tuition Credit
- Child Care Credit
- Child Tax Credit
- Earned Income Tax Credit
If you are a divorced or separated parent, a commonly encountered but often misunderstood issue is who claims the child or children for tax purposes. This is sometimes a hotly disputed issue between parents; however, tax law includes some very specific but complicated rules about who profits from the child-related tax benefits. At issue are a number of benefits, including the children's dependency, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and, in some cases, even filing status.
This is actually one of the most complicated areas of tax law, and inexperienced tax preparers or taxpayers preparing their own returns can make serious mistakes, especially if the parents are not communicating well. If parents will cooperate with each other, they often can work out the best tax result overall, even though it may not be the best for them individually and compensate for it in other ways.
Physical Custody (Custodial Parent) — If a family court awards physical custody of a child to one parent, tax law is very specific in awarding that child's dependency to the parent with physical custody, regardless of the amount of child support provided by the other parent. However, the custodial parent may release that dependency to the non-custodial parent for tax purposes by completing the appropriate IRS form. The release can be granted on a yearly basis or for multiple years at one time. But once made, it is binding for the specified period.
CAUTION — The decision to relinquish dependency should not be taken lightly, as it impacts a number of tax benefits.
Joint Custody — On the other hand, if the family court awards joint physical custody, only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and the child is actually claimed by both, the IRS tiebreaker rules will apply. Per the tiebreaker rules,the child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year; or if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income will claim the child as a dependent.
Parents in the process of divorcing should be aware that for tax purposes, the IRS's rules as to who can claim a child's dependency takes precedence over what a divorce decree says or what a judge may have ruled. So, for example, if the family court awards full custody of a child to Parent A but says that Parent B can claim the child as a tax dependent, the IRS's position is that the child is a tax dependent of Parent A unless Parent A releases the dependency to Parent B, as explained above.
Child's Exemption Allowance — While there is no longer (through 2025) a monetary tax deduction (also referred to as an exemption allowance) for a dependent child, it still matters who claims the child as a dependent because certain tax credits are only available to the taxpayer claiming the child as a dependent.
Head of Household Filing Status — An unmarried parentcan claim the more favorable head of household, rather than single, filing status if he or she is the custodial parent and pays more than half of the costs of maintaining, as his or her home, a household that is the child's principal place of abode for more than half the year. This is true even when the child's dependency is released to the non-custodial parent.
Tuition Credit — If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whomever claims the child as a dependent. Credits are significant tax benefits because they reduce the tax amount dollar-for-dollar, while deductions reduce income to arrive at taxable income, which is then taxed according to the individual's tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500, of which 40% is refundable. However, both education credits phase out for taxpayers with adjusted gross income (AGI) between $80,000 and $90,000 for unmarried taxpayers and $160,000 and $180,000 for married taxpayers.
Child Care Credit — A nonrefundable tax credit is available to the custodial parent for child care while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and be a dependent of the parent. However, a special rule for divorced or separated parents provides that if the custodial parent releases the child's exemption to the non-custodial parent, the custodial parent can still qualify to claim the child care credit, and it cannot be claimed by the noncustodial parent.
Child Tax Credit — A $2,000 credit is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $200,000 for unmarried parents and $400,000 for married parents filing jointly.
Earned Income Tax Credit (EITC) — Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency of a child or of children to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. In fact, the noncustodial parent is prohibited from claiming the EITC based on the child or children whose dependency has been released by the custodial parent.
As you can see, some complex rules apply to the tax benefits provided by the children of divorced parents. It is highly recommended that you consult this office to prepare your return. If you are the custodial parent, you should also consult with this office before deciding whether to release a child as a tax dependent.
|Haven't Filed Tax Returns for Multiple Years? Here's What You Need to Do Next
You'd be hard-pressed to find someone who actually enjoys the process of filing taxes. Having said that, it's absolutely something that you're supposed to do like clockwork every single year.
Of course, there are a myriad of different reasons why you may have fallen behind. You could be going through something of a major life transition and simply were unable to meet the filing deadline. Maybe you filed for a much-needed extension and then other things got in the way (as they often do), causing you to fall behind even further.
Regardless of the reason, it's important to take meaningful steps to get yourself back on track before it's too late. Thankfully, this isn't necessarily a difficult process - but it will require you to keep a number of important things in mind along the way.
The Consequences of Not Filing Your Taxes for Multiple Years
But first, it's important to understand the actual consequences of what can happen if you don't file your taxes for multiple years in a row - or even for ten years or more in some situations.
The most immediate impact you're likely to experience will come by way of the IRS itself. If you have income that you haven't reported on your taxes, you will be charged various penalties and fees on everything that you should have been paying up until now. These can and often do quickly add up to significant sums of money, which is why it is always important to get on track as soon as you're able to.
Keep in mind that the IRS will charge you those fees and penalties on all taxable income, not taking into consideration any credits or deductions that you would have enjoyed had you filed taxes on time. They don't have records pertaining to expenses like your rent or other things that you need for your job like essential equipment. Because of this, any fees will be assessed based on what they think you owe - not necessarily on what you actually owe.
If it is determined that you have been "willfully" failing to file taxes, you could potentially be punished with up to five years in prison. Likewise, you could get hit with a fine of up to $100,000 if your situation is considered to be "tax evasion." Needless to say, these are all consequences that you would do well to avoid at all costs.
There are other consequences involved with not filing your taxes for a lengthy period of time, too. Sometimes when you file for a passport, for just one example, you may be asked to show your recent tax returns as a form of income verification. Obviously, you can't do that if you haven't been filing them. The same is true if you were planning on applying for a mortgage or car loan.
If retirement is coming up, it could also impact the types of benefits that you will receive like Social Security and Medicare. All of these are crucial aspects of life that you do not want to jeopardize, so you should get your taxes taken care of sooner rather than later.
Getting on Track With Your Taxes: A Plan of Action
The first thing you should do to get back on track with your taxes involves checking on the current status of your account with the IRS. At the very least, this will give you an indication of what the IRS thinks you owe. You can do so at the official website via irs.gov, or by calling 1-800-829-1040 to speak to a live representative.
At that point, you have two options available to you. The first involves paying what the IRS currently says you owe, along with both the original taxes and any fees or penalties that have accrued, to settle your account. If you can't pay the full balance in one lump sum, you could always attempt to get on a payment plan.
The second involves gathering all the financial information you need to complete the tax forms you did not file. You'll need to compile several important documents, including but not limited to things like:
- Any information pertaining to the income you made during the missing years, along with any expenses that you had so that you can claim deductions and credits that apply to you.
- Any supporting documentation like receipts and income statements that are necessary to complete the aforementioned financial records. This may require you to perform some forensic accounting so that you have the most complete picture to work from.
At that point, the next step is clear: you should file your missing tax returns at your earliest convenience. Thankfully, there is no time limit associated with filing those old tax returns. However, the sooner you do it, the better.
Oftentimes, this is absolutely the way to go as once all documents and other financial information have been properly recorded, you'll likely end up owing less than the IRS thinks you do. You'll still owe money, but you'll save a bit in the long run.
Finally, you should pay your taxes as soon as you can. Again, you can do this either through a lump sum or get on some type of payment plan to bring your account up-to-date. You may also choose to look into a settlement agreement or any type of income tax forgiveness that may apply to you. You could even choose to make what is known as an "offer in compromise," which allows you to pay something towards your balance to consider everything settled. The IRS would have to agree with whatever offer you make, of course.
At that point, you should prepare for future taxes so that you don't find yourself in the same position down the road. If you need help doing precisely that, or if you have any additional questions about this process that you'd like to see answered, please don't delay - contact us to speak to a tax professional today.
|Tax Benefits for Grandchildren
- Financially Assisting Grandchildren
- College savings
- Education savings
- Retirement accounts
- Medical expenses
If you are a grandparent there are several things you can do to teach your grandchildren financial responsibility and set aside money for their future education and retirement. Before we get into actual suggestions, it is important that you understand the gift tax rules. You can give anyone, every year, an amount up to the annual gift tax exclusion. The gift tax exclusion is inflation-adjusted and is currently $17,000, which means that, in 2023, you can give any number of recipients up to $17,000. Thus, you can give each grandchild $17,000per year; and, if you are married, both you and your spouse can each give $17,000 for a total of $34,000 per year. Gifts in excess of $17,000 per donee can certainly be made, but doing so will mean the grandparent must file a Gift Tax Return (Form 709) and pay gift tax on taxable gifts in excess of a lifetime gift and estate tax exclusion $12.92 Million for 2023).
Of course, just handing out money to your grandchildren will not teach financial responsibility or meet specific goals you might have in mind for the money. The following are some suggestions.
Savings for College: The tax code allows taxpayers to put away large amounts of money limited only by the contributor's gift tax concerns and the contribution limits of the intended state plan. There are no income or age limitations for these plans, often referred to as Sec. 529 Plans (the tax code number) or Qualified Tuition Plans. The maximum amount — per beneficiary — that can be contributed is based on the projected cost of a college education and will vary among state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. These plans allow for tax-free accumulation provided the funds are used for qualified college expenses. Thus, a grandparent can currently contribute up to $17,000 per year to a Sec. 529 Plan. There are also special provisions that permit 5 years' worth of contributions up front (this requires filing gift tax returns).
Savings for Education: Funds from a Sec. 529 plan can only be used for college. Coverdell Education Accounts also provide tax-free accumulation like Sec. 529 plans; but, unlike Sec. 529 Plans, the funds can be used for education beginning with kindergarten and continuing through college. So, you might want to consider contributing the first $2,000 (Coverdell annual contribution limit) to a Coverdell account. One downside to a Coverdell account is that it becomes the child's account to do with as the child wishes when the child reaches the age of majority (age varies by state); while, with the Sec. 529 plan, the contributor maintains control of the plan's distributions.
Roth Retirement Account: You may have a teenage grandchild who has a part-time job. To the extent the child has earnings from work, you — the grandparent — could fund an IRA for him or her. Generally, a child with a part time job will benefit very little, if any, from a traditional IRA deduction, so a Roth IRA is generally a better choice. Any contribution for 2023 would be limited to the lesser of $6,500 or the child's earned income. A Roth IRA accumulates earnings tax-free and distributions are tax-free at retirement age. The amount of the IRA contribution you pay is considered a gift to the grandchild, and it goes against the annual gift tax exclusion amount. For example, if your grandchild had $3,500 of wage income in 2023 and you funded $3,500 into an IRA for the grandchild, the remaining balance of the $17,000 annual exclusion would be $13,500. If you decided to buy your grandchild a $15,000 used car later the same year, you would be over the annual exclusion amount by $1,500 and would need to file a gift tax return. You would likely not owe any gift tax unless you've previously made large gifts, but the $1,500 does reduce your lifetime gift and estate tax exclusion.
Tuition and Medical Gift Exclusion: In addition to the annual exclusion, a grandparent may make gifts that are totally excluded from the gift tax in the following circumstances:
- Payments made directly (Sec. 529 plans are not direct) to an educational institution for tuition. This includes college and private primary education. It does not include books or room and board. This could also create a tax credit of up to $2,500 for the individual who claims your grandchild as a dependent.
- Payments made directly to any person or entity providing medical care for the donee.
In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify. The tuition/medical exclusion is often overlooked, but these expenses can be quite significant. Grandparents interested in reducing the value of their estate should strongly consider these gifts.
Establish Trusts: Although a somewhat more complicated possibility and one that will require the services of a trust attorney, there are a variety of trusts that can be established to make future distributions to a grandchild based upon the grandchild's future achievements, such as completing his or her college education, holding a job, overcoming an addiction, etc.
Although none of these suggestions provides any current tax benefits for grandparents other than reducing the value of their future estate, they will help grandchildren get off to a good start in life. Please call this office for further details.
|How to Receive Payments in QuickBooks Online
One of the biggest problems small businesses face is maintaining a positive cash flow. It’s a constant battle. How do you keep your income running ahead of your expenses?
QuickBooks Online can help. It provides specialized forms and a mobile app that help you record and deposit the payments that are coming in. Do you ever receive payments instantly for some products and/or services? Are you ever out of the office and have to document a sale for both you and the buyer? Do you send invoices for products and/or services and need to make sure that payments get reported accurately when they come in?
QuickBooks Online supports all of these situations. It also provides a service that can automate your payments and help you get paid faster.
Applying Payments to Invoices
If you send invoices to customers for products and/or services, you can receive their payments easily using QuickBooks Online. Businesses can record payments manually, but there’s a better way that can help you get paid faster: QuickBooks Payments. This is a merchant account that allows you to accept credit card and bank payments electronically.
Using QuickBooks Online’s mobile app, you can check the payment status of an invoice.
Once you set this up in QuickBooks Online, your invoices will allow bank cards and electronic checks as integrated payment options. Your invoices will go out with a button that customers can click to provide bank card or check information. You’ll be able to see when invoices are viewed, paid, and deposited, as shown in the image above. You can also get notifications of invoice activity.
Of course, you can also check the payment status of the invoices you’ve sent in the browser-based version of QuickBooks Online on your desktop or laptop. Open your list of invoices on the site and click on one to highlight it. A panel will slide out from the right side of the screen displaying the invoice’s timeline.
You can also record payments manually. Look at the end of the row for an invoice that hasn’t been paid. You’ll see a Receive Payment link. Click it to open the Receive Payment screen and complete the fields that aren’t already filled in, then save the screen. There’s also a Receive Payment link on the invoice screen itself.
You can record payments for invoices manually from the Invoices screen.
There’s no cost for setting up an account in QuickBooks Payments. There are only per-transaction fees. For ACH bank payments, the rate is 1%, with a maximum of $10 per transaction. Credit and debit cards (plus PayPal, Apple Pay, and Venmo) are 2.9% if they come in through an invoice, 2.4% if you use a card reader, and 3.4% if the payments are keyed in. There’s also a $0.25 fee per transaction. Payments that come in before 3 p.n. PT should be in your account the next business day.
Payments On the Road
To accept payments remotely, you’ll need to get a free card reader from Intuit that attaches to your mobile phone. Customers can tap or insert their cards or make digital wallet payments. You can also key numbers in, but, as we said earlier, the per transaction fee is higher. You’ll also need to download the GoPayment app to process transactions. The app also allows you to add labels, prices, and images so you can find the item you’re selling quickly. Multiple security measures are used to help keep this method of mobile data transmission safe.
Receiving Payment Instantly
There may be times when you provide a product or service for someone and they pay you on the spot. QuickBooks Online allows you to create and send sales receipts for just those occasions. Click +New in the upper left corner, and then click Sales receipt under Customers. QuickBooks Online then opens a form that should look familiar to you. It looks and works like an invoice or estimate. Select the Customer in the upper left corner and complete the rest of the fields as you would with any sales form. If you click Save and send when you’re done to email a copy to the customer, you can see a preview first.
About Receiving Checks
Money from payments you’ve received sometimes* go into the Undeposited Funds account.
When we created a sales receipt just now and indicated we’d received a check, the Deposit to field defaulted to Checking, because QuickBooks Online assumed we’d be depositing this check on its own. When you have multiple checks that you’re going to combine into one deposit, you should have the payment deposited to the Undeposited Funds account. This is an account that holds any payments that have come in but not yet been physically deposited in the bank (usually cash and paper checks from invoices and sales receipts). It’s a good idea to look at this account occasionally to make sure you don’t have money just sitting there.
Questions on any of this? Contact us to set up a consultation. The mechanics of receiving payments are not that difficult, but you need to make very sure you’re recording all payments properly and getting the money into your bank accounts.
|March 2023 Individual Due Dates
March 10 - Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
March 15 - Time to Call For Your Tax Appointment
It is only one month until the April due date for your individual income tax returns. If you have not made an appointment to have your taxes prepared, we encourage you to do so before it becomes too late.
Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.
Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.
We look forward to hearing from you.
|March 2023 Business Due Dates
March 1 - Farmers and Fishermen
File your 2022 income tax return (Form 1040 or 1040-SR) and pay any tax due. However, you have until April 18 to file if you paid your 2022 estimated tax by January 17, 2023.
March 15 - Partnerships
File a 2022 calendar year return (Form 1065). Provide each partner with a copy of their Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1 and, if applicable, Schedule K-3 (Form 1065) or substitute Schedule K-3 (Form 1065). If you want an automatic 6-month extension of time to file the return, file Form 7004. Then file Form 1065 and provide Schedules K-1 or substitute Schedules K-1, and if applicable Schedules K-3, to the partners by September 15.
March 15 - S-Corporations
File a 2022 calendar year income tax return (Form 1120-S) and pay any tax due. Provide each shareholder with a copy of Schedule K-1 (Form 1120-S), Shareholder’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1 (Form 1120-S) and, if applicable, Schedule K-3 (Form 1120-S) or substitute ScheduleK-3 (Form 1120-S).
March 15 - S-Corporation Election
To request an automatic 6-month extension of time to file the return, file Form 7004 and pay the tax estimated to be owed. Then file the return; pay any tax, interest, and penalties due; and provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) and, if applicable, Schedule K-3 (Form 1120-S) by September 15.
File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2023. If Form 2553 is filed late, S treatment will begin with calendar year 2024.
March 15 - Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in February.
March 15 - Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in February.
March 31 - Electronic Filing of Forms 1098, 1099 and W-2G
If you file Forms 1098, 1099 (other than 1099-NEC), or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, January 31 or February 28 was the due date, depending on the form filed. The due date for giving the recipient these forms was January 31.
March 31 - Applicable Large Employers (ALE) – Form 1095-C
If filing electronically, file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, with the IRS. If filing on paper the due date was February 28, 2023.
March 31 - Large Food and Beverage Establishment Employers
If you file Forms 8027 for 2022 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, February 28, 2023 was the due date.