With tax season now officially underway, here are several tax documents that may be easy to miss in your mailbox or inbox:
Child tax credit letter. From July through December 2021, the IRS paid out 50% of projected child tax credit payments to qualified households. The IRS is sending out a recap of these advance payments in Letter 6419 that you can use to correctly account for these payments on your tax return. This letter should have arrived in your mailbox by late January.
Stimulus payment letter. The IRS issued millions of economic impact payments in 2021. The IRS is mailing a summary of these payments you received in Letter 6475. As with the child tax credit letter, you can use this letter to accurately report your economic impact payments on your tax return. This letter also should have arrived in your mailbox by late January.
Identification PIN. The IRS may have assigned you an Identity Protection PIN (IP PIN) to help protect your identity. An IP PIN is a six-digit number that prevents someone else from filing a tax return using your Social Security number or Individual Taxpayer Identification Number. This IP PIN is known only to you and the IRS. If you are a confirmed victim of tax-related identity theft and the IRS has resolved your tax account issues, the IRS will mail you a CP01A Notice with your new IP PIN each year.
Corrected tax forms. If an error is discovered on a tax form you’ve already received, a corrected version will be created, then mailed to both you and the IRS. You can also request a corrected tax form if you believe you found an error. Here are some of the forms you might see with corrections:
Form W-2 from your employer that shows corrected wages, salary and taxes withheld
Form 1099-INT or Form 1099-DIV from your investment broker that shows a revision in interest and dividend income
Form 1099-NEC from a client to whom you provide services
Form 1098 that shows how much mortgage or student loan interest you’ve paid
You may not be aware you were issued a corrected tax form until it shows up in your mailbox (or inbox). If you do receive a corrected form, don’t throw the old version away! Save both the original version and corrected version in case either are needed for future reference.
Often the ease of filing your tax return is dependent on having the correct information, so remember to look for everything, including these often overlooked forms.
There’s good news for your retirement accounts in 2022! The IRS recently announced that you can contribute more pre-tax money to several retirement plans in 2022. Take a look at the following contribution limits for several of the more popular retirement plans:
Plan
2022
2021
Change
SIMPLE IRA
Annual Contribution 50 or over catch-up
$14,000 Add $3,000
$13,500 Add $3,000
+ $500 No Change
401(k), 403(b), 457 and SARSEP
Annual Contribution 50 or over catch-up
$20,500 Add $6,500
$19,500 Add $6,500
+ $1,000 No Change
Traditional IRA
Annual Contribution 50 or over catch-up
$6,000 Add $1,000
$6,000 Add $1,000
No Change No Change
AGI Deduction Phaseouts:
Single; Head of Household Joint nonparticipating spouse Joint participating spouse Married Filing Separately (any spouse participating)
Single; Head of Household Married Filing Jointly Married Filing Separately
129,000 – 144,000 204,000 – 206,000 0 – 10,000
125,000 – 140,000 198,000 – 208,000 0 – 10,000
+ $4,000 + $6,000 No Change
Rollover to Roth Eligibility
Joint, Single, or Head of Household Married Filing Separately
No AGI Limit Allowed / No AGI Limit
No AGI Limit Allowed / No AGI Limit
No AGI Limit Allowed / No AGI Limit
What You Can Do
Look for your retirement savings plan from the table and note the annual savings limit of the plan. If you are 50 years or older, add the catch-up amount to your potential savings total.
Then make adjustments to your employer provided retirement savings plan as soon as possible in 2022 to adjust your contribution amount.
Double check to ensure you are taking full advantage of any employee matching contributions into your account.
Use this time to review and re-balance your investment choices as appropriate for your situation.
Set up new accounts for a spouse and/or dependents. Enable them to take advantage of the higher limits, too.
Consider IRAs. Many employees maintain employer-provided plans without realizing they could also establish a traditional or Roth IRA. Use this time to review your situation and see if these additional accounts might benefit you or someone else in your family.
Review contributions to other tax-advantaged plans, including flexible spending accounts (FSAs) and health savings accounts (HSAs).
Now is a great time to make 2022 a year to remember for retirement savings!
It’s the dead of night. Something wakes you from a deep sleep. It sounds like popcorn. Is someone in the house? Now you are alert. You grab your phone, open the door and head for the sound. It’s coming from the kitchen. At the same time, the smoke hits you AND the smoke alarms go off. Now is the time to act, and improving your survival comes from thinking about what you need to do….long BEFORE it happens.
Learn from the experts
Do a review of your situation now. Here are links to two great sources:
This includes smoke and carbon monoxide alarms and proper fire extinguishers all in the proper places and all in working order.
Minimize risks
The top causes of home fires are cooking, heating, electrical, smoking and candles. Knowing this, you can reduce the risk of fire by creating an awareness trigger when engaging in these areas. For example:
Know how to handle different types of cooking fires both inside and outside.
Know where shut off valves are for gas.
Unplug when not using electrical devices.
Never smoke inside.
Only buy candles enclosed in glass.
Have an escape plan and practice it!
When a fire occurs, you have two minutes to get out. Create a plan, provide two methods of escape, and practice the plan every six months. Know where you are going to meet so everyone is accounted for after you exit. This is especially important for kids as they may need to escape without your help. Also think about overnight guests and grandkids at sleepovers. This is where reviewing plans from experts can help.
Get out. Stay out. Call for help.
Make this your mantra when in the midst of a fire emergency.
Review this I wish list.
Hindsight is 20-20, and especially so when it comes to fires. Here are some tips from those who have gone through it:
I wish:
I had a go bag. This is a small bag of essentials stored in your bedroom to grab if you need to leave in a hurry. It contains a change of clothes, coats, or other emergency items for the kids.
I had a good inventory. After the fire, you are going to spend a significant amount of time with insurance adjusters. Periodically review your policy and develop an inventory of your household items. Take videos, document models and ages of major appliances, autos, other equipment, and valuables.
I had a where to go plan. If you cannot return to your home, where will you stay? How will you pay for it? Figure this out ahead of time.
I had a remote backup of my computer and phone. Remote backups can be invaluable in getting you back up and running.
I had an emergency fund. It will take a while to get your life back in order. What if you need to take time off from work? Having 6 months of emergency funds can make all the difference as you recover from your disaster.
The purpose of this article is not to act as an expert in fire safety, but rather to help generate awareness in this often overlooked subject. If, however, you need expert advice with your financial and tax affairs as you navigate this or other disasters, please call for help.
In the back of every Form 1040 instruction booklet there’s a section that shows where our federal government gets its money and where it is spent. As taxpayers, it makes sense to know this information. Here is the data for the government’s fiscal year ending September 30, 2019, as reported by the IRS in the 2020 instruction booklet for Form 1040. Please note that this spending is prior to COVID-19 relief bills.
FY Ending 2019
Inflow:
$3.464 trillion
Outflow:
$4.448 trillion
Deficit:
$984 billion
TOTAL INFLOWS
39%
Personal Income Taxes
28%
Social Security, Medicare, Unemployment Taxes
22%
Borrowing to Cover Deficit
6%
Excise, Customs, Estate, Gift and Misc Taxes
5%
Corporate Income Taxes
SPENDING BREAKDOWN
42%
Social Security, Medicare, & other retirement. These programs provide income support for the retired and disabled and medical care for the elderly.
21%
National defense, veterans, and foreign affairs. About 15% of outlays were to equip, modernize, and pay our armed forces and to fund national defense activities; about 4% were for veterans benefits and services; and about 1% were for international activities.
21%
Social programs. About 15% of total outlays were for Medicaid, SNAP (formerly food stamps), TANF, SSI; and 6% for health research and public health programs unemployment compensation, assisted housing, and social services.
8%
Net interest on the national debt (at historically low interest rates).
6%
Physical, human, and community development. These outlays were for agriculture and environment; transportation; aid for education and college assistance; job training; deposit insurance, commerce and housing credit; and space, energy, and general science programs.
2%
Law enforcement and general government.
SOURCE: IRS publication i1040gi, P.110, 2020 Tax Year
What You Need To Know
Deficits of $1 trillion are not sustainable. No matter where you fall on the political spectrum, annual deficits of $1 trillion cannot be sustained. And remember, this information is detailing a pre-pandemic deficit. It may be several more years before the annual deficit gets back down to this level, if at all.
Government borrowing hurts all taxpayers. In 1990, $50,000 worth of Certificates of Deposits (CDs) earned a cool 8% interest, or $4,164, each year. Today, that same $50,000 earns just 0.6%, or $301. What happened to the other $3,863? Your interest income is now helping to cover money borrowed by the government in the form of lower interest rates. Look at 2019…almost ¼ of the money spent by the federal government was borrowed!
Low interest expense risk. Look at the percentage of money spent on interest expense in 2019. It’s 8% with interest rates hovering around zero. So what happens when rates actually start to go up? As a percentage of overall expenditures, interest expense could double to 16%…and potentially go even higher than that.
Make a difference. Whether we should spend more or less is not the issue. It is that spending more than you bring in will cause big problems…eventually. Money doesn’t just magically appear on printing presses. That money has to come from someplace and that someplace is from everyone. So make your voice heard…it’s your money!
Handling employment taxes can be complicated, especially when you’re required to file important tax documents throughout the year. Here’s a quick recap of the most vital payroll tax forms and what you can do to make your payroll life easier heading into 2022.
Important Payroll Tax Forms
Form 941 — Employer’s quarterly federal tax return. This form is used to report income tax withheld from employees’ pay and both the employer’s and employees’ share of Social Security and Medicare taxes. Employers generally must deposit Form 941 payroll taxes on either a monthly or semiweekly deposit schedule.
Form 940 — Employer’s annual federal unemployment tax return (FUTA). This return is due annually at the end of January. However, FUTA taxes must generally be deposited once a quarter if the accumulated tax exceeds $500.
Form W-2 — Wage and tax statement. Employers are required to send this document to each employee and the IRS at the end of the year. It reports employee annual wages and taxes withheld from paychecks.
Make payroll easier
Remind employees to review withholdings. January is a great time to remind your employees to check their paycheck’s tax withholding amounts. Various life events in the preceding 12 months can potentially lead to one of your employees owing a different amount of taxes in 2022 than they owed in 2021. And no matter how hard you try, employees will ask for your help. So get ahead of the curve with this simple review reminder.
Create a payroll forecast. Be prepared for how much you’ll spend on salaries and wages in 2022 by creating a payroll expense and benefit forecast. In addition to base salaries and wages, include the following in total salary and wage expenses: Your share of an employee’s Social Security and Medicare taxes; health insurance premiums paid on behalf of employees; and any other benefits you provide to employees.
Ask for help. Payroll compliance involves many moving parts at the local, state and federal levels. Please call if you have any questions about your business’s payroll tax compliance, and how to properly account for payroll expenses on your financial statements.
Getting a bill for an unexpected expense can put a significant dent in your business’s cash flow. Here are some tips your business can use to deal with a surprise bill.
Stick to a reconciliation schedule. The best advice is to be prepared for the unexpected. Do this by knowing how much cash you have in your bank account at any given time. This is done by sticking to a consistent bank reconciliation schedule. Conventional wisdom suggests reconciling your bank account with bills paid and revenue received once a month. But if your business doesn’t have that many transactions, you could reconcile once every two or three months. No matter what time frame works for you, be consistent with your review!
Create a 12-month rolling forecast. This exercise projects cash out twelve months. Then each new month you drop the prior month and add another month one year out. This type of a forecast will reflect the ebbs and flows of cash throughout the year and identify times that you’ll need more cash so when a surprise bill shows up, you know exactly how it will impact your ability to pay it.
Build an emergency fund. Getting surprised with an unexpected business expense isn’t a matter of if it will happen, but when. Consider setting money aside each month into an emergency fund to be used only in case of a significant expense. A longer term goal could be to save enough money to cover 3 to 6 months of operating expenses.
Partner with a business advisor. Even small businesses sometime need help keeping their cash flow in line and avoiding unexpected expenses. Please call if you have any questions about organizing your business’s cash flow and preparing for surprise expenses.
Creating a sound financial foundation for you and your family is anything but easy. With low interest rates as an incentive to borrow more and even lower interest rates on savings accounts is it any wonder that it’s tough to retain the discipline to save? Here are five thoughts that may help.
Pay yourself first. Treat saving money with the same care you pay your bills. Take a percentage of everything you earn and save it. Using this technique can help build an emergency fund and keep you from living paycheck to paycheck.
Know and use the Rule of 72. You can roughly calculate the number of years compound interest will take to double your money using the Rule of 72. Do this by dividing 72 by your rate of return to estimate how long it takes to double your money. For example, 10% interest will double an investment in 7.2 years; investments with an 8% return will double in nine years. Use this concept to understand the power of saving and investment.
Use savings versus debt for purchases. Unpaid debt is like compound interest but in reverse. For instance, using a 12% interest credit card to pay $1,500 for home appliances costs over $2,000 if paid back over 5 years. The result is that you have to work harder and earn more to pay for the items you purchase. A better idea may be to save and then buy your dream item.
Understand amortization. When a bank loans you money, it gives you a specific interest rate and a set number of years to pay it back. Each payment you make contains interest as well as a reduction of the amount owed, called principal. Most of the interest payments are front-loaded, while the last few payments are virtually all principal. Making additional principal payments at the beginning of the loan’s term will decrease the amount of interest you pay to the bank and help you pay off the loan more quickly.
Taxes are complex and require help. Tax laws are complicated. They are made even more complex when the rules change, often late in the year. Even worse, the IRS is not in the job of telling you when you forget to take a deduction. The best way to stay out of the IRS spotlight AND minimize your taxes is to ask for help.
Despite the COVID-19 pandemic, political unrest and severe weather events, the Tax Court has continued to churn out decisions affecting individual and business taxpayers. Here’s a brief sampling of several cases that may be of particular interest.
Coming Up Aces.(Coleman, TC Memo 146, 10/22/20) You can generally deduct gambling losses up to the amount of your winnings from gambling activities if you can provide proper documentation. Now the Tax Court has allowed one taxpayer to estimate his expenses absent proper documentation.
Facts: A compulsive gambler was able to show that he likely spent the money from a $150,000 personal injury settlement in local casinos. The gambler, however, didn’t have the usual records to substantiate his claims. The Court allowed an estimated deduction because it was clear he had incurred significant expenses. The gambler was able to net his $350,000 in gambling winnings with $350,000 in estimated gambling losses.
Tax Tip: Save documentation for all your tax deductions, including gambling winnings and losses. Don’t rely on a tax court ruling!
Home (Not) Sweet Home.(Soboyede, TC Summ. Op. 2021-3, 1/26/21) Your tax home for deducting travel expenses isn’t necessarily the place where you live. It’s the general area of your primary workplace.
Facts: The taxpayer was an attorney with separate law practices in Minnesota and Washington, D.C. He deducted his hotel expenses and other travel costs in the D.C. area. But his records showed he actually spent more than 50% of his work time in or near the D.C. location. The Tax Court concluded that the attorney’s tax home is actually in D.C. As a result, he couldn’t deduct his hotel and other expenses from the D.C. area.
Tax Tip: You can deduct travel expenses only away from your tax home. If you work in multiple locations, be sure you know which location the IRS considers to be your tax home.
Skidding Off The Race Track.(Berry, TC Memo 2021-42, 4/7/21) A business can deduct advertising and marketing expenses that are related to its business activities. No write-off is allowed, however, for personal expenses.
Facts: A father and son who owned a construction company were race car enthusiasts. They deducted expenses for the son’s racing activities that were incurred as an advertising and marketing expense of the construction company. The Tax Court disallowed the deduction, ruling the expenses were a hobby expenditure, not an ordinary and necessary business expense that can be deducted for tax purposes.
Tax Tip: Understand what is considered an ordinary and necessary business expense by the IRS and know whether your activity is deemed to be either a hobby or a for-profit business enterprise.
A Slight Understatement.(Pragrias, TC Memo 2021-82, 6/30/21) The IRS normally has three years from the due date of a tax return to conduct an audit of that return. This three-year period is extended to six years, however, if the tax return omits more than 25% of taxable income.
Facts: The taxpayer received $4.9 million from a complex investment but reported only about $1.5 million. The IRS audited the return after three years. Despite the taxpayer’s contention that he didn’t omit taxable income—he said he merely understated it—the Tax Court ruled that the longer six-year limit applies. And as a general rule, there is no statute of limitations for the IRS when fraud is involved.
Tax Tip: Understand the applicable statute of limitations with your tax returns.
Please call if you have any questions about these tax court cases or any other circumstances that you think apply to your tax situation.
As we enter the New Year, businesses continue to be hampered by a near-unprecedented lack of supplies and materials. Besides items that have received widespread national attention like toilet paper and computer chips for cars, the slowdown in the supply chain is affecting everything from electronic devices to couches to sneakers—and plenty in between.
To complicate matters for businesses operating in a competitive environment, the supply chain disruption is being compounded by a tight labor market, especially for drivers and other delivery people. It all adds up to long delays, reduced profits, and frustration for everyone involved.
What can your small business do? Consider these practical suggestions.
Communicate with empathy. The worst thing you can do is clam up when customers start questioning orders or complaining about backlogs. Be upfront about the problems you’re facing.
Underpromise and overdeliver. It’s better to lower expectations than it is to set a high bar that can’t be reached. Don’t make promises you can’t keep. Customers will be pleasantly surprised if you exceed your initial estimates.
Be creative about pricing. If your production costs are shooting through the roof, it should be reflected in your pricing structure. Of course, you can’t pass on the entire extra cost to customers, but factor increases into the equation.
Rethink lead times. If you can afford to do it, order supplies for several months ahead of time. Stock up on essentials for your business when you can.
Find new partners. Your business may be forced to turn to different suppliers or vendors. If you can fund quality materials, expand your business contacts and regular resources.
Think outside the box. Try a different approach that may mitigate the shortages. For example, you might find a suitable and available replacement for a product component. Don’t just accept the status quo.
Finally, use a healthy dose of common sense to navigate through this crisis. Your business advisors can provide assistance.
A new year. New resolutions. Here are five ideas to consider to help improve your financial health in the upcoming year.
Save more for retirement. Plan for the future by feathering your retirement nest egg. For instance, you can contribute up to $20,500 to a 401(k) account in 2022, plus another $6,500 if you’re age 50 or older. Plus, your company may provide matching contributions up to a stated percentage of compensation. And you can supplement this account with contributions to IRAs and/or other qualified plans.
Update your estate plan. Now is a good time to review your will and make any necessary adjustments. For example, your will may need to be updated due to births, deaths, marriages or divorces in the family or other changes in your personal circumstances. Also review trust documents, powers of attorney (POAs) and healthcare directives or create new ones to facilitate your estate plan.
Rebalance your portfolio. Due to the volatility of equity markets, it’s easy for a portfolio to lose balance against your investment objectives. To bring things back to where you want, review your investments periodically and reallocate funds to reflect your main objectives, risk tolerance, and other personal preferences. This will put you in a better position to handle the ups and downs of the markets.
Review, consolidate, and lower debt levels. One sure-fire method for improving your financial health is to spend less and save more. Start by chipping away at any existing debts. This may mean giving up some luxuries, but it’s generally well worth it in the long run. Pay extra attention to debts with high interest charges like credit card debt. If possible, consider consolidating several of these debts into one or two obligations if you can lower your interest rate in the process.
Contingency planning. No one can foresee every twist and turn that 2022 will take. To avoid potential financial hardship, look to improve your emergency fund by setting aside enough funds to pay for six months or more of your expenses in case of events like a job loss or a severe health issue.
