Your business mileage tax deduction just became more valuable for the rest of 2022 after a recent announcement by the IRS.
Starting July 1st, the IRS’s business mileage rate is increasing by 4 cents, to 62.5 cents per mile, while the medical and moving mileage is also increasing by 4 cents, to 22 cents per mile. The previous mileage rates still apply through June 30th.
Here are some tips to make the most of your business’s vehicle expense deduction.
Don’t slack on recordkeeping. You won’t be able to take advantage of the increased mileage rates without proper documentation. The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.
Keep track of both mileage and actual expenses. The IRS generally lets you use one of two different methods to track vehicle expenses – the standard mileage rate method or the actual expense method. But even if you use the standard mileage method you can still deduct other expenses like parking and toll fees. So keep good records.
Consider using standard mileage the first year a vehicle is in service. If you use standard mileage the first year your car is placed in service, you can then choose which expense tracking method to use in subsequent years. If you initially use the actual expense method the first year your car is placed in service, you’re locked in to using actual expenses for the duration of using that car in your business. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate the first year.
Don’t forget about depreciation! Depreciation can significantly increase your deduction if you use the actual expense method. For heavy SUVs, trucks, and vans with a manufacturer’s gross vehicle weight rating above 6,000 pounds, 100% bonus depreciation is available through the end of the 2022 tax year if the vehicle is used more than 50% for business purposes. Regular depreciation is available for vehicles under 6,000 pounds with annual limits applied.
Please call if you have any questions about maximizing your business’s vehicle expense deduction.
Whether you own cryptocurrency or not, everyone should know the tax rules surrounding this type of property as it becomes more popular. If you have one take away regarding cryptocurrency, it should be this: Remember that Uncle Sam is watching you!
Here’s what you need to know about the IRS and cryptocurrency:
Background
The IRS generally considers cryptocurrency—also referred to as virtual currency or digital currency—to be property, just like stocks and bonds for federal income tax purposes.
Therefore, if you sell cryptocurrency at a gain, it is subject to capital gains tax. Similarly, you may claim a capital loss on the sale or other disposition of cryptocurrency. But that’s not all: Anytime you exchange cryptocurrency for actual currency, goods or services, the IRS says it’s a taxable event.
Say that you hold Bitcoin for longer than one year and then sell it at a gain. The gain is taxable up to 20%. High-income taxpayers may also need to pay a 3.8% surtax on the cryptocurrency gain. Accordingly, you can use a loss from a cryptocurrency sale to offset capital gains plus up to $3,000 of ordinary income. Any excess is carried over to the following tax year.
The IRS Is Watching You!
Cryptocurrency transactions often flew under the radar, but the IRS is now paying much closer attention. Here’s how the IRS is stepping up enforcement efforts:
Answer a Form 1040 question. The IRS is so concerned about cryptocurrency transactions being reported that they have a cryptocurrency question on Page 1 of your tax return, just below your name. Before filling out any part of your tax return, the IRS wants you to answer a question about whether you received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency.
Brokers must report transactions. After 7 years of gently prodding taxpayers to self-report cryptocurrency transactions, Congress has given the green light for the IRS to obtain cost basis and sales proceeds information for all crypto transactions directly from brokers (such as CoinBase, Electrum or Mycelium) or other individuals who regularly provide digital asset transfer services on behalf of other people. Similar to the reporting of stocks and bonds, taxpayers will receive a Form 1099-B from brokers that list all crypto transactions. These new reporting rules are effective beginning January 1, 2023.
Expanded $10,000 reporting requirement. Businesses that accept virtual currency as payment may be required to report transactions above $10,000 to the IRS beginning January 1, 2023. In an interesting twist, cryptocurrency and other digital assets would be considered cash for purposes of the $10,000 reporting requirement, while the IRS will continue to treat cryptocurrency as real property (and not cash) for tax compliance purposes.
What you need to do
Here are some suggestions for tracking and reporting your cryptocurrency transactions on your tax return:
Keep up-to-date records. Consider tracking each transaction as they occur throughout the year. You may also want to keep your own transaction ledger as a way to double-check the accuracy of your broker’s statements.
Set aside money to pay taxes. Consider saving a certain percentage of each cryptocurrency transaction you sell at a gain for taxes you may need to pay.
Be aware before you dive into cryptocurrency. As you can see, being involved in cryptocurrency may not be for everyone. Wild swings in valuation are common. Reporting requirements are complicated.
As Warren Buffet is quoted as saying,
If you have been playing poker for half an hour and still cannot tell who the patsy is, you’re the patsy.
Please call if you have questions about your cryptocurrency transactions.
Wages and self-employment earnings are taxable, but what about the random cash or financial benefits you receive through other means? If something of value changes hands, you can bet the IRS considers a way to tax it. Here are five taxable items that might surprise you:
Scholarships and financial aid. Applying for scholarships and financial aid are top priorities for parents of college-bound children. But be careful — if any part of the award your child receives goes toward anything except tuition, it might be taxable. This could include room, board, books, travel expenses or aid received in exchange for work (e.g., tutoring or research). Tip: When receiving an award, review the details to determine if any part of it is taxable. Don’t forget to review state rules as well. While most scholarships and aid are tax-free, no one needs a tax surprise.
Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets and sports betting. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records. Tip: Know when the gambling establishment is required to report your winnings. It varies by type of betting. For instance, the filing threshold for winnings from fantasy sports betting and horse racing is $600, while slot machines and bingo are typically $1,200. But beware, the gambling facility and state requirements may lower the limit.
Unemployment compensation. Congress gave taxpayers a one-year reprieve in 2021 from paying taxes on unemployment income. Unfortunately, this tax break did not get extended for the 2022 tax year. So unless Congress passes a law extending the 2021 tax break, unemployment will once again be taxable starting with your 2022 tax return. Tip: If you are collecting unemployment, you can either have taxes withheld and receive the net amount or make estimated payments to cover the tax liability.
Social Security benefits. If your income is high enough after you retire, you could owe income taxes on up to 85% of Social Security benefits you receive. Tip: Consider if delaying when you start collecting Social Security benefits makes sense for you. Waiting to start benefits means you’ll avoid paying taxes on your Social Security benefits for now, plus you’ll get a bigger payment each month you delay until you reach age 70.
Alimony. Prior to 2019, alimony was generally deductible by the person making alimony payments, with the recipient generally required to report alimony payments received as taxable income. Now the situation is flipped: For divorce and separation agreements executed since December 31, 2018, alimony is no longer deductible by the payer and alimony payments received are not reported as income. Tip: Alimony payments no longer need to be made in cash. Consider having the low-income earning spouse take more retirement assets such as 401(k)s and IRAs in exchange for reduced alimony payments. This arrangement would allow the higher-earning spouse to make alimony payments by transferring retirement funds without paying income taxes on it.
When in doubt, it’s a good idea to keep accurate records so your tax liability can be correctly calculated and you don’t get stuck paying more than what’s required.
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!
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.
