Start Your Tax Planning NOW!

Start Your Tax Planning NOW!

Keeping your taxes as low as possible requires paying attention to your financial situation throughout the year. Here are some tips for getting a head start on tax planning for your 2022 return:

  • Check your paycheck withholdings. Now is a good time to check your tax withholdings to make sure you haven’t been paying too much or too little. The IRS has an online tool that will help you calculate how much your current withholdings match what your final tax bill will be. Visit https://apps.irs.gov/app/tax-withholding-estimator.

    Action step: To change how much is withheld from your paycheck in taxes, fill out a new Form W-4 and give it to your employer.

  • Defer earnings. You could potentially cut your tax liability by deferring your 2022 income to a future year via contributions to a retirement account. For 2022, the 401(k) contribution limit is $20,500 ($27,000 if 50 or older); $6,000 for both a traditional and Roth IRA ($7,000 if 50 and older); or $14,000 for a SIMPLE IRA ($17,000 if 50 and older).

    Action step: Consider an automatic transfer from either your paycheck or checking account to your retirement account so you won’t have to think about manually making a transfer each month.

  • Plan withdrawals from retirement accounts to be tax efficient. Your retirement accounts could span multiple account types, such as traditional retirement accounts, Roth accounts, and taxable accounts like brokerage or savings accounts. Because of this you should plan for your withdrawals to be as tax efficient as possible.

    Action step: One way to structure withdrawals is to pull from taxable accounts first, and leave Roth account withdrawals for last. Another approach would be to structure proportional withdrawals from all retirement accounts that would lead to a more predictable tax bill each year.

  • Net capital gains with capital losses. If you have appreciated investments you’re thinking about selling, take a look through the rest of your portfolio to see if you have other assets that you could sell for a loss and use to offset your gains. Using the tax strategy of tax-loss harvesting, you may be able to take advantage of stocks that have underperformed.

    Action step: Make an appointment with your investment advisor to look over your portfolio to see if there are any securities you may want to sell by the end of 2022.

Tax planning can potentially result in a lower bill from the IRS if you start taking action now. Please call if you have questions about your tax situation for 2022.

Cryptocurrency: The IRS is Watching You!

Cryptocurrency: The IRS is Watching You!

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.

I Owe Tax on That?

I Owe Tax on That?

5 Surprising Taxable Items

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Easy-to-Overlook Tax Documents

Easy-to-Overlook Tax Documents

This year is a little more challenging

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.

Court Is In Session – Notable Tax Court Cases

Court Is In Session – Notable Tax Court Cases

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.

IRS Warns of Identity Theft Signs

IRS Warns of Identity Theft Signs

With identity thieves continuing to target the tax community, the IRS is urging you to learn the new signs of identity theft so you can react quickly to limit any damage.

The common signs of ID theft

Here are some of the common signs of identity theft according to the IRS:

  • In early 2022, you receive a refund before filing your 2021 tax return.
  • You receive a tax transcript you didn’t request from the IRS.
  • A notice that someone created an IRS online account without your consent.
  • You find out that more than one tax return was filed using your Social Security Number.
  • You receive tax documents from an employer you do not know.

Other signs of identity theft include:

  • Unexplained withdrawals on bank statements.
  • Mysterious credit card charges.
  • Your credit report shows accounts you didn’t open.
  • You are billed for services you didn’t use or receive calls about phantom debts.

What you can do

If you discover that you’re a victim of identity theft, consider taking the following action:

  • Notify creditors and banks. Most credit card companies offer protections to cardholders affected by ID theft. Generally, you can avoid liability for unauthorized charges exceeding $50. But if your ATM or debit card is stolen, report the theft immediately to avoid dire consequences.
  • Place a fraud alert on your credit report. To avoid long-lasting impact, contact any one of the three major credit reporting agencies—Equifax, Experian or TransUnion—to request a fraud alert. This covers all three of your credit files.
  • Report the theft to the Federal Trade Commission (FTC). Visit identitytheft.gov or call 877-438-4338. The FTC will provide a recovery plan and offer updates if you set up an account on the website.
  • Please call if you suspect any tax-related identity theft. If any of the previously mentioned signs of tax-related identity theft have happened to you, please call to schedule an appointment to discuss next steps.