taxes

August 17 2023

When to Call: Common Situations that Require a Tax Review

Individual Taxes, Personal Planning, Tax Planning taxes

Taxes can affect many areas of your life. Here are some common situations when you’ll want to schedule a tax review.

1. Something changed in your life. A change in your life could mean significant changes in your tax status. Some of these changes include:

Getting married or divorced
Retirement
A child starting college or an adult going back to school
Moving to a new home
The birth of a child or an adoption
A family member passes away

How your taxes may be different: Tax deductions and credits can increase and decrease because of these and other life changes. You’ll want to know as soon as possible if your taxes will be going up so you can be prepared to pay the increased amount.

2. A new job. You’ll have several decisions to make when starting a new job that will affect your tax situation:

Retirement savings plans – Learn about the available retirement savings plans offered by the employer and any other tax-deferred savings options. Remember that some employers will match a certain percentage of contributions that an employee makes to a plan.
Medical savings accounts – Your employer may offer a Flexible Spending Account or a Health Savings Account to help with paying certain medical expenses with pre-tax funds.
Withholding – You’ll need to determine if you want additional federal (along with state and local income taxes if applicable) income taxes withheld from your paycheck beyond what your employer is obligated to withhold.

How your taxes may be different: You can decrease your taxable income by contributing to qualified retirement and medical savings plans. A tax planning session can reveal how much you can contribute to each of these plans, and if you should consider adjusting your paycheck withholdings.

3. A new business or side hustle. A new business (hopefully!) means more money, but also more tax responsibilities. Here are some things to consider:

Separate accounts and credit cards – If you only remember one tip, it’s to keep separate accounts. Without this, it is easy for the IRS to deem expenses as personal and, therefore, not deductible.
Paying estimated taxes – As a business owner, you are responsible for making tax payments throughout the year to the IRS if your business is profitable.
Setting up a bookkeeping system – Having an accurate bookkeeping system is vital to making sure you don’t pay any more in taxes than you’re legally obligated to pay. Consider reconciling your bank accounts weekly (or even daily if possible) so they’re always current.
Other tax responsibilities – You may be required to submit a sales tax return depending on what types of products you sell or services you provide. You’ll also be required to submit various payroll tax returns if you have any employees.

How your taxes may be different: Most small businesses are flow through entities. This means any business profits will add to your personal income. Because of this, your personal tax situation could vary dramatically! So tax planning becomes critical on two fronts: Your new taxable income level AND helping you stay in compliance at the federal, state and local business tax rules.

Nobody likes a tax surprise and now is a great time to schedule a tax planning review.

June 15 2023

Head of Household

Individual Taxes, Tax Law, Tax Planning taxes

Head of household tax filing status is available for unmarried taxpayers and certain separated taxpayers who provide a home for a qualifying person, such as a child or a parent.

If you qualify, you’ll generally pay less tax as a head of household filer than as married filing separately or a single taxpayer.

The head of household rules are fairly specific, so if you think you might qualify please ask for a review of your situation.

June 9 2023

Nanny Tax

IRS Rules, Tax Law taxes

While most of us know this area of the tax code as the nanny tax, the IRS refers to this as household employees.

Definition. Basically the IRS believes individuals may unknowingly have employees that help them around their home. The nanny tax refers to three federal employment taxes (Social Security, Medicare, and federal unemployment tax) that employers must pay if the wages of certain household workers exceed a threshold amount.

The nanny tax only applies to your employees. A worker is generally considered to be your employee if you directly supervise the work and you supply the tools or supplies necessary to do the job. If your worker came from an agency or runs his or her own business, the nanny tax may not apply.

Who is included. Employees can include baby sitters, nannies, housekeepers, gardeners, health aides, and other household workers.

If you have any of these workers, it is always best to review your situation.

May 23 2023

Tax Facts – 2 Year Comparison

Individual Taxes, IRS Rules, Tax Law taxes

Here’s a quick review of some of the tax changes you’ll see from 2022 to 2023 as a result of inflation adjustments and new tax laws.

Provision	2023	2022	+/-
Business equipment Sec. 179 expensing deduction	$1,160,000	$1,080,000	+$80,000
Total purchase limit for full Sec. 179 expensing deduction	$2,890,000	$2,700,000	+$190,000
Standard mileage rate: business	65.5¢ per mile	58.5¢/62.5¢ per mile	+3.0¢
Standard mileage rate: medical/moving	22¢ per mile	18¢/22¢ per mile	N/C
Mileage rate: charitable activity	14¢ per mile	14¢ per mile	N/C
Maximum wages subject to social security tax	$160,200	$147,000	+$13,200
Social security earnings limit
– Under full retirement age	$21,240	$19,560	+$1,680
– Full retirement age	No limit	No limit	N/C
Top estate tax rate	40%	40%	N/C
Estate tax exemption	$12,920,000	$12,600,000	+$320,000
Annual gift tax exclusion (per donee)	$17,000	$16,000	+$1,000
Alternative minimum tax exemption
– Single	$81,300	$75,900	+$5,400
– Married, joint	$126,500	$118,100	+$8,400
– Married, separate	$63,250	$59,050	+$4,200
Maximum retirement plan contributions
– IRA for those under age 50	$6,500	$6,000	+500
– IRA for those 50 and over	$7,500	$7,000	+500
– SIMPLE plan for those under age 50	$15,500	$14,000	+$1,500
– SIMPLE plan for those 50 and over	$19,000	$17,000	+$2,000
– 401(k) plan for those under age 50	$22,500	$20,500	+$2,000
– 401(k) plan for those 50 and over	$30,000	$27,000	+$3,000
HSA contribution limits
– Self only	$3,850	$3,650	+$200
– Family	$7,750	$7,300	+$450
– Additional for 55 & older	$1,000	$1,000	N/C
“Kiddie tax” threshold	$2,500	$2,300	+$200
“Nanny tax” threshold	$2,600	$2,400	+$200
Education savings account contribution (Coverdell)	$2,000	$2,000	N/C
American opportunity (Hope) credit limit	$2,500	$2,500	N/C
Education loan interest deduction	$2,500	$2,500	N/C
Personal exemption (suspended through 2025)	Suspended	Suspended	N/A
FICA & self-employment tax
Taxable wages for Social Security/Medicare	Up to $160,200	Up to $147,000	+$13,200
Social Security/Medicare tax rate
– Employees	7.65%	7.65%	N/C
– Employers	7.65%	7.65%	N/C
– Self-employed	15.3%	15.3%	N/C
Standard deduction
– Single	$13,850	$12,950	+$900
– Joint returns & surviving spouses	$27,700	$25,900	+$1,800
– Married filing separately	$13,850	$12,950	+$900
– Head of household	$20,800	$19,400	+$1,400
– Additional for elderly or blind (married)	$1,500	$1,400	+$100
– Additional for elderly or blind (single)	$1,850	$1,750	+$100

May 18 2023

Individual Tax Rates

Individual Taxes, Tax Law, Tax Planning taxes

Always know your marginal tax rate. Use the tax table here to see the rates applied to each level of your income.

SINGLE Tax Rate	2023	2022
10%	$1 – 11,000	$1 – 10,275
12%	11,001- 44,725	10,276 – 41,775
22%	44,726 – 95,375	41,776 – 89,075
24%	95,376 – 182,100	89,076 – 170,050
32%	182,101 – 231,250	170,051 – 215,950
35%	231,251 – 578,125	215,951 – 539,900
37%	Over 578,125	Over 539,900

MARRIED JOINT Tax Rate	2023	2022
10%	$1 – 22,000	$1 – 20,550
12%	22,001 – 89,450	20,551 – 83,550
22%	89,451 – 190,750	83,551 – 178,150
24%	190,751 – 364,200	178,151 – 340,100
32%	364,201 – 462,500	340,101 – 431,900
35%	462,501 – 693,750	431,901 – 647,850
37%	Over 693,750	Over 647,850

MARRIED SEPARATE Tax Rate	2023	2022
10%	$1 – 11,000	$1 – 10,275
12%	11,001 – 44,725	10,276 – 41,775
22%	44,726 – 95,375	41,776 – 89,075
24%	95,376 – 182,100	89,076 – 170,050
32%	182,101 – 231,250	170,051 – 215,950
35%	231,251 – 346,875	215,951 – 323,925
37%	Over 346,875	Over 323,925

HEAD OF HOUSEHOLD Tax Rate	2023	2022
10%	$1 – 15,700	$1 – 14,650
12%	15,701 – 59,850	14,651 – 55,900
22%	59,851 – 95,350	55,901 – 89,050
24%	95,351 – 182,100	89,051 – 170,050
32%	182,101 – 231,250	170,051 – 215,950
35%	231,251 – 346,875	215,951 – 539,900
37%	Over 346,875	Over 539,900

March 16 2023

Sharing Economy Now in IRS Spotlight

IRS, IRS Rules, Tax Law, Tax Planning taxes

40% are unaware of their tax responsibilities

40% of the workers in the Sharing Economy are unaware of their tax responsibilities.
Over 60% of the service provider companies are not training their new workers on their tax responsibilities.

Source: Written statement of Nina E. Olson, National Taxpayer Advocate given at the Hearing on “The Sharing Economy” to the Committee on Small Business, U.S. House of Representatives, May 26, 2016.

Tax compliance is a problem for Uber drivers, Airbnb and others deemed to be in the new Sharing Economy. The IRS is aware of this and has launched a “Sharing Economy Tax Center” on their website to help this growing group of workers. Here are ideas to keep you out of this IRS spotlight.

The Sharing Economy

The sharing economy consists of workers that are taking part in the service economy by “sharing” their resources for part-time or full time employment. Some common examples are:

Cab services: use your car
Delivery services: use of your car
Short-term rentals: use of rooms, apartments, and homes
Home services: use of your personal tools and supplies

Note: While the IRS seems to be focusing on this new “Sharing Economy” really any freelance worker has the same tax challenges as these workers.

Key Tax Responsibilities

If you use your car as a cab or rent out your home for the big golf tournament, you will need to understand the following tax obligations.

Employee or contractor? You need to know which of these defines your employment arrangement. Your personal tax obligations are markedly different under each scenario. As an employee, the service company is responsible for paying the business portion of Social Security and Medicare. They will pay unemployment taxes. They will also withhold your portion of Social Security, Medicare, federal taxes and state taxes and send them in for you. These payments are reported to you on a W-2. This is not the case if you are a contractor.

Social Security and Medicare. All employers are required to pay Social Security and Medicare taxes. As a contractor you will need to reserve 12.4% of your net income for Social Security and 2.9% for Medicare payments.

Estimated taxes. You may need to send in quarterly estimated tax payments to avoid tax penalties when you file your tax return.

Other taxes. You may be subject to other taxes including unemployment taxes.

Depreciation. This area can be confusing. You are able to expense a portion of the cost of capital assets (like your car) if they are used for business purposes. However, if also used for personal use you will need to adjust the amount available for depreciation.

Special tax rules. Other areas of the tax code have special provisions. The most common of these is use of your home for business or rental.

The tax rules for those in the new service economy are complex and confusing. Ask for help before it gets out-of-hand or visit www.irs.gov and search “Sharing Economy Tax Center.”

February 16 2023

Tax Credits versus Tax Deductions

Credits, Individual Taxes, Tax Planning deductions, taxes

Which is worth more to you?

Every industry and profession has common terms that are used so often those of us in the business often forget that most people do not have the depth of understanding that a person working within the tax code might have. One of these areas is understanding the differences between the tax terms “deductions” and “credits”. Is one better than the other?

Top line. Dollar for dollar, a credit is worth more to you than a deduction. Why? A credit is a direct reduction in tax, while a deduction reduces the amount of income that gets taxed. Here is a simple chart showing the difference.

Assuming you have a $2,000 tax credit, how large a deduction would you need to be indifferent?

Your marginal tax rate	Deduction required to equal $2,000 tax credit
10%	20,000
15%	13,333
25%	8,000
28%	7,143
33%	6,061
35%	5,714

Note: This example does not account for the possibility that the deduction could move you into a lower tax rate nor does it consider other tax factors.

So on the surface it appears that a credit is worth more than a deduction to you. But the real answer is….it all depends. Here are some things to consider:

Your marginal tax rate. A similar deduction is worth more to someone in the 35% tax range than it is to someone being taxed at 10%.

How much is it? A large deduction could be worth more to you than a small credit. In combination with your marginal tax rate, a deduction could be worth a lot more to you than a credit.

Are there phase-outs? Most credits and deductions phase out when your income is over certain amounts. You must consider this when determining the true tax benefit. Consider that a deduction that reduces your income could make other credits and deductions that were previously phased out now available to you.

Is the credit refundable? Some credits get a “bonus”. While you cannot deduct your income below zero, you can sometimes receive credits that create a refund even if you owe no tax. Credits that have this “bonus” feature are called “refundable” credits.

When does any of this matter?

Educational Expenses. A common area in which understanding credits and deductions is important is in the use of educational tax benefits. If you paid tax-deductible tuition for undergraduate studies you must decide what tax alternative is best for you. Among the many alternatives that need to be evaluated are the American Opportunity Credit and the Lifetime Learning Credit (Assuming all of these options remain available to taxpayers.).

Understanding the Cost. When proposals come through Washington, understanding the difference between credits and deductions can help you understand how the proposed changes impact your tax situation. Remember the value of a deduction to you needs to be filtered with your marginal tax rate to see the true tax benefit. Here is a simple formula.

Deduction Amount x Your Tax Rate = Your Tax Benefit

Included for your reference are some of the more common deductions and credits. Thankfully, professional tax software allows for quick analysis of the choices.

Common Credits	Common Deductions
– Earned Income Tax Credit – Child Tax Credit – Adoption Credit – American Opportunity Credit – Lifetime Learning Credit – Dependent Care Credit – Retirement Saving Credit – Elderly Disabled Credit – Foreign Tax Credit – General Business Credits	– Medical Expenses – Charitable Contributions – Property Taxes – State Income Taxes – Mortgage Interest – Standard Deductions – Alimony paid (through 2018) – IRA and HSA contributions – Qualified Education Expenses

Note: Many of these credits and deductions are not a permanent part of the tax code. Some have been repeatedly extended while others have or will expire without congressional action.

August 25 2022

Is Disability Income Taxable?

Financial, Individual Taxes, IRS Tax Planning, taxes

Question: Is my disability income taxable?

Answer: Money received from worker’s compensation for sickness or illness is not subject to income tax. Amounts received under a private accident policy for which you pay the premiums are also nontaxable. To the extent your employer pays the insurance premiums, your benefits will be subject to tax.

The punitive damage amount in any legal settlement, if any, is generally includible in taxable income as is any interest included in the damage award.

August 23 2022

Business, Medical and Moving Mileage Increases for Final Six Months of 2022

Business Taxes, Financial, IRS, Tax Tips deduction, IRS, taxes

The 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, for the final six months of 2022. The previous rates of 58.5 cents for business mileage and 18.0 cents for medical and moving mileage still apply for the first six months of 2022.

In recognition of the recent spike in gas prices, the IRS made this special adjustment for the second half of 2022. The IRS normally updates the mileage rates once a year in November or December for use during the subsequent year.

“We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses, and others who use this rate,” said IRS Commissioner Chuck Rettig in an IRS press release.

The value of your mileage deduction could increase 7%

Here’s how the business mileage increase could affect the bottom line on your 2022 tax return:

Example: You’re in the 12% tax bracket and have 1,000 business miles to report on your 2022 tax return. You drive 500 miles in the first six months of 2022, which will be recorded using the 58.5 cents rate. You drive another 500 miles in the second six months of 2022, which will be recorded using the 62.5 cents rate.

500 miles x 58.5 cents = $292.50 deduction x 12% tax rate = $35.00 reduction in taxes
500 miles x 62.5 cents = $312.50 deduction x 12% tax rate = $37.50 reduction in taxes

The 58.5 cents mileage rate results in a $292.50 tax deduction for you. Since you’re in the 12% tax bracket, this deduction will lower your taxes by $35.00.

The 62.5 cents mileage rate results in a $312.50 tax deduction for you. With a 12% tax rate, this deduction will lower your taxes by $37.50, which is $2.50 or 7% more than the $35.00 deduction you received for the first six months of 2022.

A reminder to keep great mileage records

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.

So be sure to keep great records so you can take advantage of this increase to the business, medical and moving mileage rates.

August 11 2022

Is Bond Interest Taxable?

Bonds, Tax Law, Tax Tips bonds, interest rates, taxes

Question: Is bond interest taxable?

Answer: That depends on the type of bond. For example:

Corporate bond interest is taxable.

Municipal bond interest is generally not subject to federal income tax.

Treasury bond interest is free from state and local income taxes.

Savings bond interest may or may not be taxable depending on the issue and what you use the bond interest for. For example, the interest on certain Series EE and Series I bonds is nontaxable if it is used for qualified education expenses.