Month: August 2023

Businesses that receive more than $10,000 in cash must report the transactions to the IRS. This is done on Form 8300, Report of Cash Payments Over $10,000. Although many cash transactions are legitimate, information reported on Form 8300 can help combat those who evade tax, profit from the drug trade, or engage in terrorist financing.

The IRS recently announced that beginning Jan. 1, 2024, businesses must electronically file Form 8300 instead of filing paper returns. Indeed, the new requirement for e-filing Form 8300 applies to businesses mandated to e-file certain other information returns, such as the Form 1099 series and Forms W-2. For more information from the IRS: https://bit.ly/47RPimh

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Many homeowners across the country have seen their home values increase in recent years. According to the National Association of Realtors, the median price of existing homes sold in July of 2023 rose 1.9% over July of 2022 after a couple years of much higher increases. The median home price was $467,500 in the Northeast, $304,600 in the Midwest, $366,200 in the South and $610,500 in the West. Be aware of the tax implications if you’re selling your home or you sold one in 2023. You may owe capital gains tax and net investment income tax (NIIT).

You can exclude a large chunk

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain. To qualify for the exclusion, you must meet these tests: You must have owned the property for at least two years during the five-year period ending on the sale date. You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.) In addition, you can’t use the exclusion more than once every two years.

The gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary income rate, which could be more than double your long-term rate. If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss, which you can’t do on a principal residence.

The NIIT may be due for some taxpayers

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT. However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT. The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use. You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible. As you can see, depending on your home sale profit and your income, some or all of the gain may be tax-free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales. © 2023

The SECURE 2.0 law, which was enacted last year, contains wide-ranging changes to retirement plans. One provision in the law is that eligible employers will soon be able to provide more help to staff members facing emergencies. This will be done through what the law calls “pension-linked emergency savings accounts.” Effective for plan years beginning January 1, 2024, SECURE 2.0 permits a plan sponsor to amend its 401(k), 403(b), or government 457(b) plan to offer emergency savings accounts that are connected to the plan.

Basic distribution rules

If a retirement plan participant withdraws money from an employer plan before reaching age 59½, a 10% additional tax or penalty generally applies unless an exception exists. This is on top of the ordinary tax that may be due. The goal of these emergency accounts is to encourage employees to save for retirement while still providing access to their savings if emergencies arise. Under current law, there are specific exceptions when employees can withdraw money from their accounts without paying the additional 10% penalty but they don’t include all of the emergencies that an individual may face. For example, while participants can take penalty-free distributions to pay eligible medical expenses, they can’t take them for car repairs.

Here are some features of pension-linked emergency savings accounts: The accounts can only be offered to employee-participants who aren’t highly compensated. In general, a highly compensated employee is one who is a 5% or more owner of a business or has compensation in the preceding year that exceeds an indexed limit (for 2024, $150,000 or more of compensation in 2023). Plan sponsors can automatically enroll employee-participants in these accounts at up to 3% of their salary. Plan participants may opt out of making these contributions or pick a different rate to be taken from their pay. Annual contributions are capped at the lesser of $2,500 (indexed for inflation) or an amount chosen by the plan sponsor. Contributions to pension-linked emergency savings accounts are made on a Roth after-tax basis. Contributions reduce an employee’s other retirement contributions that can be made to a plan. A participant must be allowed to make withdrawals from his or her account at least once per month. No reason needs to be provided and a participant must not be subject to any fees or charges for the first four withdrawals from the account each plan year. (However, subsequent withdrawals may be subject to reasonable fees and charges.)

Another option to help employees

In addition to these accounts, SECURE 2.0 adds a new exception for certain retirement plan distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions beginning January 1, 2024.

Determine whether there’s time

In addition to what is outlined here, other rules apply to pension-linked emergency savings accounts. The IRS is likely to issue additional guidance in the next few months. Be aware that plan sponsors don’t have to offer these accounts and many employers may find that they need more time to establish them before 2024. Or they may decide there are too many administrative hurdles to clear.

Contact us with questions. © 2023

The IRS on July 26 released a draft 2023 revision of Form W-9, “Request for Taxpayer Identification Number and Certification,” that includes a new reporting line for flowthrough entities like partnerships and trusts.

Individuals or entities that are required to file certain information returns with the IRS use Form W-9 to request the taxpayer identification number (TIN) from U.S. persons and resident aliens for the required reporting. Taxpayers that do not reply to W-9 requests with their correct TIN may be subject to backup withholding.

The draft 2023 revised form adds a new line 3b checkbox relating to flowthrough entities. Line 3 of the current form (2018 revision) asks respondents to check a box to indicate their federal tax classification as an individual, C corporation, partnership, etc. The revised form breaks off a new line 3b, adding an additional checkbox for entities that select “partnership” or “trust/estate” on line 3a (current line 3) and that are providing the Form W-9 to a partnership, trust, or estate. The form instructs these entities to check the box in line 3b if they have any foreign partners, owners, or beneficiaries.

The IRS explains that the change is intended to give flow-through entities information regarding indirect foreign partners, owners, or beneficiaries for purposes of complying with relevant reporting requirements. This includes requirements for partnerships with indirect foreign partners to complete Form 1065 Schedules K-2 and K-3.

The instructions to the draft Form W-9 clarify that for purposes of the checkbox in line 3b, partnership includes a limited liability company classified as a partnership for U.S. federal tax purposes. They further state that respondents must check the line 3b box if they receive a Form W-8 (or documentary evidence) from any partner, owner, or beneficiary establishing foreign status or if they receive a Form W-9 from any partner, owner, or beneficiary that has checked the box on line 3b.

The draft Form W-9 has a revision date of October 2023. Once finalized, withholding agents are generally required to accept the current version Form W-9.

Meet ATA’s international tax expert, Jim Duncan, CPA.

Child care tax credits could expand if a bipartisan bill passes. On July 17, U.S. House members Salud Carbajal (D-CA) and Lori Chavez-DeRemer (R-OR) introduced the Child Care Investment Act. “Skyrocketing costs have left affordable child care out of reach for too many families,” stated Chavez-DeRemer in a press release. If passed, the bill would use a three-pronged approach to reduce child care costs and improve access to assistance for many families. Among other things, the bill would double the credit for employer-provided child care and raise the maximum credit from $150,000 to $500,000 (possibly higher for small businesses). Here’s the press release: https://bit.ly/3Ep8BWR

If you’ve been noticing your neighbors making energy related home improvements lately, such as installing solar panels on the roof, it may be thanks to the expanded home energy tax credits provided by the Inflation Reduction Act.

You can claim either the Energy Efficient Home Improvement Credit or the Residential Clean Energy Credit for the year in which you make qualifying improvements to your primary residence. The former can help cover the costs of replacing windows, doors, and heating and air conditioning systems. The latter may cover the costs of solar, wind, and other sustainable energy projects. For additional details from the IRS on these two credits: https://bit.ly/3QwWr5i

The IRS is making progress on one of its major modernization objectives. The tax agency has announced that taxpayers will have the choice to go fully paperless by 2024’s filing season. It estimates that more than 94% of taxpayers will no longer need to send any form of paper mail to the IRS. And by 2025’s filing season, the IRS will convert all paper returns it receives into digital form.

These and other technological initiatives are made possible by funding from the Inflation Reduction Act. In a fact sheet, the IRS states that digitization will reduce errors and help its customer service employees more quickly and accurately answer questions and resolve problems.

Before long, students will be heading off to college or trade school. Higher education is expensive, but taxpayers who take post-high school coursework in 2023 (or who have dependents taking such courses) may qualify for one of two tax credits that can reduce their tax bills.

The American Opportunity Tax Credit is worth up to $2,500 per eligible student for the first four years at an eligible school. The Lifetime Learning Credit tops out at $2,000 per tax return for any number of years. Income-based limits and additional rules apply. For more information and a link to a tool to find out if you qualify: https://bit.ly/3QoUiJ2

Summertime can mean hiring time for many types of businesses. With legions of working-age kids and college students out of school, and some spouses of business owners looking for part-time or seasonal work, companies may have a much deeper hiring pool to dive into this time of year. If you’re considering hiring your children or spouse, there could be some tax advantages in play. However, you’ll need to be careful about following the IRS rules.

Employing your kids

Children who work for the business of a parent are subject to income tax withholding regardless of age. If the company is a partnership or corporation, children’s wages are also subject to Social Security and Medicare taxes (commonly known as FICA taxes) and Federal Unemployment Tax Act (FUTA) taxes — unless each partner is a parent of the child. However, substantial savings are possible for a business that’s a sole proprietorship or a partnership in which each partner is a parent of the child-employee. In such cases: Children under age 18 aren’t subject to FICA or FUTA taxes, and Children who are 18 to 20 years old are subject to FICA taxes but not FUTA taxes.

As you can see, substantial tax savings may be in the offing depending on your child’s age. Avoiding FICA or FUTA taxes, or both, means more money in your pocket and that of your child. It’s also worth noting that children generally are taxed at lower rates than their parents. Moreover, a child’s income can be offset partially or completely by the child’s standard deduction ($13,850 for single taxpayers in 2023). If your child earns less than the standard deduction, income is tax-free for the child on top of being deductible for the business.

Hiring your spouse

When your spouse goes to work for your business, that individual’s wages are subject to income tax withholding and FICA taxes — but not FUTA taxes. Employers generally must pay 6% of an employee’s first $7,000 in earnings as the FUTA tax, subject to tax credits for state unemployment taxes paid. Thus, you’ll save the money you’d otherwise spend for a non-spouse employee’s FUTA taxes. It’s important that your spouse is treated and compensated as an employee. When spouses run a business together, and they share in profits and losses, the IRS may deem them partners — even in the absence of a formal partnership agreement.

You also may reap some savings from hiring your spouse if you’re a sole proprietor and have a Health Reimbursement Arrangement (HRA). Your family can receive tax-free reimbursement from the business for medical expenses, and the business can deduct the reimbursements — reducing your income and self-employment taxes. HRA reimbursements aren’t subject to FICA taxes and the plan itself is a tax-free fringe benefit for your spouse. Do note, however, that this strategy isn’t available if you have other employees.

Handling it properly

Whether you decide to hire a child or spouse, or both, you’ll need to step carefully. Assign them actual job duties, pay them a reasonable amount, and keep thorough employment records (including timesheets as well as IRS Forms W-4 and I-9). Essentially, treat them as you would any other employee. Our firm can help you handle the situation properly. © 2023

An estimated 190 million Americans have recently been under heat advisory alerts, according to the National Weather Service. That may have spurred you to think about making your home more energy efficient — and there’s a cool tax break that may apply. Thanks to the Inflation Reduction Act of 2022, you may be able to benefit from an enhanced residential energy tax credit to help defray the cost.

Eligibility rules

If you make eligible energy-efficient improvements to your home on or after January 1, 2023, you may qualify for a tax credit up to $3,200. You can claim the credit for improvements made through 2032. The credit equals 30% of certain qualified expenses for energy improvements to a home located in the United States, including: Qualified energy-efficient improvements installed during the year, Residential “energy property” expenses, and Home energy audits.

There are limits on the allowable annual credit and on the amount of credit for certain types of expenses. The maximum credit you can claim each year is: $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600 total) and home energy audits ($150), as well as $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers. In addition to windows and doors, other energy property includes central air conditioners and hot water heaters.

Before the 2022 law was enacted, there was a $500 lifetime credit limit. Now, the credit has no lifetime dollar limit. You can claim the maximum annual amount every year that you make eligible improvements until 2033. For example, you can make some improvements this year and take a $1,200 credit for 2023 — and then make more improvements next year and claim another $1,200 credit for 2024. The credit is claimed in the year in which the installation is completed.

Other limits and rules

In general, the credit is available for your main home, although certain improvements made to second homes may qualify. If a property is used exclusively for business, you can’t claim the credit. If your home is used partly for business, the credit amount varies. For business use up to 20%, you can claim a full credit. But if you use more than 20% of your home for business, you only get a partial credit. Although the credit is available for certain water heating equipment, you can’t claim it for equipment that’s used to heat a swimming pool or hot tub. The credit is nonrefundable. That means you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years. However, there’s no phaseout based on your income, so even high-income taxpayers can claim the credit.

Collecting green for going green

Contact us if you have questions about making energy-efficient improvements or purchasing energy-saving property for your home. The Inflation Reduction Act may have other tax breaks you can benefit from for making clean energy purchases, such as installing solar panels. We can help ensure you get the maximum tax savings for your expenditures. Stay cool! © 2023