Category: General

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General

Awarded money in a lawsuit or settlement? It’s only tax-free in certain circumstances.

You generally must pay federal tax on all income you receive but there are some exceptions when you can exclude it. For example, compensatory awards and judgments for “personal physical injuries or physical sickness” are free from federal income tax under the tax code. This includes amounts received in a lawsuit or a settlement and in a lump sum or in installments. But as taxpayers in two U.S. Tax Court cases learned, not all awards are tax-free. For example, punitive damages and awards for unlawful discrimination or harassment are taxable. And the tax code states that “emotional distress shall not be treated as a physical injury or physical sickness.” Here are the facts of the two cases.

Case #1: Payment was for personal injuries, not physical injuries A taxpayer received a settlement of more than $327,000 from his former employer in connection with a lawsuit. He and his spouse didn’t report any part of the settlement on their joint tax return for the year in question. The IRS determined the couple owed taxes and penalties of more than $119,000 as a result of not including the settlement payment in their gross income. Although the settlement agreement provided the payment was “for alleged personal injuries,” the Tax Court stated there was no evidence that it was paid on account of physical injuries or sickness. The court noted that the taxpayer’s complaint against the employer “alleged only violations of (state) labor and antidiscrimination laws, wrongful termination, breach of contract, and intentional infliction of emotional distress.” The taxpayer argued that he had a physical illness that caused his employer to terminate him. But he didn’t provide a “direct causal link” between the illness and the settlement payment. Therefore, the court ruled, the amount couldn’t be excluded from his gross income. (TC Memo 2022-90)

Case #2: Legal malpractice payment doesn’t qualify for exclusion This case began when the taxpayer was injured while at a hospital receiving medical treatment. She sued for negligence but lost her case. She then sued her attorneys for legal malpractice. She received $125,000 in a settlement of her lawsuit against the attorneys. The amount was not reported on her tax return for the year in question. The IRS audited the taxpayer’s return and determined that the $125,000 payment should have been included in gross income. The tax agency issued her a bill for more than $32,000 in taxes and penalties. The taxpayer argued that the payment was received “on account of personal physical injuries or physical sickness” because if it wasn’t for her former attorneys’ allegedly negligent representation, she “would have received damages from the hospital.” The IRS argued the amount was taxable because it was for legal malpractice and not for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed with the IRS. (Blum, 3/23/22) Strict requirements As you can see, the requirements for tax-free income from a settlement are strict.

If you receive a court award or out-of-court settlement, contact us about the tax implications. © 2023

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General

What to Consider When Filing Your 2022 Tax Return

The IRS’s first Chief Taxpayer Experience Officer, Ken Corbin, recently wrote an article highlighting what’s new and what to consider when filing your 2022 tax return. Among other things, Corbin states that filing a 2022 tax return, even when not required, could give you access to certain tax credits available only when filing a return. In addition, some taxpayers may still be eligible for the Premium Tax Credit for enrolling in a qualified health plan. Corbin also notes that eligibility rules to claim a tax credit for clean vehicles, under the Inflation Reduction Act, have changed.

Read the article: https://bit.ly/33KFsTjb.

If you have questions regarding filing your return, contact us.

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General

Child Tax Credit: The Rules Keep Changing but it’s Still Valuable

If you’re a parent, you may be confused about the rules for claiming the Child Tax Credit (CTC). The rules and credit amounts have changed significantly over the last six years. This tax break became more generous in 2018 than it was under prior law — and it became even better in 2021 for eligible parents. Even though the enhancements that were available for 2021 have expired, the CTC is still valuable for parents.

Here are the current rules.

For tax years 2022 and 2023: the CTC applies to taxpayers with children under the age of 17 (who meet CTC requirements to be ‘’qualifying children’’). A $500 credit for other dependents is available for dependents other than qualifying children.

CTC amount

The CTC is currently $2,000 for each qualifying child under the age of 17. (For tax years after 2025, the CTC will go down to $1,000 per qualifying child, unless Congress acts to extend the higher amount.) Refundable portion The refundable portion of the credit is a maximum $1,400 (adjusted annually for inflation) per qualifying child. The earned income threshold for determining the amount of the refundable portion for these years is $2,500. (With a refundable tax credit, you can receive a tax refund even if you don’t owe any tax for the year.) The $500 credit for dependents other than qualifying children is nonrefundable.

Credit for other dependents in terms of the $500 nonrefundable credit for each dependent who isn’t a qualifying child under the CTC rules, there’s no age limit for the credit. But certain tax tests for dependency must be met. This $500 credit can be used for dependents including:

Those age 17 and older.

Dependent parents or other qualifying relatives supported by you. Dependents living with you who aren’t related to the taxpayer.

AGI “phase-out” thresholds You qualify for the full amount of the 2022 CTC for each qualifying child if you meet all eligibility factors and your annual adjusted gross income isn’t more than $200,000 ($400,000 if married and filing jointly).

Parents with higher incomes may be eligible to claim a partial credit. Before 2018 and after 2025, the income threshold amounts for the total credit are lower: $110,000 for a joint return; $75,000 for an individual filing as single, head of household or a qualifying widow(er); and $55,000 for a married individual filing a separate return.

Claiming the CTC

To claim the CTC for a qualifying child, you must include the child’s Social Security number (SSN) on your return. The number must have been issued before the due date for filing the return, including extensions. If a qualifying child doesn’t have an SSN, you may claim the $500 credit for other dependents for that child. To claim the $500 credit for other dependents, you’ll need to provide a taxpayer identification number for each non-CTC-qualifying child or dependent, but it can be an Individual Taxpayer Identification Number, Adoption Taxpayer Identification Number or SSN.

If you expect the CTC to reduce your income tax, you may want to reduce your wage withholding. This is done by filing a new Form W-4, Employee’s Withholding Certificate, with your employer. These are the basics of the CTC. As you can see, it’s changed quite a bit and the credit is scheduled to change again in 2026. Contact us if you have any questions. © 2023

Categories
General Tax

2023 Q1 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. If you have questions about filing requirements, contact us. We can ensure you’re meeting all applicable deadlines.

January 17

(The usual deadline of January 15 is on a Sunday and January 16 is a federal holiday) Pay the final installment of 2022 estimated tax. Farmers and fishermen: Pay estimated tax for 2022. If you don’t pay your estimated tax by January 17, you must file your 2022 return and pay all tax due by March 1, 2023, to avoid an estimated tax penalty.

January 31

File 2022 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.

Provide copies of 2022 Forms 1099-NEC, “Nonemployee Compensation,” to recipients of income from your business where required.

File 2022 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7, with the IRS.

File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2022. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security, and income taxes withheld in the fourth quarter of 2022. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)

File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2022 to report income tax withheld on all non-payroll items, including backup withholding and withholding on accounts such as pensions, annuities, and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 15

Give annual information statements to recipients of certain payments you made during 2022. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date applies only to the following types of payments: All payments reported on Form 1099-B. All payments reported on Form 1099-S. Substitute payments reported in box 8 or gross proceeds paid to an attorney reported in box 10 of Form 1099-MISC.

February 28

File 2022 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2022 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2022 contributions to pension and profit-sharing plans. © 2022

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General

The Ways and Means Committee Chair Selection

The Ways and Means Committee is the chief tax-writing committee in the U.S. House of Representatives. It also oversees Social Security, Medicare, and other issues. Not surprisingly, it’s a popular assignment. Now that Republicans have secured a House majority, their representation on the committee is expected to increase from 17 to 25. (Democrats likely will retain 18 seats). However, at least 10 Republicans are vying for eight available spots. Also, several representatives are competing for the chairmanship. The chair will be selected by the Republican Steering Committee, but candidates for committee seats generally must undergo a three-step process that involves a House floor vote.

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General

4 Steps for Building Resilience in Your Organization

To expand or contract a business as market conditions change requires flexibility, agility, and foresight. For companies who want to be positioned as well as possible at the forefront of a recession, taking concrete steps now can ease the pain of an economic downturn or other unforeseen challenges.

 

How can companies navigate economic uncertainty and build resilience in their organizations?

 

1. Contain costs. When met with financial constraints—or the need to rapidly invest in growth areas—it will be critical to contain unnecessary expenses. Consider what costs can be pared back:

 

  • Can you pause certain projects and initiatives and reallocate funds where there is the greatest opportunity for growth?
  • Do you need to maintain your physical workplace, or can you trim the overhead?
  • Can you consider alternative staffing models to reduce costs?

 

2. Build a safety net of liquidity. Whether your business needs a capital reserve to invest in areas of growth, or to pay the bills while waiting out the storm, conserving liquidity will help fortify the financial health of your company. Investigate all potential funding sources available, as well as the terms attached to potential loans and grants.

 

3. Cultivate a nimble workforce. An adaptable workforce is key to scaling your business up or down. Be prepared to: reskill and upskill your existing workers to fill new roles; staff for agility so workers can serve as pinch hitters to serve areas with spikes in demand; and consider hiring contractors and freelancers in roles with a lot of variance of demand.

 

4. Outsource infrastructural needs. One way to minimize fixed costs and ensure best-in-class operational agility is by hiring external experts for non-core business functions, such as technology, finance & accounting, and human capital resources. Business operations are critical to maximizing workforce productivity and financially navigating a challenging climate. External experts working with companies across industries to scale during a recession can offer tried and true best practices to chart what would otherwise be uncharted territory.

 

While it’s impossible to know precisely what lies ahead, companies that take these four steps will be better poised to contend with whatever comes their way—whether it be a recession or an unprecedented growth opportunity. Visit our Value Creation page to speak with our team to discuss best practices on applying these steps.

 

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Financial News General

Student Loan Forgiveness Plan

On Aug. 24, President Biden announced a plan for student loan debt relief. The three-part plan may affect nearly 8 million borrowers.

Part one will allow $20,000 of debt forgiveness for taxpayers who went to college on a Pell Grant or $10,000 without a Pell Grant. This applies only to taxpayers earning below $125,000 a year ($250,000 for married couples). The plan doesn’t specify how earnings are calculated or to which tax year they apply.

Part two is an extension of the pause on student loan repayment until Dec. 31, 2022.

Part three modifies the income-based repayment plan rules. Pell Grant recipients with undergraduate degrees will have their repayments capped at 5% of monthly income.

Contact one of our experts if you have any questions.

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General

Update on the Inflation Reduction Act

The proposed Inflation Reduction Act imposes a new 15% corporate alternative minimum tax on the adjustable financial statement income of certain corporations. The tax will apply if it exceeds the taxpayer’s regular tax, including its base erosion and anti-abuse tax for the tax year. An applicable corporation for a tax year is one that meets an average annual adjusted financial statement income test for one or more tax years that “are prior to such taxable year and end after Dec. 31, 2021.” A corporation meets the income test if its average annual adjusted financial statement income for the three-tax-year period (without regard to loss carryovers) ending with the tax year exceeds $1 billion.

Contact one of our experts with any questions about the Inflation Reduction Act.

Categories
General Tax

Estates now have an additional three years to file for a portability election.

Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death.

To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return (Form 706). The return is due nine months after death, with a six-month extension option.

Unfortunately, estates that aren’t otherwise required to file a return (typically because they don’t meet the filing threshold) often miss this deadline. The IRS recently revised its rules for obtaining an extension to elect portability beyond the original nine-months after death (plus six-month extension) timeframe.

What’s new? In 2017, the IRS issued Revenue Procedure 2017-34, making it easier (and cheaper) for estates to obtain an extension of time to file a portability election. The procedure grants an automatic extension, provided: The deceased was a U.S. citizen or resident, The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, and The executor files a complete and properly prepared estate tax return within two years of the date of death.

Since the 2017 ruling, the IRS has had to issue numerous private letter rulings granting an extension of time to elect portability in situations where the deceased’s estate wasn’t required to file an estate tax return and the time for obtaining relief under the simplified method (two years of the date of death) had expired.

According to the IRS, these requests placed a significant burden on the agency’s resources. The IRS has now issued Revenue Procedure 2022-32. Under the new procedure, an extension request must be made on or before the fifth anniversary of the deceased’s death (an increase of three years). This method, which doesn’t require a user fee, should be used in place of the private letter ruling process. (The fee for requesting a private letter ruling from the IRS can cost hundreds or thousands of dollars.)

Don’t miss the revised deadline If your spouse predeceases you and you’d benefit from portability, be sure that his or her estate files a portability election by the fifth anniversary of the date of death.

Contact us with any questions you have regarding portability. © 2022

Categories
General Tax

The Kiddie Tax: Does It Affect your Family?

Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children. While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if: The child hasn’t reached age 18 before the close of the tax year, or The child’s earned income doesn’t exceed half of his or her support and the child is age 18 or is a full-time student age 19 to 23. The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022.

While some tax savings up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial. If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax. Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates. Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself.

Property can be transferred to minor children using custodial accounts under state law. Possible saving vehicles The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include: Securities and mutual funds oriented toward capital growth; Vacant land expected to appreciate in value; Stock in a closely held family business, expected to become more valuable as the business expands, but pays little or no cash dividends; Tax-exempt municipal bonds and bond funds; U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in or an election to recognize income annually is made.

Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as: Traditional and Roth IRAs, which can be established or contributed to if the child has earned income; Qualified tuition programs (also known as “529 plans”); and Coverdell education savings accounts. A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount.

Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation. If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return. Two reporting options Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax. © 2022