Tag: tax

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Tax

The tax deadline is almost here: File for an extension if you’re not ready

The April 15 tax filing deadline is right around the corner. However, you might not be ready to file. Sometimes, it’s not possible to gather your tax information by the due date. If you need more time, you should file for an extension on Form 4868. An extension will give you until October 15 to file and allows you to avoid “failure-to-file” penalties. However, it only provides extra time to file, not to pay. Whatever tax you estimate is owed must still be sent by April 15, or you’ll incur penalties — and as you’ll see below, they can be steep. Two different penalties Separate penalties apply for failing to pay and failing to file.

The failure-to-pay penalty runs at 0.5% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made May 25, the penalty is 1% (0.5% times 2 months or partial months). The maximum penalty is 25%. The failure-to-pay penalty is based on the amount shown as due on the return (less amounts paid through withholding or estimated payments), even if the actual tax bill turns out to be higher.

On the other hand, if the actual tax bill turns out to be less, the penalty is based on the lower amount. The failure-to-file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum 25%. If you file for an extension on Form 4868, you’re not filing late unless you miss the extended due date. However, as mentioned earlier, a filing extension doesn’t apply to your responsibility for payment. If the 0.5% failure-to-pay penalty and the failure-to-file penalty both apply, the failure-to-file penalty drops to 4.5% per month (or part) so the combined penalty is 5%. The maximum combined penalty for the first five months is 25%. Thereafter, the failure-to-pay penalty can continue at 0.5% per month for 45 more months (an additional 22.5%).

Thus, the combined penalties can reach a total of 47.5% over time. The failure-to-file penalty is also more severe because it’s based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid through withholding or estimated payments. If no amount is owed, there’s no penalty for late filing.) For example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual liability is later determined to be an additional $1,000, the failure-to-file penalty (4.5% × 3 = 13.5%) would also apply to this amount for an additional $135 in penalties. A minimum failure-to-file penalty also applies if a return is filed more than 60 days late. This minimum penalty is the lesser of $485 (for returns due after December 31, 2023) or the amount of tax required to be shown on the return.

Exemption in certain cases Both penalties may be excused by the IRS if lateness is due to “reasonable cause” such as death or serious illness in the immediate family. Interest is assessed at a fluctuating rate announced by the government apart from and in addition to the above penalties. Furthermore, in particularly abusive situations involving a fraudulent failure to file, the late filing penalty can jump to 15% per month, with a 75% maximum.

If you have questions about filing Form 4868 or IRS penalties, contact us. © 2024

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General

Being a Gig Worker Comes with Tax Consequences

In recent years, many workers have become engaged in the “gig” economy. You may think of gig workers as those who deliver take-out restaurant meals, walk dogs and drive for ride-hailing services. But so-called gig work seems to be expanding. Today, some nurses have become gig workers, and writers in Hollywood who recently went on strike have expressed concerns that screenwriting is becoming part of the gig economy. 

There are tax consequences when performing jobs that don’t involve taxes being deducted from a regular paycheck. The bottom line: If you receive income from freelancing or from one of the online platforms offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made. 

Gig worker basics 

The IRS considers gig workers those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb, and DoorDash. Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other federal law protections and they aren’t part of states’ unemployment insurance systems. In addition, they’re on their own when it comes to retirement savings and taxes. 

Make quarterly payments during the year 

If you’re part of the gig or sharing economy, here are some tax considerations. You may need to make quarterly estimated tax payments because your income isn’t subject to withholding. These payments are generally due on April 15, June 15, September 15, and January 15 of the following year. (If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.) You should receive a Form 1099-NEC, Nonemployee Compensation, Form 1099-K, or other income statement from the online platform. 

Some or all of your business expenses may be deductible on your tax return, subject to the normal tax limitations and rules. For example, if you provide rides with your own car, you may be able to deduct depreciation for wear and tear and deterioration of the vehicle. Be aware that if you rent a room in your main home or vacation home, the rules for deducting expenses can be complex. 

Maintain meticulous records

It’s important to keep good records tracking income and expenses in case you are audited by the IRS or state tax authorities. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an unwanted surprise when you file your tax return. © 2023

Categories
Tax

April 18th Tax Deadline

April 18th is the deadline to file your individual 2022 tax return and pay any tax due. If you can’t file on time, you can request a six-month extension to file. However, any tax owed is generally still due by April 18th to avoid interest and penalties. If you owe taxes and don’t seek an extension to file, the IRS encourages you to file and pay as soon as possible to limit interest and penalties.

 

Some taxpayers may automatically qualify for extra time to file and pay tax due without penalties. This includes military members serving in combat zones, certain disaster victims, and taxpayers living abroad. If you’re due a refund, there’s no penalty for filing late. Here’s more: https://bit.ly/3YASLjn

 

Do you have tax questions or need to file an extension? Contact one of our experts for help.

Categories
Tax

Plan Now to Make Tax-Smart Year-End Gifts to Loved Ones

Are you feeling generous at year-end? Taxpayers can transfer substantial amounts free of gift taxes to their children or other recipients each year through the proper use of the annual exclusion. The exclusion amount is adjusted for inflation annually, and for 2022, the amount is $16,000. The exclusion covers gifts that an individual makes to each recipient each year. So a taxpayer with three children can transfer a total of $48,000 to the children this year free of federal gift taxes. If the only gifts are made this way during a year, there’s no need to file a federal gift tax return. If annual gifts exceed $16,000, the exclusion covers the first $16,000 and only the excess is taxable.

 Note: This discussion isn’t relevant to gifts made to a spouse because they’re gift tax-free under separate marital deduction rules.

Gift splitting by married taxpayers

If you’re married, gifts made during a year can be treated as split between the spouses, even if the cash or asset is actually given to an individual by only one of you. Therefore, by gift splitting, up to $32,000 a year can be transferred to each recipient by a married couple because two exclusions are available. So for example, a married couple with three married children can transfer a total of $192,000 each year to their children and the children’s spouses ($32,000 times six). If gift splitting is involved, both spouses must consent to it. This is indicated on the gift tax return (or returns) of the spouses’ file. (If more than $16,000 is being transferred by a spouse, a gift tax return must be filed, even if the $32,000 exclusion covers total gifts.) 

The “present interest” requirement

For a gift to qualify for the annual exclusion, it must be a “present interest” gift, meaning the recipient’s enjoyment of the gift can’t be postponed to the future. For example, let’s say you put cash into a trust and provide that your adult child is to receive income from it while your child is alive and your grandchild is to receive the principal at your child’s death. Your grandchild’s interest is a “future interest.” Special valuation tables determine the value of the separate interests you set up for each recipient. The gift of the income interest qualifies for the annual exclusion because the enjoyment of it isn’t deferred, so the first $16,000 of its total value won’t be taxed. However, the “remainder” interest is a taxable gift in its entirety. If the gift recipient is a minor and the terms of the trust provide that the income may be spent by or for the minor before he or she reaches age 21 and that any amount left is to go to the minor at age 21, then the annual exclusion is available. The present interest rule won’t apply.

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and are therefore taxable, may not result in a tax liability. That’s because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $12.06 million for 2022. However, to the extent you use this credit against a gift tax liability, it reduces or eliminates the credit available for use against the federal estate tax at your death. 

Contact your ATA representative if you are interested in making year-end gifts to your loved ones or if you have any questions about tax planning.

Categories
Tax

Sen. John Thune and Sen. Ben Cardin Recently Introduced the Athlete Opportunity and Taxpayer Integrity Act

More than a year ago, the U.S. Supreme Court ruled that student-athletes can be compensated for the use of their names, images, or likenesses (NIL). Now, a new bipartisan bill would eliminate a tax incentive for contributions to tax-exempt affiliates of colleges and universities. Since the ruling, groups of college boosters (third-party entities that promote a program’s interests) have formed what are known as NIL collectives. Sen. John Thune (R-SD) and Sen. Ben Cardin (D-MD) recently introduced the Athlete Opportunity and Taxpayer Integrity Act, which would bar individuals and organizations from claiming tax deductions for donations used by collectives for NIL payouts to student-athletes.

Contact one of our experts with all your tax-related questions.

Categories
Tax

Deducting Eligible Medical Expenses

Taxpayers that itemize may be able to deduct eligible medical expenses they incurred for themselves, their spouses, and dependents, subject to limits. Taxpayers bear the burden to prove the expenses, to show they were paid during the tax year and weren’t reimbursed by insurance. 

 

One corporate executive and her husband deducted medical expenses of $41,648 on behalf of her father. They claimed the medical bills were paid by intrafamily loans but provided no proof that the loans had been repaid or that insurance hadn’t reimbursed them. Their records, they stated, were lost due to a hurricane and other setbacks. The U.S. Tax Court partially disallowed the deduction. (TC Memo 2022-99)

 

Contact one of our experts to discuss what expenses are eligible for deduction.

Categories
Tax

Year-End Tax Planning Ideas for Individuals

Now that fall is officially here, it’s a good time to start taking steps that may lower your tax bill for this year and next. One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2022. Many taxpayers won’t itemize because of the high 2022 standard deduction amounts ($25,900 for joint filers, $12,950 for singles and married couples filing separately, and $19,400 for heads of household). Also, many itemized deductions have been reduced or abolished under current law. If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction.

Bunching, pushing, pulling

Some taxpayers may be able to work around these deduction restrictions by applying a “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the year where they’ll do some tax good. For example, if you’ll be able to itemize deductions this year but not next, you may want to make two years’ worth of charitable contributions this year.

Here are some other ideas to consider: Postpone income until 2023 and accelerate deductions into 2022 if doing so enables you to claim larger tax breaks for 2022 that are phased out over various levels of AGI. These include deductible IRA contributions, child tax credits, education tax credits and student loan interest deductions. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to accelerate income into 2022. For example, that may be the case if you expect to be in a higher tax bracket next year. If you’re eligible, consider converting a traditional IRA into a Roth IRA by year-end. This is beneficial if your IRA invested in stocks (or mutual funds) that have lost value. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels. High-income individuals must be careful of the 3.8% net investment income tax (NIIT) on certain unearned income. The surtax is 3.8% of the lesser of: 1) net investment income (NII), or 2) the excess of modified AGI (MAGI) over a threshold amount. That amount is $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separately and $200,000 for others. As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax depends on your estimated MAGI and NII for the year. Keep in mind that NII doesn’t include distributions from IRAs or most retirement plans.

It may be advantageous to arrange with your employer to defer, until early 2023, a bonus that may be coming your way. If you’re age 70½ or older by the end of 2022, consider making 2022 charitable donations via qualified charitable distributions from a traditional IRA — especially if you don’t itemize deductions. These distributions are made directly to charities from your IRA and the contribution amount isn’t included in your gross income or deductible on your return. Make gifts sheltered by the annual gift tax exclusion before year-end. In 2022, the exclusion applies to gifts of up to $16,000 made to each recipient. These transfers may save your family taxes if income-earning property is given to relatives in lower income tax brackets who aren’t subject to the kiddie tax. These are just some of the year-end steps that may save taxes.

Contact one of our experts to work on a plan that is best for you.

Categories
Tax

Time is Running Out for the October 17th Deadline

If you requested an extension from the IRS to file your 2021 tax return, the Oct. 17 deadline is coming up soon. Taxpayers who asked for an extension should file on or before the deadline to avoid a late-filing penalty. Although Oct. 17 is the last day for most people to file, certain taxpayers may have more time; including military members and others serving in a combat zone. They typically have 180 days after they leave the combat zone to file returns and pay any taxes due. Also, taxpayers in federally declared disaster areas who already had valid extensions are given more time. Contact us right away to prepare your return to avoid penalties and claim any refund due.

Categories
Tax

Are you aware of the Residential Clean Energy Credit?

The Clean Vehicle Credit is getting some of the attention, but the Inflation Reduction Act (IRA) also includes many new or revised home energy improvement-related tax credits. For example, the credit previously known as the Residential Energy Efficient Property (REEP) Credit is now the Residential Clean Energy Credit. Individuals are allowed a personal tax credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes before 2024. Under the IRA, the credit has been extended for property installed before 2035. The credit is also available for qualified battery storage technology expenditures.

Contact one of our experts for more information.

Categories
Tax

Inflation Reduction Act Of 2022 Includes Numerous Clean Energy Tax Incentives

On July 27, 2022, Sens. Joe Manchin (D-WV) and Chuck Schumer (D-NY) released legislative text for budget reconciliation legislation, also known as the Inflation Reduction Act of 2022. Twelve days later, the U.S. Senate on August 7 approved the bill on a party-line vote, with all 50 Democratic Senators voting for the legislation and all Republicans voting against it. Vice President Kamala Harris cast the decisive 51st vote in favor of the legislation. The House of Representatives then approved the bill on August 12, with all 220 Democrats voting for, and 207 Republicans voting against (with four Republicans not voting) the bill. The House made no changes to the Senate-passed bill, which President Biden signed into law on August 16.

The act includes the largest-ever U.S. investment committed to combat climate change, allocating $369 billion to energy security and clean energy programs over the next 10 years, including provisions incentivizing manufacturing of clean energy equipment and electric vehicles domestically.

Overall, the act modifies many of the current energy-related tax credits and introduces significant new credits and structures intended to facilitate long-term investment in the renewables industry.

 

Base and Bonus Credit Rate Structure

The act introduces a new credit structure whereby the tax incentives are subject to a base rate and a “bonus rate.” To qualify for the bonus rate, projects must satisfy certain wage and apprenticeship requirements implemented to ensure both the payment of prevailing wages and that a certain percentage of total labor hours are performed by qualified apprentices.

Projects under 1MW or that begin construction within 60 days of the date when Treasury publishes guidance regarding the wage and apprenticeship requirements are automatically eligible for the bonus credit.

Additional bonus credits may also be available for certain projects that are placed in service after December 31, 2022, and that meet domestic content requirements. For a project to qualify for this 10% bonus credit, taxpayers must ensure that a certain percentage of any steel, iron, or manufactured product that is part of the project at the time of completion was produced in the United States.

Facilities located in energy communities are also eligible for up to a 10% additional credit. Energy communities are defined as a brownfield site, an area with significant fossil fuel employment, or a census tract or any immediately adjacent census tract in which, after December 31, 1999, a coal mine has closed, or, after December 31, 2009, a coal-fired electric generating unit has been retired.

 

Credit Monetization Changes

The act includes two new options for the monetization of the tax credits in the form of direct pay and transferability.  Direct pay allows certain tax-exempt entities including state or local governments and Indian tribal governments to receive tax refunds in the amount of the credits as an overpayment of tax.   Taxpayers not eligible for direct pay can elect a one-time transfer of all or a portion of certain tax credits for cash to unrelated taxpayers. The cash received for the transfer of the credits is not included in the income, nor is the cash paid for the transferred credits deducted from income. The IRS may release registration requirements or other procedures to govern these tax credit transfers.

The act also increases the carryback period for certain credits to three years for credits eligible to be transferred from the current one-year carryback and extends the carryforward period two additional years, from 20 to 22 years.

 

Clean Energy Provisions

A number of additional changes to the energy related tax credits are summarized below:

 

Production Tax Credit (PTC) and Investment Tax Credit (ITC)

The PTC and ITC are extended and enhanced with the restoration to full rates for projects that begin construction prior to January 1, 2025, subject to prevailing wage and apprenticeship requirements. Wind and solar projects are also eligible for bonus credits for projects placed in service in low-income communities. Solar projects have the option to claim the PTC and the ITC is expanded to include energy storage as well as biogas and microgrid property.

 

Clean energy PTC and ITC

New technology-neutral credits will be available for qualified zero-emission facilities that begin construction after December 31, 2024. The credits begin to phase out the earlier of the calendar year when the annual greenhouse gas emissions from the production of electricity are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. for calendar year 2022 or 2032.

 

Carbon Capture Sequestration Credit

The act extends the “begin construction” date to December 31, 2032, and changes the credit rate and carbon capture requirements for both direct air capture and electricity-generating facilities. Qualification for the bonus rate requires satisfaction of prevailing wage and apprenticeship requirements and there is an option for all taxpayers to elect a direct payment of the credit for the first five years of operation.

 

Clean Hydrogen

A new tax credit is established for facilities that produce clean hydrogen at a qualified facility after December 31, 2022, and that begin construction prior to January 1, 2033. Taxpayers can claim the PTC or ITC with bonus rates subject to their fulfilling prevailing wage and apprenticeship requirements. All taxpayers can elect a direct payment of the credit for the first five years of operation.

 

Advanced Manufacturing Production Credit

A new production tax credit is available beginning in 2023 for each eligible renewable energy component produced by the taxpayer in the U.S. and sold to an unrelated person. Eligible components include any solar or wind component, qualifying inverters and qualifying battery components, and any applicable critical mineral. The credit is fully transferable and there is also an option for direct payment during the first five years of production.

 

Sustainable Aviation Fuel and Clean Fuel

The act includes new credits for sustainable aviation fuel used or sold as part of a qualified mixture between January 1, 2023, and December 31, 2024, and clean transportation fuel produced and sold after December 31, 2024, and before January 1, 2028.

 

Electric Vehicles

The existing $7,500 credit is modified by removing the current provision that begins phasing out the credit once a manufacturer sells 200,000 qualifying vehicles per manufacturer. The act also introduces limitations regarding domestic assembly requirements and for taxpayers with income over certain thresholds. Beginning in 2024, the act provides an option to transfer the credit to qualifying dealers and there is no credit available for purchases after December 31, 2032.

The act also establishes a new credit for previously owned clean vehicles on the initial transfer. The credit is allowed for vehicles with a sales price of $25,000 or less that have a model year at least two years old.  Similar to the credit for a new EV, this credit is limited for taxpayers with income over certain thresholds.

Immediately following President Biden’s signing of the bill,  the U.S. Department of the Treasury and the Internal Revenue Service published initial information – guidance and FAQs –  on changes to the tax credit for electric vehicles strengthened by the new legislation.

 

Alternative Refueling Property

The credit that expired on December 31, 2021, is extended and modified for property placed in service through December 31, 2032. The eligible expenses are increased and the per location limit is removed. However, beginning in 2023, only property placed in service in low-income or rural census tracts will be eligible for the credit. Prevailing wage and apprenticeship requirements must be satisfied to qualify for the full credit.

 

Commercial Clean Vehicles

Qualified commercial vehicles acquired after December 31, 2022, and before January 1, 2033, are eligible for a credit equal to the lesser of 30% of the cost of the vehicle not powered by a gasoline or diesel internal combustion engine or the incremental cost of the vehicle. The credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds or $40,000 for all other vehicles and is available only for depreciable property acquired from qualified manufacturers.

Additional clean energy and efficiency incentives for individuals included in the act include:

  • Extension, increase, and modification of nonbusiness energy property credit.
  • Residential clean energy credit.
  • Energy efficient commercial buildings deduction.
  • Extension, increase, and modifications of new energy efficient home credit.

 

Insights

  • Projects placed in service in 2022, including before the act’s date of enactment, may be eligible for the PTC and the ITC at full rates. Additional guidance around the prevailing wage and apprenticeship requirements is forthcoming and is expected to include required administrative procedures and documentation to meet the certification requirement to qualify for the bonus rates.
  • Direct pay, albeit limited in scope, in addition to the ability to transfer credits for cash, provides new flexibility in how certain tax credits may be monetized. Combined with the continuation of traditional tax equity structures, this option will impact capital and financing structures going forward.

Contact one of our experts for more information about the Inflation Reduction Act.