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IRS officials have warned taxpayers to avoid promoters of fraudulent tax schemes involving donations of ownership interests in closely held businesses, sometimes marketed as “Charitable LLCs.”

These promotions often target higher-income filers and are considered abusive transactions by the IRS.

While taxpayers can properly deduct donations of closely held business interests, unscrupulous promoters sometimes lure taxpayers into schemes involving false charitable deductions.

These schemes typically encourage higher-income taxpayers to create limited liability companies (LLCs), put cash or other assets into the LLCs, then donate a majority percentage of nonvoting, nonmanaging, membership units to a charity while the taxpayer maintains control of the voting units and reclaims the cash or asset(s) directly or indirectly for personal use. The promoter sometimes has control over the charity that receives the donation.

Abusive scheme design

In the “Charitable LLCs” scheme, promoters create documents establishing the LLC for a fee. Then they assist in the transfer of the taxpayer’s assets to the LLC and create documents that purport to transfer membership units in the LLC to a charity. The promoter might supply an appraisal supporting the valuation for the claimed gift and might even provide a list of charities willing to accept the membership units or identify a single charity that will accept the donation.

Promoters might incorrectly advise clients that they can retain control and legally access the cash or other assets transferred to the LLC for their own personal use after the donation. Promoters might also execute an “exit strategy” for taxpayers to buy back their contributions at a significantly discounted price after a period of time.

Generally, taxpayers cannot deduct a charitable contribution of less than their entire interest in property, and retaining rights to control the donated interests or buy back assets will disqualify the transaction as a deductible charitable contribution.

Watch for red flags

Taxpayers should be wary of any scheme that involves transferring assets to an LLC, followed by the “donation” of a majority percentage of nonvoting, nonmanaging, membership units to a charity as a “charitable contribution” while the taxpayer retains control over and access to the assets. A valid charitable contribution requires the taxpayer give control over the donated assets to the charity.

Taxpayers should use caution when they are promised any personal benefit, beyond the tax deduction, based on a charitable donation.

Taxpayers should scrutinize transactions that include potential red flags. A few examples are described below:

• Promoters marketing a transaction as a way to grow wealth in a “tax-free environment” and claim charitable contribution deductions.
• Promoters marketing a plan that requires the creation of one or more entities in order to make a charitable donation.
• Creating entities that do not engage in any business activity to facilitate a charitable donation.
• Donating an interest in an LLC that loans cash or other assets back to the taxpayer or a related party.
• The charity, as the majority owner of the LLC, has no control over the LLC or its assets.
• The taxpayer is allowed to personally use the assets contributed to the LLC after the donation.
• The promoter assists the taxpayer in the creation of intellectual property to fund the LLC prior to the donation.
• The taxpayer uses the LLC funds to purchase life insurance policies benefitting their heirs or a related party after the donation.
• The taxpayer retains the ability to reclaim the donated LLC interests from the charity for less than fair market value.
• The promoter requires the taxpayer to use specific appraisers and/or charities.
• Appraisals fail to take into account all facts and circumstances of the entire transaction, like the ability of the taxpayer to remove all assets from the LLC after the donation.

Low- and moderate-income taxpayers can save for retirement now and possibly earn a tax credit in 2025 and future years thanks to the Retirement Savings Contributions Credit, also known as the Saver’s Credit. This credit can help offset a portion of the first $2,000 ($4,000 if married filing jointly) you voluntarily contribute to Individual Retirement Arrangements (IRAs), 401(k) plans and similar workplace retirement programs.

The credit can also help eligible people with disabilities who are the designated beneficiary of an Achieving a Better Life Experience (ABLE) account and contributes to that account.

The maximum Saver’s Credit is $1,000 ($2,000 for married couples). If you are eliible, the credit can increase your refund or reduce the tax owed but is affected by other deductions and credits. Rollover contributions do not qualify for the credit, and distributions from a retirement plan or ABLE account reduce the contribution amount used to figure the credit.

Who is eligible?

You are eligible for the credit if you are:

• Age 18 or older,
• Not claimed as a dependent on another person’s return, and
• Not a full-time student.

Furthermore, the Saver’s Credit can be claimed by:

• Married couples filing jointly with adjusted gross incomes up to $76,500.
• Heads of household with adjusted gross incomes up to $57,375.
• Married individuals filing seperately and singles with adjusted gross incomes up to $38,250.
• Qualified surviving spouse filers.

Contribution deadlines

Individuals with IRAs have until April 15, 2025 – the due date for filing their 2024 return – to set up a new IRA or add money to an existing IRA for 2024. Both Roth and traditional IRAs qualify.

Contributions to workplace retirement plans must be made by December 31 to a:

• 401(k) plan.
• 403(b) plan for employees of public schools and certain tax-exempt organizations.
• Governmental 457 plan for state or local government employees.
• Thrift Savings Plan (TSP) for federal employees.

The IRS has announced a change to the requirements that third-party settlement organizations (TPSOs), also known as payment apps and online marketplaces, have regarding reporting transactions during calendar years 2024 and 2025 on Form 1099-K.

Under the issued guidance, TPSOs will be required to report transactions when the amount of total payments for those transactions is more than $5,000 in 2024; more than $2,500 in 2025; and more than $600 in calendar year 2026 and after.

What this means for you

If you receive payments from TPSO (such as PayPal, Amazon, Etsy, or other online marketplaces), this announcement may change whether you should be expecting a Form 1099-K. As always, if you do receive a Form 1099-K be sure to include it in the material that you provide us when we prepare your tax return.

The end of the year is fast approaching, and with it come a few deadlines that you should consider. If you are age 70½ or older and have an individual retirement arrangement (IRA), one thing you should think about is whether you want to make a qualified charitable distribution (QCD) for 2024. Qualified IRA owners can make up to $105,000 in tax-free charitable donations during 2024 through qualified charitable distributions. That’s up from $100,000 in past years.

For those age 73 or older, qualified charitable distributions (QCDs) also count toward the year’s required minimum distribution (RMD).

Generally, IRA distributions are taxable, but QCDs remain tax-free if sent directly to a qualified charity by the trustee. If you would like to make a QCD for 2024, contact your IRA trustee soon to ensure the transaction completes by year-end.

Each eligible IRA owner can exclude up to $105,000 in QCDs from taxable income. Married couples, if both meet qualifications and have separate IRAs, can donate up to $210,000 combined. QCDs don’t require itemizing deductions.

For those planning ahead, starting this year, the QCD limit is subject to annual adjustment, based on inflation. For that reason, the annual QCD limit will rise to $108,000 in 2025.

The Internal Revenue Service recently announced updates to several amounts that are updated annually for inflation. The tax year 2025 adjustments described below generally apply to income tax returns to be filed starting tax season 2026.

The tax items for tax year 2025 of greatest interest to many, include the following dollar amounts:

• Standard deductions. For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024. For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for tax year 2024.

• Marginal rates. For tax year 2025, the top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly). The other rates are:

  • 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
  • 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
  • 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
  • 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
  • 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
  • 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).

• Alternative minimum tax exemption amounts. For tax year 2025, the exemption amount for unmarried individuals increases to $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350. For married couples filing jointly, the exemption amount increases to $137,000 and begins to phase out at $1,252,700.

• Earned income tax credits. For qualifying taxpayers who have three or more qualifying children, the tax year 2025 maximum Earned Income Tax Credit amount is $8,046, an increase from $7,830 for tax year 2024. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

• Qualified transportation fringe benefit. For tax year 2025, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking rises to $325, increasing from $315 in tax year 2024.

• Health flexible spending cafeteria plans. For the taxable years beginning in 2025, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements rises to $3,300, increasing from $3,200 in tax year 2024. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount rises to $660, increasing from $640 in tax year 2024.

• Medical savings accounts. For tax year 2025, participants who have self-only coverage the plan must have an annual deductible that is not less than $2,850 (a $50 increase from the previous tax year), but not more than $4,300 (an increase of $150 from the previous tax year).

  The maximum out-of-pocket expense amount rises to $5,700, increasing from $5,550 in tax year 2024.

  For family coverage in tax year 2025, the annual deductible is not less than $5,700, increasing from $5,550 in tax year 2024; however, the deductible cannot be more than $8,550, an increase of $200 versus the limit for tax year 2024. For family coverage, the out-of-pocket expense limit is $10,500 for tax year 2025, rising from $10,200 in tax year 2024.

• Foreign earned income exclusion. For tax year 2025, the foreign earned income exclusion increases to $130,000, from $126,500 in tax year 2024.

• Estate tax credits. Estates of decedents who die during 2025 have a basic exclusion amount of $13,990,000, increased from $13,610,000 for estates of decedents who died in 2024.

• Annual exclusion for gifts increases to $19,000 for calendar year 2025, rising from $18,000 for calendar year 2024.

• Adoption credits. For tax year 2025, the maximum credit allowed for an adoption of a child with special needs is the amount of qualified adoption expenses up to $17,280, increased from $16,810 for tax year 2024.

Unchanged for tax year 2025

By statute, certain items that were indexed for inflation in the past are currently not adjusted:

• Personal exemptions for tax year 2025 remain at 0, as in tax year 2024. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act of 2017.

• Itemized deductions. There is no limitation on itemized deductions for tax year 2025, as in tax year 2024 and preceding, to tax year 2018. The limitation on itemized deductions was eliminated by the Tax Cuts and Jobs Act of 2017.

• Lifetime learning credits. The modified adjusted gross income amount used by taxpayers to determine the reduction in the Lifetime Learning Credit provided in Sec. 25A(d)(1) of the Internal Revenue Code is not adjusted for inflation for taxable years beginning after Dec. 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).

The Internal Revenue Service recently announced that the annual contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $23,500 in 2025, up from $23,000 in 2024.

The limit on annual contributions to an IRA remains $7,000. The IRA catch‑up contribution limit for people aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment but remains $1,000 for 2025.

The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan remains $7,500 for 2025. Therefore, participants in most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plan who are 50 and older generally can contribute up to $31,000 each year, starting in 2025. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.

You can deduct contributions to a traditional IRA if you meet certain conditions. If during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced, or phased out, until it is eliminated, depending on your filing status and income. (If neither you nor your spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2025:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $79,000 and $89,000, up from between $77,000 and $87,000.
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $126,000 and $146,000, up from between $123,000 and $143,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $150,000 and $165,000 for singles and heads of household, up from between $146,000 and $161,000. For married couples filing jointly, the income phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $79,000 for married couples filing jointly, up from $76,500; $59,250 for heads of household, up from $57,375; and $39,500 for singles and married individuals filing separately, up from $38,250.
• The amount individuals can generally contribute to their SIMPLE retirement accounts is increased to $16,500, up from $16,000. Pursuant to a change made in SECURE 2.0, individuals can contribute a higher amount to certain applicable SIMPLE retirement accounts. For 2025, this higher amount remains $17,600.
• The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most SIMPLE plans remains $3,500 for 2025. Under a change made in SECURE 2.0, a different catch-up limit applies for employees aged 50 and over who participate in certain applicable SIMPLE plans. For 2025, this limit remains $3,850. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in SIMPLE plans. For 2025, this higher catch-up contribution limit is $5,250.

If you would like help determining your eligibility for any of these programs, please contact our office. We would be happy to help.

The IRS has opened a second round of the Employee Retention Credit Voluntary Disclosure Program (or “ERC VDP”) for businesses who may have improperly claimed the ERC in the past. The ERC VDP is open now and runs through Nov. 22, 2024. This ERC VDP helps businesses repay credits they received after filing ERC claims in error.

The program allows businesses to correct improper payments at a 15% discount and avoid potential compliance action in the future such as audits, full repayment, penalties and interest. This second round of the program is open for tax periods in 2021. Employers can’t use the second ERC VDP to disclose and repay ERC money from tax periods in 2020.

If your business claimed the ERC, and you fear that the claim may have been in error, please contact our office. We can review your claim and help you determine if the ERC VDP is a good option.

Crowdfunding is a method of raising money through websites by soliciting contributions from a large number of people. The contributions may be solicited to fund businesses, for charitable donations, or for gifts. Sometimes, the money raised through crowdfunding is solicited by crowdfunding organizers on behalf of other people or businesses. In other cases, people establish crowdfunding campaigns to raise money for themselves or their businesses.

Form 1099-K and crowdfunding

If the amount raised through crowdfunding meets certain limits, the crowdfunding website or its payment processor may be required to report distributions of money raised by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

If required to file a Form 1099-K with the IRS, the crowdfunding website or its payment processor must also furnish a copy of that form to the person to whom the distributions are made. The American Rescue Plan Act (ARPA) clarifies that the crowdfunding website or its payment processor is not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the payments are not made in exchange for goods or services.

The reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K are:

• Calendar years 2023 and prior – Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions.
• Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA.

Note: The ARPA lowered the reporting threshold for third party settlement organizations (TPSOs) so that TPSOs are only required to report on Forms 1099-K if the total of all payments distributed to a payee in a calendar year exceeds $600, regardless of the number of transactions. However, implementation of this lower threshold has been delayed.

Crowdfunding distributions may be made to the crowdfunding organizer, or directly to individuals or businesses for whom the organizer solicited funds. A Form 1099-K must be filed with the IRS and furnished to the person or entity that received the payments if the reporting threshold is met for the year in which the distributions were made.

The person receiving a Form 1099-K for distributions of money raised through crowdfunding may not recognize the filer’s name on the form. Sometimes the payment processor used by the crowdfunding website, rather than the crowdfunding website itself, will furnish the Form 1099-K and will be listed as the filer on the form. If you receive a Form 1099-K and don’t recognize the filer’s name or the amounts included on the Form 1099-K, you can use the filer’s telephone number listed on the form to contact a person knowledgeable about the payments reported.

Tax treatment of money raised through crowdfunding

Under federal tax law, gross income includes all income from whatever source derived unless it is specifically excluded from gross income by law. Whether crowdfunding distributions are includible in the gross income of the person receiving them depends on all the facts and circumstances of the distribution.

In most cases, property received as a gift is not includible in the gross income of the person receiving the gift.

If crowdfunding contributions are made as a result of the contributors’ generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized. But some contributions to crowdfunding campaigns are not necessarily a result of detached and disinterested generosity, and therefore may not be gifts. Additionally, contributions to crowdfunding campaigns by an employer for the benefit of an employee are generally includible in the employee’s gross income.

If a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer’s gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized.

Because determining the taxable status of funds received as part of a crowdfunding campaign can be complicated, we encourage you to contact our office if you find yourself the beneficiary or organizer of such a campaign. We can look at all the facts and circumstances involved, and help you determine how to handle these funds.

If you’d like to avoid surprises next year at tax time, consider doing an end-of-summer tax update and make any tax withholding or payment updates that are necessary.

While most people get a refund after filing their taxes, many also find they unexpectedly owe taxes. This is often due to a life or job change for which they did not make the necessary tax adjustment during the year.

Those who should be especially careful are:

• Gig economy workers.
• People with a “side hustle.”
• Anyone earning income not subject to withholding.

If this sounds like you, be sure to check the amount you pay, or the amount you withheld throughout the year, and make adjustments as needed to bring the tax you pay or withhold closer to what you owe.

Here are some important things to keep in mind:

How refunds work

The federal tax system is pay-as-you-go. You should pay tax as you earn wages or receive income during the year. For many, taxes are withheld from their paycheck by their employer and then given over to the IRS on their behalf. Others, such as gig economy workers, should make quarterly estimated tax payments throughout the year to stay current. A refund normally results when too much is withheld or paid throughout the year.

Avoid an unexpected bill

On the other hand, some people end up with estimated tax penalties because they underpay throughout the year. The penalty amount varies but for some it can be several hundred dollars. Adjusting withholding on paychecks or the amount of estimated tax payments can help prevent penalties. This is especially important for self-employed people, including those in the gig economy, those with more than one job, and those with major changes in their life, like a recent marriage or a new child.

With that in mind, we encourage you to take a look at your current withholding and estimated tax payments and make adjustments as necessary to bring them into alignment with the tax you will owe. If you need help doing this, please contact our office. We would be happy to help.

With the new school year upon us, teachers should remember that they may be eligible to deduct up to $300 for classroom expenses in 2024.

This deduction allows educators to offset the cost of supplies, materials and other classroom essentials, providing some financial relief for those who spend their own money to improve their students’ learning experience.

Who qualifies for educator expense deductions?

This deduction is available for teachers, instructors, counselors, principals and aides who work at least 900 hours a school year in a school providing elementary or secondary education. Educators filing jointly can claim up to $600 if both spouses are eligible, but no more than $300 per person. Educators can claim this deduction even if they take the standard deduction, and both public and private school educators qualify.

What’s deductible?

Educators can claim deductions for out-of-pocket expenses on classroom items like books, supplies, equipment (including computers and software) and COVID-19 safety measures such as masks, disinfectants and air purifiers. They may also deduct costs for professional development courses relevant to their teaching.

Expenses for homeschooling or nonathletic supplies for health or physical education are not eligible. The IRS recommends educators maintain detailed records, such as receipts and canceled checks, to substantiate their deductions.