Author: relanetAdmin (Page 4 of 9)

As every parent knows, kids are expensive. If you are the parent or caregiver of a child, there are some tax breaks that can help make those expenses a little less painful.

First things first…

If you are a new parent, there are a few things you will want to do before exploring any tax breaks that you may be eligible for. These steps will help make sure you are eligible for tax deductions and credits related to your child, and can help avoid unhappy surprises come next tax season.

• Get a Social Security or Individual Tax Identification number for your child. In order to claim parental tax breaks, you must have your child or dependent’s Social Security number, Adoption Tax Identification Number, or Individual Tax Identification number. Confirming a child’s birth is the only way the IRS can verify that your are eligible for the credits and deductions you claim on your tax return.
• Check your withholding. A new family member might make you eligible for new credits and deductions, which can greatly change your tax liability. If you need to adjust your withholding due to these changes, provide your employer with an updated Form W-4, Employee’s Withholding Certificate, to change how much tax is withheld from your paycheck.

Check eligibility for tax credits and deductions

• Child Tax Credit. If you claim at least one child as your dependent on your tax return, you may be eligible for the Child Tax Credit, which may take thousands of dollars off your tax bill.
• Child and Dependent Care Credit. If you paid someone to take care of your children or another member of your household while your worked, your may qualify for the Child and Dependent Care Credit regardless of your income. For example, you may be eligible to claim up to 35% of your daycare expenses with certain limits.
• Adoption Tax Credit. This credit lets families who are in the adoption process during the tax year claim eligible adoption expenses for each eligible child. You can apply the credit to international, domestic, private and public foster care adoptions.
• Earned Income Tax Credit. The Earned Income Tax Credit helps low- to moderate-income families get a tax break. If you qualify, you can use the credit to reduce the taxes you owe – and maybe increase your tax refund.

Spring and Summer are the height of the real estate sales season. If you’re selling your home this year, you may be able to exclude all or part of any gain from the sale from your income when you file your next tax return.

When selling a home, homeowners should think about:

• Ownership and use. In order to exclude all or part of your capital gains from the sale of your home, you must meet ownership and use tests. During the five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.
• Gains. If you sell your main home for a capital gain, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return with your spouse, you may be able to exclude up to $500,000. If you can exclude all the gain, you do not need to report the sale on your tax return unless a Form 1099-S was issued.
• Losses.If you find yourself in the unfortunate position of selling your main home for less than you paid for it, this loss is not deductible.
• Multiple homes.If you own more than one home, you can exclude the gain only on the sale of your main home. You must pay taxes on the gain from selling any other home.
• Reported sale. If you don’t qualify to exclude all of the taxable gain from your income, you must report the gain from the sale of your home when your file your tax return. And even if you have no taxable gain, you must report the sale on your tax return if you receive a Form 1099-S, Proceeds from Real Estate Transactions.
• Mortgage debt. Generally, you must report forgiven or canceled debt as income on your tax return. This includes any mortgage workout, foreclosure, or other canceled mortgage debt on your home. If you had debt discharged in whole or in part on a qualified principal residence, you can’t exclude that debt from income unless it was discharged before January 1, 2026, or a written agreement for the debt forgiveness was in place before January 1, 2026.

As with most things tax-related, there are exceptions to the general guidance above. In particular, there are exceptions to these rules for people with a disability, certain members of the military or intelligence community, and Peace Corps workers. If you have questions about the whether any capital gains you received from the sale of your home might be deductible, please contact our office.

Despite the rise of Zoom, Webex, and other video calling software, travel is still an important part of many people’s work life. If you are one of the thousands who travel for work, there may be tax deductions available to help you offset the cost of this travel.

What to know about tax deductions for business travel

Business travel deductions may be available when you travel away from your home or main place of work for business reasons. You are “traveling away from home” when you are away for longer than an ordinary day’s work and you need to sleep in a location other than your home to meet the demands of your work while you’re away.

In order to be deductible, a travel expense must be “ordinary and necessary.” It can’t be lavish, extravagant or for personal purposes.

Employers can deduct travel expenses paid or incurred during a temporary work assignment if the assignment is less than one year.

Travel expenses for conventions are deductible if your attendance benefits the business. There are special rules for conventions held outside of North America.

Deductible travel expenses include:

Travel by plane, train, bus or car between home and a business destination
Fares for taxis or other types of transportation between an airport or train station and a hotel, or from a hotel to a work location
Shipping of baggage and sample or display material between regular and temporary work locations
Using a personally owned car for business
Lodging and meals
Dry cleaning and laundry
Business calls and communication
Tips paid for services related to any of these expenses
Other similar ordinary and necessary expenses related to the business travel

Keep records of your expenses

If you plan to deduct expenses related to business travel, it’s important that you keep records of those expenses. Records such as receipts, canceled checks, credit card bills, and other documents can help you reconstruct your expenses, and support your deductions when it comes time to file your taxes.

If you own a business, you may have been approached by mail, email, or telephone by marketers who claim that they can get you a tidy chunk of government money by preparing your application for the Employee Tax Credit (ERC). While the credit is real, aggressive promoters are wildly misrepresenting and exaggerating who can qualify for the credits.

The IRS has stepped up audit and criminal investigation work involving these claims. Businesses, tax-exempt organizations and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS.

The Employee Retention Credit (ERC), also sometimes called the Employee Retention Tax Credit or ERTC, is a legitimate tax credit. Many businesses legitimately apply for the pandemic-era credit. But improperly applying for the ERC can land your business in hot water.

Identifying fraudulent and improper ERC applications is an ongoing priority area for the IRS, and the IRS continues to increase compliance work involving ERC. The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims. So realize that improper claims for the ERC are likely to be discovered.

Those who are found to have improperly claimed the ERC will be required pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place. So, it’s important to avoid getting scammed.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.

Warning signs of aggressive ERC marketing

Many Employee Retention Credit scams have certain characteristics in common. Warning signs to watch out for include:

• Unsolicited calls or advertisements mentioning an “easy application process.”
• Statements that the promoter or company can determine ERC eligibility within minutes.
• Large upfront fees to claim the credit.
• Fees based on a percentage of the refund amount of Employee Retention Credit claimed.
• Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
• Suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.

These promoters may lie about eligibility requirements. In addition, using these companies could put you at risk of someone using the credit as a ploy to steal your identity or take a cut of your improperly claimed credit.

How the promoters lure victims

There are a variety of ways that promoters can lure businesses, tax-exempt groups and others into applying for the credit.

• Aggressive marketing. This can be seen in countless places, including radio, television and online as well as phone calls and text messages.
• Direct mailing. Some ERC mills are sending out fake letters to taxpayers from the non-existent groups like the “Department of Employee Retention Credit.” These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action.
• Leaving out key details. Third-party promoters of the ERC often don’t accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances.
  • For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.
  • Again, the promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business’ federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business.
• Payroll Protection Program participation. In addition, many of these promoters don’t tell employers that they can’t claim the ERC on wages that were reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness.

How businesses can protect themselves

There are simple steps that businesses, tax-exempt groups and others being approached by these promoters can take to protect themselves from making an improper Employee Retention Credit application.

• Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional. Don’t rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for your best interests.
• Don’t apply unless you believe you are legitimately qualified for this credit. Consult with a trusted tax professional—not someone promoting the credit—to get critical professional advice on the ERC.

There are a lot of reasons why you might make improvements that improve the energy efficiency of your home. They are good for the environment, they can make your home more comfortable, and new equipment can be less prone to breaking down. To this list, you can also add tax credits that can make these improvements more affordable.

The Inflation Reduction Act of 2022 expanded the amounts and types of energy efficiency expenses that can qualify for home energy tax credits. If you are considering energy improvements to your home, it’s worth knowing which credits you might qualify for.

What you need to know

You can claim the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit for the year in which qualifying expenditures are made.

Homeowners who improve their primary residence will find the most opportunities to claim a credit for qualifying expenses. Renters may also be able to claim credits, as well as owners of second homes used as residences. Landlords cannot claim this credit.

Energy Efficient Home Improvement Credit

If you make qualified energy-efficient improvements to your home after January 1, 2023, you may qualify for a tax credit of up to $3,200 for the tax year in which the improvements are made.

As part of the Inflation Reduction Act, beginning January 1, 2023, the credit equals 30% of certain qualified expenses:

• Qualified energy efficiency improvements installed during the year which can include things like:
  • Exterior doors, windows and skylights.
  • Insulation and air sealing materials or systems.
• Residential energy property expenses such as:
  • Central air conditioners.
  • Natural gas, propane or oil water heaters.
  • Natural gas, propane or oil furnaces and hot water boilers.
• Heat pumps, water heaters, biomass stoves and boilers.
• Home energy audits of a main home.

The maximum credit that can be claimed 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) and home energy audits ($150).
• $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

The credit is available only for qualifying expenditures to an existing home or for an addition or renovation of an existing home, and not for a newly constructed home. The credit is nonrefundable which means you can’t get back more from the credit than what is owed in taxes and any excess credit cannot be carried to future tax years.

Residential Clean Energy Credit

If you invest in energy improvements for your main home, including solar, wind, geothermal, fuel cells or battery storage, you may qualify for an annual residential clean energy tax credit. You may be able to claim a credit for certain improvements other than fuel cell property expenditures made to a second home that you live in part-time and don’t rent to others.

The Residential Clean Energy Credit equals 30% of the costs of new, qualified clean energy property for a home in the United States installed anytime from 2022 through 2033.

Qualified expenses include the costs of new, clean energy equipment including:

• Solar electric panels.
• Solar water heaters.
• Wind turbines.
• Geothermal heat pumps.
• Fuel cells.
• Battery storage technology (beginning in 2023).

Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit:

• Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the applicable state.
• Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase.
• Battery storage technology must have a capacity of at least 3 kilowatt hours.

The credit is available for qualifying expenditures incurred for installing new clean energy property in an existing home or for a newly constructed home. This credit has no annual or lifetime dollar limit except for fuel cell property. You can claim this credit each tax year you install eligible property until the credit begins to phase out in 2033.

This is a nonrefundable credit, which means the credit amount received cannot exceed the amount owed in tax. You can carry forward excess unused credit and apply it to any tax owed in future years.

Good recordkeeping

If you think you might be eligible for one of these tax credits, be sure to keep good records of purchases and expenses during the time the improvements are made. This will assist in claiming the applicable credit during tax filing season.

If you have filed your federal tax return and are due a refund, you’re probably pretty eager to get your hands on the money you are owed. If you’re wondering when your refund will arrive, the IRS has an online tool called “Where’s My Refund?” that you can access on their website at https://www.irs.gov/refunds. The status of your refund should be available within 24 hours of receiving notification that the IRS has received your e-filed return.

To use the tool, you will need your:

• Social Security number or Individual Taxpayer Identification number
• Filing status
• Exact amount of the refund claimed on your tax return

The tool shows three statuses:

• Return received
• Refund approved
• Refund sent

When the status changes to “refund approved,” the IRS is preparing to send the refund, either as a direct deposit to your bank account or directly to you by check in the mail to the address on your tax return.

A death is oftentimes a time of sadness. But that sadness can be compounded with confusion for surviving family members who are responsible for taking care of final arrangements. One of these arrangements that many are unfamiliar with is filing a final federal tax return for a deceased person. If you are responsible for the estate of someone who has died, here are some things you should know.

Filing a final tax return

Generally, the final individual income tax return of a deceased person is prepared and filed the same way as if the person were alive.

• The return must report all income up to the date of death and claim all eligible credits and deductions.
• If the deceased person did not file individual income tax returns for the years before their death, their surviving spouse or representative may have to file prior year returns.
• The IRS considers the surviving spouse married for the full year their spouse died if they don’t remarry during that year.
• The surviving spouse is eligible to use filing status “married filing jointly” or “married filing separately.”
• The same tax deadlines apply for final returns. For example, if the deceased person died in 2022, their final return was due by April 18, 2023, unless the surviving spouse or representative had an extension to file.

Who should sign the tax return

Obviously, the deceased cannot sign his or her own tax return. Here’s how to determine who should sign it.

• Any appointed representative must sign the return. If it’s a joint return, the surviving spouse must also sign it.
• If there isn’t an appointed representative, the surviving spouse filing a joint return should sign the return and write in the signature area, “filing as surviving spouse.”
• If there’s no appointed representative and no surviving spouse, the person in charge of the deceased person’s property must file and sign the return as “personal representative.”

Other documents to include with the final tax return

Court-appointed representatives should attach a copy of the court document showing their appointment. Representatives who aren’t court-appointed must include Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer to claim any refund. Surviving spouses and court-appointed representatives don’t need to complete this form.

If tax is due, the filer should submit payment with the return or visit the payments page of IRS.gov for other payment options. If they can’t pay the amount due immediately, they may qualify for a payment plan or installment agreement.

Qualifying widow or widower

Surviving spouses with dependent children may be able to file as a Qualifying Surviving Spouse for two years after their spouse’s death. This filing status allows them to use joint return tax rates and the highest standard deduction amount if they don’t itemize deductions.

Required Minimum Distributions (RMDs) are minimum amounts you must withdraw from your IRA or retirement plan account when you reach age 72. Beginning in 2023, the SECURE 2.0 Act changes the age RMDs must begin to age 73 for taxpayers that reach age 72 after December 31, 2022.

Roth IRAs are not subject to RMDs until after the original account owner dies. Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.

RMDs from an IRA

You can meet your RMD requirement by taking a withdrawal from one or more of your traditional IRAs, or SEP, SIMPLE and SARSEP IRAs. It’s not necessary to take a withdrawal from each of your IRAs, but your total withdrawals must be at least equal to the total RMD due from all IRAs combined.

If you reached age 72 in 2022: The first RMD from your IRAs is due by April 1, 2023, based on the December 31, 2021, account balances. Your second RMD is due by December 31, 2023, based on the December 31, 2022, account balances.

If you reach age 72 in 2023: If you reach age 72 in 2023, you don’t have an RMD requirement for 2023. Your first RMD is for 2024, the year you reach age 73, and is due by April 1, 2025.

If you reach age 73 in 2023: If you reach age 73 in 2023, you were 72 in 2022 and must take your first RMD for 2022 by April 1, 2023, based on your December 31, 2021, account balances.

RMDs from a retirement plan

To satisfy the RMD requirements in a retirement plan, you must take RMDs separately from each of your retirement plans. If you reached age 72 in 2022, your first RMD for 2022 is due by April 1, 2023, based on your December 31, 2021, account balance. Your 2023 RMD is due by December 31, 2023, based on your December 31, 2022, account balance.

If you’re still employed by the plan sponsor, and not a 5% owner, your plan may allow you to delay taking RMDs from that workplace retirement plan until you retire. IRS rules always require you to take RMDs beginning at age 72 from traditional IRAs, SEP, SIMPLE and SARSEP IRA plans, even if you’re still employed.

If you can’t pay your tax bill by the April 18, 2023 deadline, don’t panic. The IRS offers several options to help you pay on a schedule you can afford.

First of all, if you find yourself with a tax bill you can’t afford, it’s important that you don’t ignore the problem. You still need to file your tax return or request an extension of time to file by the April 18, 2023, deadline – even if you can’t pay your tax bill in full. Filing or requesting an extension on time will help you avoid costly penalties that could make you owe even more.

Also remember that an extension applies only to the filing deadline, not the payment deadline. If you can’t pay the full amount of taxes you owe by April 18, you should file and pay what you can. Making a payment, even a partial payment, will help limit penalty and interest charges.

Payment options

If you find yourself struggling to meet your tax obligation, you might consider these options:

Online payment plans

If you owe but can’t pay in full by April 18, you don’t have to wait for a tax bill to set up a payment plan. You can apply for a payment plan online, or contact us and we can help you. These payment plans can be either short- or long-term.

• Short-term payment plan – The payment period is 180 days or less, and the total amount owed is less than $100,000 in combined tax, penalties and interest.
• Long-term payment plan – The payment period is longer than 180 days, paid in monthly payments, and the amount owed is less than $50,000 in combined tax, penalties and interest.

Offers in compromise

An offer in compromise lets you settle your tax debt for less than the full amount you owe. This may be an option if you can’t pay your full tax bill or if doing so creates a financial hardship. The IRS considers a taxpayer’s unique set of facts and circumstances when deciding whether to accept an offer.

Penalties and Interest

If you owe tax and don’t file on time, you can be charged a failure-to-file penalty. This penalty is usually five percent of the tax owed for each month or part of a month that the tax return is late, up to 25 percent. The failure-to-pay penalty applies if you don’t pay taxes by the due date.

Interest is based on the amount of tax owed and for each day it’s not paid in full. The interest is compounded daily, so it is assessed on the previous day’s balance plus the interest.

Remember: An extension of time to file is not an extension of time to pay. An extension only gives you until October 16, 2023, to file your 2022 tax return, but taxes owed are still due April 18, 2023.

If you have questions about payment options for your tax bill, please contact our office. We would be happy to help.

Many states made special tax refunds or payments related to the pandemic and its associated consequences in 2022. A variety of state programs distributed these payments in 2022 and the rules surrounding their tax treatment are complex. One question was whether income related to these payments was taxable at a federal level. Recently, the IRS has clarified its position on these payments by determining that taxpayers in many states will not need to report these payments on their 2022 tax returns.

During a review, the IRS determined that it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see below for more nuanced information.

In addition, many people in Georgia, Massachusetts, South Carolina and Virginia also will not include state payments in income for federal tax purposes if they meet certain requirements. For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.

Refund of state taxes paid

If the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied) the payment is not included in income for federal tax purposes.

Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.

• Georgia
• Massachusetts
• South Carolina
• Virginia

General welfare and disaster relief payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions can be complex, so to simplify the matter, the IRS has determined that it will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.

Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.

• Alaska (see below)
• California
• Colorado
• Connecticut
• Delaware
• Florida
• Hawaii
• Idaho
• Illinois (see below)
• Indiana
• Maine
• New Jersey
• New Mexico
• New York (see below)
• Oregon
• Pennsylvania
• Rhode Island

For Alaska, this applies only to for supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.

Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.

Other payments

Other payments that may have been made by states are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska’s Permanent Fund Dividend and any payments from states provided as compensation to workers.