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Year-end Tax Planning Strategies for Individuals

With the end of the year fast approaching, now is the time to take a closer look at tax planning strategies that could reduce your tax bill for 2022.

General Tax Planning Strategies

General tax planning strategies for individuals include accelerating or deferring income and deductions and carefully considering timing-related tax planning strategies concerning investments, charitable gifts, and retirement planning. For example, taxpayers might consider using one or more of the following strategies:

Investments. Selling any investments on which you have a gain (or loss) this year. See Investment Gains and Losses below for more on this.

Charitable deductions. Bunching charitable deductions every other year is also a good strategy if it enables the taxpayer to get over the higher standard deduction threshold under the Tax Cuts and Jobs Act of 2017 (TCJA). Another option is to put money into a donor-advised fund that enables donors to make a charitable contribution and receive an immediate tax deduction. A public charity manages the fund on behalf of the donor and, in turn, recommends how to distribute the money over time.

Medical expenses. Medical expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI); therefore, you might pay medical bills in whichever year they would do you the most tax good. In 2022, these medical and dental expenses must exceed 7.5 percent of AGI. By bunching medical expenses into one year rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing the deduction.

Deductible expenses such as medical expenses and charitable contributions can be prepaid this year using a credit card or check. You can only deduct the medical and dental expenses you paid this year – not payments for medical or dental care you will receive in the future. For example, suppose you charge a medical expense in December but pay the bill in January. Assuming it’s an eligible medical expense, you can take the deduction on your 2022 tax return.

Stock options. If your company grants stock options, you may want to exercise the option or sell stock acquired by exercising an option this year. Use this strategy if you think your tax bracket will increase in 2023. Generally, exercising this option is a taxable event; the sale of the stock is almost always a taxable event.

Invoices. If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December; however, make sure you keep an eye on estimated tax requirements. Conversely, if you anticipate a lower income next year, consider deferring sending invoices to next year.

Withholding. If you know you have a set amount of income coming in this year that is not covered by withholding taxes, there is still time to increase your withholding before year-end and avoid or reduce any estimated tax penalty that might otherwise be due.

Avoid the penalty by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

Accelerating or Deferring Income and Expenses

Most taxpayers anticipate increased earnings from a job or investments from year to year, so accelerating income works well. On the flip side, if you are retiring and anticipate a lower income next year or you know you will have significant medical bills, you might want to consider deferring expenses to the following year.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of deferring income and/or accelerating expenses might allow you to claim deductions, credits, and other tax breaks for 2022, depending on your situation. These types of tax benefits include Roth IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.

Accelerating income into 2022 is also a good idea if you anticipate being in a higher tax bracket next year. It is especially true for taxpayers whose earnings are close to threshold amounts in 2023, making them liable for the Additional Medicare Tax or Net Investment Income Tax ($200,000 for single filers and $250,000 for married filing jointly). See more about these two topics below.

Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or any other large asset that may be subject to tax

Examples of accelerating deductions include:

  • Paying an estimated state tax installment in December instead of at the January due date. However, if 2022 state/local income and property taxes already exceed $10,000, there is no benefit to accelerating the January 2023 payment into December 2022.
  • Paying your entire property tax bill, including installments due in 2023, by year-end. This does not apply to mortgage escrow account and again, is not beneficial if state/local income and property taxes exceed $10,000.
  • Paying 2023 tuition in 2022 to take full advantage of the American Opportunity Tax Credit, an above-the-line tax credit worth up to $2,500 per student that helps cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.

Additional Medicare Tax

Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns. They may, however, request that their employers withhold additional income tax from their pay prior to the end of 2022.

If you’re a taxpayer who is close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax (NIIT) as well (more about the NIIT below).

Alternative Minimum Tax

The alternative minimum tax (AMT) applies to high-income taxpayers that take advantage of deductions and credits to reduce their taxable income. The AMT ensures that those taxpayers pay at least a minimum amount of tax. In 2022, the phaseout threshold increased to $539,900 ($1,079,800 for married filing jointly). Both the exemption and threshold amounts are indexed for inflation.

AMT exemption amounts for 2022 are as follows:

  • In 2022, the exemption amounts begin to phase out at $539,900 ($1,079,800 for married filing jointly). Both the exemption and threshold amounts are indexed for inflation.
  • $75,900 for single and head of household filers,
  • $118,100 for married people filing jointly and for qualifying widows or widowers,
  • $59,050 for married people filing separately.

Charitable Contributions

Property, as well as money, can be donated to a charity. You can generally take a deduction for the property’s fair market value; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses.

Contributions of appreciated property (i.e., stock) provide an additional benefit because you avoid paying capital gains on any profit.

Keep in mind that you must itemize for 2022 (unlike 2021 and 2020) to take advantage of the charitable deduction. You must also keep a written record of your charitable contributions, including travel expenses such as mileage. A donor may not claim a deduction for any cash contribution, check, or other monetary gifts unless the donor maintains a record of the contribution. A canceled check or written receipt from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution is usually sufficient.

Qualified Charitable Distributions (QCDs). Taxpayers who are age 70 1/2 and older can reduce income tax owed on required minimum distributions (RMDs) from IRA accounts by donating them to a charitable organization(s) instead. Of note is that there is an annual maximum amount of $100,000 for single filers and $200,000 for married couples.

Starting in 2020, taxpayers required to take required minimum distributions from IRAs, SIMPLE IRAs, SEP IRAs, or other retirement plan accounts can wait until age 72 (70 1/2 if age 70 1/2 before January 1, 2020).

Investment Gains and Losses

Investment decisions are often more about managing capital gains than minimizing taxes. For example, taxpayers below threshold amounts in 2022 might want to take profits, whereas taxpayers above threshold amounts might want to take losses. Tax-loss harvesting – offsetting capital gains with losses – may be an excellent strategy to use if you have significant losses this year or an unusually high income. Be mindful of the $3,000 net capital loss limitation ($1,500 if married filing separately).

Fluctuations in the stock market are commonplace; don’t assume that a down market means investment losses. If you’ve held the stock for a long time, your cost basis may be low.

Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term capital gains, which are taxed as ordinary income (i.e., the rate is the same as your tax bracket).

In 2022, tax rates on capital gains and dividends remain the same as 2021 rates (0%, 15%, and a top rate of 20%); however, threshold amounts have been adjusted for inflation:

  • 0% – Maximum capital gains tax rate for taxpayers with income up to $41,675 for single filers, $83,350 for married filing jointly;
  • 15% – Capital gains tax rate for taxpayers with income of $41,675 to $459,750 for single filers and $83,350 to $517,200 for married filing jointly;
  • 20% – Capital gains tax rate for taxpayers with income above $459,750 for single filers, $517,200 for married filing jointly.

Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000. As a general rule, if you have a significant capital gain this year, consider selling an investment on which you have an accumulated loss. You can claim capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) as a deduction against income.

Wash Sale Rule. After selling a securities investment to generate a capital loss, you can repurchase it after 30 days. This is known as the “Wash Rule Sale.” The loss will be disallowed if you repurchase it within 30 days. Or you can immediately repurchase a similar (but not the same) investment, e.g., an ETF or another mutual fund with the same objectives as the one you sold.

The wash sale rule only applies to stocks and securities. It does not currently apply to cryptocurrencies such as Bitcoin, which means you can sell Bitcoin and immediately buy it back.

If you have losses, you might consider selling securities at a gain and then immediately repurchasing them since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment will be restored, and you will have a higher cost basis for your new investment (i.e., any future gain will be lower).

Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT) is a 3.8 percent tax applied to investment income such as long-term capital gains for earners above a certain threshold amount ($200,000 for single filers and $250,000 for married taxpayers filing jointly). It is not indexed for inflation.

Short-term capital gains are subject to ordinary income tax rates and the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not subject to the NIIT, provided the individual business owner materially participates in the business.

Mutual Fund Investments

Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether it will be paid early in the following year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.

Action: You invest $20,000 in a mutual fund in 2022. You opt for automatic reinvestment of dividends, and in late December of 2022, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.

Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.

The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these are reported to you as “ordinary dividends” that don’t qualify for relief.

Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date. To find out a fund’s ex-dividend date, call the fund directly.

Year-End Giving To Reduce Your Potential Estate Tax

The federal gift and estate tax exemption is currently set at $12.06 million in 2022 ($25.84 million for a married couple). The maximum estate tax rate is set at 40 percent.

Gift Tax. Sound estate planning often begins with lifetime gifts to family members. In other words, gifts that reduce the donor’s assets are subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax. Gifts to a donee are exempt from the gift tax for amounts up to $16,000 a year per donee in 2022 and increase to $17,000 for 2023.

An unused annual exemption doesn’t carry over to later years. To use the exemption for 2022, you must make your gift by December 31.

  • Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $32,000 ($16,000 each). Though what’s given may come from you, your spouse, or both, you must consent to such “split gifts.”
  • Gifts of “future interests” are assets that the donee can only enjoy at some future period, such as certain gifts in trust, and generally don’t qualify for an exemption. Gifts for the benefit of a minor child, however, can be made to qualify.
  • Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.
  • You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings and built-in gain on the sale.

Gift tax returns for 2022 are due on the same date as your income tax return (April 18, 2023). Gifts over $16,000 (including husband-wife split gifts totaling more than $16,000) and gifts of future interests must file a gift tax return. Though you are not required to file if your gifts do not exceed $16,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed.”

Tax Rate Structure for the Kiddie Tax

Children with unearned income are allowed a standard deduction of the greater of $1,150 or the child’s earned income plus $400, but not more than the regular standard deduction ($12,950 in 2022). The next $1,150 of unearned income is taxed at the child’s tax rate. Any amounts over $2,300 are taxed at the rates for single individual filers.

Exception. If the child is under age 19 (or under age 24 and a full-time student) and both the parent and child meet certain qualifications, then the parent can include the child’s income on the parent’s tax return.

Other Year-End Moves

Roth Conversions. Roth conversions allow taxpayers to convert funds in a pre-tax individual retirement account or 401(k) to a post-tax Roth IRA. The amount withdrawn from the IRA is considered income and subject to tax; however, future Roth IRA distributions are tax-free.

You do not have to convert your entire IRA to a Roth IRA at once; you can convert all or part of it during different tax years. For example, if you have $90,000 in a 401(k) (assuming the 401(k) plan permits a conversion) you can convert it over three years – $30,000 in the first year and $30,000 per year for the next two years. This strategy works well for taxpayers who want to eliminate or minimize RMDs (Required Minimum Distributions) at age 72 from their IRAs and leave more of their retirement account funds to heirs.

Converting to a Roth IRA from a traditional IRA makes sense if you’ve experienced a loss of income (lowering your tax bracket) or your retirement accounts have decreased in value.

Maximize Retirement Plan Contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.

If you are an employee and your employer has a 401(k), contribute the maximum amount ($20,500 for 2022), plus an additional catch-up contribution of $6,500 if age 50 or over, assuming the plan allows this, and income restrictions don’t apply.

If you are employed or self-employed with no retirement plan, you can contribute up to $6,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.

Health Savings Accounts. Consider setting up a health savings account (HSA). The HSA is a tax-advantaged account created for or by individuals covered under high-deductible health plans to save for qualified medical expenses. You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and any amounts you withdraw are tax-free when used to pay medical bills. In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the amount of excess over 7.5 percent of AGI). For amounts withdrawn at age 65 or later not used for medical bills, the HSA functions much like an IRA.

529 Education Plans. Maximize contributions to 529 plans, which can be used for elementary and secondary school tuition, college, or vocational school.

Year-end Tax Planning Strategies for Business Owners

Several end-of-year tax planning strategies are available to business owners to reduce their tax liability. Let’s take a look:

Deferring Income

Businesses using the cash method of accounting can defer income into 2023 by delaying end-of-year invoices so that payment is not received until 2023. Businesses using the accrual method can defer income by postponing the delivery of goods or services until January 2023.

Purchase New Business Equipment

Bonus Depreciation. Businesses are allowed to immediately deduct 100% of the cost of eligible property, such as machinery and equipment that is placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over four years: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.

The first-year 100% bonus depreciation deduction is available for qualifying assets even if they are placed in service for only a few days in 2022.

Section 179 Expensing. Businesses should take advantage of Section 179 expensing this year whenever possible. In 2022, businesses can elect to expense (deduct immediately) the entire cost of most equipment up to a maximum of $1.08 million of the first $2.70 million of property placed in service by December 31, 2022. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.70 million threshold and eliminated above amounts exceeding $3.78 million.

Qualified Property. Qualified property is defined as property placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.

Taxpayers can also elect to include certain improvements made to nonresidential real property after the date the property was first placed in service.

1. Qualified improvement property refers to any improvement to a building’s interior; however, improvements do not qualify if they are attributable to:

  • the enlargement of the building,
  • any elevator or escalator or
  • the internal structural framework of the building.

2. Roofs, HVAC, fire protection, alarm, and security systems.

These changes apply to property placed in service in taxable years beginning after December 31, 2017.

Real estate qualified improvement property is eligible for immediate expensing, thanks to the CARES Act, which corrected an error in the Tax Cuts and Jobs Act.

Other Year-End Moves to Take Advantage Of

Qualified Business Income Deduction. Many business taxpayers – including owners of businesses operated through sole proprietorships, partnerships, and S corporations, as well as trusts and estates, may be eligible for the qualified business income. This deduction is worth up to 20 percent of qualified business income (QBI) from a qualified trade or business for tax years 2018 through 2025. Depending on your taxable income, the QBI is subject to limitations including the type of trade of business, the amount of W-2 wages paid by the trade or business, and the unadjusted basis immediately after acquisition of qualified property held by the trade or business.

The QBI is complex, and tax planning strategies can directly affect the amount of deduction, i.e., increase or reduce the dollar amount.

Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees with average annual wages of $56,000 in 2020 (indexed for inflation) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).

Business Energy Investment Tax Credit (ITC). The Inflation Reduction Act of 2022 (IRA) expanded eligible technologies and extended the expiration date of the credit, in addition to several other changes. As such, business energy investment tax credits are still available, and businesses that want to take advantage of these tax credits (worth up to 30 percent) can still do so.

Business energy credits are available for the following technologies:

Solar Water Heat, Solar Space Heat, Geothermal Electric, Solar Thermal Electric, Solar Thermal Process Heat, Solar Photovoltaics, Wind (All), Geothermal Heat Pumps, Municipal Solid Waste, Combined Heat & Power, Fuel Cells using Non-Renewable Fuels, Tidal, Wind (Small), Geothermal Direct-Use, Fuel Cells using Renewable Fuels, Microturbines, Lithium-ion, Offshore Wind.

Repair Regulations. Where possible, end-of-year repairs and expenses should be deducted immediately rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) can take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or invoice). Businesses with applicable financial statements can deduct $5,000. Small businesses with gross receipts of $10 million or less can also take advantage of the safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.

Depreciation Limitations on Luxury, Passenger Automobiles, and Heavy Vehicles. Tax reform changed depreciation limits for luxury passenger vehicles placed in service after December 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the maximum allowable depreciation deduction for 2022 is $11,200 for the first year.

Deductions are based on a percentage of business use. A business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent.

For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through December 31, 2022. Combined with the increased depreciation allowance above, the deduction amounts to as much as $19,200 in 2022.

Heavy vehicles, including pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds, are treated as transportation equipment instead of passenger vehicles. As such, heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well.

Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2022.

Paid Family and Medical Leave Credit. A business tax credit is available for employers providing paid family and medical leave to qualifying employees through 2025. Employers must have a written policy that meets certain requirements and other conditions. A paid leave policy for general purposes, such as sick leave or paid time off (PTO) does not qualify an employer for the credit. The credit, set to expire in 2020, was extended through 2025. It ranges from 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave per taxable year.

Work Opportunity Tax Credit (WOTC). Extended through 2025 (The Consolidated Appropriations Act, 2021), the Work Opportunity Tax Credit is available for employers who hire individuals from certain targeted groups. Among the eligible individuals are veterans and long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.

Year-end Tax Planning Could Make a Difference in Your Tax Bill

If you’d like more information, please call to schedule a consultation to discuss your specific tax and financial needs and develop a plan that works for your business.

Tips for Avoiding an IRS Tax Audit

Although the chances of taxpayers being audited have declined in recent years, with taxes becoming more complicated every year, there is always the possibility that a tax mistake turns into an IRS tax audit. Avoiding “red flags” like the ones listed below could help.

Claiming Business Losses Year After Year

When you operate a business and file Schedule C, the IRS assumes you operate that business to make a profit. Claiming losses year after year without any profit raises a red flag with the IRS.

Failing to Report Income from Form 1099

Resist the temptation to underreport your income if you are self-employed or have a second job. The IRS receives the same 1099 forms that you do, and even if you didn’t receive a Form 1099 when you think you should have, you can’t be sure the IRS didn’t either. If the IRS finds a mismatch, you will hear about it.

Early Withdrawals From a Retirement Account

Generally, if you withdraw money from a retirement account before age 59 1/2, you will need to pay a 10 percent penalty. You will also owe income tax on the amount withdrawn unless you qualify for an exception. Sometimes – but not always – these types of early withdrawals trigger an audit, typically a correspondence audit where the IRS sends you a letter.

Excessive Business Expense Deductions

Too many deductions for your income and type of business, claiming 100 percent use of a car for business, and inflating business meals, travel, and entertainment expenses are examples of excessive business expenses that could raise a red flag. Always save receipts and document your mileage and expenses.

Failing to Report Winnings or Claiming Big Gambling Losses

Professional gamblers report winnings/losses on Schedule C, Profit or Loss from Business (Sole Proprietorship). They can also deduct costs related to their professions, such as lodging and meals. Gambling winnings are reported on Form W-2G, which is sent to the IRS. As such, you must report this income. You may deduct gambling losses, but you must itemize your deductions on Schedule A (Form 1040) and keep a record of your winnings and losses. Ordinary taxpayers (recreational gamblers) report income/losses as “Other Income” on Schedule 1 of their Form 1040 tax return.

What To Do if You Are Audited

If you’ve received correspondence from the IRS in the U.S. mail that indicates that you are being audited, don’t try to handle it yourself. Instead, contact the office immediately for assistance.

Taxpayers who have been audited or otherwise interacted with the IRS should know that they have the right to know when the IRS has finished the audit. The right to finality is one of ten basic taxpayer rights – known collectively as the Taxpayer Bill of Rights. All taxpayers dealing with the IRS are entitled to these rights.

Understanding IRAs: Terms to Know

IRAs, or Individual Retirement Arrangements, provide tax incentives for people to make investments that can provide financial security for their retirement. To help people better understand this type of retirement savings account, here’s a basic overview of terms to know:

Contribution. The money that someone puts into their IRA. There are annual limits to contributions depending on their age and the type of IRA. Generally, taxpayers or their spouses must have earned income to contribute to an IRA.

Distribution. The amount that someone withdraws from their IRA.

Withdrawals. Taxpayers may face a 10% penalty and a tax bill if they withdraw money before age 59 ½ unless they qualify for an exception.

Required distribution. There are requirements for withdrawing from an IRA:

  • Someone generally must start taking withdrawals from their IRA when they reach age 70 1/2.
  • Per the 2019 SECURE Act, if a person’s 70th birthday is on or after July 1, 2019, they do not have to take withdrawals until age 72.
  • Special distribution rules apply for IRA beneficiaries.

Traditional IRA. An IRA where contributions may be tax-deductible. Generally, the amounts in a traditional IRA are not taxed until they are withdrawn.

Roth IRA. This type of IRA is subject to the same rules as a traditional IRA but with certain exceptions:

  • A taxpayer cannot deduct contributions to a Roth IRA.
  • Qualified distributions are tax-free.
  • Roth IRAs do not require withdrawals until the owner dies.

Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.

Simplified Employee Pension. This is known as a SEP-IRA. An employer can contribute toward their own retirement and their employees’ retirement. The employee owns and controls a SEP.

Rollover IRA. This is when the IRA owner receives a payment from their retirement plan and deposits it into a different IRA within 60 days.

Understanding the tax implications of your retirement planning choices is essential. If you haven’t started saving for retirement, call the office and speak to a tax professional who will help you figure out a plan that works for you.

Deducting Casualty Losses on a Tax Return

Every year, hurricanes, tornadoes, floods, wildfires, and other natural disasters affect US citizens. The bad news is that recovery efforts after natural disasters can be costly. For instance, when hurricanes strike, they not only cause wind damage but can cause widespread flooding.

Many homeowners are not covered for damage due to flooding because most standard insurance policies do not cover flood damage. Fortunately, tax relief is available – but only if you meet certain conditions. For business owners and self-employed individuals who may owe estimated taxes, the IRS typically delays filing deadlines for taxpayers who reside or have a business in the disaster area.

Fortunately, personal casualty losses are deductible on your tax return as long as the property is in a federally declared disaster zone. Please call the office if you are not sure.

Casualty loss rules for business or income property may be different than rules for property held for personal use.

You must also meet the following four conditions:

1. The loss was caused by a sudden, unexplained, or unusual event.

Natural disasters such as flooding, hurricanes, tornadoes, and wildfires all qualify as sudden, unexplained, or unusual events.

2. The damages were not covered by insurance.

You can only claim a deduction for casualty losses that are not covered or reimbursed by your insurance company. Keep in mind that timing is important. If you submit a claim to your insurance company late in the year, your claim might not be processed before it is time to prepare your taxes. One solution is to file for a 6-month extension on your taxes. If you have any questions about this, please call the office.

3. The dollar amount of your losses was greater than the reductions required by the IRS.

To claim casualty losses on your tax forms, the IRS requires several “reductions.” The first reduction is referred to as the $100 loss limit and requires taxpayers to subtract $100 from the total loss amount.

Next, you must reduce the loss amount by 10 percent of your adjusted gross income (AGI). Here is an example: Let’s say your AGI is $35,000, and your insurance company paid for all the losses except the $5,800 you incurred due to tornado damage. First, you would subtract $100 and then reduce that amount by $3,500 (10%). The amount you could deduct as a loss would be $2,200.

4. You must itemize.

To claim a deduction for the loss, you must itemize your taxes. If you normally don’t itemize but have a large casualty loss, you can calculate your taxes both ways to figure out which method gives you the lowest tax bill. Please call if you need help figuring out which method is best for your circumstances.

Two Options for Deducting Casualty Losses on Your Tax Returns

Generally, casualty losses are deductible in the year you sustain the loss – generally, in the year the casualty occurred. For example, if you were affected by a natural disaster this year, you can claim your losses on your 2022 tax return. However, there is another option if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both). In this case, you can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which you sustained the disaster loss. If you choose to deduct losses on your 2021 tax return, you have one year from the date the tax return was due to file an amended return for that preceding tax year.

Do not consider the loss of future profits or income due to the casualty as you figure out your loss.

Figuring the Amount of Loss

Figure the amount of your loss using the following steps:

  • Determine what your adjusted basis in the property was before the casualty occurred. For property you buy, your basis is usually its cost to you. For property you acquire in some other way, such as inheriting it or getting it as a gift, you must figure your basis in another way. Please call the office for more information.
  • Determine the property’s decrease in fair market value (FMV) due to the casualty. FMV is the price at which you could sell your property to a willing buyer. The decrease in FMV is the difference between the property’s FMV immediately before and immediately after the casualty.
  • Subtract any insurance or other reimbursements you received -or expect to receive – from the smaller of those two amounts.

Help is Just a Phone Call Away.

If you have been affected by a natural disaster this year and are wondering if you qualify for tax relief, don’t hesitate to contact the office for assistance.

Eligible Families Can Claim Tax Benefits Until Nov. 17th.

Starting in October, more than 9 million letters were sent out by the IRS to individuals and families who appear to qualify for a variety of key tax benefits – but did not claim them by filing a 2021 federal income tax return. Many in this group may be eligible to claim some or all of the 2021 Recovery Rebate Credit (RRC), the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), and other tax credits depending on their personal and family situation. The letter provides a brief overview of each of these three credits. As a reminder, these and other tax benefits were expanded under last year’s American Rescue Plan Act (ARPA) and other recent legislation.

Claiming the credits.

Many times, individuals and families can get these expanded tax benefits, even if they have little or no income from a job, business, or another source – but the only way to get the valuable benefits is to file a 2021 tax return.

Eligible people, especially families, may qualify for one or more of these valuable tax credits. They may still qualify for tax credits even if they aren’t required to file a tax return. Grandparents, foster parents, or people caring for siblings or other relatives should also check their eligibility to receive the 2021 Child Tax Credit. They might qualify – even if they haven’t qualified in the past. However, eligible individuals must file a 2021 federal tax return to receive the tax credit.

Who is Receiving the Letters?

The Treasury’s Office of Tax Analysis has identified individuals who don’t typically have a tax return filing requirement because they appear to have very low incomes, based on Forms W-2, 1099s, and other third-party statements available to the IRS. The letters are being sent as part of an ongoing effort to encourage people who aren’t normally required to file to look into possible benefits available to them under the tax law. Every year, people can overlook filing a tax return when they may be entitled to tax credits and a refund.

Free File to stay open until November 17.

It’s important to note that people can file a tax return even if they haven’t received their letter yet. There is no penalty for a refund claimed on a tax return filed after the regular April 2022 tax deadline. As a reminder, the fastest and easiest way to get a refund is to file an accurate return electronically and choose direct deposit.

To help people claim these benefits without charge, Free File will remain open for an extra month this year until November 17, 2022. Available only at, Free File enables people whose incomes are $73,000 or less to file a return online for free using brand-name software. Please contact the office immediately for assistance if you need help understanding how to claim these credits.

Individuals whose incomes are below $12,500 and couples whose incomes are below $25,000 may be able to file a simple tax return to claim the 2021 Recovery Rebate Credit – which covers any stimulus payment amounts from 2021 they may have missed – and the Child Tax Credit. Individuals do not need to have children in order to use Get Your Child Tax Credit to find the right filing solution for them.

To recap, the three credits include:

  • An expanded Child Tax Credit: Families can claim this credit, even if they received monthly advance payments during the last half of 2021. The total credit can be as much as $3,600 per child.
  • A more generous Earned Income Tax Credit: The law boosted the EITC for childless workers. There are also changes that can help low- and moderate-income families with children. The credit can be as much as $1,502 for workers with no qualifying children, $3,618 for those with one child, $5,980 for those with two children, and $6,728 for those with at least three children.
  • The Recovery Rebate Credit: Those who missed out on last year’s third round of Economic Impact Payments (EIP3) may be eligible to claim the RRC. Often referred to as stimulus payments, this credit can also help eligible people whose EIP3 was less than the full amount, including those who welcomed a child in 2021. The maximum credit is $1,400 for each qualifying adult plus $1,400 for each eligible child or adult dependent.

Many filers may also qualify for two other benefits with a tax return filed for 2021:

  • An increased Child and Dependent Care Credit: Families who pay for daycare so they can work or look for work can get a tax credit worth up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons.
  • A deduction for gifts to charity: Most tax-filers who take the standard deduction can deduct eligible cash contributions they made during 2021. Married couples filing jointly can deduct up to $600 in cash donations, and individuals can deduct up to $300 in donations. In addition, itemizers who make large cash donations often qualified to deduct the full amount in 2021.

Claiming these credits does not affect the ability of someone to be eligible for federal benefits like Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). Claiming these credits also does not affect an individual’s immigration status, ability to get a green card, or immigration benefits.

Please call if you have any questions about these and other tax credits you may be entitled to in 2021.

Watch Out for Natural Disaster Donation Scams

After a natural disaster, people often rally to help victims by donating money to charitable organizations that help disaster victims. Unfortunately, this can allow criminals to prey on them by soliciting donations from fake charities. As such, before donating to charity, people should ensure their money goes to a reputable organization.

What taxpayers should know:

Be suspicious of unsolicited contact. Scammers often contact their possible victims by telephone, social media, email, or in person. They may also pose as federal agencies to dupe disaster victims trying to get disaster relief. Taxpayers should also know or be aware of the following:

  • Thieves may pose as a representative of a charity to ask for money or private information from well-intentioned taxpayers.
  • Scammers may set up bogus websites using names that sound like real charities. When a taxpayer searches for a charity online, they find a fake website or social media page instead.
  • Donors can use the Tax Exempt Organization Search tool on to find or verify qualified charities. Donations to these real charities may be tax deductible.
  • Taxpayers should always give by check or credit card to have a record of the donation.
  • Donors shouldn’t give out personal financial information to anyone who asks for money, such as Social Security numbers, credit card information, bank account numbers, and passwords.

What disaster victims should know:

  • Scammers may claim to work for the IRS. The thieves say they can help victims file casualty loss claims and get tax refunds.
  • Disaster victims can call the IRS disaster assistance line at 866-562-5227. IRS representatives will answer questions about tax relief or disaster-related tax issues.


If you think you’ve been a victim of a charitable scam, it’s important to take immediate action. If you have any questions or need assistance, help is just a phone call away.

Taxpayer Alert: Significant Increase in Texting Scams

To date, the IRS has identified and reported thousands of fraudulent domains tied to multiple text scams, known as smishing, targeting taxpayers. Recently, IRS-themed smishing has increased significantly. As such, taxpayers are reminded to be on the lookout for scams and schemes that could put sensitive tax data at risk – especially this latest IRS-themed texting scams aimed at stealing personal and financial information.

How smishing text scams work:

Campaigns target mobile phone users, and the scam messages often look like they’re coming from the IRS, with fake messages known as “lures.” These fake text messages typically offer COVID relief, tax credits, or help setting up an IRS online account. In the latest smishing activity, the scam texts ask taxpayers to click a link or call a telephone number where criminals will collect their personal or financial information.

Taxpayers are reminded that the IRS does not send emails or text messages asking for personal, financial information or account numbers.

How to report IRS-related smishing:

The IRS maintains [email protected] to process complaints tied to IRS, Treasury, and tax-related online scams. Recipients of these IRS-related scams should report them to the IRS via email: [email protected]

Reporting text scams allows the agency to report the scams to the appropriate security professionals to track and disrupt these scams. Taxpayers should not report smishing involving other agencies or brands to this email address.

If you have received a smishing text scam, take the following steps to capture and report the details of the IRS-related smishing text:

  1. Create a new email to [email protected]
  2. Copy the caller ID number or email address.
  3. Paste the number or email address into the email.
  4. Press and hold the SMS/text message and select “copy.”
  5. Paste the message into the email; screenshots can be sent if necessary.
  6. If possible, include the exact date, time, time zone, and telephone number that received the message.
  7. Send the email to [email protected]

Recipients can also copy and forward scam SMS/text messages to wireless providers and send the text to 7726 (SPAM). This helps the provider spot and block similar messages in the future.

Finally, anyone receiving any scamming incident – successful and attempted – should also report these incidents to the Internet Crime Complaint Center.

Beware Third Parties Promoting Improper ERC Claims

Taxpayers are always responsible for the information reported on their tax returns. Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true.

As such, employers should be wary of third parties taking improper positions related to taxpayer eligibility for and computation of the credit – advising them to claim the Employee Retention Credit (ERC) when they may not qualify. These third parties often charge large upfront fees or a fee contingent on the refund amount. Further, they may not inform taxpayers that wage deductions claimed on the business’s federal income tax return must be reduced by the amount of the credit.

Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest. Suppose the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit. In that case, the business should file an amended income tax return to correct any overstated wage deduction.

What is the Employee Retention Credit (ERC)?

The ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.

To be eligible for the ERC, employers must have:

  • Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
  • Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
  • Qualified as a recovery startup business for the third or fourth quarters Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021 Notice 2021-2 of 2021.

As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages reported as payroll costs in obtaining PPP loan forgiveness or used to claim certain other tax credits.

To report tax-related illegal activities relating to ERC claims, submit Form 3949-A, Information Referral. You should also report instances of fraud and IRS-related phishing attempts to the Treasury Inspector General for Tax Administration at 800-366-4484.

Avoid a Tax Surprise: Check Your Withholding

While tax season may seem far away, the reality is that there are only two months left in the year. Now is the perfect time to review withholding and estimated tax payments to avoid a surprise tax bill next year.

Adjust tax withholding

Withholding is the amount of federal income tax withheld from an employee’s paycheck. The amount of income tax an employer withholds from an employee’s regular pay depends on two things:

  • The amount they earn.
  • The information they give their employer on Form W–4.

Because federal taxes are pay-as-you-go, taxpayers must withhold enough from their paychecks or pay enough in estimated tax. If they don’t, they risk being charged a penalty. All taxpayers should review their federal withholding each year to ensure they’re not having too little or too much tax withheld.

Individuals can use the IRS Tax Withholding Estimator tool at to help decide if they should make a change to their withholding. This online tool guides users, step-by-step, through the process of checking their withholding and provides withholding recommendations to help aim for their desired refund amount when they file next year.

Taxpayers can check with their employer to update their withholding or submit a new Form W-4, Employee’s Withholding Certificate.

Make estimated payments

Taxpayers may need to make quarterly estimated tax payments in a few situations:

  • If the amount of income tax withheld from a taxpayer’s salary or pension isn’t enough.
  • If they receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards.
  • If they are self-employed.

Estimated tax payments are due from individual taxpayers on April 15, June 15, September 15, and January 17. The fastest and easiest way to make estimated tax payments is using Direct Pay or the Electronic Federal Tax Payment System. Other payment options are available at as well.

Other items that may affect 2022 taxes:

Some unforeseen life events can be a trigger to make withholding adjustments. They include:Coronavirus tax relief. Tax help for taxpayers, businesses, tax-exempt organizations, and others – including health plans – affected by the coronavirus (COVID-19).Disasters such as wildfires and hurricanes. Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location a major disaster area.Job loss can create new tax issues.Workers moving into the gig economy due to the pandemic. People earning income in the gig economy should consider estimated tax payments to avoid a balance due or penalties when they file.

Don’t hesitate to contact the office if you think you might face a tax surprise next year. Help is just a phone call away.

Exploring QuickBooks’ Insights and Snapshots Pages

There’s more than one way to get where you’re going in QuickBooks. The software was designed to make similar information available by taking multiple paths and allows you to choose what makes the most sense for you and what’s most convenient.

Let’s say you need to get a quick summary of your finances. There are multiple choices. You could, for example:

  • Run a Report. This gives you the opportunity to narrow down the data in your company file so QuickBooks only displays exactly what you want to see. It also takes time.
  • Go to the Customer Center or Vendor Center. You can learn everything you need to know about your business associates and related transactions. But again, this method could be faster.>/li>

There are better ways to get fast access to information about your company’s health: Insights and Snapshots.

What Are Insights?

When you open the 2021 version of QuickBooks (this is also available in some earlier versions), you’ll see two tabs at the top. One says Home Page and the other, Insights. Click on Insights.

 Figure 1 - You can modify QuickBooks' <strong>Insights</strong> page to display just the set of charts and graphs that you want.

Figure 1: You can modify QuickBooks’ Insights page to display just the set of charts and graphs that you want.

To ensure that you see everything available, click the gear icon in the upper right. This opens a list of all the charts and graphs available on the Insights page. If they’re not all checked, go ahead and click in front of the ones that aren’t turned on so you can see everything at first. You can change this later.

Directly below the gear icon, QuickBooks displays either Cash Basis or Accrual Basis. You would have established this when you were setting up QuickBooks. Please call if you’re unsure what the difference is or whether you made the right choice.

How Do You See All of the Charts?

QuickBooks can’t show all of the content available for the Insights screen at one time, so you won’t see everything if you’ve selected all seven options. You should see the Profit & Loss chart at the top. You can change the date range by clicking the down arrow next to the field in the upper left. Below are two additional charts that remain on the screen even if you move on to additional content: Income and Expenses. These three graphs give you a quick look at whether you’re making or losing money. Two links here allow you to Create Invoice and Create Bill.

To get to the other charts, click the Next arrow to the right of Profit & Loss. Keep clicking to see six more graphical representations of various elements of your business. They are Prev(ious) Year Income Comparison, Top Customers by Sales, Income and Expense Trend, Business Growth, Net Profit Margin, and Prior Year Expense Comparison. Like you could with Profit & Loss, you can change the date ranges for these charts.

The first three that appear are self-explanatory. Please let us know if you have questions about any of the others. These charts can provide a good understanding of problems that may be lurking, and we encourage you to look at them every time you open QuickBooks.

What Are Snapshots?

 Figure 2 - You can see a great deal of information about individual customers by viewing their <strong>Customer Snapshot</strong>.

Figure 2: You can see a great deal of information about individual customers by viewing their Customer Snapshot.

There’s some overlap between Insights and Snapshots in terms of content, but there are plenty of new charts here, too, in addition to tables and links to actions. Click Snapshots in the QuickBooks toolbar to see them. You’ll see that there are three kinds, accessible by clicking labeled tabs:

  • Company. The Company Snapshot displays some of the charts you saw on the Insights screen, but it also includes tables and graphs like Account Balances, Customers Who Owe Money, and Expense Breakdown.
  • Payments. How do your accounts receivable (A/R) look? This screen tells you in great detail. One chart compares your paid invoices to your unpaid ones, and another shows how much money is tied up in overdue payments (1-30, 31-60, 61-90, and greater than 90 days). There are tables listing Recent Transactions, Customers Who Owe Money, and Payment Reminders. And links take you to related reports and payment activities.
  • Customer. This screen provides different information about each customer than you’ll find in the Customer Center. There are details like Number of years as a customer and Average days to pay. Tables list Recent Invoices and Recent Payments, and charts illustrate their Sales History and Best-Selling Items.

If you’d like to make one of these Snapshots appear as your opening page, display it, and then open the Edit menu and select Preferences. Click Desktop View in the left vertical pane. With My Preferences open, click on the button in front of Save current desktop to check it, and uncheck Show Home Page when opening a company file.

It’s tempting to open QuickBooks, do your daily work, then get out. But it is strongly recommended that you take a few minutes every time you run the software to use these tools that excel at showing you how your company is doing. Questions? Answers are just a phone call away.

Tax Due Dates for November 2022

During November

Employers – Income Tax Withholding. Ask employees whose withholding allowances will be different in 2023 to fill out a new Form W-4. The 2023 revision of Form W-4 will be available on the IRS website by mid-December.

November 10

Employees who work for tips – If you received $20 or more in tips during October, report them to your employer. You can use Form 4070.

Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the third quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.

November 15

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in October.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in October.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intentended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, not is it sufficient to avoid tax related penalties. If desired, we would be please to perform the requisite research and provide you with a detailed written analysis. Such an engagment may be the subjuest of a separate engagement letter that would define the scope and limites of the desired consultation services.