Complete Tax Solutions LLC

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 detemined 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.

If you travel for business, you probably know that you can deduct some of the expenses related to that travel from your income taxes. But knowing which expenses are deductible, and under what circumstances might make your head spin. In this article we want make sense of business travel deductions so that you know what records to keep in order to maximize your deduction.

The basics of business travel deductions

In order for expenses related to your business travel to be deductible, your travel must take you away from your tax home or main place of work for business reasons. For the purposes of this deduction, you are “traveling away from home” if you are away for longer than an ordinary day’s work and you need to sleep to meet the demands of your work while away.

Travel expenses must be ordinary and necessary. They 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 length does not exceed one year.

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

Deductible travel expenses include:

• Travel by airplane, train, bus or car between your home and your 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.

Travel deductions for the self-employed

If you are self-employed, you can deduct travel expenses on your Schedule C (Form 1040). If you are a farmer, you will need to use Schedule F (Form 1040).

Recordkeeping

If you will be claiming deductions for business travel, it’s important to keep good records of your expenses so that you can support your deductions. Keep receipts, canceled checks, credit card statments, and other evidence that supports your expenses so that you can claim your full dedcution.

The nature of work has changed over the last several years. In this time it has become more common for workers to work part-time and on-demand. Uber drivers, Doordash, grocery delivery, it seems like every week you hear about another company built on the so-called “gig economy.”

But the income earned from these types of jobs aren’t immune to the reach of Uncle Sam. Gig workers are still required to report their gig economy earnings on a tax return – whether they earned that money through a part-time, temporary or side gig.

If you have income from a side gig, here are some things to keep in mind as you get ready to file in 2023.

Gig economy income is taxable

• You must report all income on your tax return unless excluded by law, whether or not you receive an information return like a Form 1099.
• You may be required to make quarterly estimated tax payments to pay income tax and self-employment tax on your earnings from side gigs.

Workers report income according to their worker classification

Gig economy workers who perform services, such as driving a car for booked rides, running errands and other on demand work, must be correctly classified. Classification helps these workers determine how to properly report their income.

• If workers are employees, they report their wages from the Form W-2, Wage and Tax Statement.
• If they are independent contractors, they report their income on a Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).

Expenses related to gig economy income may be deductible

If you have a side gig, you may be able to deduct expenses related to that work income, depending on tax limits and rules.

• You may be able to lower the amount of tax you owe by deducting certain expenses.
• It is important to keep records of your business expenses so that you can support any potential tax deductions.

Pay the right amount of taxes throughout the year

An employer typically withholds income taxes from their employees’ pay to help cover taxes their employees owe.

If you are involved in the gig economy there, are two ways to cover you taxes due:

• If you have another job where you are considered an employee, you can submit a new Form W-4 (Employee’s Withholding Certificate) to your employer to have more taxes withheld from your paycheck to cover the tax owed from your side gig.
• You can make quarterly estimated tax payments throughout the year.

If you need help understanding how your side gig might affect your tax situation, please contact our office. We would be happy to help.

If you itemize your deductions on your tax return, you may be interested to know that the IRS has updated the standard mileage rates for the use of a car. For 2023, the rates will be:

• 65.5 cents per mile driven for business use, up 3 cents from the increase that occurred midyear in 2022.
• 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, which is unchanged from the increase that occurred midyear in 2022.
• 14 cents per mile driven in service of charitable organizations. (This rate is set by law and remains unchanged from 2022.)

Also keep in mind that these rates apply not just to gasoline and diesel-powered vehicles, but also to electric and hybrid automobiles.

It is important to note that under the Tax Cuts and Jobs Act, you can’t claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. You also cannot claim a deduction for moving expenses, unless you are a member of the Armed Forces on active duty moving under orders to a permanent change of station.

Finally, remember that you always have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates. It takes more recordkeeping, but depending on your circumstances, it might be worth it.

The IRS has announced a delay in reporting thresholds for third-party settlement organizations that was scheduled to take effect for the upcoming tax filing season.

As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or to the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan of 2021.

As part of this, the IRS released guidance outlining that calendar year 2022 will be a transition period for implementation of the lowered threshold reporting for third-party settlement organizations (TPSOs) that would have generated Form 1099-Ks for taxpayers.

The American Rescue Plan of 2021 changed the reporting threshold for TPSOs. The new threshold for business transactions is $600 per year; changed from the previous threshold of more than 200 transactions per year, exceeding an aggregate amount of $20,000. Under the law, beginning January 1, 2023, a TPSO would have been required to report third-party network transactions paid in 2022 with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions. TPSOs report these transactions by providing individual payee’s an IRS Form 1099-K.

The newly announced transition period delays the reporting of transactions in excess of $600 to transactions that occur after calendar year 2022. The transition period is intended to facilitate an orderly transition for TPSO tax compliance, as well as individual payee compliance with income tax reporting. A participating payee, in the case of a third-party network transaction, is any person who accepts payment from a third-party settlement organization for a business transaction.

The IRS also noted that the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect.

As I’m sure you know, Congress seems to make changes to tax laws just about every year. This year was no exception, so here are a few things related to taxes that you should be aware of as we head into 2023.

Some tax credits return to 2019 levels

Some tax credits that were adjusted in recent years are scheduled to return to 2019 levels. This means that you might receive a smaller refund compared to recent tax years. Changes include amounts for the Child Tax Credit (CTC), Earned Income Tax Credit (EITC) and Child and Dependent Care Credit.

• If you got $3,600 per dependent in 2021 for the CTC, you will (if you’re eligible) get $2,000 for the 2022 tax year.
• For the EITC, if you have no children and received roughly $1,500 in 2021, you will now get $500 in 2022.
• The Child and Dependent Care Credit returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021.

No above-the-line charitable deductions

In recent years, you could take up to a $600 charitable donation tax deduction on your tax return, due to Coronavirus relief passed by Congress. However, in 2022, you may not take an above-the-line deduction for charitable donations if you take the standard decuction.

More people eligible for the Premium Tax Credit

In tax year 2022, you may still qualify for temporarily expanded eligibility for the premium tax credit.

Clean vehicle tax credit

If you are interested in claiming a tax credit for a plug-in electric vehicle, you should be aware that those rules may have changed, depending on when in 2022 you purchased your vehicle. Please contact our office for more information.

In most cases, distributions from a traditional Individual Retirement Account (IRA) are taxable in the year you receive them, but there are some exceptions. A qualified charitable distribution (QCD) is one of these exceptions, and this opens up the possibility of using a QCD to reduce your taxes.

A QCD is a nontaxable distribution made directly by the trustee of your IRA to charitable organizations that are eligible to receive tax-deductible contributions. QCDs can’t be made from Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees IRA.

Making a QCD can benefit you by reducing your taxable income while at the same time supporting your favorite charitable organizations. Best of all, you don’t have to worry about meeting the standard deduction or itemizing deductions with a QCD.

QCD Guidelines

If you are thinking about making a qualified charitable contribution, keep the following guidelines in mind.

• To make a QCD, you must be at least 70½ years old on the day of the distribution.
• A QCD will count toward your required minimum distribution (if any).
• You must have an acknowledgement of the contribution
• The amount of the QCD can’t be more than the amount of the distribution that would count as income.
• You must declare the QCD as income to claim the charitable contribution as a deduction.
• The maximum annual exclusion for QCDs is $100,000 for individuals, or $200,000 for joint returns.
• The amount of QCD contribution limits for exclusion reduce after age 70½.

If you would like more information about qualified charitable distributions, or held determining if you might be able to take advantage of them, please contact our office. We would be happy to help.

If you are an employer, be careful about third parties that may advise you to claim the employee retention credit (ERC) when you don’t qualify. Some third parties are taking positions related to taxpayer eligibility for and computation of the credit that can’t be supported. This could spell trouble for employers that use these third parties to claim an ERC that they are not entitled to.

Many of these businesses charge large upfront fees or a fee that is contingent on the amount of the refund that you receive. They may also fail to inform you that wage deductions claimed on your business’ federal income tax return must be reduced by the amount of the credit.

If your business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.

If you are a business owner, be cautious of schemes and direct solicitations promising tax savings that are too good to be true. You are responsible for the information reported on your tax returns, so if you improperly claim the ERC you could be required to repay the credit along with penalties and interest.

What is the employee retention credit?

The ERC is a refundable tax credit for businesses who continued paying employees while shutdown 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, you must be an employer who meets one the following conditions:

• You 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
• Your business experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021
• Your business qualified as a recovery startup business for the third or fourth quarters of 2021.

Only recovery startup businesses are eligible for the employee retention credit in the fourth quarter of 2021.

Eligible employers cannot claim this credit on wages reported as payroll costs to get PPP loan forgiveness or that they used to claim certain other tax credits at any time.

The IRS has announced that the amount individuals can contribute to their 401(k) plans in 2023 has increased to $22,500, up from $20,500 for 2022. They have also announced increased contribution limits for Individual Retirement Arrangements (IRAs).

Highlights of changes for 2023

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500, up from $20,500.

The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,500, up from $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,000, starting in 2023. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans is increased to $3,500, up from $3,000.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit all increased for 2023.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the 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 2023:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
• 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 $116,000 and $136,000, up from between $109,000 and $129,000.
• 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 $218,000 and $228,000, up from between $204,000 and $214,000.
• 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 $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000. For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000. 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 $73,000 for married couples filing jointly, up from $68,000; $54,750 for heads of household, up from $51,000; and $36,500 for singles and married individuals filing separately, up from $34,000.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.

The Internal Revenue Service has announced the tax year 2023 annual inflation adjustments for manyu tax provisions, including the tax rate schedules and other tax changes. Below are some of the highlights of these changes.

Highlights

The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.

The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:

• The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.

• Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).

  The other rates are:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).

• The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800).

• The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

• For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.

• For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.

• For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.

• For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.

• Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.

• The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.

• The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022.

Items unaffected by indexing

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

• The personal exemption for tax year 2023 remains at 0, as it was for 2022, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

• For 2023, as in 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

• The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 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).