Summertime Tax Planning Tips

Now that Memorial Day has passed, many people are thinking more about summer vacations than taxes. But summer is a great time to review withholding and see if your summer plans will affect next year’s tax return. Here are some common summertime tax situations and tips to help you figure out if they apply to your tax situation.

Getting married

If you’re a newlywed and your name has changed, you should report the change to the Social Security Administration. You should also report any address change to the United States Postal Service, your employer, and the IRS. To report a change of address for federal tax purposes, complete Form 8822, Change of Address, and submit it to the IRS. This will help make sure you receive the documents you will need to file your taxes.

Sending kids to summer day camp

Unlike overnight camps, the cost of summer day camp may count towards the child and dependent care credit.

Working part-time

Summertime and part-time workers may not earn enough to owe federal income tax, but they should still remember to file a return. They’ll need to file early next year to get a refund for taxes withheld from their checks this year.

Gig economy work

You may find it convenient to earn summer income by providing on-demand work, often through an online platform like an app or website. Examples include ride sharing, delivery services and other activities. If this sounds like you, be aware that you may be categorized as either an employee or an independent contractor, depending on the nature of your work.

Normally, employees receive a Form W-2 from their employer to account for the summer’s work. They then use this to prepare their tax return. If you are categorized as an employee, you should receive your W-2 by January 31 next year. Employees will get a W-2 even if they no longer work for the summertime employer.

Independent contractors, on the other hand, won’t receive a W-2 for their work, and aren’t subject to withholding. This makes them responsible for paying their own income taxes plus Social Security and Medicare taxes.

Adjust your withholding now to avoid tax surprises next year

You can avoid a tax surprise next filing season by reviewing your withholding now. Life events like marriage, divorce, having a child, or a change in income can all affect taxes. If you contact our office, we can help you assess your situation and determine whether you need to change your withholding by submitting a new Form W-4 to your employer.

Work Opportunity Tax Credit Extended

Everyone knows that it’s tough to find employees right now. It seems like every business has a “Help Wanted” sign in their front window. With the employment market so tight, the federal government has taken steps through the Work Opportunity Tax Credit (WOTC) to encourage businesses to consider employees that have historically been overlooked by employers.

The WOTC, which encourages employers to hire workers certified as members of any of ten targeted groups facing barriers to employment, has been extended through the end of 2025. The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. The WOTC may be claimed by any employer that hires and pays wages to members of one of 10 targeted groups. In general, the WOTC is equal to 40% of up to $6,000 (up to $2,400 maximum) of wages paid to an individual who:

  • is in their first year of employment;
  • is certified as being a member of a targeted group; and
  • performs at least 400 hours of services for that employer.

The ten targeted groups are:

  • Temporary Assistance for Needy Families recipients
  • Qualified unemployed veterans, including disabled veterans
  • Formerly incarcerated individuals
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in Empowerment Zones
  • Supplemental Nutrition Assistance Program recipients
  • Supplemental Security Income recipients
  • Long-term family assistance recipients
  • Long-term unemployment recipients

Claiming the credit

If your business would like to claim the WOTC, the job applicant will need to be certified as being eligible for this credit. On or before the day that an offer of employment is made, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). The employer has 28 calendar days from the new employee’s start date to submit Form 8850 to the designated local agency located in the state where the employee works. Additional forms may be required by the Department of Labor to obtain certification. Following receipt of a certification from the designated local agency that the employee is a member of one of the 10 targeted groups, taxable employers file Form 5884 (Work Opportunity Credit) and tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans) to claim the WOTC.

If you would like more information about the Work Opportunity Tax Credit and whether your business might be able to take advantage of it, please contact our office so that we can discuss your specific circumstances.

Tax Benefits for Small Businesses

It’s tough owning a small business in the current environment. It can be difficult to get needed supplies, prices keep going up, and it can be stressful trying to grow your business. Luckily there are a few tax breaks that can make running a business a little bit easier.

Enhanced business meal deduction

If you find yourself often entertaining customers, there is an enhanced tax deduction that you may be able to take advantage of. For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. Usually, the limit is 50% of the cost of the meal.

As usual, there are a few conditions. To qualify for the higher limit, the business owner or an employee of the business must be present when food or beverages are provided. Also, the expense can’t be lavish or extravagant, so that $800 bottle of wine you’ve had your eye on probably won’t count. But all in all, this is a change that will be welcomed by any business owner that relies on entertaining to close sales or maintain customer relationships.

Home office deduction

With a growing number of business owners now working from home, many may qualify for the home office deduction (known more formally as the deduction for business use of a home).

Usually, a business owner must use a room or other identifiable portion of the home exclusively for business on a regular basis. Exceptions to the exclusive-use standard apply to home-based daycare facilities and to portions of the home used for business storage, where the home is the only fixed location for that business.

There are different ways to calculate this deduction, so if you qualify for it, we encourage you to contact our office so that we can discuss which calculation would be more advantageous given your circumstances.

Other tax benefits

In addition to the two deductions discussed above, there are a variety of other deductions that a business owner might qualify for. There is a deduction for business start-up expenses, qualified business income, and even health-insurance for people who are self-employed. Now is the perfect time to start planning for the 2022 tax year, so please contact our office so that we can help.

Resolving After-Tax-Day Issues

The April 18th income tax deadline has come and gone, but that doesn’t mean that everyone is finished dealing with their taxes. Many people, for a variety of reasons, might still have some loose ends from this past tax season that need to be tied up. Here are some of the more common ones, and how you might handle them.

Didn’t file a return

This year’s deadline to file and pay federal income taxes has passed for most people. If you are due a refund, there’s no penalty for filing late. However, if you owe and missed the deadline without requesting an extension, you should file quickly to limit penalties and interest.

Check refund status

You can check on your refund using the Where’s My Refund? tool. It is available on IRS.gov and the IRS2Go app. To use this tool, you will need your Social Security number or ITIN, tax filing status, and the exact amount of the refund claimed on your tax return. The tool updates once daily, so there’s no need to check more often.

Check withholding

You are encouraged to check your withholding using the Tax Withholding Estimator on the IRS website. This will help you make sure your employer is withholding the right amount of tax from your paycheck. Doing this now could help avoid an unexpected tax bill and possibly a penalty when you prepare and file your taxes next year.

You can use the results from the Estimator to help complete a new Form W-4 and adjust your income tax withholding with your employer. If you receive pension income, you can use the results to complete a Form W-4P and submit it to your payer.

Review payment options

If you owe taxes, you can review all payment options online. These include:

Errors on your tax return

After filing your tax return, you may find an error. Common errors taxpayers should fix are those made about filing status, income, deductions, and credits. You usually do not need to file an amended return to fix a math error or if you forgot to attach a form or schedule. Normally, the IRS will correct the math error and notify you by mail. Similarly, the agency will send a letter requesting any missing forms or schedules.

If you are expecting a refund, you should not file an amended return before your original return has been processed.

The IRS issues most refunds within 21 days if you filed electronically and chose direct deposit. However, some returns that have errors or need more review and may take longer to process.

Is It a Hobby or Business?

Most people have a hobby. Maybe it’s scrapbooking, or maybe it’s restoring vintage cars. Our hobbies are important because they help us relax from the stress of everyday life and because they bring us enjoyment. But what happens when someone with a scrapbooking hobby starts to sell some of his greeting cards? Or when a backyard mechanic sells his vintage car at a profit? When our hobbies start to produce income, it might not be clear whether our hobby is still a hobby, or if it has become a business that should enjoy the financial benefits and responsibilities that are attached to its status as a business.

So what exactly is a hobby? A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit. When our hobbies turn into a source of income it may be unclear whether we are still participating in a hobby, or if our hobby has grown into a business.

To help simplify things, the IRS has established factors that must be considered when determining whether an activity is a business or hobby. These factors are whether:

  • You carry out the activity in a businesslike manner and maintain complete and accurate books and records.
  • You put time and effort into the activity to show you intend to make it profitable.
  • You depend on income from the activity for your livelihood.
  • You have personal motives for carrying out the activity such as general enjoyment or relaxation.
  • You have enough income from other sources to fund the activity.
  • Losses are due to circumstances beyond your control or are normal for the startup phase of your type of business.
  • There is a change to methods of operation to improve profitability.
  • You have the knowledge needed to carry out the activity as a successful business.
  • You were successful in making a profit in similar activities in the past.
  • The activity makes a profit in some years and how much profit it makes.
  • You can expect to make a future profit from the appreciation of the assets used in the activity.

In the end, all factors, facts, and circumstances with respect to the activity must be considered when determining if an activity is a hobby or a business. No one factor is more important than another.

If you have questions about whether your hobby might be a business, we encourage you to contact our office so that we can help advise you, and make plans for the upcoming tax year. By taking action now, you might save yourself a big tax bill next year.

Cryptocurrency Disclosure

You may have noticed that there is a virtual currency, or “cryptocurrency”, question at the top of your 2021 tax return. It asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” and it requires a response of “Yes” or “No.” If you’ve used or held Bitcoin, Etherium, or other crytocurrencies in 2021, it’s important that you talk to your tax preparer so that your return can be completed correctly.

When you can check “No”

If you owned virtual currency during 2021, you can still check the “No” box if you have not engaged in any transactions involving virtual currency during the year, or their activities were limited to:

  • Holding virtual currency in your own wallet or account.
  • Transferring virtual currency between your own wallets or accounts.
  • Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal and Venmo.
  • Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.

When you must check “Yes”

The list below covers the most common transactions in virtual currency that require checking the “Yes” box:

  • The receipt of virtual currency as payment for goods or services provided;
  • The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;
  • The receipt of new virtual currency as a result of mining and staking activities;
  • The receipt of virtual currency as a result of a hard fork;
  • An exchange of virtual currency for property, goods, or services;
  • An exchange/trade of virtual currency for another virtual currency;
  • A sale of virtual currency; and
  • Any other disposition of a financial interest in virtual currency.

If you disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, you must check “Yes” and report your capital gain or loss on Schedule D (Form 1040).

If you received any virtual currency as compensation for services, or disposed of any virtual currency that you held for sale to customers in a trade or business, you must report the income as you would report other income of the same type.

Cryptocurrency and its tax treatment can be confusing. If you hold cryptocurrency and are unsure how your position should be treated for tax purposes, please contact our office. We would be happy to help.

Small Business Rent Expenses May Be Deductible

Rent is any amount paid for the use of property that a small business doesn’t own. Typically, rent can be deducted as a business expense when the rent is for property the taxpayer uses for the business. Here are some things small business owners should keep in mind when it comes to deducting rental expenses:

Lease or purchase

  • Sometimes a business must determine whether its payments are for rent or for the purchase of the property, because different tax rules may apply.
  • Businesses must first determine whether an agreement is a lease or a conditional sales contract.
  • Payments made under a conditional sales contract aren’t deductible as rent expense.

Unreasonable rent

Businesses can’t take a rental deduction for unreasonable rents paid. Rent is unreasonable for the purposes of deduction when it is higher than market value or a professional appraisal.

  • Usually, unreasonable rent becomes a problem when business owners and the lessors are related.
  • Rent paid to a related person is reasonable if it’s the same amount a business owner would pay to a stranger for use of the same property.

Office in the home

A business owner’s workplace can be in their home if they have a home office that qualifies as their principal place of business.

    Business owners who rent their home and have a home office as their principal place of business may also qualify for a deduction.

    IRS Publication 587, Business Use of Your Home, Including Use by Daycare Providers, has more details about this deduction.

Rent paid in advance

Rent paid for a business is usually deductible in the year it is paid.

  • If a business pays rent in advance, it can deduct only the amount that applies to the use of the rented property during the tax year. The business can deduct the rest of the payment over the period to which it applies.
  • Business owners can review Publication 535, Business Expenses, for detailed examples on rent paid in advance.

Canceling a lease

A business can usually deduct the costs paid to cancel a business lease.

Why Some Tax Refunds Take Longer to Process

Even though the IRS issues most refunds in less than three weeks if you file electronically and choose direct deposit, some refunds may take longer to process. Many different factors can affect the timing of a refund after the IRS receives a return. For example, a refund may be delayed when:

  • A return has errors or is incomplete
  • A return might be affected by identity theft or fraud
  • A return needs to a correction made to the Child Tax Credit or Recovery Rebate Credit amount
  • A return includes a claim for the Earned Income Tax Credit
  • A return includes a claim for the Recovery Rebate Credit
  • A return includes Form 8379, Injured Spouse Allocation

As always, the fastest way to get a tax refund is by filing electronically and choosing direct deposit.

If you are due a refund and you’re wondering where it is, you can use the Where’s My Refund? tool on the IRS website. Information for the most current tax year filed is generally available within 24 hours after the IRS acknowledges receipt of your e-filed return. If you filed a paper return, you should allow four weeks before checking its status.

2020 tax returns

Waiting on a 2020 tax return to be processed? If your tax return from 2020 still hasn’t been processed, you should still file your 2021 tax return by the April due date or request an extension to file.

People who file their 2021 return electronically will need to provide their their Adjusted Gross Income, or AGI, from their most recent tax return. If you are one of those who are still waiting on your 2020 tax return to be processed, make sure to enter $0 (zero dollars) for last year’s AGI on the 2021 tax return.

Finally, if your 2020 return has not been processed or if you used the Non-Filers tool in 2021 to register for an advance Child Tax Credit payment or third Economic Impact Payment in 2021, there are special instructions that apply to your 2021 tax returns. You should review those special instructions on the IRS website.

Leveraging Kiddie Tax Rules to Save on Owed Taxes

The term “kiddie tax” was introduced by the Tax Reform Act of 1986. The kiddie tax rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2022 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,300 be taxed at their parent’s tax rate.

Application

It’s important to note that the kiddie tax doesn’t apply in all circumstances. It doesn’t apply to all children, and it doesn’t apply to all income.

The kiddie tax applies to:

  • Children under the age of 18
  • Full-time students under the age of 24 and providing less than half of their own financial support
  • Children with unearned incomes above $2,300

The kiddie tax does not apply to:

  • Earned income (wages and self-employed income from things like babysitting or paper routes)
  • Children that are age 18 or older and have earnings providing more than half of their support
  • Gifts received by your child during the year

Calculation

When estimating your kiddie tax obligation, remember that:

  • The first $1,150 of unearned income is generally tax-free
  • The next $1,150 of unearned income is taxed at the child’s (usually lower) tax rate
  • Only unearned income over $2,300 is taxed at the parent’s rate.

Planning

Remember that only unearned income above $2,300 is taxed by the kiddie tax. Because of that limit, there are some tax planning opportunities that exist which can help minimize your tax obligation:

  • Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.
  • Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.
  • Leverage gift giving. If your children are not maximizing tax-free investment income each year, consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.

Properly managed, the kiddie tax rules can be used to your advantage. But be careful, this part of the tax code can create an unwelcome surprise if not handled properly. If you have questions about how the kiddie tax applies to your own situation (or that of your child), please contact our office. We would be happy to help.

Tips for a Quick Tax Refund

The IRS is currently dealing with a huge backlog of tax returns, and stories are rampant of delayed responses to returns that have been properly filed. How can you avoid these problems and receive your tax return as quickly as possible? We’ve put together a few tips to help you do just that:

  • E-file your tax return. The most important thing you can do to make sure that you quickly receive your refund is e-file your tax return. The IRS says approximately 90% of the more than 160 million individual tax returns expected for the 2021 tax year will be e-filed. The majority of these taxpayers will avoid any issues filing their return and getting their refund. If you do e-file, don’t forget to sign Form 8879, which authorizes the e-filing of your return.
  • Stay calm if you receive a letter from the IRS. You may receive an IRS notice indicating you have an unfiled tax return or that you have an unpaid balance on your account. If the notice was mailed because of the backlog and you already filed the tax return in question or paid the amount due listed, the IRS says there is no need to call or respond to the notice. The IRS is continuing to process tax returns from previous years as quickly as possible.
  • Use certified mail. If you must respond to the IRS, be sure to send your response via certified mail. Certified mail provides proof of when your coorespondence was mailed. So even if your response gets lost or caught up in the backlog, you’ll have evidence that you responded by the deadline listed on the notice.
  • Prepare to be patient. The IRS received a record 282 million phone calls during its 2021 fiscal year. Only 32 million of these calls were answered. If you have to call the IRS, the best time to reach them is Wednesday through Friday, especially early mornings starting at 7 am Eastern time.
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