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Tax 101: Credits and Deductions

If you’re not a tax professional, some of the lingo used when talking about taxes might be a little confusing. Today we want to look at two terms that are often confused and which together play an important role in determining how much you are required to pay in taxes: tax credits and tax deductions.

Tax credits and deductions both change your tax bill or refund, but in slightly different ways. It’s important to understand the difference between credits and deductions so that you can know which of these you want to claim, and so you know what records to keep in order to prove your eligibility.

Tax credits

A tax credit reduces your income tax bill dollar-for-dollar.

Some tax credits, such as the Earned Income Tax Credit, are refundable. If your tax bill is less than the amount of a refundable credit, you can get the difference back in your refund.

To claim a tax credit, you should:

  • Keep records to show your eligibility for the tax credits you claim.
  • Check now to see if you qualify to claim any credits next year on your tax return.

Deductions

Deductions can reduce the amount of your income before you calculate the tax you owe.

Most people take the standard deduction. The standard deduction changes each year for inflation. The amount of the standard deduction depends on your filing status, age, whether you’re blind, and whether you are claimed as a dependent by someone else.

Some people must itemize their deductions, and some people may choose to do so because it reduces their taxable income more than the standard deduction. Generally, if your itemized deductions are larger than your standard deduction, it makes sense to itemize.

If you would like help understanding the tax credits and deductions that you are eligible for, please contact our office.

Reducing Taxes with Qualified Charitable Contributions

If you are age 70½ or older, you may be able to exclude a qualified charitable distribution (QCD) of up to $100,000 from your income each year. A QCD is a taxable distribution paid directly from an IRA (other than an ongoing SEP or SIMPLE IRA) to a qualified charity. It cannot be paid to you as the IRA owner.

To take advantage of this tax reducing strategy, you must be at least age 70½ when the QCD distribution to the charity is made. The SECURE 2.0 Act of 2022 did not change the 70½ age to be eligible to make a QCD.

A few features that make a QCD attractive are:

  • A QCD does not affect your income and is tax-free if paid directly from the IRA to an eligible charitable organization.
  • A QCD is available whether you itemize deductions or take the standard deduction.
  • A QCD may also count toward your required minimum distribution for the year.
  • Because a QCD does not count toward income, a QCD does not affect eligibility for certain tax credits that are based on income.

If you would like more information about whether a QCD is a good option for you given your situation, please contact our office. We would be happy to talk things over.

Standard Mileage Rates for 2024

The Internal Revenue Service has issued the 2024 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2024, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 67 cents per mile driven for business use, up 1.5 cents from 2023.
  • 21 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, a decrease of 1 cent from 2023.
  • 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2023.

These rates apply to electric and hybrid-electric automobiles as well as gasoline and diesel-powered vehicles.

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Note that you always have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.

You can use the standard mileage rate but generally must opt to use it in the first year the car is available for business use. Then, in later years, you can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

Increased 1099-K Reporting Threshold Delayed

The IRS has announced a delay of the new $600 Form 1099-K reporting threshold for third party settlement organizations for calendar year 2023. Instead, the agency will treat 2023 as an additional transition year. As a result, reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023.

The IRS also announced that it is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP).

The ARP required third party settlement organizations (TPSOs), which include popular payment apps and online marketplaces, to report payments of more than $600 for the sale of goods and services on a Form 1099-K starting in 2022. These forms would go to the IRS and to taxpayers and would help taxpayers fill out their tax returns. Before the ARP, the reporting requirement applied only to the sale of goods and services involving more than 200 transactions per year totaling over $20,000.

The IRS temporarily delayed the new requirement last year.

Reporting requirements do not apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K.

However, the casual sale of goods and services, including selling used personal items like clothing, furniture and other household items for a loss, could generate a Form 1099-K for many people, even if the seller has no tax liability from those sales.

This complexity in distinguishing between these types of transactions factored into the IRS decision to delay the reporting requirements an additional year and to plan for a threshold of $5,000 for 2024 in order to phase in implementation.

Tax-Related Inflation Adjustments for 2024

The IRS has announced the annual inflation adjustments for more than 60 tax provisions for tax year 2024, including the tax rate schedules and other tax changes. Here are some highlights:

The standard deduction for married couples filing jointly for tax year 2024 rises to $29,200, an increase of $1,500 from tax year 2023. For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600 for 2024, an increase of $750 from 2023; and for heads of households, the standard deduction will be $21,900 for tax year 2024, an increase of $1,100 from the amount for tax year 2023.

Marginal rates: For tax year 2024, the top tax rate remains 37% for individual single taxpayers with incomes greater than $609,350 ($731,200 for married couples filing jointly).

The other rates are:

  • 35% for incomes over $243,725 ($487,450 for married couples filing jointly)
  • 32% for incomes over $191,950 ($383,900 for married couples filing jointly)
  • 24% for incomes over $100,525 ($201,050 for married couples filing jointly)
  • 22% for incomes over $47,150 ($94,300 for married couples filing jointly)
  • 12% for incomes over $11,600 ($23,200 for married couples filing jointly)
  • 10% for incomes of $11,600 or less ($23,200 or less for married couples filing jointly)

The Alternative Minimum Tax exemption amount for tax year 2024 is $85,700 and begins to phase out at $609,350 ($133,300 for married couples filing jointly for whom the exemption begins to phase out at $1,218,700). For comparison, the 2023 exemption amount was $81,300 and began to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption began to phase out at $1,156,300).

The tax year 2024 maximum Earned Income Tax Credit amount is $7,830 for qualifying taxpayers who have three or more qualifying children, an increase of from $7,430 for tax year 2023. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

For tax year 2024, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $315, an increase of $15 from the limit for 2023.

For the taxable years beginning in 2024, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,200. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $640, an increase of $30 from taxable years beginning in 2023.

For tax year 2024, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,800, an increase of $150 from tax year 2023, but not more than $4,150, an increase of $200 from tax year 2023. For self-only coverage, the maximum out-of-pocket expense amount is $5,550, an increase of $250 from 2023. For tax year 2024, for family coverage, the annual deductible is not less than $5,550, an increase of $200 from tax year 2023; however, the deductible cannot be more than $8,350, an increase of $450 versus the limit for tax year 2023. For family coverage, the out-of-pocket expense limit is $10,200 for tax year 2024, an increase of $550 from tax year 2023.

For tax year 2024, the foreign earned income exclusion is $126,500, increased from $120,000 for tax year 2023.

The basic exclusion amount for estates of decedents who die during 2024 is $13,610,000, increased from $12,920,000 for estates of decedents who died in 2023.

The annual exclusion for gifts increases to $18,000 for calendar year 2024, increased from $17,000 for calendar year 2023.

The maximum credit allowed for adoptions for tax year 2024 is the amount of qualified adoption expenses up to $16,810, increased from $15,950 for 2023.

401k and IRA Limits for 2024

The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan is increased to $23,000, up from $22,500.

Additionally, the limit on annual contributions to an IRA increased to $7,000, up from $6,500. The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment but remains $1,000 for 2024.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan remains $7,500 for 2024. Therefore, participants in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,500, starting in 2024. The catch-up contribution limit for employees 50 and over who participate in SIMPLE plans remains $3,500 for 2024.

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 2024.

You can deduct contributions to a traditional IRA if you meet certain conditions. If during the year either you or your spouse was covered by a retirement plan at work, the deduction may be phased-out or eliminated, depending on your filing status and income. (If neither you nor your spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2024:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $77,000 and $87,000, up from between $73,000 and $83,000.
  • 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 $123,000 and $143,000, up from between $116,000 and $136,000.
  • 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 $230,000 and $240,000, up from between $218,000 and $228,000.
  • 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 those making contributions to a Roth IRA is increased to between $146,000 and $161,000 for singles and heads of household, up from between $138,000 and $153,000. For married couples filing jointly, the income phase-out range is increased to between $230,000 and $240,000, up from between $218,000 and $228,000. 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 $76,500 for married couples filing jointly, up from $73,000; $57,375 for heads of household, up from $54,750; and $38,250 for singles and married individuals filing separately, up from $36,500.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $16,000, up from $15,500.

IRS Announces ERC Withdrawal Process

If you own a business, you have probably been targeted by a scam trying to get you to claim the Employee Retention Credit (ERC). These scams have run rampant over the last year and have solicited business owners via email, telephone, and postal mail. Unfortunately some business owners have been tricked into improperly claiming an ERC for which they do not qualify, leading to the possibility of fines and repayment of the credit with interest.

Recognizing this problem, the IRS has announced the details of a special withdrawal process to help those who filed an ERC claim and are concerned about its accuracy. This new withdrawal option allows some employers that filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest and penalties. Employers that submitted an ERC claim that’s still being processed can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible.

The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest.

Those who willfully filed a fraudulent claim, or those who assisted or conspired in such conduct, should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

Who can ask to withdraw an ERC claim

Employers can use the ERC claim withdrawal process if all of the following apply:

  • They made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).
  • They filed the adjusted return only to claim the ERC, and they made no other adjustments.
  • They want to withdraw the entire amount of their ERC claim.
  • The IRS has not paid their claim, or the IRS has paid the claim, but they haven’t cashed or deposited the refund check.

Taxpayers who are not eligible to use the withdrawal process can reduce or eliminate their ERC claim by filing an amended return.

How to withdraw an ERC claim

To take advantage of the claim withdrawal procedure, taxpayers should carefully follow the special instructions at IRS.gov/withdrawmyerc, summarized below.

  • Taxpayers whose professional payroll company filed their ERC claim should consult with the payroll company. The payroll company may need to submit the withdrawal request for the taxpayer, depending on whether the taxpayer’s ERC claim was filed individually or batched with others.
  • Taxpayers who filed their ERC claims themselves, haven’t received, cashed or deposited a refund check and have not been notified their claim is under audit should fax withdrawal requests to the IRS using computer or mobile device. The IRS has set up a special fax line to receive withdrawal requests. This enables the agency to stop processing before the refund is approved. Taxpayers who are unable to fax their withdrawal using a computer or mobile device can mail their request, but this will take longer for the IRS to receive.
  • Employers who have been notified they are under audit can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.

Those who received a refund check, but haven’t cashed or deposited it, can still withdraw their claim. They should mail the voided check with their withdrawal request using the instructions at IRS.gov/withdrawmyerc.

IRAs and Retirement Planning

It’s never too early to begin planning for retirement. Individual retirement accounts provide tax incentives for people to make investments that can provide financial security when they retire. These accounts can be with a bank or other financial institution, a life insurance company, mutual fund or stockbroker.

A traditional IRA is the most common type of individual retirement account. IRAs let earnings grow tax deferred. You pay taxes on investment gains only when you make withdrawals. You also may be able to claim a deduction on your federal income tax return for the amount you contributed to an IRA.

What to consider before investing in a traditional IRA

  • A traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.
  • Generally, the money in a traditional IRA isn’t taxed until it’s withdrawn.
  • There are annual limits to your contributions depending on your age and the type of IRA.
  • When planning when to withdraw money from an IRA, you should know that:
    • You may face a 10% penalty and a tax bill if you withdraw money before age 59½ unless you qualify for an exception.
    • Usually, you must start taking withdrawals from your IRA when you reach age 73 (age 72 if you turned 72 in 2022). For tax years 2019 and earlier, that age was 70½.
    • Special distribution rules apply for IRA beneficiaries.

Differences between a Roth and a traditional IRA

A Roth IRA is another tax-advantaged personal savings plan with many of the same rules as a traditional IRA, but there are exceptions:

  • You can’t deduct contributions to a Roth IRA.
  • Qualified distributions are tax free.
  • Roth IRAs don’t require withdrawals until after the death of the owner.

Other types of IRAs

  • Simplified Employee Pension – A SEP IRA is set up by an employer. The employer makes contributions directly to an IRA set up for each employee.
  • Savings Incentive Match Plan for Employees – A SIMPLE IRA allows the employer and employees to contribute to an IRA set up for each employee. It is suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
  • Payroll Deduction IRA – Employees set up a traditional or a Roth IRA with a financial institution and authorize a payroll deduction agreement with their employer.
  • Rollover IRA – The IRA owner receives a payment from their retirement plan and deposits it into an IRA within 60 days.

Moratorium on Processing ERC Claims Declared

Due to rising concerns about a flood of improper Employee Retention Credit claims, the IRS has announced an immediate moratorium through at least the end of the year on processing new claims for the pandemic-era relief program in order to protect honest small business owners from scams.

The IRS Commissioner ordered the immediate moratorium, to run through at least December 31, following growing concerns inside the tax agency from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.

The IRS will continue to work on previously filed Employee Retention Credit (ERC) claims received prior to the moratorium but processing times will be longer because of increased concerns about fraud. On July 26, the agency announced it was increasingly shifting its focus to review these claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS announced today that hundreds of criminal cases are being worked, and thousands of ERC claims have been referred for audit.

Payouts for ERC claims will continue during the moratorium period but at a slower pace due to the detailed compliance reviews. With the stricter compliance reviews in place during this period, existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit. The IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim.

This enhanced compliance review of existing claims submitted before the moratorium is intended to protect against fraud but also to protect businesses from facing penalties or interest payments stemming from bad claims pushed by promoters.

The IRS is developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment; more details will be available this fall.

In addition, the IRS is finalizing details that will be available soon for a special withdrawal option for those who have filed an ERC claim but the claim has not been processed. This option – which can be used by taxpayers whose claim hasn’t yet been paid– will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees. Filers of these more than 600,000 claims awaiting processing will have this option available.

Reconstructing Financial Records After a Disaster

Natural disasters can strike without warning, and sometimes even the most diligent taxpayers are left without the important personal and financial records they need. People may need documentation for tax purposes, federal or state assistance programs or insurance claims.

Here are some steps that can help you reconstruct your important records if you’re confronted with a disaster.

Tax records

  • You can get free federal tax return transcripts immediately using Get Transcript on IRS.gov.
  • You can also order transcripts by calling 800-908-9946 and following the prompts.
  • Keep our office information in a safe place so that we can help you reconstruct tax records, if needed.

Financial statements

Financial statements from credit card companies or banks are usually available online. You can also contact your bank to get paper copies of statements.

Property records

  • If you are a homeowner, you may be able to contact the title company, escrow company or bank that handled the purchase of your home to get documents related to the purchase.
  • Many property records are available online from tax assessors or other government agencies. Check local government websites for information.
  • If you made home improvements, you can get in touch with the contractors who did the work and ask for statements to verify the work and cost. You can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, you can check court records for probate values. If a trust or estate existed, you can contact the attorney who handled the trust.
  • Insurance companies often keep records related to property maintained in a home, so keep your property insurance contacts handy.
  • If you own a car, you can research the current fair-market value of most vehicles via resources available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.
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