Category: News (Page 8 of 9)

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.

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.

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.

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.

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.

The deadline for filing your tax return is April 18 for most people this year (due to the Emancipation Day holiday in Washington, DC falling on April 15), but if you are expecting a refund this year, you will probably want to file long before that deadline so that you can receive your tax refund sooner rather than later.

In addition to filing early, there are a number of other things you can do to ensure that you receive your tax refund as quickly as possible.

• Fastest refunds by e-filing, avoiding paper returns: Filing electronically with direct deposit and avoiding a paper tax return is more important than ever this year to avoid refund delays. If you need a tax refund quickly, do not file on paper – file electronically through a trusted tax professional.
• Special care for EIP, advance Child Tax Credit recipients: If you received a third Economic Impact Payment or advance Child Tax Credit in 2021, you should have received a letter from the IRS documenting the stimulus payments and advance Child Tax Credits that you received. Be sure to provide these letters to your tax preparer so that they can be entered correctly on your tax return. If these payments are reported incorrectly on your return, the IRS will need to further review the tax return, creating an extensive delay.
• Earned Income Tax Credit or Additional Child Tax Credit refunds: By law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns earlier. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.
• Don’t normally file a return? Consider filing for CTC, and other valuable credits: If you don’t normally file a tax return and didn’t file a 2020 return or use the IRS Non-Filers tool, you can still qualify for important credits that you’re eligible for, including the Recovery Rebate Credit (stimulus payment), advance Child Tax Credit (CTC) or the Earned Income Tax Credit (EITC). If you fall in this group, be sure to file a 2021 tax return so you can receive all the credits for which you’re eligible.

If you need help getting your refund as quickly as possible, please call our office so we can schedule an appointment.

The Internal Revenue Service announced on January 26 that all third-round Economic Impact Payments have been issued. While some payments of the Economic Impact Payments from 2021 may still be in the mail, the IRS is no longer issuing new payments.

Families with new dependents in 2021

The third-round Economic Impact Payment was an advance payment of the tax year 2021 Recovery Rebate Credit. The amount you received as a third-round Economic Impact Payment was based on your income and number of dependents as listed on your 2019 or 2020 income tax return, but the amount of the 2021 Recovery Rebate Credit you are due is based on your income and number of dependents as listed on your 2021 income tax return. As a result, you may not have received the full amount you are due if your circumstances changed between 2020 and 2021.

If you or your family fit into any of the categories below, you may be eligible to receive more money by claiming the 2021 Recovery Rebate Credit on you 2021 income tax return:

• Parents of a child born in 2021 who claim the child as a dependent on their 2021 income tax return may be eligible to receive a 2021 Recovery Rebate Credit of up to $1,400 for this child. (All eligible parents of qualifying children born or welcomed through adoption or foster care in 2021 are also encouraged to claim the child tax credit — worth up to $3,600 per child born in 2021 — on their 2021 income tax return.)
• Families who added a dependent – such as a parent, a nephew or niece, or a grandchild – on their 2021 income tax return who was not listed as a dependent on their 2020 income tax return may be eligible to receive a 2021 Recovery Rebate Credit of up to $1,400 for this dependent.
• Reduced income.
  • Single filers who had incomes above $80,000 in 2020 but less than this amount in 2021; married couples who filed a joint return and had incomes above $160,000 in 2020 but less than this amount in 2021; and head of household filers who had incomes above $120,000 in 2020 but less than this amount in 2021 may be eligible for a 2021 Recovery Rebate Credit of up to $1,400 per person.
  • Single filers who had incomes between $75,000 and $80,000 in 2020 but had lower incomes in 2021; married couples who filed a joint return and had incomes between $150,000 and $160,000 in 2020 but had lower incomes in 2021; and head of household filers who had incomes between $112,500 and $120,000 in 2020 but had lower incomes in 2021 may be eligible for a 2021 Recovery Rebate Credit.

If you are entitled to eligible to receive more money by claiming the 2021 Recovery Rebate Credit, you must claim it on your 2021 income tax return in order to receive it; the IRS will not automatically calculate the 2021 Recovery Rebate Credit. The IRS began accepting 2021 income tax returns on January 24.

Most other eligible people already received the full amount of their credit in advance and don’t need to include any information about this payment when they file their 2021 tax return. The IRS issued additional payments – called “Plus-Up” Payments – to people who initially received a third-round Economic Impact Payment based on information on their 2019 tax return and were eligible for a larger amount based on information on their 2020 tax return.

The IRS announced that it will issue information letters to Advance Child Tax Credit (CTC) recipients starting in December and to recipients of the third round of the Economic Impact Payments (EIP) at the end of January. Using this information when preparing a tax return can reduce errors and delays in processing, so be sure to provide them to your tax preparer.

The IRS started sending out Letter 6419, which documents the advance Child Tax Credits you received, in late December 2021, and will continue sending them through January 2022. This letter contains important information that can make preparing your tax returns easier, and help your tax preparer determine how much of the Child Tax Credit you are eligible to claim on your 2021 tax return.

The IRS will also begin sending out Letter 6475, titled “Your Third Economic Impact Payment”, to EIP recipients in late January. Like the advance CTC letter, the Economic Impact Payment letter includes important information that can help you quickly and accurately file your tax return. In particular, it can help your tax preparer determine if you are eligible to claim a Recovery Rebate Credit for tax year 2020 or 2021.

The IRS issued the 2022 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning Jan. 1, 2022, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 58.5 cents per mile driven for business use
• 18 cents per mile driven for medical care or moving expenses for purposes of certain members of the Armed Forces
• 14 cents per mile driven in service of charitable organizations

Notice 2022-03 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan, and the maximum fair market value of employer-provided automobiles.

For many people, the end of the year is a time to review charitable gifts that have already been made during the year and to consider making additional charitable gifts before the tax year ends. If you are one of these people, we have a few reminders that you might find helpful.

Expanded tax benefits for those who don’t itemize

The law now permits you to claim a limited deduction on your 2021 federal income tax return for cash contributions made to qualifying charitable organizations even if you don’t itemize your deductions. Individuals can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021, and married individuals filing joint returns can claim up to $600.

Qualified charitable distributions

If you are age 70 ½ or older, you can make a qualified charitable distribution (or “QCD”) of up to $100,000, directly from your IRA to a qualified charitable organization. A QCD is generally a nontaxable distribution made by the IRA trustee directly to a charitable organization. A qualifying deduction may also count toward the taxpayers required minimum distribution requirement for the year.

Cash donations

Most cash donations made to charity qualify for the deduction. However, there are some exceptions. Cash contributions that are not tax deductible include those:

• Made to a supporting organization
• Intended to help establish or maintain a donor advised fund
• Carried forward from prior years
• Made to most private foundations
• Made to charitable remainder trusts

These exceptions also apply to taxpayers who itemize their deductions.

Cash contributions include those made by check, credit card or debit card as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization. Cash contributions don’t include the value of volunteer services, securities, household items or other property.