Carol McAtee's Blog

Grandparents who are raising their grandchildren may be able to claim a number of tax benefits on their tax returns. The details of determining if grandchildren can be claimed as dependents can be challenging and are best left to your tax accountant. But understanding a little more about the benefits you may be eligible for can help prepare you.

You might be able to claim your grandchild as a dependent and be eligible for the same tax benefits available to a parent raising children (amounts are for the 2022 tax year):
• The dependent exemption – reduces taxable income by up to $4,400 per child.
• The child tax credit – up to $2,000 per child. This credit is “refundable,” meaning that the credit will be paid to you even if you don’t owe any tax.
• The earned income tax credit (EITC) (also refundable) – up to $3,733 if you have one dependent child, subject to income limitations.
• The child and dependent care credit – up to 50% of qualified child care expenses per child under age 13, depending in income.

Qualifying as a Dependent
Dependency status covers children to age 18 or, if a full-time student, the age of 24. Adult grandchildren who are totally and permanently disabled may be any age.

Your grandchildren must live with you for more than half the year. You do not have to submit proof with your tax return, but, if challenged by the IRS, you should be able to produce proof, such as school registration and attendance and medical records. Special rules apply when children live with parents, grandparents, and other adult relatives in the same home.

You must be paying for more than half of the basic financial necessities of the grandchild—shelter, food, clothes, etc. The child can be receiving state aid, child support from a parent, and other kinds of help from agencies and other people as long as it is less than half the child’s support.

Adoption
If you legally adopt your grandchild, you are eligible for a credit of up to $14,890 (2022 tax year) for adoption fees, court costs, attorney fees and travel expenses. The adoption must be finalized in the tax year you claim it and your 2022 income must be under $263,410. And the credit is non-refundable, meaning it can only reduce your tax burden.

Single with Grandchild
If you are widowed or no longer married but still raising a grandchild, you may also qualify for “head of household” filing status on your tax return. This status can result in lower taxes than you would have if you file as a single person.

Other Related Children
The same possibilities for grandchildren apply to other children you may be raising. That can include nieces and nephews and their children (your great nieces and nephews).

Grandchild Claimed by Someone Else
Only one person (or couple) can claim a child as a dependent and claim the tax benefits. If the grandchild lives with you but someone else claims them before you do, it may still be possible for you to claim them as a dependent. You would need to contact the IRS and explain the circumstances. If more than one person claims, or tries to claim any child, special tax rules determine who is “first in line” to do so.


If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The $1.7 trillion federal spending bill signed by President Biden in December includes several changes to retirement plans. Among them are changes to both Roth IRAs and Roth 401(k)s, including an opportunity to move leftover money in a 529 college savings account to a Roth IRA.

Roth IRA Accounts
A Roth account differ from a standard workplace 401(k) and IRA in the way Roth investors pay income tax. When you deposit money in a Roth, you pay income tax on it that same year. Then, when you withdraw money, usually you don’t have to pay taxes on your earnings in the account.

This allows you to deposit money when your income tax rate is relatively low, for example when you are younger and your income is lower. Then later in life when your income may be higher, you can withdraw your earnings tax-free.

Under the current rules for Roth IRA, you don’t have to start withdrawing money at age 72 as you do with regular IRAs. For the Roth 401(k), the same rules currently apply as for regular 401(k). However, under the new spending bill, this will change starting in 2024, when withdrawals are no longer required.

Catch-up Contributions
People age 50 or older can put more money away in traditional IRAs beyond the regular annual contribution limits, allowing them to catch up on retirement savings. Starting in 2024, people earning more than $145,000 will have to put that catch-up money into a Roth 401(k), meaning they must pay income tax on it before making the deposit.

Moving 529 Money into a Roth IRA
Parents who have a 529 college savings plan may find themselves with taxes and penalties if, for example, their child ends up not going to college. Under the new bill, families with leftover 529 savings will be able to move it to a Roth IRA starting in 2024. There are some restrictions, such as a $35,000 lifetime limit per account beneficiary.

UPDATE ON THIRD-PARTY PAYMENT REPORTING
In a recent blog (Year End Tax Planning, December 7, 2022) I reported that starting in tax year 2022, third-party payment settlement networks like PayPal or Venmo would report what you are paid over $600. Due to an overwhelmingly negative response from small business owners and lawmakers, the IRS is delaying this change for one year.

Previously, the networks only supplied an income report, called a 1099-K, if users received more than $20,000 or 200 transactions in a tax year. By lowering the income level to $600, many more small businesses and “gig workers” could be required to pay more taxes. Additional confusion could result since many network users also receive funds for personal transactions such as their share of a meal or ride-share.

As it stands, there is a year’s “reprieve” until the low $600 goes into effect for the 2023 tax season. However, with resistance mounting, it is too soon to tell what will happen. Keeping your own ongoing record of funds received will be helpful in anticipating your tax liability and making estimated tax payments.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Small business owners can take deductions for a number of expenses that the IRS considers “ordinary and necessary” to conducting a business. Below are some deductions that are sometimes overlooked, that may lower your taxable income and reduce your tax liability.

Health Insurance
Depending on the type of business entity, you may be able to take a self-employed health insurance deduction on your personal return. This can include the cost of insurance you paid not just for your own plan but for your entire family’s insurance costs as well.

Home Office
If you run your business out of your home – without a separate office space elsewhere — you can deduct a percentage of many home-related expenses, including mortgage interest, homeowner’s insurance, property taxes, utilities, home repairs and maintenance. The percentage reflects the portion of your home that is used exclusively for your business. For example, if your home is 2,000 square feet and you use a 400-square foot room exclusively as your office, then 20% of those expenses may be applied toward the home office. The IRS requires this to be an actual dedicated space, so using your laptop on a kitchen table does not count.

Business Startup Costs
If you are launching a new business, some business expenses that are incurred prior to the actual launch may be deductible. These may include market analysis, advertisements, consultant costs and travel expenses.

Wages and Payroll Taxes
You can avoid paying a self-employment tax on your personal return by paying yourself as
an employee in your own business rather than through a distribution or dividend. And, that allows you to pass the payroll tax deduction to the business.

Bad Debt
If you use an accrual method of accounting – meaning you report income as you earn it – you can deduct the amount of a worthless debt. The debt amount must be included in your reported income and you must document the steps you took to collect it. If you use a cash method of accounting – reporting income as you receive it – you generally cannot deduct a bad debt.

Employee Education and Training
Deductible costs you incur for educating and training employees may include workshops, conferences, tradeshows and other expenses, as long as it is a subject directly related to the business.

Advertising and Marketing
Marketing, advertising and other promotional costs that bring in new customers and retain current ones are deductible expenses. In addition to traditional advertising and printed materials, expenses may include media relations, website development, email marketing and even hiring a marketing consultant. In addition, expenses related to goodwill advertising and support of community events to keep the business name before the public may be deductible, as long as there is a reasonable expectation to gain business in the future. However, costs of political or lobbying activities are not deductible.

Travel Expenses
Travel and lodging expenses as well as transportation expenses at the destination (such as taxis or a rental car) are ordinarily deductible at 50% of the expense. You can mix personal and business travel as long as you are clear which days count as business and which as personal. You cannot deduct expenses for family members unless there is a genuine business reason for them to attend.

In general, expenses for entertainment, amusement and recreation are not deductible, even if you are doing them as part of client relations. Business meal costs – where business is discussed – are deductible, but care must be taken not to include the portion of the expense that may be considered entertainment; for example, a meal at an entertainment venue such as a dinner theater is deductible, but not the cost of the entertainment itself.

Your tax accountant can help you identify legitimate business deductions and the record-keeping you will need to justify them.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Digital currencies have had dramatic ups and downs in recent years and especially the last few months. But since Bitcoin was launched in 2009, digital assets have steadily become more popular. Not surprisingly, these new forms of assets give rise to new rules for their regulation and taxation. Yet despite their increasing use as investments and in commerce, the IRS has issued relatively little guidance about taxing virtual currencies and digital activity in general.

The general term “digital asset” is a broad category that includes virtual currencies, pass-through and asset backed tokens, nonfungible tokens (NFT) and other holdings. The IRS has defined virtual currency as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”

Reporting Digital Transactions
You may have noticed a question that started appearing on Form 1040 in 2019: “At any time during 2019, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” At first, some wondered if leaving the answer blank could delay processing, the receipt of a refund, or even raise the audit profile of a tax return.

In 2022 the IRS clarified that the mere purchase of virtual currency does not require a “yes” answer. If your only transactions were purchases of virtual currency with real currency, you are not required to answer “yes” to the Form 1040 question. You can check the “no” box. Beyond that, determining what digital assets or transactions you need to report and what transactions have tax consequences gets more complicated.

Digital Assets as Property
The IRS has ruled that virtual currency is property as opposed to actual currency. So, the tax rules applicable to property transactions in general apply to transactions using virtual currency. For example, when you sell virtual currency, you report a gain or loss as you would upon the disposition of any other property and you must recognize any capital gain or loss on the sale.

Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your federal income tax return in U.S. dollars. Capital gain or loss is short-term or long-term, depending upon how long the virtual currency has been held.

Market Value of Digital Assets
The most common source used to determine market value of a virtual currency is the value published on the currency’s exchange. For example, the value of Bitcoin is available throughout the day, similar to stock prices. If the market value of a cryptocurrency is not posted on an ongoing basis, the burden is on the taxpayer to employ other defensible methodologies such as comparisons with similar digital assets.

Wages Paid in Digital Currency
Cryptocurrency-friendly businesses are increasingly accepting virtual currency as payment for goods or services or to pay employees, independent contractors and suppliers. The amount of the payment is recorded using the market value of the virtual currency at the time of the transaction.

The virtual payments you receive as an employee or contractor are subject to the same federal income tax withholding and reporting as other income. They are expressed in U.S. dollars at the date of receipt. Employee wages are subject to FICA and FUTA tax and reported on Form W-2.

Once an employee receives the compensation in a taxable transaction, they take tax basis in the virtual currency equal to the amount of income recognized. From that point forward, the employee essentially becomes an investor in the property that was received, subject to capital gain rates on any gain or loss recognized at disposition.

Your accountant is in the best position to help you negotiate the challenging and ever-changing world of digital assets. As in any activity that could change your tax liability, conferring with your tax professional in advance of digital activities will enable you to plan for the best outcome.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

More taxpayers than ever before are starting home-based businesses. Some are working as newly independent contractors in the same fields where they worked as employees, while others are opening totally new fields of venture. No matter what your situation, the business structure you choose affects many issues, including exposure to liability and how your business income is taxed. It can also affect your financing and your ability to grow the business.

The most common business entities are Sole Proprietorships, Partnerships, Limited Liability Companies, S Corporations and C Corporations. I will discuss most of these below and save the details of partnerships for a future post.

Sole Proprietor
Your home business income and expenses can often be reported on your personal tax return on Schedule C, Profit or Loss from Business. Schedule C works to report income or loss from a business you operated or a profession you practiced alone, as a sole proprietor. To qualify as a business, your primary purpose must be for income or profit, rather than a hobby activity. You must be involved in the business “with continuity and regularity.”

Filing a Schedule C also enables you to get tax advantages for business-related expenses, which may include the cost of a home office and miles driven to operate your business. Any resulting profit is typically considered self-employment income, subject to self-employment tax.

You can report a loss on your business, but the IRS will only allow you to claim losses for three out of five tax years. If you don’t show that your business is starting to make a profit in that time, then the IRS may question whether you have a legitimate business, leading to a possible audit or prohibition from claiming your business losses on your tax return.

As a sole proprietor, there is no distinction between you and your company. If the business incurs debt or is subjected to a lawsuit, you are personally responsible, with your personal assets at risk of seizure.

Limited Liability Company (LLC)
Operating as an LLC offers you protection from personal liability for debts and other obligations that a business might incur. It also enables you to open a bank account in the name of the business and gives you a better opportunity of getting funding in the future through a business credit card or loan.

With an LLC, you can still report business income or losses on the Schedule C, meaning the business is taxed through your personal tax return, known as a “pass-through.” An LLC with multiple owners is considered a partnership, with each owner reporting profits and losses on their personal tax returns.

The LLC is required to be filed with the Florida Department of State, Division of Corporations. There is an initial setup fee and a fee for brief but required annual reports.

S Corporation (“S Corp”)
Incorporating as an S Corporation also enables you to do a pass-through to your personal tax return, though you must also complete a separate tax return for the business. A business must meet specific guidelines by the IRS in order to qualify as an S Corp.

An S Corp also protects your personal assets from any corporate liability. And the pass-through income in the form of dividends or salary enables you to avoid double corporate and personal taxation (see C Corporation below). Your business losses can be written off on your personal tax return as well.

S Corps help companies establish more credibility as corporations. Your S Corp can have up to 100 shareholders – required to be U.S. citizens — and pay them dividends or cash payments from the company’s profits.

The S Corp structure also facilitates the qualified business income deduction (QBID), a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their business income on their tax returns. You can claim the qualified business income deduction whether you itemize or take the standard deduction.

Income limits apply to the QBID: For tax year 2022, total taxable income must be under $170,050 for single filers or under $340,100 for joint filers to qualify. If you’re over that limit, complicated IRS rules determine whether your business income may qualify for a full or partial deduction.

S Corps cannot be owned by other S Corps, C Corporations, LLCs, or trusts. For companies that are hoping to get acquired at some point, this could complicate the eventual sale of the business.

C Corporation (“C Corp”)
C Corporations are considered the default type of corporation. When you file articles of incorporation in your state, you’re designated a C Corp unless you file specifically as an S-Corp.

Unlike the S Corp, C Corps actually get taxed twice: The company pays corporate income tax and then the shareholders pay income tax on their personal tax returns from dividends they receive. And C Corps don’t allow tax write-offs for owners on their personal income tax returns.

C Corps have no restrictions when it comes to ownership. Anyone can be an owner, and there can be as many owners as you’d like. If you’re planning on selling stock to potential investors or selling your company in the future, a C Corp is preferred.

With a C Corp, you can deduct 100% of the company’s charitable contributions and donations on your corporate tax return, as long as the donations don’t exceed 10% of your company’s income. You can also help employees by deducting certain benefits, like health insurance, for your employees.

Deciding on Your Business Structure
When you are considering starting a business or changing your business structure, the experts at Carol McAtee & Associates can provide expert Due Diligence services and facilitate the creation of a Sole Proprietorship, Partnership, LLC, or Corporation (SubChapter C or S). Florida Incorporations can be completed in as little as 48 hours. We will work with you to analyze the most beneficial business structure arrangement to meet your business objectives.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Owners of small businesses have to deal with a number of annual reporting and compliance requirements. I wanted to mention briefly two reporting requirements for the 2022 tax year with upcoming deadlines.

1099 Forms
If your small business or sole proprietorship paid for contract labor or other services by non-employees, you likely have to send them a Form 1099:
• A 1099-NEC form is required to be filed if you paid an individual, partnership or LLC $600 or more in calendar year 2022. This includes payments for services to non-employees.
• A 1099-MISC form is required to be filed if you paid an individual, partnership or LLC $600 or more in the calendar year 2022. This includes payments for rents, attorney fees and other income payments.
• If you paid interest or dividends of $10 or more to an individual, you are required to file a 1099-INT or 1099-DIV.

The 1099 forms are due to recipients on January 31, 2023 and due to the IRS February 28, 2023 (paper-filed) or March 31, 2023 (e-filed).

Failure to file 1099s on time can lead to penalties of up to $290 per 1099 form. If the IRS believes the failure to file is “intentional,” they quote a minimum penalty is $580 per form!

Health Insurance Expenses Paid by S-Corporations
If your S-Corporation pays health, disability or accident insurance premiums on your behalf – including long term care insurance or Medicare premiums – these should be reported as taxable wages to you, subject to federal income tax withholding. In addition to being the proper reporting procedure, there is a tax benefit to you on your personal income tax return.

If you have not been including the insurance premiums paid throughout the 2022 calendar year in your paychecks, be sure to add the entire insurance amount paid to one of your last 2022 payroll checks.

You should provide this information to your payroll service provider by early January, since they will need to incorporate the amount into your 4th quarter 2022 payroll reports, your annual Form 940 and your 2022 W-2.

In the last several years, we have seen major changes to the tax code under Congressional legislative actions. These include the Tax Cuts and Jobs Act in 2017, the Infrastructure Investment and Jobs Act in 2021 and, most recently, the Inflation Reduction Act (IRA), which was signed into law by President Biden in August 2022. In addition, new tax legislation under consideration by Congress will be debated in the coming months.

For the most part, the tax world has caught up with these changes and stabilized, making year-end planning more predictable. There are tax planning steps that can be taken in response to recent developments, in addition to tried-and-true steps than can be taken on an annual basis for both personal and small business tax returns.

PERSONAL TAX RETURNS

Increase in Retirement Contributions
Cost of living adjustments have increased the amounts you can save tax-free in various retirement plans. The amount individuals can contribute to their 401(k) plans in 2023 will increase to $22,500 — up from $20,500 for 2022. The limit on annual contributions to an individual retirement account (IRA) will increase to $6,500. Contributions for tax year 2023 can be made up to April 15, 2024.

Catch-up contributions allow people age 50 or older to save more in their 401(k)s and IRAs than the usual annual contribution limits. Catch-up contributions allow you to make up for the years you were not able to save enough. But the IRA catch up contribution limit for individuals age 50 and over did not have an annual cost of living adjustment and remains at $1,000.

Sale of Capital Items
If you are considering sales of investment items, you should consider the possible tax impact in that tax year, especially if your income fluctuates year to year. You might want to postpone the sale of a capital item to a future tax year if the resulting income would push you into a higher capital gains bracket. Conferring with your accountant will be essential in determining the optimal timing.

“Bunching” Your Deductions
Fewer taxpayers these days benefit from itemizing their tax deductions because the Standard Deduction is relatively high ($12,950 for single filers and $25,900 for joint filers in 2022). One way to maximize your deductions and exceed the Standard Deduction is a bunching strategy. This involves accumulating charitable contributions or even medical expenses from two or more years into one year.

For example, you could plan to skip your usual contributions to charity in one year and then made double the normal amount in the following year in order to help surpass the standard deduction amount. The same strategy can be employed for deductible medical expenses where your timing is flexible, such as elective surgical procedures. But purely cosmetic procedures are not deductible.

Bunching can be an effective strategy, especially if you can plan it two to three years in advance. Again, your accountant’s advice will be essential.

Electric Vehicle Tax Credit
The Inflation Reduction Act of 2022 included a somewhat revised Clean Vehicle Credit for taxpayers who purchased a plug-in electric vehicle. As in past years, the maximum credit is $7,500, but the requirements for a vehicle to qualify for the credit have become much more stringent.

While the new credit eliminates the old limitation based upon the number of qualifying vehicles sold by particular manufacturers, there will be a new limitation based on the price of the vehicle. And the vehicle’s final assembly must be in North America.

After tax year 2022, a credit will also be available for the purchase of a previously owned clean vehicle. Similar requirements for qualification apply to a previously owned clean vehicle, as well as income limitations. So before making your purchase decision, consult your tax professional to estimate the expected credit amount.

A Few More Personal Tax Issues
• You can claim a credit for tuition paid in 2022 even if the academic period begins in 2023 — as long as the period begins by the end of March.
• Your adjusted gross income (AGI) can be reduced if you increase the amount of your IRA contributions. For tax year 2022, you can contribute through April 18, 2023.
• If you are a teacher, you can claim a deduction for up to $300 of classroom expenses like books, supplies, and computer equipment, as well as personal protective equipment, disinfectant, and other supplies used to prevent the spread of COVID-19.

BUSINESS TAX RETURNS

Depreciation and Expensing
Since the Tax Cuts and Jobs Act in 2017, businesses may take advantage of 100-percent first-year depreciation on machinery and equipment purchased during the tax year, with a maximum dollar limit of $1,050,000. That maximum will be even higher in tax year 2023, so it’s a good time to plan major purchases.

Third-Party Payment Networks
As of tax year 2022, third-party payment settlement networks like PayPal or Venmo will report what you are paid over $600. You will receive a 1099-K form covering money you received throughout the year, but keeping your own ongoing record will be helpful in anticipating your tax liability and making estimated tax payments.

Mileage Rate
If you drive a vehicle for business purposes, you will want to plan on keeping a log of your trips and mileage, especially since the IRS increased the mileage rate in response to rising gas prices. For vehicle mileage driven from January 1 to June 30, 2022, the standard mileage rate is 58.5¢ per mile. From July 1 to December 31, the mileage rate rises to 62.5¢ per mile.

Corporate Alternative Minimum Tax
As part of the 2022 Inflation Reduction Act, Congress focused on very large publicly traded companies with significant earnings who pay little or no corporate tax. The IRA includes a 15% corporate alternative minimum tax on companies whose average income over a three-year period exceeds $1 billion (the “$1 Billion Test”). The intent is to have these companies pay tax on book income rather than taxable income.

How this will apply in reality and how it could impact stock prices and investments is not clear. While it applies to only a small fraction of the businesses in the US (estimated at a total of more than 33 million), it will be interesting to see how that plays out.


If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

With the holiday season in full swing, it’s helpful to review how we can make financial gifts to family, friends and charities – and the possible tax advantages and consequences.

Gifts to Individuals
Under the annual “gift tax exclusion,” you can make gifts in tax year 2022 of up to $16,000 to as many individual people as you want, with no federal gift tax consequences. Gifts can be made to friends as well as children, grandchildren, their spouses, etc. Your spouse can also make their own gifts of up to $16,000 to individuals, and there is no limitation at all on gifts between spouses.

The gifts you make do not impact your Federal income tax. And you cannot take any deduction for the value of the gift – other than gifts that are deductible charitable contributions, see below.

For Federal tax purposes, a gift is not considered to be income. So, the individuals receiving gifts of money or anything else of value from you do not need to report the gifts on their tax returns. An exception is a gift that may appreciate in value, such as stocks: The person receiving the gift may have to pay capital gains tax. Any checks you write as gifts need to clear your bank by the end of the applicable tax year.

Other Options for Individual Giving
As alternatives to straight cash gifts, you can make unlimited direct payments for medical and tuition expenses for as many individuals as you want, with no gift or estate tax consequences. But these need to be direct payments to the institutions. For example, you can’t give your granddaughter the money to pay her college tuition; it has to go directly to the school.

Or, you can set up or contribute to a 529 college savings plan, even if she is already in college. What you contribute grows, tax-free, and comes out also tax free if used for educational purposes including books, supplies and even a computer. The money in a 529 plan can also be used for grades K-12 tuition, up to $10,000 a year per student.

Charitable Giving
Contributions to charity can be taken as deductions for taxpayers who itemize their deductions. But for most of us, the Standard Deduction (which was substantially increased several years ago) makes more sense than itemizing.

So, for the most part, charitable deductions no longer lower your tax bill, unless your possible deductions for charity combined with other deductions like mortgage interest, real estate taxes and medical expenses total more than the Standard Deduction. For tax tear 2022, the Standard Deduction is $12,950 for single taxpayers and $25,900 for married couples filing jointly.

Some taxpayers can maximize the impact of their charitable contributions by giving away the gain on appreciated securities instead of cash. Since charities are exempt from capital gains taxes, the gain is never taxed. But you get to deduct the full market value of your stock at the time of the gift.

The tragic outcomes of recent disasters like floods or hurricanes inspire many of us to want to open our pocketbooks to help. But scammers also lie in wait for opportunities when people’s generosity may outweigh their caution. It’s always a good idea to verify a charity’s tax-exempt status at the IRS Tax Exempt Organization Search page before donating.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You or your family, friends or neighbors may have sustained damage to your homes from Hurricane Ian, which is known as a “casualty” event. The cost of repairing or replacing aspects of your home such as roofs, trees or shrubs can come into play on your tax return as casualty loss deductions. But it’s not as simple as just deducting the replacement or repair costs and there are many confusing details about how to determine your loss.

Most of the following information pertains to casualty losses due to a Federally declared disaster like Ian. And in this post, I am only addressing casualty losses to residential property. These issues are somewhat different for business properties, where, for example, the land and any buildings on it are considered as separate entities.

Change in Fair Market Value

In general, the amount of casualty loss you can deduct is equal to the fair market value of your property immediately before the casualty, reduced by the fair market value after the casualty – minus whatever you received as compensation from the insurance company. So, say your home was worth $300,000 before Ian and only $280,000 afterwards, and the insurance company gives you $15,000 – your possible casualty loss is the difference, $5,000.

One way of determining the loss of fair market value from a casualty event is through an appraisal. Unfortunately, the property is treated as a whole and the change in appraised value may not reflect the loss, for example, of your favorite oak tree. Improvements to the property like your garden and other outdoor features are considered integral parts of the property and are not considered separately.

Cost of Repairs or Replacement

A more common way of determining the casualty loss is basing it on the cost of repairs or replacement. So, if a tree came down on your garden shed and the shed costs $3,200 to rebuild or replace, your casualty loss for the shed is $3,200 – minus anything paid by your insurance. Likewise, the cost of removing the fallen tree and replacing it could be part of the casualty loss.

Keep in mind, to be deductible, repairs must actually be done, not be excessive, be necessary to bring the property back to its state before the casualty event, and not cause the property to be worth more than before.

When to Take the Casualty Loss

It may take months for the insurance company to tell you what they are paying you. So, the casualty loss deduction can be taken either in the tax year when you determine your loss, or in the preceding tax year. Sometimes this means that an Amended tax return should be filed to add your casualty loss deduction in the previous year. The IRS does require you to file “a timely insurance claim” if your loss is covered. The year you claim the deduction is known as the “disaster year.”

Casualty losses are reported on IRS Form 4684, Casualties and Thefts. But if the loss is NOT attributable to a federally declared disaster, the loss is taken on Schedule A as an Itemized Deduction. Your accountant will know to include the FEMA declaration number (DR-4673-FL for Hurricane Ian) on any return claiming a loss.

The maximum possible casualty loss is limited to the Adjusted Basis of the property, which can be determined by your tax accountant. And unfortunately for those who endured substantial damage or even total loss of their homes, the casualty loss is limited to 10% of your Adjusted Gross Income.

Disaster Assistance Payments

On the bright side, disaster victims generally do not to have to pay income tax on assistance payments they receive. Taxpayers in a Federally declared disaster area who receive grants from state programs, charitable organizations or employers to cover medical, transportation or temporary housing expenses do not have to include these grants in their income.

An exception is payments received for replacements for lost or destroyed property. In calculating your casualty loss, if the payment is for replacement of lost or destroyed property, then you would subtract that payment amount in figuring your casualty loss.

I hope this has given you a place to start in assessing a possible casualty loss. As always, your tax accountant is the best resource to determine the way forward and the many details that come into play.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

I have received many client inquiries about the Employee Retention Credit (ERC), part of the relief package passed by Congress to help small businesses deal with the coronavirus pandemic. A refundable government tax credit, the ERC enabled employers to continue paying staff in spite of suspended or reduced revenues due to shutdowns and slowdowns, during the most challenging times of the pandemic in 2020 and 2021.

The ERC is a key tax relief measure for both employers and employees and has helped businesses retain key personnel during difficult times. The ERTC is available to all businesses, regardless of size or industry. Best of all, you can file for it retroactively.

How to Qualify for the ERC
To qualify for the ERC, the employer must meet at least one of two conditions: Your business must have experienced a decline in business operations or gross revenue during 2020 or 2021, compared to the comparable quarter in 2019. OR Your business was at least partially suspended due to COVID-19 related government orders.

Funds Provided by the ERC
The ERC may cover up to $26,000 per employee ($11,000 is the average) depending on wages, health care and other personnel expenses business owners have already paid. The credit is equal to 50% of the qualifying wages paid to eligible employees, up to $10,000 of wages per employee per quarter. For 2020, the limit is 50% of $10,000 of wages for the year for each eligible employee. For 2021 the limit is 70% of $10,000 of wages for each quarter, for each employee.

For employers, the ERC is treated as a business tax credit, so in most cases it reduces the total amount of payroll tax owed. If the business’s payroll taxes owed are reduced to zero, the business may receive compensation above and beyond the original payroll tax liability.

Filing Retroactively
The ERC is applied to the year 2020 and 2021 payroll tax returns. If your business has previously filed those returns, it can retroactively claim the ERC through Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, with their quarterly federal tax return. That can result in reduction of the tax debt or a surplus credit, which could mean a cash refund.

Even if your business took a loan from the Paycheck Protection Program (PPP), you may be eligible for the ERC as well. However, businesses cannot claim a payroll expense as both an ERC wage and a forgivable payroll cost on the PPP forgiveness application. The ERC refund can be spent on anything by the company.

The statute of limitations for filing amended quarterly returns is up to three years from the date of filing the original quarterly employment tax return (Form 941). So, if your business qualified for the ERTC program in the third quarter of 2020, the amended documentation needs to be submitted by October 2023.

Navigating the process of the Employee Retention Credit, including eligibility rules and required paperwork, is best left to your accountant. Our professional staff at Carol McAtee & Associates can provide expert services and facilitate your ERC application accurately.


If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.