"Into the Portal"

Welcome "Into the Portal" where you have been transported within a dimension where financial, business, tax, and CPA musings converge. 

Year-End 2023 - Tax Planning

Thankfully it’s not too late to try and minimize your taxes for 2023. If you haven’t scheduled a tax planning session, now is a great time to do so. Here's how a tax planning session can potentially help your situation:

• It can make a difference. This is especially true if you have a major event that occurs during the year. For example:
  Even in uneventful years, external forces like new tax laws can be managed if planned for in advance.
  • Selling a house? You can avoid taxes if primary residence requirements are met.
  • Starting a business? Choosing the correct entity can lower your taxes every year!
  • Getting ready to retire? Properly balancing the different revenue streams (part-time wages, Social Security benefits, IRA distributions and more) has a huge impact on your tax liability.
• Put yourself in control. Timing is important when it comes to minimizing taxes, and the timing is often in your control. For instance, bundling multiple years of charitable contributions into one year can create an opportunity to itemize deductions. Plus holding investments for longer than one year to get a lower tax rate, and making efficient retirement withdrawals are other examples of prudent tax strategies that you control.
• There are tax planning opportunities for every level of income, not just those at the top of the tax bracket. Tax deductions are available for student loan interest, IRA contributions and other situations even if you claim the standard deduction. Certain tax credits (called refundable credits) will increase your refund even if you don’t owe taxes. Missing any of these tax breaks can unnecessarily increase your taxes.
• The tax landscape is constantly changing. New tax laws are passed almost every year. New laws may mean new tax deductions you can take advantage of. It can also mean that an existing deduction you had been used to taking is no longer available. A tax planning session can help you understand what deductions are and are not available for your particular situation.
• You have help. Tax planning comes down to looking for ways to reduce taxable income, delay a tax bill, increase tax deductions, and take advantage of all available tax credits. The best place to start is to bolster your level of tax knowledge by picking up the phone and asking for assistance.

(Courtesy of November blog)

September 2023 - IRA Announces Guidelines for Home Energy Audit Tax Credit

The Inflation Reduction Act expanded many home improvement energy saving tax credits that have been around since the mid 2000's. Taxpayers now can receive a tax credit for the cost of a home energy audit. An home energy audit can help you determine how much energy your home uses, where your home is inefficient, and which problem areas and fixes you should prioritize to save energy and improve the comfort of your home. The tax credit is 30% of the audit cost up to $150 and also subject to the overall $1,200 annual energy related home improvement tax credit cap. The IRS provided the following rules to be eligible for the tax credit:

• A home energy audit is an inspection and written report for a dwelling located in the United States. The home must be owned and used by the taxpayer as a principal residence and the audit must meet certain requirements.
• The audit must identify the most significant and cost-effective energy efficiency improvements, including an estimate of the energy and cost savings for each improvement.
• The inspection must be conducted or supervised by a qualified home energy auditor.
• The written report must be prepared and signed by a qualified home energy auditor.
• The audit must be consistent with certain Department of Energy and industry guidelines. 

Starting in tax year 2024 and after, individual taxpayers claiming the home energy audit tax credit will need the employer identification number (EIN) of the person or firm that performed the audit to disclose on their tax return. There is no such requirement in 2023. 

June 2023 - Your Home is a Bundle of Tax Benefits

There are many tax benefits built into home ownership. Here is a review of the most common.

• The home gain exclusion. When you sell an asset for a profit, it creates a taxable event. If the asset, though, is your primary residence, you can exclude up to $250,000 ($500,000 if married filing jointly) of these gains. Special rules do apply, but this is a major tax benefit of home ownership.
  
  How to take advantage: You must live in your house for at least 2 of the previous 5 years to qualify for the home gain exclusion. Start planning now if you think you'll be selling your house in the near future so you can qualify for this tax break.
• Itemized deductions. Mortgage interest and property taxes are two deductions you can claim as a homeowner. The interest is deductible on the first $750,000 associated with loans secured by your primary and secondary residences ($1 million for mortgages underwritten prior to 2018), while up to $10,000 of property taxes may be deducted. You may also deduct points paid as an itemized deduction over the life of your mortgage.
  
  How to take advantage: You need to itemize your deductions to take advantage of these tax breaks. Consider bunching your mortgage interest and property taxes with other itemized deductions such as charitable contributions, taxes and excess medical expenses to try and exceed the standard deduction for your filing status.
• Free rental income. You can rent out your home for up to two weeks and not claim the income. While you cannot deduct expenses in this scenario, this is a great tax break if your home is located next to a popular landmark or a major event.
  
  How to take advantage: Keep track of how many days you rent out your home so you don't go over the 14-day limit. If you rent your house for just 15 days over a given year instead of 14, you'll owe taxes on all rental income for that year, including the first 14 days.
• Home office deduction. If you use a portion of your house exclusively as a home office, you may be able to deduct certain expenses such as mortgage interest, insurance, utilities, & repairs.
  
  How to take advantage: To qualify for the deduction, you generally must use this portion of your house exclusively for business purposes on a regular basis. So be sure to understand the limitations of this deduction.

Your house is a great place to control the amount of tax you owe, but only if you know the rules and can apply these rules to your situation. Use this information as a starting point to see if there are ways to leverage your home's tax benefits.

January 2023 - The TCJA Sunset

In 2017, Congress passed the Tax Cut and Jobs Act (TCJA) that represented the largest tax legislation since the 1986 Tax Reform Act under the President Reagan era. The Tax Cuts and Jobs Act made significant changes to individual income taxes and the estate tax. While working on the legislation, some lawmakers were concerned that the tax cuts would not stimulate the economy enough where those cuts would pay for itself. As a result, the law for the individual tax provisions were set as temporary and expire after 2025. Most corporate provisions remain permanent which was mostly to establish a competitive tax rate in the global business world.

Yes, Congress could legislate an extension of TCJA, however, with the growing U.S. government fiscal deficit and divided government, it is hard to envision an extension of all TCJA provisions. It is estimated that TCJA benefited 65 percent of the US taxpayers; generally, taxpayers that lived in lower tax states. If TCJA benefits you, you have three more years of known tax law to take advantage of the lower tax rates. What is mostly going to change at the start of 2026?

• Personal Exemptions Return, but smaller standard deductions. TCJA did away with personal exemptions that assisted larger families. The trade-off is smaller standard deductions where itemizing your tax return may become more standard procedure.
• Full SALT and Miscellaneous Itemized Deductions. One of the most requested item to return to the tax code is the full State and Local Tax (SALT) deduction without any limitation. Under TCJA, taxpayers can only claim up to $10,000 in an itemized SALT deduction.  Miscellaneous itemized deductions, such as investment fees and employee unreimbursed expenses, may be itemized again in Schedule A.
• Pease limitation. This limitation will return in 2026. It limited certain itemized deductions if your adjusted gross income (AGI) exceeded a certain level depending on your filing status.
• Alternative Minimum Tax (AMT). While this tax is still around under TCJA, the exemption level was increased where it is very rare that a taxpayer trips the AMT lever. This tax will re-appear in 2026 as before where it often trips up dual working spouses and those taxpayers who earn a decent income from dividends and capital gains.
• Qualified Business Income (QBI) Deduction. As a self-employed individual or as a business, these taxpayers receive a 20% deduction of their gross profit subject to earnings limitation. This is a huge benefit for business owners for the next 3 years.  I think of any TCJA deduction, this may receive the most bi-partisan support to extend it separately from other deductions since the corporate tax rate is low.
• Estate Taxes. The estate tax exemption will reduce from approximately $13 million to about $6.5 million.
• Tax Rates. In most cases, the TCJA rates are lower than the pre-TCJA rates. Putnam Investments put together a excellent chart to show the difference between the 2023 tax rates vs the expected 2026 projected tax rates.

To make the most of the next 3 years—

• If you are in a position where you have money sitting in a savings or money market account to pay the tax upfront, converting a portion of your IRA to a Roth IRA makes a lot of sense if the Putnam chart breaks in your favor and you plan to live in a state that has the same or higher tax in the future. For example, if you live in Virginia at a 5.75% state tax rate and plan to retire in Tennessee that has no state tax, additional analysis may be needed to determine whether a Roth conversion makes sense even with the lower Federal tax rates.  
• In certain situations, businesses may want to defer their capital expenditures until 2026 to ensure they make the most of the lower tax rates and 20% QBI deduction.
• In cases where you can accelerate income or sell assets in the next three years, you may consider the pro’s and con’s of selling within this window versus waiting into 2026 and beyond. While the capital gains rate stays the same in TCJA and post-TCJA period, there is a more likely scenario that you may be subject to the alternative minimum tax in the post-TCJA era.  

As we pass the three-year mark within the TCJA expiration, it is a good time to review your retirement accounts and other assets to determine if it is a good time to accelerate any financial moves that you were considering in the next 10 years.

December 2022 - State Residency and Tax

With more remote work and families that maintain two homes, state residency issues have become more complex. While your drivers license may say you are from one state, revenue hungry states are becoming more aggressive at determining whether you may actually be a resident of their state and subject to their income taxes.  If your situation is not clear cut, then navigating state and local taxes can be problematic. For example:

1) Your job is now remote, so you move from your old state to the state of Tennessee to establish your residency. However, your company headquarters is still in your old state.

2) You have retired and moved to the beaches of Delaware to set up residency. However, you maintain your former residence in the old state and continue to perform some consulting work in both your new and old state.

3) Tired of another winter season, you suddenly decide to move to Florida in November. In September of the following year, after the heat and a hurricane, you decide the cooler weather in your old state is not that bad.

4) Due to a work project, you work on-site in the City of Philadelphia for one month staying at a Philadelphia hotel. You hear that the city has a city wage tax and wonder if that would actually apply to you.

These questions are not always easy and there is not always a one size fits all. For example, if you have changed your residency by obtaining your new state's driver license, registered to vote in your new state, and notified the IRS of your new residence, this may not always be enough to avoid taxes in your former state. In the first example, if the person's company headquarters was the state of New York, New York is one of 5 states that have convenience of the employer rule. Unless your company and you show that you need to be in Tennessee for business reasons, your wages are subject to New York State taxes. However, if the company headquarters was in one of the other 45 states, then you would not be subject to income taxes from your company's headquarters state. 

If you are performing business in a state or city, you may be subject to tax within their jurisdiction. Commonly referred to as the "jock tax," many of these taxes also apply to business travelers. In example 4, your work while in the city of Philadelphia would be technically subject to the city wage tax. However, while the city of Philadelphia can easily track Aaron Judge when his New York Yankees are playing in Philadelphia, it is probably harder for the city to track you and assess you a tax if you fail to file a city wage tax return. 

The Mobile Workforce State Income Tax Simplification Act could solve many of these issues, however, Congress members have not shown an interest to advance the bill. As a result, you can expect tax mobility issues to continue in the future. 

November 2022 - Closing out 2022

As we approach the holiday season, there are still some last days in 2022 to make your taxes lighter and your outlook brighter when you prepare your 2022 tax return in 2023.

Flush with cash? Use more to stash in a retirement account. If you have a job with a 401(k), determine whether you can put more in your company's 401(k) for 2022. Depending how quick your company can change your withholdings, you may be able to sneak 1 to 2 more withholdings to increase your 401(k) amount and reduce your 2022 tax liability. If you do not have a job with a 401(k) or are self-employed, you have until April 18, 2023 to decide whether you want to make a contribution to an IRA or another self-employed retirement account.
As an alternative option, contribute to a Roth IRA account instead even though you do not receive a tax deduction. With the financial market at lower prices, it is a great time (if eligible) to make a Roth IRA contribution and realize tax-free income in retirement.  

Tax loss harvesting. If you own stock in a taxable account that is not in a tax-deferred retirement plan, you can sell your underperforming stocks by December 31 and use these losses to reduce any taxable capital gains. If your net capital losses exceed your gains, you can even net up to $3,000 against other income such as wages. Losses over $3,000 can be used in future years. Just be sure you do not repurchase the same stock within 30 days, or the loss will be deferred.

Make cash charitable contributions if you itemize. If you're like 90% of all taxpayers, you receive no tax benefit from charitable contributions because you are unable to itemize your personal deductions. However, if you will itemize your deductions, those last minute cash and non-cash donations will result in a lower tax liability. 

Remember the child tax credit returns back to pre-2021 rules. If you thought your tax liability in 2021 was lower than usual, you may have benefited from the 2021 child tax credit rules. As a result, you may be in tax sticker shock when your taxes are prepared for 2022. The maximum benefit returns to $2,000 per child tax credit for dependents under age 17. Dependents age 17 years and older receive a $500 tax credit (Remember dependents who were age 17 year old in 2021 qualified for at least a $2,000 tax credit). 

You may receive a 1099-K reporting your online or credit card selling activity. This is the first year that the IRS requires each payment settlement entity to send you a Form 1099-K by January 31 if it has processed at least $600 worth of payments in 2022. Even though the 1099-K statement may be due to a non-taxable event, it is best to address the 1099-K on your tax return to avoid any IRS or state inquiries. 

If you are paying higher education tuition for a dependent outside of a 529 plan and are eligible for the American Opportunity Tax Credit, you may want to time your tuition payments correctly to maximize credit. The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.  The IRS uses cash basis to determine the year for deduction. Therefore, if you pre-pay your dependent's 2023 spring semester tuition in December 2022, it actually applies to your 2022 taxes and you are not eligible to use that payment to apply to a 2023 tax credit. In most cases, the tuition and books will exceed $4,000 in one semester and you have already maximized your benefit. However, if you have not maximized your benefit in 2022 or your dependent is in their senior year expecting to graduate this spring, timing your payment can help reduce your tax liability for 2022 and 2023. 

If you are self-employed or own rental property, you are most likely able to deduct year-end purchases. One of the perks of being self-employed is being your own boss. In addition, you are somewhat able to lower or higher your income by deciding when to incur discretionary business expenses. If you buy office supplies before 2022 year-end, then you can effectively lower your 2022 net income. However, remember these purchases will most likely increase your next year net income by reducing the expenses you would have incurred in that year. 

October 2022 

More Inflation Reduction Act-New Electric Vehicle and Other Energy Credits (courtesy from the September blog)

Tax incentives for purchasing clean (electric) vehicles and installing high efficiency home improvements are some of the featured provisions in the recently-passed Inflation Reduction Act (IRA). Here’s a closer look at some of the bill’s tax provisions regarding the new incentives.

Clean Vehicle Credit (formerly Plug-In Electric Vehicle Credit)

Here is a summary of the details surrounding the new Clean Vehicle Credit:

• The tax credit of up to $7,500 for electric vehicles (EVs) is extended for 10 years until December 2032.
• Starting in 2023, used cars now qualify for up to a $4,000 tax credit.
• Starting in 2024, you can take the credit as a discount at the time you purchase the vehicle instead of waiting to file your tax return.
• In the past, if a manufacturer had produced at least 200,000 EVs, you could no longer qualify for the tax credit if purchasing a vehicle from that manufacturer. The new bill removes this 200,000 vehicle cap starting in 2023.

On the other hand, there are significantly more hurdles you’ll have to overcome to qualify for the new Clean Vehicle Credit:

MSRP hurdle

• New clean cars must have a manufacturer’s suggested retail price (MSRP) of no more than $55,000.
• New clean vans, pickup trucks, and SUVs must have an MSRP of no more than $80,000.
• Used clean vehicles must cost no more than $25,000.

Income hurdle

• For a new clean vehicle, your adjusted gross income must be less than $150,000 if single, $225,000 if head of household, or $300,000 if married.
• For a used clean vehicle, your adjusted gross income must be less than $75,000 if single, $112,500 if head of household, or $150,000 if married.

Domestic production hurdle

• The final assembly of a new clean vehicle must occur in North America as of August 16, 2022.
• Starting in 2023, at least 40% of critical battery minerals and 50% of battery components must be recycled, mined, or manufactured in the U.S.
• Many automakers are unsure whether they will be able to meet this criteria as the new law is currently written.

What you can do

• Wait until 2023 to buy Tesla and GM vehicles. Because Tesla and General Motors have both crossed the 200,000 electronic vehicle threshold, any Tesla or GM vehicle purchased in 2022 won’t qualify for the tax credit. Starting in 2023, certain Tesla and GM vehicles will once again qualify for the credit once the 200,000 limit is removed.
• Government to release further guidance. There are still many unanswered questions about how the new Clean Vehicle Credit will be implemented. The federal government plans to release further guidance by the end of the year that hopefully answers some of these questions.

Other Tax-Related Provisions

• Qualifying high efficiency home improvements now qualify for an annual $1,200 credit, up from a $500 maximum lifetime credit.
• Energy efficient heat pumps, heat pump water heaters, central air conditioners, wood stoves, and natural gas or oil furnaces or boilers qualify for a $2,000 credit.

What you can do

• Look for the details. Prior to purchasing new high efficient home improvements, double check how the new credit will apply to your purchase.
• Check with manufacturers. Most manufacturers are motivated to understand the new program and could be a good resource to see how they apply to your situation.

There will be more details on how to obtain these credits in the future. So stay alert and check before making any purchase decisions if you are expecting to take any of these new energy saving credits.

September 2022 

Inflation Reduction Act

Last year at this time, Congress passed the Infrastructure Bill and was re-working the Better Back Bill to accommodate West Virginia Senator Joe Manchin and Arizona Senator Krysten Sinema requests to have the votes for passage. Despite repeated attempts, the two senators would not bite and the bill was left on the Senate floor. Under a new name and refocused purpose, the Democrat-controlled Congress were able to reel in the Senators and pass the Inflation Reduction Act (IRA). The legislation, sponsored by Senators Chuck Schumer and Joe Manchin, projects a $300 million deficit reduction in the Federal budget in the next 10 years.  The most significant tax revenue increase is from assessing a corporate minimum tax to very large corporations that could be applicable if the corporation does not at least pay 15% of their pre-tax financial statement income. The most significant budget savings comes from the Medicare Drug Price Reform provisions within the legislation. 

Will you notice any change in your tax liability because of the IRA legislation?  If anything, the legislation will most likely decrease your tax liability, although, you will need to make a conscious effort to invest in clean energy products. Here's a summary of the major individual tax changes from the IRA legislation to consider in 2022 and beyond. 

Energy-Efficient Home Improvement Credit. The credit for nonbusiness energy property has been repackaged as the energy-efficient home improvement credit expiring on December 31, 2032. Starting in tax year 2023, the credit is increased from a $500 lifetime tax credit to a $1,200 annual tax credit. The unique aspect is that after 2024, the taxpayer must include the product identification number for the item on the tax return to receive the tax credit.

Residential Clean Energy Credit,  If you install solar energy equipment in your residence any time this year through the end of 2032, you are entitled to a nonrefundable credit off your federal income taxes, equal to 30 percent of eligible expenses. While the tax credit is nonrefundable, any unused amount may be carried over to the next year.

Clean Vehicle Credit. The act modified the $7,500 nonrefundable tax credit for electric vehicles in several ways. First, it changes the name of the credit to the clean vehicle credit. It also imposes a requirement that the final assembly of the vehicle must occur in North America (effective Aug. 16, 2022). In 2023, the act also removes the limitation on the number of vehicles eligible for the credit, so electric vehicles purchased from manufacturers that had formerly reached their cap will now be eligible for the credit. However, there are price caps, so the credit is not allowed for cars with a manufacturer's suggested retail price over $55,000 or for vans, SUVs, or pickup trucks with a manufacturer's suggested retail price over $80,000. Also, the credit is not allowed for taxpayers whose modified adjusted gross income (MAGI) exceeds certain thresholds ($300,000 on joint returns, $225,000 for heads of household, and $150,000 for single taxpayers). Starting in 2024, auto dealers may provide the consumer the immediate. The IRS will need to provide final guidance to determine how this tax credit will exactly work. If you are currently shopping for an electric vehicle and want to ensure you receive the federal tax credit, check out the Department of Energy website. 

IRS Funding. The act appropriates approximately $80 billion in funds for the IRS in addition to their annual appropriation funding. The funding goes mainly to tax enforcement where this investment will actually realize higher tax revenue due to income under-reporting. Different media outlets have many concerns with this funding stating that not enough funding is going to IRS services to assist taxpayers. In addition, concerns have been voiced that the IRS will use this enforcement against lower income taxpayers who do not have the resources to fight the IRS "aggressive" findings and assessments. Treasury Secretary Yellen has stated that taxpayers making under $400,000 will not see a proportionate increase in audits.

In my opinion, I think it will take the IRS at least 3 to 5 years to "catch-up" on hiring and training for the average taxpayer to maybe see any differences in services or increased notices. Although the $400,000 has been cited as a threshold, I believe those small businesses or individuals (whether you gross more than $400,000 or not) that work in traditional cash-based businesses or professions will be at a greater audit risk in about 3 to 5 years. Further, the IRS will have more personnel to perform analytics on tax returns, and if your income or deductions are outside the normal range, the IRS will be more likely to request documentation to support deductions or request business and personal bank information to analyze whether your income is fully reported on your tax return. Time will tell how whether this investment is successful or not. 

Summer 2022 

I quit! How the U.S. Tax Code can assist in your Great Resignation adventure!

“Now Hiring” has been the tagline in 2022. PWC recently conducted a global survey that 1 in 5 workers plan to quit their jobs in the next 12 months either for a higher paying job or finding more fulfillment in life whether it be a new job or lifestyle.  In many cases, workers are quitting on the spot knowing that jobs are so plentiful that they can find employment whenever they want.

The US Tax Code does assist in some ways to help those thinking of quitting or retiring early. Most tax breaks take some pre-planning in terms of saving enough in your retirement plans or brokerage accounts, however, not all tax breaks require it.

Here’s my top 4 great resignations tax moves to supplement your income or reduce your tax liability while looking for that perfect job:

Become an independent contractor.  Being your own boss can be truly fulfilling and the Tax Cuts and Jobs Act (TCJA) rewards it. While employees are not able to deduct their unreimbursed expenses, an independent contractor may fully deduct all business expenses. If you work out of your home, you may also deduct and prorate some of your home expenses to the business. In addition, business owners receive the Qualified Business Income deduction which provides a 20% discount on net income. Downside: Don’t forget about the FICA tax where you pay 15.3% of your self-employment income and remember you are the boss for both the good and bad.

Withdraw your Roth IRA Contributions Tax and Penalty Free. Roth IRA rules can be confusing and to explain the full set of rules take some ink. The easiest rule to remember is that your Roth IRA contributions may be withdrawn tax and penalty free at any time.  So, if you contributed $35,000 to a Roth IRA over your work life, you can withdraw that $35,000 at any time, at any age, tax and penalty free. Downside: Building your Roth IRA nest egg can take some time and taking the funds now will reduce your tax-free retirement down the road.

Withdraw from your traditional IRA through Separate Equal Periodic Payments (SEPP) without Penalty.  Without a qualifying exception, withdrawing from a traditional IRA before age 59½ will incur a 10% tax penalty. One of the qualifying exceptions is to withdraw your IRA funds using SEPP.  The SEPP may not be for everyone, however, if you are closer to the end of your career, it can assist in supplementing your income. The IRS provides 3 different methods to calculate SEPP distributions. Once calculated and implemented, the SEPP payments must continue for a minimum of five years or until you reach age 59½; whatever comes later. If you start your SEPP payments at age 48, you will need to continue your SEPP payments for the next 11½ years.  SEPP payments are taxable since you are withdrawing the funds from your traditional IRA, however, it qualifies as an exception from the 10% penalty for early withdrawal. Downside: If you decide you no longer want to take the payments or alter the amounts before you meet the age or years requirement, then you will owe a 10% penalty on the entire SEPP payments even from previous years.   

Refresh your educational learning and qualify for the Lifetime Learning Tax Credit. If you are looking to improve your job skills, the Lifetime Learning Tax Credit could help reduce your tax bill. Unlike the American Opportunity Tax Credit, pursuit of a degree is not required, and it can be claimed unlimited times. The tax credit is equal up to 20% of the first $10,000 spent on qualified higher education expenses up to a maximum of $2,000. Downside: The Lifetime Learning Credit has a relatively low phase out amount especially in high cost of living areas where salaries are generally higher. For those filing single or head of household, the tax credit starts phasing out at $80,000 and is completely phased out at $90,000 in income. For married filing jointly, the tax credit phases out at $160,000 and is completely phased out at $180,000.