by Jean Miller | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual, Uncategorized
The IRS wants American taxpayers to be prepared for a potentially smaller tax refund in 2023. There are a few contributing factors that prompted the warning from the IRS in a recent statement, and we go over those below.
Economic Impact Payments
In a recent statement, the IRS cited the lack of Economic Impact Payments in 2022 as the main factor in lower tax refunds for next year. In 2020 and 2021, many taxpayers received additional refunds due to Economic Impact Payments (also known as stimulus payments), which were issued in response the financial impact Americans experienced during the COVID-19 pandemic. The final stimulus payment was distributed in March 2021. With no stimulus payment issued in 2022, taxpayers won’t see the additional money in their refunds.
Charitable Contribution Deductions
Additionally, in 2020 and 2021, taxpayers who take the standard deduction could claim a tax deduction of up to $300 for cash donations to charity. This pandemic-era exception hasn’t been extended for 2022. In order to write off gifts to charity, taxpayers must once again itemize. Almost 90% of taxpayers use the standard deduction, which means most Americans won’t be able to deduct charitable contributions.
An Additional Hurdle for Side Hustles and Small Gigs
The American Rescue Plan enacted a new rule that will affect those who rely on side hustles using third-party payment services like PayPal or Venmo – or sell on sites like eBay, Etsy, and Facebook Marketplace. Taxpayers who used these platforms to sell more than $600 worth of goods or services will be receiving a 1099-K form from whichever platform they used. Prior to the American Rescue Plan, the threshold that would trigger the need for a 1099-K form was either 200 transactions or $20,000. With this new requirement, many Americans will be filing taxes on their side hustles for the first time in 2023, which could also contribute to a lower tax refund for some filers. Note that money received from friends or family via a third-party app as a gift or reimbursement for personal expenses is not taxable.
NOTE: On Dec. 23, 2022, the IRS announced that calendar year 2022 will be treated as a transition year for the reduced reporting threshold of $600. For calendar year 2022, third-party settlement organizations who issue Forms 1099-K are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions.
by Daniel Kittell | Accounting News, Budget, Financial goals, News
The beginning of a new year has long been associated with starting from a blank slate and setting new goals for the year ahead. While 2020 taught us that plans and goals can quickly veer off course through no fault of our own, maybe 2021 can teach us the value of planning anyway—even in the face of the unknown. The financial tasks set forth below will help you pay down debts, save money, and better prepare you for whatever 2021 has in store.
File Your Tax Return ASAP
Not only does filing early help stave off refund-hungry thieves, but, generally, the sooner you file the sooner you get your refund. If you’re planning on owing the IRS, it’s better to know early and make arrangements for payment.
Given the unemployment plunge of 2020, keep in mind that unemployment checks are typically taxable, so if you received extended jobless benefits, be prepared to face a potentially greater-than-expected tax bill.
Check Your Withholding
You can use an online income tax calculator to estimate how much you’ll owe in federal taxes. Use your prepared 2020 tax return and your first pay stub from 2021 to check that you’re on track with tax withholding. If not, the calculator can help work out adjustments to your paycheck, and you can contact your employer if you need to make changes.
If you’re a business owner, you may need to make estimated quarterly payments. Tax professionals can help you work out amounts and details.
Get Organized
There’s no time like the present to organize your financial life. All those paper receipts and statements scattered on desktops or tossed into random drawers? Corral them into labeled file folders, baskets, or envelopes. If you want to shed the paper clutter all together, go digital with an accounting software like QuickBooks. A digital snapshot of your finances will help you gain a better grasp for where you are financially before setting new goals.
Commit to Saving in a Realistic Way
Instead of just thinking about saving, commit to establishing a habit of saving by striving for a concrete goal. Set the amount and time frame for your goal, then come up with actionable steps on how you’re going to reach it. For instance, set up an automatic draft from checking into savings, take on a side hustle, and/or comb through your budget to see where extra funds could be found. In order to set yourself up for success from the get-go, be sure to be realistic. A goal of $100,000 in five years might be realistic for some people, while beginning with a goal to save $50 a month will be more on par for others.
Create a Budget
First, look back over bank and credit card statements from last year to help identify spending patterns and areas of improvement. Next, set a budget. Think of your budget as a roadmap of how you’ll save and spend your money, starting with essentials, such as mortgage, food, utilities, and healthcare; then move to recreation and savings. Keep in mind that your budget has movable parts, meaning life circumstances can change, even month to month.
Start an Emergency Fund
An emergency fund is exactly what it sounds like—funds set aside for an unexpected cost like car or home repairs. At the minimum you should aim for $1,000 to be put into an emergency fund, and try to work your way to saving three months’ worth of income.
Spend Your Medical FSA Early Rather than Later
If you have an employer-provided flexible spending account, spending it as early in the year has possible has a few advantages, including:
- Acquiring medical expenses early in the year can help you meet insurance deductibles, so the rest of your health care can cost less.
- If you leave your job at any point during the year, you can spend the full amount you had planned to contribute—up to $2,750—and aren’t required to finish making the full FSA contribution.
- You mitigate the risk of not using the full amount by the deadline and potentially losing money.
Consult a Financial Advisor
Contrary to popular belief, you don’t have to be a millionaire to seek professional guidance from a financial advisor. Whether you’re looking for a one-time consultation or on-going advice, someone in the know can help set you on the path for long-term planning.
by Jean Miller | Accounting News, News, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
President Trump signed the Tax Cuts and Jobs Act in December of last year, but the income tax credits, deductions, and individual tax rates aren’t applicable until the 2019 tax-filing season. Various factors, such as your tax bracket, can influence whether your taxes will increase under the new tax code. Below are some indicators that could signal an increase on your tax bill.
Do You Have a Large Family?
The new tax code eliminated personal and dependent exemption deductions, which was estimated to have been $4,150 each in 2018 under previous law. However, standard deductions were nearly doubled. For 2018-2025 the deductions are as follows:
- $12,000 for single (previously $6,350)
- $24,000 for joint-filing marries couples (previously $12,700)
- $18,000 for heads of households (previously $9,350)
The elimination of dependent exemptions hurts some families and benefits others. Large families, who don’t benefit from increased standard deductions, will be hit the hardest.
Are You an Average Taxpayer?
If you have a conventional job, file a W-2, and don’t own a lot of property or foreign investments, your taxes won’t likely increase. Instead, you should see a modest decrease as a result of lower tax rates, increased standard deduction, and an increased child tax credit. Despite this, however, there are thousands of potential tax situations that could affect the average taxpayer differently (i.e. a wealthier couple with children who itemize state and local taxes would be limited to a $10,000 deduction under the new law – a loss of $20,000 in deductions – and would likely have higher taxes under the new tax code).
Are You Withholding Enough from Your Paycheck?
The IRS changed the tax withholding tables back in February. The tables are calculated by how much income you earn and the number of allowances you claim. If you aren’t withholding enough from your paycheck, you could end up owing taxes. Check the tax withholding tables on IRS.gov to determine how much income tax should be withheld from your paycheck.
Do You Have Older Children?
The new tax code increases the child tax credit from $1,000 to $2,000 per child under the age of 17. Taxpayers with children over 17 only receive a $500 tax credit.
Do You Have High Property Taxes?
Under prior law you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. So, a big property tax bill could be completely deducted if you itemized. However, under the new tax code, itemized deductions for personal state and local property taxes and personal state and local income taxes are capped at $10,000 ($5,000 if you use married filing separate status).
Even considering the above factors, with the myriad of potential tax circumstances and the complexity of the changes implemented by the Tax Cuts and Jobs Act, it’s difficult to predict how your taxes will be affected until you run the numbers.
If you have any questions about how to plan for your 2018 tax return, please feel free to contact me at [email protected].
by Amanda O'Brien | Accounting News, Audit and Accounting, Bookkeeping, Community, CPA, IRS, News, Tax Consulting, Tax Preparation - Individual
Nearly three years ago, the IRS launched the tax return preparer oversight program and seeds were planted in the landscape of tax return preparation services. Today, those seeds are starting to sprout.
In June, the IRS estimated there are 717,161 PTIN holders, many of which (212,975, or 29.7%) are CPAs, outnumbering Enrolled Agents (42,895) and attorneys (31,189) combined. While CPAs have dominated the regulated tax preparation arena, that landscape is about to change. More and more people are completing the final step to becoming a Registered Tax Return Preparer, or RTRP (they have until 12/31/13 to pass the competency exam). Currently, there are 4,893 RTRPs. That leaves an estimated 338,127 “provisional preparers” who may join the RTRP ranks.
That means more competition is coming and it will influence the public perception of tax return preparers. Unfortunately, the public doesn’t really understand the difference between a CPA and other tax return preparers. We have all seen the advertisements by the big box tax preparation and software chains that inflate the qualifications of their employees. They often compare them to CPAs or perhaps they feature a CPA in the ad, implying that every customer representative will have similar qualifications.
Some believe that RTRPs will leverage their new designation as some form of implied association with or endorsement by the IRS, thus giving them an advantage in the marketplace. While the IRS has put in restrictions on advertising that leverage the RTRP designation (thanks to AICPA advocacy), they cannot possibly enforce them completely. And they can’t police informal or non-commercial promotions. If CPAs wait to counter such marketing efforts, they may find themselves in the same position as a political candidate trying to counteract a negative ad: while the ad may be false, it is hard to change someone’s mind after the fact.
That’s why it is important for CPAs to start telling their stories better, more often and everywhere they can think of. And they need to start now. Clients need to hear messages about the value of a CPA directly from their CPA. They also need to understand how they are more than just a tax return, that their CPA is available year-round and can help them plan for life’s significant milestones such as buying a house, planning for retirement, saving for college and much, much more. If we don’t start tooting our own value horn louder and longer, who will?
When do you need to start building your new value proposition? Yesterday. And how do you do this? Start by developing a value-centric firm culture, then educating your staff on the importance of value based client communications.
The AICPA has developed the Tax Practitioner Toolkit (available free) to help members better define their value and communicate it to current and prospective clients. A Toolkit Implementation Checklist is included, so you can get started right away.
Once your firm masters its story so it is infused in every client contact, networking presentation, or prospective client meeting, it will become part of who you are and what your firm represents for its clients. Once you know your value and live it every day, clients will never have to guess. They’ll automatically know that their CPA is the premier provider of tax services and they would never trust their finances to anyone else.
by Daniel Kittell | Accounting News, Tax, Uncategorized
As you’re nearing the tax return finish line, you probably have some clients who are stragglers or haven’t “checked in” yet. Fortunately, you can still rely on the automatic tax filing extension to bail procrastinators out of a jam. Here’s some valuable information to pass along to your clients.
The due date for filing 2011 federal income tax returns is April 17, 2012, but that deadline isn’t etched in stone. You can buy yourself more time by filing Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return, by April 17. This provides an automatic extension for filing your return for six months until October 15, 2012 – with absolutely no questions asked by the IRS!
Of course, an extension to file is NOT an extension to pay the tax that’s due. You still have to pay estimated tax in a timely manner to avoid penalties and interest charges.
If you don’t pay the requisite amount of tax by the April 17 deadline, the IRS will impose a penalty of one-half percent each month on the amount of tax owed. And, if you fail to file a return by the October 15 extension date, the IRS will ramp up the penalty to 5 percent per month, up to a maximum of 25 percent.
Why would you need a filing extension? Typically, it’s used by taxpayers who simply couldn’t get their act together in time. But here are few other common reasons for seeking an extension:
1. You don’t have all the information you need for your return or it’s been lost or misplaced. For instance, delays may be caused if you haven’t received a K-1 stating income received in 2011 from a pass-through business entity.
“Frequently, an extension is needed because the business or partnership hasn’t completed its own return,” says Chris Hesse, a partner in CliftonLarsonAllen’s federal tax resource group in Minneapolis, Minnesota. “This has become common because pass-throughs are being used to avoid the double taxation issue. The client must make a payment based on a reasonable estimate.”
2. Circumstances dictate a delay. Even if you fully intended to file your tax return by April 17, sometimes life gets in the way. If there’s been an unexpected illness or death in the family, you might not able to file on time. Similarly, a natural disaster can cause interruptions, although the IRS usually offers relief to those in harm’s way.
3. You don’t have the cash on hand for a retirement plan contribution. If you’re self-employed, you might be using a Keogh plan or SEP to save for retirement. The annual contributions reduce your tax liability, but only if the deposits are made on time, notes Hesse. He says that filing for an extension effectively gives you an extra six months to come up with the money.
4. Obtaining an extension might reduce your tax liability. For example, if you converted a traditional IRA to a Roth in 2011, you must pay tax on the entire account balance at the time of conversion. But the value of the account may have declined since then. By recharacterizing your Roth back into a traditional IRA before you file your tax return, you can avoid an unnecessary tax “overpayment.”
5. You’re concerned about tax audits. There’s a school of thought that filing for an extension reduces your chances of being audited. Here’s why: Normally, IRS auditors examine a certain percentage of returns to randomly check for tax cheats. If you obtain an extension, you might sidestep this auditing procedure entirely, thereby reducing your overall exposure to an audit.
In any event, if you don’t pay the requisite amount of tax by the April 17 deadline, the IRS will impose a penalty of one-half percent each month on the amount of tax owed. And, if you fail to file a return by the October 15 extension date, the IRS will ramp up the penalty to 5 percent per month, up to a maximum of 25 percent.
As with your regular tax return, you can e-file your filing extension request or send it by snail mail. If you’re going to a US Post Office, we recommend using certified mail so you can prove to the IRS that you requested the extension on time.
How do you know how much you have to pay with the filing extension application? It’s not an exact science. Hesse says that his firm refers to figures in prior returns to help arrive at a reasonable amount. Contact your CPA immediately for guidance.
Full Article: http://www.accountingweb.com/topic/tax/five-good-reasons-obtain-filing-extension
