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Year-round tax planning: Part 1

 All taxpayers should understand eligibility for credits and deductions

Tax credits and deductions can help lower the amount of tax owed. All taxpayers should begin planning now to take advantage of the credits and deductions they are eligible for when they file their 2022 federal income tax return next year.

Here are a few facts that can help taxpayers with their year-round tax planning:

  • Adjusted Gross Income, or AGI, is a taxpayer’s total gross income minus specific deductions that can reduce the taxpayer’s income before calculating tax owed. AGI is the starting point for calculating taxes and determining a taxpayer’s eligibility for certain tax credits and deductions that can help lower their tax bill.
  • Taxable income is a taxpayer’s AGI minus the standard deduction or itemized deductions, whichever is greater.
  • The standard deduction is a set dollar amount that reduces taxable income. Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions and using the option that lowers their tax the most.
  • Properly claiming tax credits can reduce taxes owed or boost refunds.
  • Some tax credits, like the earned income tax credit, are refundable, which means an eligible taxpayer can get money refunded to them even if they don’t owe any taxes.
  • To claim a deduction or credit, taxpayers should keep records that show their eligibility for it.

Options for taxpayers who need help paying their tax bill

Taxpayers who can’t pay the full amount of federal taxes they owe should file their tax return on time and pay as much as possible. This will help reduce penalties and interest. If they can’t pay their full bill, they have some other options.

Get a loan
In many cases, loan costs may be lower than the combination of interest and penalties the IRS must charge under federal law. Normally, the late-payment penalty is 0.5% per month, not to exceed 25% of unpaid taxes. The interest rate, adjusted quarterly, is currently 4% per year, compounded daily.
If a taxpayer can’t get a loan, the IRS offers other options.

Online payment plans
Most individual taxpayers qualify to set up an online payment plan with the IRS, and it only takes a few minutes to apply. Applicants are notified immediately if their request is approved. There is no need for them to contact the IRS for a payment plan or an installment agreement. The agency generally processes online payment plans quicker than requests made with electronically filed tax returns. If a taxpayer just filed their return and they know they’ll owe a balance, they may be able to set up a payment plan online before they even receive a notice or bill.

There are two main types of online payment plans:

  • Short-term payment plan – The payment period is 180 days or less and the total amount owed is less than $100,000 in combined tax, penalties, and interest. There’s no fee for setting one up, though interest and the late-payment penalty continue to accrue.
  • Long-term payment plan – Payments are monthly, and the amount owed must be less than $50,000 in combined tax, penalties, and interest. If the IRS approves a long-term payment plan, also known as an installment agreement, a setup fee normally applies. Low-income taxpayers may qualify to have the fee waived or reimbursed. In addition, for anyone who filed their return on time, the late-payment penalty rate is reduced while an installment agreement is in effect. The late payment penalty accrues at the rate of 0.25% per month, instead of up to 1% per month.

Taxpayers who do not qualify for an online payment agreement may still be able to pay in installments. Taxpayers should review the Additional Information on Payment Plans page of IRS.gov for details.

Delayed collection
If the IRS determines a taxpayer is unable to pay, it may delay collection until their financial condition improves. However, the total amount owed will still increase because penalties and interest continue to accrue until the taxpayer pays in full. Taxpayers can request a delay by calling the phone number on their notice or 800-829-1040.

Penalty relief
Some taxpayers qualify to have their late-filing or late-payment penalties reduced or eliminated. This is done on a case-by-case basis, based on reasonable cause. Alternatively, where a taxpayer has a history of compliance, the IRS can typically provide relief under the First Time Abatement program. Taxpayers should review the Penalty Relief page of IRS.gov for more information.

Offer in Compromise
Some taxpayers qualify to settle their tax bill for less than the full amount due, through an Offer in Compromise. There is a $205 non-refundable OIC application fee; however, it is generally waived for individual low-income taxpayers. Offers require a partial payment of the offer amount except for offers filed based on doubt as to liability. The Offer in Compromise Pre-Qualifier tool can help determine eligibility for individuals interested in applying.

Small business rent expenses may be tax deductible

Rent is any amount paid for the use of property that a small business doesn’t own. Typically, rent can be deducted as a business expense when the rent is for property the taxpayer uses for the business.

Here are some things small business owners should keep in mind when it comes to deducting rental expenses:

Lease or purchase

  • Sometimes a business must determine whether its payments are for rent or for the purchase of the property, because different tax rules may apply.
  • Businesses must first determine whether an agreement is a lease or a conditional sales contract.
  • Payments made under a conditional sales contract aren’t deductible as rent expense.

Unreasonable rent
Businesses can’t take a rental deduction for unreasonable rents paid. Rent is unreasonable for deduction when it is higher than market value or a professional appraisal.

  • Usually, unreasonable rent becomes a problem when business owners and the lessors are related.
  • Rent paid to a related person is reasonable if it’s the same amount a business owner would pay to a stranger for use of the same property.

Office in the home
A business owner’s workplace can be in their home if they have a home office that qualifies as their principal place of business.

  • Business owners who rent their home and have a home office as their principal place of business may also qualify for a deduction.
  • IRS Publication 587Business Use of Your Home, Including Use by Daycare Providers, has more details about this deduction.

Rent paid in advance
Rent paid for a business is usually deductible in the year it is paid.

  • If a business pays rent in advance, it can deduct only the amount that applies to the use of the rented property during the tax year. The business can deduct the rest of the payment over the period to which it applies.
  • Business owners can review Publication 535Business Expenses, for detailed examples on rent paid in advance.

Canceling a lease
A business can usually deduct the costs paid to cancel a business lease.

Report tip money as income on your tax return

For those working in the service industry, tips are often a vital part of their income. Like most forms of income, tips are taxable. Therefore, it’s also vital that people understand the tax obligations that come with tip income. Here’s some information to help taxpayers report tip income so they don’t receive a surprise tax bill.

Taxpayers must include all tips they receive in their gross income. This includes:

  • Tips directly from customers.
  • Tips added using credit, debit or gift cards.
  • Tips from a tip-splitting arrangement with other employees.

The value of non-cash tips, such as tickets, passes or other items of value is also income and subject to tax.

Three things can help taxpayers to correctly report their tip income.

  • Keep a daily tip record.
  • Report tips to their employer.
  • Report all tips on their income tax return.

 

 

Social Security benefits may be taxable

A new tax season has arrived. The IRS reminds taxpayers receiving Social Security benefits that they may have to pay federal income tax on a portion of those benefits.

Social Security benefits include monthly retirement, survivor and disability benefits. They don’t include supplemental security income payments, which aren’t taxable.

The portion of benefits that are taxable depends on the taxpayer’s income and filing status.

To determine if their benefits are taxable, taxpayers should take half of the Social Security money they collected during the year and add it to their other income. Other income includes pensions, wages, interest, dividends and capital gains.

  • If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable.
  • If they are married filing jointly, they should take half of their Social Security, plus half of their spouse’s Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable.

Fifty percent of a taxpayer’s benefits may be taxable if they are:

  • Filing single, head of household or qualifying widow or widower with $25,000 to $34,000 income.
  • Married filing separately and lived apart from their spouse for all of 2020 with $25,000 to $34,000 income.
  • Married filing jointly with $32,000 to $44,000 income.

Up to 85% of a taxpayer’s benefits may be taxable if they are:

  • Filing single, head of household or qualifying widow or widower with more than $34,000 income.
  • Married filing jointly with more than $44,000 income.
  • Married filing separately and lived apart from their spouse for all of 2021 with more than $34,000 income.
  • Married filing separately and lived with their spouse at any time during 2021.

Remember all your documents when filing tax return

With 2022 Tax season now on its way, Tax Associates is here to remind you about the most important things to do and not do when filing a tax return. Read the following suggestions and if any questions arise, feel free to contact our offices by phone or email.

Phone: 847-566-3010

E-mail: info@tax-associates.com

Don’t file before you are ready

While taxpayers should not file late, they also should not file prematurely. People who file before they receive all the proper tax reporting documents risk making a mistake that may lead to processing delays.

Typically, year-end forms start arriving by mail – or are available online – in January. Taxpayers should review them carefully. If any of the information shown is inaccurate or not available, taxpayers should contact the payer right away for a correction or to ensure they have their current mailing or email address.

New this year, the IRS sent Letter 6419, Advance Child Tax Credit Reconciliation, in January 2022 to help individuals reconcile and receive the full amount of their 2021 Child Tax Credit. This letter includes the total amount of the 2021 advance Child Tax Credit payments issued and the number of qualifying children used to calculate their advance payments. People need this important information to accurately claim the other half of the 2021 Child Tax Credit when filing their 2021 tax return and prevent delays in processing. The IRS reminds people to check this information carefully.

Most eligible people were already issued their third Economic Impact Payment and won’t include any information about it when they file. However, people who didn’t qualify for a third payment or did not receive the full amount may be eligible for the 2021 Recovery Rebate Credit based on their 2021 tax situation. They will need the total amount of their third Economic Impact Payment to file an accurate tax return to avoid a processing delay. Taxpayers can sign into their IRS Online Account to view the total amount of the third-round Economic Impact Payment or wait to receive IRS Letter 6475.

If you have any questions with these forms please give us a call and we can guide you through the process of obtaining them.

How to deduct home office from your taxes

The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction on their 2021 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.

Here are some details about this deduction to help taxpayers determine if they can claim it:

  • Employees are not eligible to claim the home office deduction.  

  • The home office deduction, calculated on Form 8829, is available to both homeowners and renters.

  • There are certain expenses taxpayers can deduct. These may include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.

  • Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.

  • The term “home” for purposes of this deduction:  
    • Includes a house, apartment, condominium, mobile home, boat or similar property.
    • Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.
    • Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
  • Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction:  
    • There generally must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.
    • The home must generally be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.

  • Expenses that relate to a separate structure not attached to the home may qualify for a home office deduction. They will qualify only if the structure is used exclusively and regularly for business.

  • Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:  
    • The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
    • When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

IRS sending information letters to Taxpayers

 

IRS sending information letters to recipients of advance child tax credit payments and third Economic Impact Payments

The IRS started issuing information letters to advance child tax credit recipients in December. Recipients of the third round of the Economic Impact Payments will begin receiving information letters at the end of January. Using the information in these letters when preparing a tax return can reduce errors and delays in processing.

People receiving these letters should keep themDo not throw them away. These letters can help taxpayers, or their tax professional prepare their 2021 federal tax return.

Advance child tax credit payments letter can help people get remainder of 2021 credit
To help taxpayers reconcile and receive all the 2021 child tax credits to which they are entitled, the IRS started sending Letter 6419, 2021 advance CTC, in late December 2021 and will continue into January. This letter includes the total amount of advance child tax credit payments taxpayers received in 2021 and the number of qualifying children used to calculate the advance payments. People should keep this and any other IRS letters about advance child tax credit payments with their tax records.

Families who received advance payments need to file a 2021 tax return and compare the advance payments they received in 2021 with the amount of the child tax credit they can properly claim on their 2021 tax return.

The letter contains important information that can make preparing their tax returns easier. People who received the advance payments can also check the amount of their payments by using the CTC Update Portal available on IRS.gov.

Eligible families who did not receive any advance child tax credit payments can claim the full amount of the child tax credit on their 2021 federal tax return. This includes families who don’t normally need to file a tax return.

Economic Impact Payment letter can help people claim the 2021 recovery rebate credit
The IRS will begin issuing Letter 6475, Your Third Economic Impact Payment, to EIP recipients in late January. This letter will help Economic Impact Payment recipients determine if they are entitled to and should claim the recovery rebate credit on their 2021 tax returns when they file in 2022.

Letter 6475 only applies to the third round of Economic Impact Payments, which were issued in March through December of 2021. The third round of Economic Impact Payments, including “plus-up” payments, were advance payments of the 2021 recovery rebate credit that would be claimed on a 2021 tax return. Plus-up payments were additional payments the IRS sent to people who received a third Economic Impact Payment based on a 2019 tax return or information received from the Social Security Administration, Railroad Retirement Board or Veterans Affairs. Plus-up payments were also sent to people who were eligible for a larger amount based on their 2020 tax return.

Most eligible people already received the payments. However, people who are missing stimulus payments should review information on IRS.gov to determine their eligibility and whether they need to claim a recovery rebate credit for 2020 or 2021. This includes people who don’t normally need to file a tax return.

The Economic Impact Payment letters include important information that can help people quickly and accurately file their tax return.

What’s new and what to consider when filing in 2022

The Internal Revenue Service today encouraged taxpayers to take important actions this month to help them file their federal tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments.

Here are some key items for taxpayers to consider before they file next year.

Check on advance Child Tax Credit payments
Families who received advance payments will need to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return.

Taxpayers who received less than the amount for which they’re eligible will claim a credit for the remaining amount of Child Tax Credit on their 2021 tax return. Taxpayers who received more than the amount for which they’re eligible may need to repay some or all of the excess payment when they file.

In January 2022, the IRS will send Letter 6419 with the total amount of advance Child Tax Credit payments taxpayers received in 2021. People should keep this and any other IRS letters about advance Child Tax Credit payments with their tax records.

Eligible families who did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the Child Tax Credit when they file a 2021 federal income tax return next year. This includes families who don’t normally need to file a return.

Economic Impact Payments and claiming the Recovery Rebate Credit
Individuals who didn’t qualify for the third Economic Impact Payment or did not receive the full amount may be eligible for the Recovery Rebate Credit based on their 2021 tax information. They’ll need to file a 2021 tax return, even if they don’t usually file, to claim the credit.

Individuals will also need the amount of their third Economic Impact Payment and any Plus-Up Payments received to calculate their correct 2021 Recovery Rebate Credit amount when they file their tax return. Ensuring they use the correct payment amounts will help them avoid a processing delay that may slow their refund.

In early 2022, the IRS will send Letter 6475 that contains the total amount of the third Economic Impact Payment and any Plus-Up Payments received. People should keep this and any other IRS letters about their stimulus payments with other tax records. Individuals can also log in to their IRS.gov Online Account to securely access their Economic Impact Payment amounts.

Charitable deduction changes
Taxpayers who don’t itemize deductions may qualify to take a charitable deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations. For more information, read Publication 526, Charitable Contributions.

Get banked to get ready to direct deposit
Direct deposit gives taxpayers access to their refund faster than a paper check. Those without a bank account can learn how to open an account at an FDIC-insured bank or through the National Credit Union Locator Tool. Veterans should see the Veterans Benefits Banking Program for access to financial services at participating banks.

Special tax deduction for people who give up to $600 to charity

The Internal Revenue Service today reminded taxpayers that a special tax provision will allow more Americans to easily deduct up to $600 in donations to qualifying charities on their 2021 federal income tax return.

Ordinarily, people who choose to take the standard deduction cannot claim a deduction for their charitable contributions. But a temporary law change now permits them to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to qualifying charitable organizations. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify.

Under this provision, individual tax filers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married individuals filing joint returns.

Included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, a more limited version of this temporary tax benefit originally only applied to tax-year 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted last December, generally extended it through the end of 2021.

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

The IRS reminds taxpayers to make sure they’re donating to a recognized charity. To receive a deduction, taxpayers must donate to a qualified charity. To check the status of a charity, they can use the IRS Tax Exempt Organization Search tool.

Cash contributions to most charitable organizations qualify. But contributions made either to supporting organizations or to establish or maintain a donor advised fund do not. Contributions carried forward from prior years do not qualify, nor do contributions to most private foundations and most cash contributions to charitable remainder trusts.

In general, a donor-advised fund is a fund or account maintained by a charity in which a donor can, because of being a donor, advise the fund on how to distribute or invest amounts contributed by the donor and held in the fund. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities.

Keep good records
Special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining an acknowledgment letter from the charity before filing a return and retaining a cancelled check or credit card receipt for contributions of cash.

For details on the recordkeeping rules for substantiating gifts to charity, see Publication 526, Charitable Contributions, available on IRS.gov.

Remind families about the Child Tax Credit
Besides  the special charitable contribution deduction, the IRS also encourages employers to help get the word out about the advanced payments of the Child Tax Credit because they have direct access to many employees and individuals who receive this credit. In particular, remind low-income workers, especially those who don’t normally file returns, that the deadline for signing up for these payments is now Nov. 15, 2021. More information on the Advanced Child Tax Credit is available on IRS.gov.