Month: November 2022

Preface: “Life is either a daring adventure, or nothing at all” – Helen Keller

Can You Handle Travel Costs More Easily

As you likely have discovered, travel expenses are a stressing task for your company. Besides the cost of the actual travel, you also must navigate budgeting for travel costs that vary from destination to destination, the administrative hassle of tracking actual expenditures from employee-maintained records, paying directly for the expenses or providing employees with advances or reimbursements, and keeping track of which expenses are completely deductible (lodging and round-trip travel) and those that yield only a 50-percent deduction (meals while the employee is on travel status).

Fortunately, the IRS may be able to help you work out an alternative plan of action that puts strict limits on your travel expenses, encourages employees to be frugal, and involves a bare minimum of tax complications. In a nutshell, the plan involves paying employees a flat daily or per-diem rate for meals, incidental expenses, and lodging costs while they are out-of-town on company business.

If employees pay more for their meals and lodging than the per-diem rate, they must personally pay for the difference; if they pay less than the per-diem, they pocket the difference. Along with costs, recordkeeping is cut, too, if the per-diem rate does not exceed the per-diem rate that the federal government pays its employees traveling to the same destination as your employees. All employees need to do to substantiate the travel expenses for tax purposes and keep the per-diem payroll- and income tax-free, is to submit a written log of the time, place, and business purpose of the travel. Receipts and to-the-penny recordkeeping of actual travel expenses are not required.

Your business may deduct 100 percent of the lodging portion of the per-diem and 50 percent of the meals expense portion. However, Congress provides for the temporary allowance of 100% deduction for business meal food and beverage expenses provided by a restaurant that are paid or incurred in 2021 and 2022.

To make the per-diem program work, you need a list of the federal government’s per-diem reimbursement schedule, which varies year to year as well as locality to locality. We’ll be glad to make this schedule available to you, as well as full details on this trouble-free reimbursement plan.

A simpler version of the per-diem travel reimbursement program is available. Regardless of the actual government reimbursement rate for a particular locality within the lower 48 states, your company can reimburse travel to “low cost” travel destinations at one rate and use a higher rate for all “high cost” travel destinations. These so-called “high-low” rates are changed periodically.

Call us for the current list of high-cost areas available to you and work out a detailed guide that will help you control travel and recordkeeping costs without adversely affecting your deductions for employee travels.

Preface: “The question isn’t at what age I want to retire, it’s at what income.” -George Foreman

2022 Tax Planning: Benefits of Lowering Adjusted Gross Income

Planning to reduce your income can reduce your overall tax burden. Individual taxpayers may be able to reduce their taxable income through deductions if they meet the qualifications and income limitations. Saving for retirement and for future medical costs is an important way for an individual may achieve financial security and prepare to save for future expenses. This blog focuses on the background and tax benefits on reducing adjusted gross income by contributing to retirement plans, contributing to a health savings account, and opportunities for a student loan interest deduction.

 Traditional IRA. Any individual, regardless of whether or not covered under other qualified retirement plans, can establish an individual retirement account (IRA). Whether an individual is employed or self-employed, they may also take advantage of a variety of employer-sponsored retirement plans.

These options not only provide security for the future, but also may provide opportunities for current tax savings. Traditional IRAs allow an individual with earned income to make tax-deductible contributions to a savings plan under which the gains and earnings are not taxed until they are distributed.

 Contributions to a traditional IRA are generally deductible on the taxpayer’s individual income tax return, to the extent that they do not exceed the lesser of the individual’s compensation for the year or the maximum contribution limit for the year and subject to income limits. In addition, nondeductible contributions from after-tax income may be made to traditional IRAs.  

For 2022, total contributions to all of a taxpayer’s traditional and Roth IRAs cannot be more than the lesser of $6,000 ($7,000 if they are age 50 or older) or their taxable compensation for the year. The prior maximum age limitation of 70 ½ to contribute to an IRA ended effective for contributions after December 31, 2019.

 SEP Plan. A SEP is a type of IRA for small business owners or self-employed individuals. A SEP IRA allows the employer to make contributions to the accounts set up for employees. Self-employed individuals choosing a SEP must include all employees who satisfy the following requirements: at least 21 years of age; were employed during any three of the preceding five years; and earned at least $650 in the current year.

Contributions to a SEP plan are tax-deductible and earnings are not taxable until withdrawal. One advantage of the SEP IRA is the higher contribution limit. For 2022, employers can contribute the lesser of up to 25% of income (limited to $305,000) or $61,000.

SIMPLE Plan. Any employer that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. Self-employed individuals who received earned income from the taxpayer and leased employees are taken into account for purposes of the 100-employee limitation.

Employers must also make contributions whether or not an employee elects to defer a portion of their income to the plan. Contributions are tax deductible and investments grow tax deferred until the owner is ready to make withdrawals in retirement. For 2022 an employee may defer up to $14,000. If the individual age 50 or over, there is a $3,000 catch up contribution allowed, for a total of $17,000.

Health Savings Account (HSA). Health savings accounts (HSAs) are available for individuals who have a high deductible health plan and may be funded by the individual or the individual’s employer.

The benefits of an HSA include: 

• • • • • • taxpayers can claim a tax deduction for contributions you or someone other than your employer make to your HSA,
          • contributions to your HSA made by your employer may be excludable from income, and
          • the contributions remain in your account until you use them.

 For 2022, the maximum contribution to an HSA is the lesser of: the annual deductible under the individual’s high deductible health plan; or $3,700 for an individual with self-only coverage and $7,400 for an individual with family coverage.

Student loan interest deduction. Interest paid by an individual taxpayer during the tax year on any qualified education loan is deductible from gross income in calculating adjusted gross income. The student loan must be incurred by the taxpayer solely to pay qualified higher education expenses. The maximum deductible amount of interest is $2,500, but the deduction is phased out or reduced based on the taxpayer’s modified adjusted gross income.

 If you would like to evaluate the tax advantages of retirement plans, health savings account, or education benefits with to your individual income tax situation, please contact us to review potential tax opportunities for you to reduce your 2022 taxable income or tax liability. 

Preface: “We make a living by what we get, but we make a life by what we give.” ―Winston Churchill

Guidance on Tax-Free IRA Distributions to Charity

If you generally receive distributions from your IRA and make charitable contributions during the year, you may benefit from arranging a qualified charitable distribution (QCD). A QCD is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to a charitable organization.

A QCD counts towards your required annual minimum distribution from your IRA. The amount of the distribution that is transferred directly to the charity you designate is not included in your adjusted gross income. On the other hand, you can’t claim a charitable contribution deduction for any QCD not included in income. However, by making a QCD, you receive the full benefit of the charitable contribution even if you don’t itemize. Hence the tax benefits options. In addition, this may reduce the tax impact of other income and deductions, such as the amount of taxable social security benefits.

You must be at least age 70 1/2 when the QCD distribution is made. The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

Although a charitable contribution may be motivated by charitable reasons rather than by tax considerations, it is, nevertheless, wise to take tax considerations into account when making a IRA QCD contribution. Please call us to discuss the QCD option if interested in its pertinence to your charitable tax planning.

Preface: “Happiness isn’t something you experience; it’s something you remember.” – Oscar L.

Year-End 2022 Tax Planning

The tax space for the 2022 year is adapted with some new provisional tax law changes that differ somewhat from the prior 2021 tax year. Firstly, several COVID Era tax laws have completely lapsed for taxpayers. Additionally, The Inflation Reduction Act of 2022 introduces a number of new tax law attributes for individuals and businesses. Any further tax proposals or tax changes between now and December 31 are yet obscured. The following are some highlighted features for 2022 tax planning.

Standard Deduction

The standard deduction is inflation adjusted for 2022 for joint filers at $25,900 and individual taxpayers $12,950 and head of households $19,400.

Non-Profit Contributions

The tax provisions for above the line charitable deduction for non-itemizers introduced in 2020 was effective only for tax years 2020 and 2021. Unless modifications are introduced to 2022 tax codes, it is completely phased-out for the 2022 tax year. Therefore, only those itemizing deductions can obtain charitable contribution benefits for taxes in 2022.

Mileage Rates

For tax year 2022, there has been a mid-year change to the applicable standard mileage rate for inflation adjusted vehicle expenses that skyrocketed during the 2022 tax year. Taxpayers will need to sort mileage logs for a bifurcated calculation on effective 2022 mileage rate changes. From January 1 to June 30, the 2022 standard mileage rate for business driving is 58.5¢ per mile. From July 1 to December 31, the 2022 mileage rate for business purposes rises to 62.5¢ per mile.

Gift and Estates Taxes

The annual gift tax exclusion for 2022 increases from $15,000 to $16,000 per taxpayers. So, an individual can give up to $16,000 ($32,000 with spouse) to each child, grandchild or any other taxpayer in 2022 without being required to file a gift tax return. The lifetime estate and gift tax exemption for 2022 increases from $11.700 million to $12.060 million or $24.120 million for couples.

Capital Gain Tax Rates

For 2022, similar to prior years a 0% capital gain tax rate applies for individual taxpayers with up to $41,675 of taxable earnings (joint filers $80,800). A 3.8% surtax on net investment income continues in 2022 for individual taxpayers with taxable income above $200,000 and joint filers above $250,000 of AGI.

Enhanced Child Tax Credit Expired

The enhanced Child Tax Credit legislated into law during the Covid Pandemic in 2020 has also expired for 2022. Although legislators have constructed work to extend the enhanced child tax credit, thus far all efforts have been futile.

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit has been extended through 2022. Payments to install qualifying electric, water heating, or temperature control systems for your home that use solar, wind, geothermal, biomass or fuel cell power qualify for an energy credit increased to 30% starting in 2022.

Research and Development Expenditures

The tax benefit for for-profit businesses to currently write off research and development costs from the Tax Cuts and Jobs Act also expired at the end of 2021, Thus for 2022 tax laws will require businesses to amortize these research and development payments. Retroactive tax law amendments are still a possibility.

Educator Deductions

Teachers receive an inflation adjusted above-the-line educator deduction for qualify classroom expenses adjusted to $300 for 2022 or $600 for joint teaching couples. An “eligible educator” is any taxpayers who is a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 1,000 hours during a school year. Homeschooling educational expenses do not qualify.

IRA Required Minimum Distributions

Revised calculations are now in effect for required minimum distributions in 2022. The 2022 contribution limit for traditional IRAs and Roth IRAs has no changes at $6,000, with a $1,000 additional catch-up contribution for individuals age 50 and up. Taxable income ceilings on Roth IRA contributions increased for contributions phase out in 2022 at adjusted gross incomes (AGIs) of $204,000 to $214,000 for joint filers and $129,000 to $144,000 for individual taxpayers.

Scheduled income phaseouts for traditional IRAs also begin at an increased levels in 2022, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers. If only one spouse is covered by a plan, the phaseout level for deducting a contribution for the uncovered spouse starts at $204,000 of AGI to $214,000.

Adoption of a Child

For 2022, the adoption credit is available for up to $14,890 of qualified expenses. The full credit is available for a special-needs adoption, even if the adoption costs less. The credit begins to phase out for taxpayers with adjusted AGIs above $223,410 to $263,410.

Student Loan Forgiveness

President Biden’s program to revised student loan forgiveness program will provide non-taxable income for taxes from cancellation of student debt from qualifying loans.

Digital Assets

The draft Form 1040 for 2022 includes an updated question for material ownership of “digital assets” rather than “virtual currency.”

Summary

Further to these tax planning items for the 2022 tax year, the typical year-end tax planning strategies also are applicable including year-end qualifying gifts and qualifying contributions, deferring taxable income and accelerating tax deductions, maximizing qualified retirement contributions, and managing taxable gains and losses from investments.