Month: December 2023

As we approach the joyous season of Christmas and the dawn of a New Year, we want to extend our warmest greetings and heartfelt thanks for entrusting Sauder & Stoltzfus, CPA with your financial needs. It has been a privilege to serve you, and we are grateful for the blessings of your partnership.

Christmas is a time of reflection, gratitude, and the celebration of love and faith. In the spirit of this season, we want to express our sincere appreciation for the trust you have placed in us. Your support has been a source of inspiration, and we feel truly blessed to have clients like you.

May this Christmas bring you moments of joy, peace, and the warmth of family and friends. As we eagerly anticipate the New Year, we pray it unfolds with abundant blessings, prosperity, and opportunities for growth.

Thank you for choosing Sauder & Stoltzfus. We wish you a Merry Christmas filled with the love of Christ and a New Year filled with His grace, prosperity, and joy.

The Team at Sauder & Stoltzfus

Preface: “The art of living easily as to money is to pitch your scale of living one degree below your means.” – Sir Henry Taylor

2023 Tax Planning: Itemized Deductions

There are two ways you can take deductions on your federal income tax return: you can itemize deductions or use the standard deduction. Deductions reduce the amount of your taxable income.

The standard deduction amount varies depending on your income, age, whether or not you are blind, and your filing status. The amount is also adjusted annually for inflation.

Certain taxpayers cannot use the standard deduction:

• • • • A married individual filing separately whose spouse itemizes deductions.
      • An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
      • An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction.

 Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses from a Federally declared disaster. You may also include gifts to charity and part of the amount you paid for medical and dental expenses. You would usually benefit by itemizing if you:

• • • • Cannot use the standard deduction or the amount you can claim is limited
      • Had large uninsured medical and dental expenses
      • Paid interest or taxes on your home
      • Had large “other” deductions
      • Had large uninsured casualty or theft losses from a Federally declared disaster
      • Made large contributions to qualified charities

 The higher standard deduction under Tax Reform means fewer taxpayers are itemizing their deductions. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:

Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount cannot be deducted.

Refinancing a home. The deduction for mortgage interest is also limited. It’s limited to interest paid on a loan secured by the taxpayer’s main home or second home. For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”

Buying a home. People who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home ($375,000 if married filing separately). For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Donating items and deducting money. Many taxpayers often find unused items in good condition they can donate to a qualified charity. These donations may qualify for a tax deduction. Taxpayers must have proof of all cash and non-cash donations.

Deducting mileage for charity. Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2023.

If you have any questions related to itemized deductions or tax planning in general, please call our office.

Preface: “The best and most beautiful things in the world cannot be seen or even touched. They must be felt with the heart. Wishing you happiness.” — Helen Keller

Tax highlights for 2023 tax filing

Standard Deduction

The standard deduction is adjusted for inflation for 2023 as follows:
• Joint filers – $27,700
• Individual taxpayers – $13,850
• Heads of household – $20,800

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 2023 tax codes, it is completely phased out for the 2023 tax year. Therefore, only taxpayers who are itemizing deductions can obtain charitable contribution benefits for taxes in 2023.

Mileage Rates

The 2023 mileage rate for business purposes is 65.5¢ per mile. The rate for miles driven for medical purposes or moving purposes for qualified active-duty members of the Armed Forces is 22¢ per mile. The rate for miles driven in service of charitable organizations is 14¢ per mile.
Gift and Estates Taxes

The annual gift tax exclusion for 2023 increases from $16,000 to $17,000 per taxpayer. So, an individual can give up to $17,000 ($34,000 with spouse) to each child, grandchild or any other taxpayer in 2023 without being required to file a gift tax return. The lifetime estate and gift tax exemption for 2023 increases from $12.06 million to $12.92 million ($25.84 million with spouse).

Capital Gain Tax Rates

For 2023, similar to prior years, a 0% long-term capital gain tax rate applies for individual taxpayers with up to $$44,624 of taxable earnings (joint filers up to $89,249). The capital gain rate jumps to 15% for income from $44,625 to $492,299 (joint filers $89,250 to $553,849. For income above those thresholds, the long-term capital gain rate is 20%.

A 3.8% surtax on net investment income continues in 2023 for individual taxpayers with Adjusted Gross Income (AGI) above $200,000 and joint filers with AGI above $250,000.

Child Tax Credit

The child tax credit remains $2,000 for each qualifying child who was under the age of 17 at the end of 2023. The Credit for Other Dependents remains $500 for each qualifying child who was 17 or 18 years old the end of 2023 or was a student not yet of age 24 at the end of that year, or was of any age but permanently and totally disabled. The $500 credit is also available for qualifying relatives whose gross income was less than $4,700.

Form 4029 Exemption

If a taxpayer with a valid Form 4029 leaves one 4029 exempt fellowship or conference and joins another 4029 exempt fellowship or conference, the IRS would like the taxpayer to file a new 4029. If the taxpayer is merely switching congregations within the same fellowship or conference, there is no need to file a new 4029. If you are 4029 exempt but are in a different fellowship or conference than when you originally applied for the exemption, then please file a new exemption if you wish to remain exempt.

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit have been extended through 2023. 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 that has increased to 30% starting in 2023.

Educator Deductions

Teachers may claim an educator deduction for unreimbursed qualified classroom expenses up to $300 for 2023. For married couples filing jointly where both spouses are eligible educators, the $300 limit applies separately to each. An “eligible educator” is any taxpayer who is a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. Homeschooling educational expenses do not qualify.

IRA Contributions, Allowable Deductions, and Required Minimum Distributions

The Contribution limit for Traditional and Roth IRAs in 2023 is $6,500 for taxpayers under the age of 50 at the end of 2023, and $7,500 for individuals age 50 and older. The limit is for the combined total of Traditional and Roth IRA contributions during the year.

Contributions allowed to Roth IRAs are reduced for single filers earning more than $138,000 and for married couples earning more than $218,000. The possibility of contributing to a Roth IRA is phased out completely for single filers earning more than $153,000 and for married couples earning more than $228,000.

While contributions to Roth IRAs are not deductible, contributions to Traditional IRA are usually fully deductible for taxpayers who are not enrolled in a job-related qualified retirement plan such as a 401(k).

For a taxpayer who is enrolled in a qualified plan, deductions for contributions to a traditional IRA will begin to phase out for a single filer who earns more than $73,000, and for a married filer who earns more than $116,000. The ability to deduct any part of a contribution to a Traditional IRA phases out completely for a taxpayer enrolled in a qualified plan filing single who earns more than $83,000, and married filing jointly who earns more than $136,000.

A married taxpayer filing jointly who is not enrolled in a qualified plan but whose spouse is, will have a limited ability to deduct contributions to a traditional IRA if the couple’s combined income is greater than $218,000. The non-participating spouse’s ability to deduct for Traditional IRA contributions phases out completely if the couple’s combined income is greater than $228,000

Required Minimum Distributions from Traditional IRAs now begin at age 73. Taxpayers born in 1950 or earlier who have money in a Traditional IRA will need to make the Required Minimum Distribution for tax year 2023. The penalty for not doing so is now 25% of the amount not distributed. This penalty can be reduced to 10% if the taxpayer withdraws all of the required amount within two years.
Research and Experimental Expenses

For 2023, tax laws will require businesses to amortize research and experimental payments. The amortization period is 5 years for domestic activities and 15 years for activities outside the U.S.

Adoption of a Child

For 2023, the adoption credit is available for up to $15,950 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 $239,230 and is completely phased out at $279,230.

Student Loan Forgiveness

In June 2023, the U.S. Supreme Court struck down President Biden’s student loan debt forgiveness plan. However, some student loans are being forgiven under a number of other, less ambitious plans. The American Rescue Plan Act of 2021 excludes student loan forgiveness from taxable income through 2025.

Digital Assets

All taxpayers must state on Form 1040 whether they received, sold, or otherwise exchanged any digital assets during the year. This includes cryptocurrency, stablecoin, non-fungible tokens, and other digital assets. Such assets are taxed much the same as stocks and other capital assets. There is still no requirement for brokers to issue Form 1099-B for digital asset transactions.

Preface: The desire of gold is not for gold. It is for the means of freedom and benefit. –Ralph Waldo Emerson

Reporting and Taxation for Investors in Precious Metals

Credit: Benjamin Gelbart

The term “precious metals” generally means gold and silver, but also includes other metals such as platinum and titanium.

Investment grade precious metal that has been refined to high levels of purity is known as bullion. Bullion includes both coins and bars.
Sale of bullion is taxed as a capital gain or loss in a way similar to other investments like commodities or stocks. This means that you must report not when you buy, but when you sell the investment. If the amount of the sale is greater than the amount of your original purchase, you have a capital gain. If it is smaller, you have a capital loss.

When reporting the sale of precious metals, as with similar investments, you must include five data points:

1) A description of the asset
2) The original date of purchase
3) The cost or other basis of the purchase
4) The date of sale
5) Proceeds from the sale (net of transaction costs)

Gain on assets held for more than one year are considered long-term. Precious metals are considered collectibles, which means that their long-term gains cannot be taxed at more than 28%. Ordinary tax rates in 2023 range from 10% to 37% depending on your income. So the rate cap on long-term gains from collectibles will only make a difference to taxpayers whose total income is large enough to put them in a tax bracket of over 28%.
Gain on an asset held for a year or less is considered short-term and is in any case taxed at ordinary rates.

Note that all transactions that result in capital gains or losses should be reported. Despite any rumors you may have heard, there is no minimum threshold that would except you from having to report a capital transaction.
Exchange traded funds that hold precious metals are likewise considered collectibles for tax purposes. However, stock in companies than mine precious metals are not.

Another issue to consider when investing in precious metals is that certain types of coins, when sold in certain quantities greater than certain amounts, require that the seller issue a form 1099-B to report the sale. This is not an additional tax, it is just an additional filing requirement. The quantities that require the seller to issue a 1099-B differ depending on the type of coin or bar sold. When required, form 1099-B must be filed by January 31 following the year the sale is made.

The types of precious metals sales that would require you to issue a 1099-B are determined by the Commodity Futures Trading Commission. Experienced precious metals traders are also a good source of information on this topic and often maintain their own lists.

Note that whether or not the sale you make requires you to issue a 1099-B, it must in any case be reported on your income tax return.