IRS Archives - ATS Advisors - Certified Public Accountants in Plymouth, MI

12 Tax Write Offs for 2022

On March 1, 2023 / IRS

Interested in saving some money this tax year? Here are 12 Tax Write Offs for 2022 :

As always, Contact ATS Advisors with any questions!

Taxpayers may be able to take advantage of numerous deductions and credits on their taxes each year that can help them pay a lower amount of taxes—or receive a refund from the IRS.

You may be able to write off the following twelve common write-offs, which include both tax credits and deductions. Additionally, you may be entitled to write-offs on your state taxes, so check your state tax department’s website to see if you qualify.

1. Property Taxes

Property taxes may be deductible if you itemize, but a limit comes into play.

Under a massive tax overhaul that was signed into law in 2017, deductible state and local income taxes (SALT), including property taxes, are capped at $10,000.

The limit is scheduled to last through the 2025 tax year, unless Congress extends it.

2. Mortgage Interest

The interest you pay for your mortgage can be deducted from your taxes. The write-off is limited to interest on up to $750,000 ($375,000 for married-filing-separately taxpayers) of mortgage debt incurred after Dec. 15, 2017.

3. State Taxes Paid

Again, you can deduct state income taxes that are paid, but the write-off is limited to up to $10,000, which includes all deductible state and local taxes.

4. Homeowner Deductions

You can deduct mortgage insurance premiums, mortgage interest and real estate taxes that you pay during the year for your home.

5. Charitable Contributions

Generally, you can deduct charitable contributions of cash totaling up to 60% of your adjusted gross income, or AGI. Donations of items or property also are considered deductible charitable contributions.

6. Medical Expenses

Medical and dental expenses qualify for a tax deduction, though you can deduct only the costs that exceed 7.5% of your AGI.

To claim medical-related expenses on your 2022 tax return next year, they must have been paid in 2022, unless they were charged to a credit card. In those cases, you can deduct the expenses in the year you charged the card, not necessarily the year in which you repaid them.

Trips to your doctor’s office or hospital appointments qualify for medical mileage. For 2022, you can deduct 18 cents a mile for travel you made for medical purposes through June 2022. The amount has increased to 22 cents a mile from July 1, 2022, through the end of the year.

7. Lifetime Learning Credit Education Credits

The lifetime learning credit allows people to claim a tax credit for taking classes at a community college, university or other higher education institution. The maximum amount of expenses you can deduct is up to $10,000 for an unlimited number of years. However, the top credit you can receive per tax return is worth $2,000.

The credit allows for a dollar-for-dollar reduction on the amount of taxes owed. The expenses can include tuition, fee payments and required books or supplies for post-secondary education for yourself, spouse or dependent child. The credit isn’t refundable, which means it can be used to pay any taxes you owe, but you can’t receive any of it as a refund.

The amount of your credit depends on your income. You should check IRS Publication 170 to determine the income qualifications.

Note: This credit can’t be claimed in the same year as the American opportunity tax credit using the same expenses.

8. American Opportunity Tax Education Credit

The American opportunity tax credit offers a tax break for the first four years of higher education. The maximum annual credit is $2,500 per eligible student. If the amount of taxes you owe is zero because of this credit, the IRS says 40% of any remaining amount of the credit (a maximum of $1,000) can be refunded to you.

The credit is worth 100% of the first $2,000 of qualified education expenses paid for each eligible student and 25% of the next $2,000 of qualified education expenses.

“If you, your spouse, or child are in school, make sure to look deeper into education credits,” says Daniel Fan, managing director and head of wealth planning at First Foundation Advisors, an Irvine, California-based financial institution. “For students who are in the first four years of college, this credit could provide greater tax savings than the lifetime learning credit.”

Qualifying expenses include tuition, fee payments and required books or supplies for post-secondary education for yourself, spouse or dependent child.

The amount of your credit is determined by your income. This credit can’t be claimed the same year the lifetime learning credit is claimed.

9. Retirement Credits

The contributions you make to a retirement plan such as a 401(k) or a traditional or Roth IRA give you a tax credit of 50%, 20% or 10%, depending on your adjusted gross income that you report on Form 1040. Any rollover contributions do not qualify for the credit.

The maximum contribution amount that qualifies for the credit is $2,000 ($4,000 if married filing jointly), making the maximum possible credit $1,000 ($2,000 if married filing jointly). The IRS has a chart to help calculate your credit.

10. IRA Contributions

The maximum contribution for 2022 in a traditional or Roth IRA is $6,000, plus another $1,000 for people who are 50 years old or more. Your contributions to a traditional IRA are tax-deductible.

11. Self-Employed Health Care Premiums

If you’re self-employed, you can deduct 100% of the health insurance premiums you pay monthly for yourself, your spouse and your dependents, whether or not you itemize deductions, says Robert Charron, a CPA in charge of the tax department at Friedman, a New York-based accounting firm.

If you have kids under 27 at the end of 2022, you can also deduct their premiums—even if they aren’t dependents.

However, you can’t claim this deduction if you’re eligible to participate in a subsidized health plan from an employer for either yourself, your spouse, dependents or kids under 27.

12. Student Loan Interest

Student loan interest can be written off your taxes, but the maximum interest you can deduct is $2,500. The amount you may write off depends on your income. Review the previously mentioned IRS Publication 970 for more information.

So thats it! There are 12 Tax Write Offs for 2022 that you can use to your advantage.

What Is the Standard Deduction?

The standard deduction is an automatic deduction from your taxable income that you can receive without any itemizing.

Before deciding to claim the standard deduction, it’s a good idea to compare your standard deduction amount with your total itemized deductions.

For the 2022 tax year (meaning the taxes you’ll file in 2023), the standard deduction amounts are: :

$12,950 for single and married filing separate taxpayers
$19,400 for head of household taxpayers
$25,900 for married taxpayers filing jointly or qualifying widow(er)s

Tips for Writing Off Your Expenses and Charitable Contributions

Keeping a good record of your income and deductible expenses in a spreadsheet throughout the year can make filing taxes a lot quicker and easier.

“Preparing and organizing everything for your taxes can seem like a daunting task, but a lot of people come across the same common mistakes,” Fan says. “Don’t forget to always include all sources of income, make sure you are looking for and including all possible deductions, and understand the difference between a deduction and a credit.”

Some common mistakes people make include:

Not listing all income
Not accounting for all possible deductions
Not taking advantage of contributions to retirement accounts to increase tax-deductible contributions.

If you are filing taxes with several deductions, start by gathering all the appropriate paperwork, such as Form 1098 for mortgage interest rate deductions. For other deductions, which are based on expenses or contributions, keep accurate records.

“If you itemize your deductions, then keep track of qualified medical expenses, charitable contributions made, or any other deductions which can be itemized,” says Fan. “If you are likely to take the standard deduction, then record keeping will not be as important.”

“12 Common Tax Write-Offs You Can Claim On Your Next Return” Sourced From FORBES, Ellen Chang

Tax Bracket 2022 Head of Household

On January 9, 2023 / IRS

Tax Bracket 2022 Head of Household – Need Michigan Tax Help? Contact ATS Advisors today!

2022 Tax Rates and Brackets

When you’re working on your 2022 federal income tax return next year, here are the tax brackets and rates you’ll need based on your filing status:

**Single Filers and Married Couples Filing Jointly**
Tax Rate	Taxable Income (Single)	Taxable Income (Married Filing Jointly)
10%	Up to $10,275	Up to $20,550
12%	$10,276 to $41,775	$20,551 to $83,550
22%	$41,776 to $89,075	$83,551 to $178,150
24%	$89,076 to $170,050	$178,151 to $340,100
32%	$170,051 to $215,950	$340,101 to $431,900
35%	$215,951 to $539,900	$431,901 to $647,850
37%	Over $539,900	Over $647,850

**Married Couples Filing Separately and Head-of-Household Filers**
Tax Rate	Taxable Income (Married Filing Separately)	Taxable Income (Head of Household)
10%	Up to $10,275	Up to $14,650
12%	$10,276 to $41,775	$14,651 to $55,900
22%	$41,776 to $89,075	$55,901 to $89,050
24%	$89,076 to $170,050	$89,051 to $170,050
32%	$170,051 to $215,950	$170,051 to $215,950
35%	$215,951 to $323,925	$215,951 to $539,900
37%	Over $332,925	Over $539,900

2023 Tax Rates and Brackets

If you’re already thinking about how to handle your 2023 finances in a tax-efficient way — even though it’s still only 2022 – here are the 2023 federal income tax brackets and rates for the four most common filing statuses:

Single Filers and Married Couples Filing Jointly
Tax Rate	Taxable Income (Single)	Taxable Income (Married Filing Jointly)
10%	Up to $11,000	Up to $22,000
12%	$11,001 to $44,725	$22,001 to $89,450
22%	$44,726 to $95,375	$89,451 to $190,750
24%	$95,376 to $182,100	$190,751 to $364,200
32%	$182,101 to $231,250	$364,201 to $462,500
35%	$231,251 to $578,125	$462,501 to $693,750
37%	Over $578,125	Over $693,750

Married Couples Filing Separately and Head-of-Household Filers
Tax Rate	Taxable Income (Married Filing Separately)	Taxable Income (Head of Household)
10%	Up to $11,000	Up to $15,700
12%	$11,001 to $44,725	$15,701 to $59,850
22%	$44,726 to $95,375	$59,851 to $95,350
24%	$95,376 to $182,100	$95,351 to $182,100
32%	$182,101 to $231,250	$182,101 to $231,250
35%	$231,251 to $346,875	$231,251 to $578,100
37%	Over $346,875	Over $578,100

Inflation’s Impact on the 2023 Brackets

Since inflation has been high over the past year or so, the inflation adjustments impacted the tax brackets more this year than what we’re used to seeing. This shows up when we look at the “width” of the 2023 brackets and see that they got comparatively wider than before. (By width, we mean the amount of income taxed at the applicable rate – so the difference between the bracket’s lowest dollar amount and its highest dollar amount.

Take, for example, the 22% bracket for single taxpayers. For the 2021 tax year, the bracket ranged from $40,526 to $86,375 and covered $45,849 of taxable income ($86,375 – $40,526 = $45,849). For 2022, the 22% bracket for singles goes from $41,776 to $89,075 and covers $47,299 of taxable income ($89,075 – $41,776 = $47,299). So, from 2021 to 2022, the 22% bracket for single filers got $1,450 wider ($47,299 – $45,849 = $1,450).

For 2023, however, the width of the 22% singles bracket grew by more than twice as much. The 2023 bracket covers $50,649 of taxable income ($95,375 – $44,726 = $50,649), which is $3,350 wider than for 2022.

But that’s OK – wider tax brackets are a good thing, because it helps prevent “bracket creep.” When a bracket gets wider, there’s less of a chance that you’ll end up in a higher tax bracket if your income stays the same or doesn’t grow at the rate of inflation from one year to the next.

How the Tax Brackets Work

Suppose you’re single and end up with $100,000 of taxable income in 2022. Since $100,000 is in the 24% bracket for singles, will your 2022 tax bill simply a flat 24% of $100,000 – or $24,000? No! Your tax is actually less than that amount. That’s because, using marginal tax rates, only a portion of your income is taxed at the 24% rate. The rest of it is taxed at the 10%, 12%, and 22% rates.

How Much Is Your Standard Deduction?

Here’s how it works. Again, assuming you’re single with $100,000 taxable income in 2022, the first $10,275 of your income is taxed at the 10% rate for $1,028 of tax. The next $31,500 of income (the amount from $10,276 to $41,775) is taxed at the 12% rate for an additional $3,780 of tax. After that, the next $47,300 of your income (from $41,776 to $89,075) is taxed at the 22% rate for $10,406 of tax. That leaves only $10,925 of your taxable income (the amount over $89,075) that is taxed at the 24% rate, which comes to an additional $2,622 of tax. When you add it all up, your total 2022 tax is only $17,836. (That’s $6,164 less than if a flat 24% rate was applied to the entire $100,000.)

Now, suppose you’re a millionaire. (We can all dream, right?) If you’re single, only your 2022 income over $539,900 is taxed at the top rate (37%). The rest is taxed at lower rates as described above. So, for example, the tax on $1 million for a single person in 2022 is $332,955. That’s a lot of money, but it’s still $37,045 less than if the 37% rate were applied as a flat rate on the entire $1 million (which would result in a $370,000 tax bill).

Capital Gains Tax Rates

It’s important to note that the tax rates on capital gains from the sale of stocks, bonds, cryptocurrency, real estate, and other capital assets aren’t necessarily the same as the tax rates mentioned above for wages, interest, retirement account withdrawals, and other “ordinary” income. When determining the tax on capital gains, the rates that apply generally depend on how long you held the capital asset before selling it.

Capital Gains Tax on Real Estate

If you hold a capital asset for one year or less, any gain from the sale is considered short-term capital gain and taxed using the rates for ordinary income listed above. However, if you hold the asset for more than one year, the gain is treated as long-term capital gain and taxed a lower rate – either 0%, 15%, or 20%. As with the ordinary tax rates and brackets, which specific long-term capital gains tax rate applies depends on your taxable income. However, the long-term capital gain brackets are set up so that you’ll generally pay tax at a lower rate than if the ordinary tax rates and brackets were applied.

For more on the taxation of capital gains, see Capital Gains Tax 101.

States Sending Stimulus Checks

“What Are the Income Tax Brackets for 2022 vs. 2023?” – Mengle, Rocky. 2023. Kiplinger.com.

Tax Bracket 2022 Head of Household

EITC 2022 Qualifications

On December 19, 2022 / IRS

EITC 2022 Qualifications

Low- to moderate-income workers with qualifying children may be eligible to claim the Earned Income Tax Credit (EITC) if certain qualifying rules apply to them.

You may qualify for the EITC even if you can’t claim children on your tax return. Find out how to claim the EITC without a qualifying child.

Basic Qualifying Rules

To qualify for the EITC, you must:

Have worked and earned income under $57,414
Have investment income below $10,000 in the tax year 2021
Have a valid Social Security number by the due date of your 2021 return (including extensions)
Be a U.S. citizen or a resident alien all year
Not file Form 2555 (related to foreign earned income)

Special Qualifying Rules

The EITC has special qualifying rules for:

If you’re unsure if you qualify for the EITC, use our Qualification Assistant.

Valid Social Security Number

To qualify for the EITC, everyone you claim on your taxes must have a valid Social Security number (SSN). To be valid, the SSN must be:

Valid for employment
Issued before the due date of the tax return you plan to claim (including extensions)

For the EITC, we accept a Social Security number on a Social Security card that has the words, “Valid for work with DHS authorization,” on it.

For the EITC, we don’t accept:

Individual taxpayer identification numbers (ITIN)
Adoption taxpayer identification numbers (ATIN)
Social Security numbers on Social Security cards that have the words, “Not Valid for Employment,” on them

For more information about the Social Security number rules for the EITC, see Rule 2 in Publication 596, Earned Income Credit.

Filing Status

In 2021, to qualify for the EITC, you can use one of the following statuses:

Married filing jointly
Head of household
Qualifying widow or widower
Single
Married filing separate

You can claim the EIC if you are married, not filing a joint return, had a qualifying child who lived with you for more than half of 2021, and either of the following apply.

You lived apart from your spouse for the last 6 months of 2021, or
You are legally separated according to your state law under a written separation agreement or a decree of separate maintenance and you didn’t live in the same household as your spouse at the end of 2021.

If you’re unsure about your filing status, use our EITC Qualification Assistant or the Interactive Tax Assistant.

There are special rules if you or your spouse are a nonresident alien.

Head of Household

You may claim the Head of Household filing status if you’re not married and pay more than half the costs of keeping up your home where you live with your qualifying child.

Qualifying Widow or Widower

To file as a qualifying widow or widower, all the following must apply to you:

You could have filed a joint return with your spouse for the tax year they died. It does not matter if you filed a joint return.
Your spouse died less than 2 years before the tax year you’re claiming the EITC and you did not remarry before the end of that year
You paid more than half the cost of keeping up a home for the year
You have a child or stepchild you can claim as a relative. This does not include a foster child.
This child lived in your home all year, except for temporary absences. Note: There are exceptions for a child who was born or died during the year and for a kidnapped child. For more information, see Qualifying Child Rules, Residency.

Keeping up a Home

If you paid more than half the total cost to keep up a home during the tax year you file your taxes, you meet the requirement of paying more than half the cost of keeping up the home.

Costs include:

Rent, mortgage interest, real estate taxes and home insurance
Repairs and utilities
Food eaten in the home
Some costs paid with public assistance

Costs don’t include:

Money you got from Temporary Assistance for Needy Families or other public assistance programs
Clothing, education and vacations expenses
Medical treatment, medical insurance payments and prescription drugs
Life insurance
Transportation costs like insurance, lease payments or public transportation
Rental value of a home you own
Value of your services or those of a member of your household

U.S. Citizen or Resident Alien

To claim the EITC, you and your spouse (if filing jointly) must be U.S. citizens or resident aliens.

If you or your spouse were a nonresident alien for any part of the tax year, you can only claim the EITC if your filing status is married filing jointly and you or your spouse is a:

U.S. Citizen with a valid Social Security number or
Resident alien who was in the U.S. at least 6 months of the year you’re filing for and has a valid Social Security number

Claim the EITC Without a Qualifying Child

You are eligible to claim the EITC without a qualifying child if you meet all the following rules. You (and your spouse if you file a joint tax return) must:

Meet the EITC basic qualifying rules
Have your main home in the United States for more than half the tax year
- The United States includes the 50 states, the District of Columbia and U.S. military bases. It does not include U.S. possessions such as Guam, the Virgin Islands or Puerto Rico
Not be claimed as a qualifying child on anyone else’s tax return
Be at least age 18 at the end of the tax year (usually Dec. 31)
- The minimum age to claim the EIC is generally age 19; however, if you are a qualified former foster youth or a qualified homeless youth, you need to be at least age 18.
- If you are a specified student (other than a qualified former foster youth or a qualified homeless youth), you need to be at least age 24.

When You Will Get Your Refund

The IRS expects most EITC/Additional CTC related refunds to be available in taxpayer bank accounts or on debit cards by March 1, if they chose direct deposit and there are no other issues with their tax return. However, some taxpayers may see their refunds a few days earlier. Check Where’s My Refund? or the IRS2Go mobile app to check your refund status.

Other Credits You May Qualify For

If you qualify for the EITC, you may also qualify for other tax credits.

Questions? Contact ATS Advisors

Contact ATS

2022 Taxes For Venmo & Other Third Party Networks

On December 13, 2022 / IRS

2022 Taxes For Venmo & Other Third Party Networks. – DEC 10. – CNBC

KEY POINTS

If you’ve accepted payments via apps such as Venmo or PayPal in 2022, you may receive Form 1099-K in early 2023, which reports income from third-party networks.
For 2022, you may receive the form for even a single transaction over the $600 threshold, but the change doesn’t apply to personal transfers.
Experts say it’s possible to reduce your tax liability through business deductions and retirement plan contributions.

If you’ve accepted payments via apps such as Venmo or PayPal in 2022, you may receive Form 1099-K, which reports income from third-party networks, in early 2023. But there’s still time to reduce your tax liability, according to financial experts.

“There’s no change to the taxability of income,” the IRS noted in a release Tuesday about preparing for the upcoming tax season. “All income, including from part-time work, side jobs or the sale of goods is still taxable,” the agency added.

Before 2022, you may have received a 1099-K if you had more than 200 transactions worth an aggregate above $20,000. But the American Rescue Plan Act of 2021 slashed the threshold to just $600, and even a single transaction can trigger the form.

While the change targets business transactions, not personal transfers, experts say it’s possible some taxpayers will receive 1099-Ks by mistake. If this happens, the IRS says to contact the issuer or make adjustments to your tax return.

Either way, the IRS urges “early filers” to make sure they have all tax forms, including 1099-Ks, before submitting their return.

Whether you work with a professional or self-prepare taxes, you need to be ready, said Albert Campo, a certified public accountant and president of AJC Accounting Services in Manalapan, New Jersey.

Here’s what to know about reporting 1099-K payments on your return and how to reduce your tax liability.

How to report 1099-K payments and claim deductions

You can report 1099-K payments as income on Schedule C of your tax return, which covers profits and losses for sole proprietor businesses.

You’ll have the chance to subtract expenses, known as business deductions, on Part II of Schedule C, including things like the costs of your products, the portion of your internet and phone bills used for business, travel, possibly your home office and other expenses.

You can report 1099-K payments as income on Schedule C of your tax return, which covers profits and losses for sole proprietor businesses.

Jim Guarino, a certified financial planner, CPA and managing director at Baker Newman Noyes in Woburn, Massachusetts, said it’s good to begin reviewing possible business deductions now — including gathering your receipts for each one — to get organized before tax season kicks off.

If you’re paying for your own health insurance, there’s also a chance to deduct the cost of your premiums on Schedule 1, which reduces your adjusted gross income, Guarino said. This won’t apply if an employer provides your health coverage.

Consider a retirement account for your business

Another way to reduce your tax liability is by opening and contributing to a self-employed retirement plan, which is also reported as an “adjustment to income” on Schedule 1.

One option is a Solo 401(k), which covers one participant and their spouse, and allows employee deferrals, which are due by Dec. 31, and employer contributions, which are due by the tax deadline.

“The key piece is making sure that the paperwork or documents are established by the end of the year,” Guarino said. If you’re confused about setting up the plan or how to calculate the employer contribution, it may be smart to speak with a tax professional, he said.

Of course, if you haven’t maxed out your workplace 401(k), it’s possible there’s still time to boost contributions for your last one or two paychecks for 2022, but “time is of the essence,” Guarino said.

Plus, you have until the tax deadline for pretax individual retirement account contributions, which may also qualify for a deduction.

Keep personal and business transactions separate

When starting a business, tax professionals say to avoid “commingling” personal and business income and expenses by keeping them separate — and 1099-K earnings are no exception.

Campo suggests opening another bank account and credit card and using separate third-party payment network accounts for business transactions “to make your life a lot easier.”

Here’s why: If you receive a 1099-K for $10,000, and only $5,000 applies to your business, you’ll need to show the other $5,000 was for personal transfers through recordkeeping, he said.

“It creates more onus on the taxpayer,” Campo said, noting that it’s better to keep personal and business accounts separate because “it’s really cut and dried.”

It’s critical to save receipts for any business expenses you plan to deduct on Schedule C. In the case of an audit, the IRS won’t accept credit card statements as support, Campo warned. The agency wants to see copies of your receipts covering each business expense.

Contact ATS Advisors

Tax Brackets 2023

On December 2, 2022 / IRS

Michigan Tax Brackets 2023 –

The IRS announced its annual adjustments to the standard deduction and tax brackets for the 2023 tax year. They are a considerable increase over 2022. This is a response to ongoing inflation, which has the effect of eroding spending power even as it increases some workers’ take home pay.

As with all things taxes, this can raise some questions. Below, we’ll provide answers.

For more info on how these changes will affect your personal tax bill, consider reaching out to ATS Advisors Today!

What Is The New Standard Deduction For 2023?

The new standard deductions for personal income taxes apply as follows:

Individuals: $13,850 in 2023, a $900 increase
Head of Household: $20,800, a $1,400 increase
Married Filing Jointly: $27,700, an $1,800 increase

What Are The New Tax Brackets For 2023?

The new tax brackets for personal income taxes apply as follows:

10%: All income below $11,000 Individual / $22,000 Married
12%: $11,000 Individual / $22,000 Married, an increase of $725/$1,450
22%: $44,725 Individual / $89,450 Married, an increase of $2,950/$5,900
24%: $95,375 Individual / $190,750 Married, an increase of $6,300/$12,600
32%: $182,100 Individual / $364,200 Married, an increase of $12,050/$24,100
35%: $231,250 Individual / $462,500 Married, an increase of $15,300/$30,600
37%: All income above $578,125 Individual / $693,750 Married, an increase of $38,225/$45,900

Capital gains taxes have also been adjusted. The 2023 capital gains brackets are:

0%: All earnings below $44,625 Individual/$89,250 Married
15%: $44,625 Individual/$89,250 Married, an increase of $2,950/$5,900
20%: $492,300 Individual/$553,850 Married, an increase of $32,550/$36,650

Does The IRS Ordinarily Do This?

Yes.

The IRS automatically adjusts income tax brackets and the standard deduction every year in response to annual inflation. If it didn’t, Americans would pay 30% on every dollar over $6,000. Adjusted for inflation, this would come to a 30% tax bracket on all income over $75,800, indicating how little Americans pay in taxes compared with past decades.

What is noteworthy in 2023 is the scale of these adjustments. Since the 1980’s, U.S. inflation has stayed around the Federal Reserve’s target 2% rate, fluctuating between 0% and 4% most years. This has led to relatively minor annual tax adjustments.

The high inflation of 2022 caused outsized results in this otherwise routine practice, with most adjustments between 6.5% and 8%. For example, between 2021 and 2022 the IRS adjusted the 12% individual bracket by $325, an increase of roughly 3.2%. For tax year 2023 the IRS adjusted that same 12% bracket by $725, an increase of 6.5%.

What Is The Impact of the New Brackets?

Any upward adjustment to the standard deduction or tax brackets is an effective income tax cut. It means that taxes apply to less of your income and that you pay less on the income that is taxed.

The question is whether any given taxpayer ends up with more spending power. The IRS doesn’t adjust its rates to give people tax relief, but rather to reflect the new value of money based on inflation/deflation cycles. If prices have gone up by 10%, but you keep 7% more from your taxes, then as a consumer you’re still effectively a little bit less wealthy than when you started.

What makes this more confusing is the degree to which sector-specific and region-specific inflation have muddled the economic picture as, contrary to general reporting, prices have stabilized in many areas but are skyrocketing in a few others. The result is that some taxpayers will, in fact, end up wealthier from these rate changes based on their spending patterns.

For example, if you already own your own home you’re largely insulated from the housing costs that are driving a lot of current inflation. With gas prices back to normal, and inflation currently flat for food and consumer goods, you may end up wealthier from these bracket changes. By contrast, median rents have increased between 12.5% and 16% since 2021. If you rent an apartment, particularly in a city, these tax changes won’t even cover half of your cost of living increase.

Who Does This Tax Change Apply To?

This applies to all U.S. income tax payers. If you file and pay income taxes to the IRS in 2023, you will do so using the new brackets.

What Income Does This Affect?

The new tax brackets will apply to all earnings starting on January 1, 2023. It does not apply retroactively, meaning that you can’t apply the new standard deduction or tax rates to income on or before December 31, 2022.

Can I Apply This to Current Earnings?

As above, you cannot apply the new tax brackets to any income that you earn on or before December 31, 2022. In IRS-speak, this means that if you trigger a tax event in 2022 the current tax brackets apply, not the new ones.

But you might apply the new tax brackets if you can defer earnings until 2023. The key is in that term “tax event.” This is a technical term for the IRS which means any event that causes you to owe taxes on income, earnings or other wealth. It means different things under different circumstances, but for individuals a tax event usually occurs when you take possession of new wealth. For example, when you receive your paycheck this is considered a tax event. The same goes for when you collect the earnings on a stock sale or when you receive payment after billing a client.

Business Earnings – It’s important to note that businesses can us two different methods of bookkeeping. One considers it a tax event when you are owed money. The other considers it a tax event when you collect that money. Make sure you understand which method you use and apply it consistently.

The common theme is that, in most cases, you trigger a tax event when the new wealth is received, not when it’s owed. In other words, you pay 2022 tax rates on all money that you collected in 2022. You will pay 2023 tax rates on all money that you collect in 2023.

So, if you can defer income or earnings until 2023 you might be able to take advantage of the new rates. For example, some employers will allow you to defer your paycheck. Employees who do this can push their earnings to the new tax year. Self-employed individuals may be able to hold off on invoicing clients until January 1, 2023, collecting under the new brackets rather than the old. Selling investments assets is a little more complicated, since price changes may obviate any tax gains, but the same rules would apply to selling in 2022 vs. 2023.

It’s important to note that all of this is theoretical and absolutely should not be taken as individual tax planning advice. The rules for your personal situation may vary, as tax laws are highly situation-specific and can depend on your employer’s method of bookkeeping.

Do I Have To Do Anything?

No. While outsized, this is a standard change. It does not affect your rights or responsibilities differently than any other tax year. You will pay your taxes as normal, simply applying the new numbers as appropriate.

Bottom Line

The IRS has announced its new tax brackets for 2023, and they’re a considerable change over previous years.

SmartAsset – Eric Reed

403(b) retirement plan changes

On November 15, 2022 / IRS

IR-2022-196, November 7, 2022 – 403(b) retirement plan changes

WASHINGTON — The Treasury Department and Internal Revenue Service today announced the expansion of one of their programs for approving retirement plans. The IRS will now allow 403(b) retirement plans, which are used by certain public schools, churches and charities, to use the same individually designed retirement plan determination letter program currently used by qualified retirement plans.

Revenue Procedure 2022-40PDF details this expansion and includes other changes affecting individually designed retirement plans.

Highlights of these changes:

Revenue Procedure 2022-40 contains the following notable additions for 403(b) retirement plans:

Expansion for initial plan determination – Beginning June 1, 2023, 403(b) retirement plan sponsors may submit determination letter applications for all initial individually designed retirement plans based on the sponsor’s Employer Identification Numbers. (For further details, see section 12 of Revenue Procedure 2022-40PDF.)
Terminations – Beginning June 1, 2023, 403(b) retirement plan sponsors may also request a determination letter upon plan termination on a Form 5310, Application for Determination for Terminating Plan, or at any time thereafter without regard to their EIN.

Notable changes to procedures for submitting and processing individually designed retirement plans include:

Prior letter issued to a Pre-approved Plan adopter not treated as an initial plan determination – A determination letter issued to an adopter of a pre-approved retirement plan as a result of filing a Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans, is no longer considered in determining whether a plan sponsor is eligible to submit that plan for a determination letter for an initial plan determination on a Form 5300, Application for Determination for Employee Benefit Plan.
Scope of review – IRS generally will consider in its review qualification requirements and section 403(b) requirements that are in effect, or that have been included on a Required Amendments List, on or before the last day of the second calendar year preceding the year in which the determination letter application is submitted, subject to any specified modifications on the annual Employee Plans revenue procedure that provides the administrative and procedural rules for submitting determination letter applications, currently Revenue Procedure 2022-4.

These rules will apply to submissions of all individually designed retirement plans.

Revenue Procedure 2023-4, currently in development, will be released in the near future and will contain additional changes to procedural requirements for plan submissions, such as phasing-in mandatory e-submission of determination letter requests. Forms 5300 and 5310 will also be updated to reflect these changes.

Questions? Contact Us!

Tax Credits For Veterans & Other IRS News

On November 9, 2022 / IRS

Tax Credits For Veterans & Other IRS News

TAX PLANNING ALL YEAR

Stay on top of your taxes all year long with Publication 3, Armed Forces’ Tax Guide
Publication 3, Armed Forces’ Tax Guide, covers the special tax situations of active members of the U.S. Armed Forces.
YouTube Video (less than 2 minutes): https://youtu.be/SRYppoVk9zM

HAVE YOU SEEN THIS?

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers of all sizes for hiring and employing a qualified veteran who have faced significant barriers to employment. This includes both taxable and certain tax-exempt employers located in the United States and in certain U.S. territories. While taxable employers claim the WOTC against income taxes, eligible tax-exempt employers can claim the WOTC only against payroll taxes.
Up to $24,000 in wages may be taken into account in determining the WOTC for certain qualified veterans.
A “qualified veteran” is a veteran who is any of the following:
- A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least a 3-month period during the 15-month period ending on the hiring date
- Unemployed for periods of time totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date
- Unemployed for periods of time totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date
- Entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released from active duty in the U.S. Armed Forces or
- Entitled to compensation for a service-connected disability and unemployed for periods of time totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date
See our September Tax Tip for information when hiring veterans: Help wanted? Businesses that are hiring should know about the work opportunity tax credit

DID YOU KNOW?

The Internal Revenue Service have a military page on IRS.gov? Connect here: Military | Internal Revenue Service (irs.gov)
IRS Free File remains open until November 17th for those, including the military, who still need to file their 2021 tax returns. This includes those who qualify for the Child Tax Credit, Recovery Rebate Credit or Earned Income Tax Credit but haven’t yet filed a 2021 tax return to claim them.
Use Free File: Do your Federal Taxes for Free | Internal Revenue Service (irs.gov)

Questions? Contact ATS

IRS tax gap estimates

On October 30, 2022 / IRS

IR-2022-192, October 28, 2022 – IRS tax gap estimates

WASHINGTON — The Internal Revenue Service today released a new set of tax gap estimates on tax years 2014 through 2016 showing the estimated gross tax gap increased to $496 billion, a rise of over $58 billion from the prior estimate.

The gross tax gap is the difference between estimated ‘true’ tax liability for a given period and the amount of tax that is paid on time. As discussed below, it is important to note that the tax gap estimates cannot fully account for all types of evasion.

“These findings underscore the importance of ensuring fairness in our nation’s tax system,” said IRS Commissioner Chuck Rettig. “The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance. The IRS remains committed to ensuring fairness and helping taxpayers while also working to better identify emerging compliance issues that contribute to the tax gap. The recent funding addition will help the IRS in many ways, increasing taxpayer education, significantly improving service to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers.”

After late payments and IRS efforts collected an additional $68 billion, the IRS estimated the net tax gap was $428 billion. This increase in the tax gap can be attributed to economic growth.

Between the two periods, 2011-2013 and 2014-2016, the estimated tax liability increased by more than 23 percent.

The tax gap estimates translate to about 85% of taxes paid voluntarily and on time, which is in line with recent levels. The new estimate is a slight improvement from 83.7 percent in a revised Tax Year 2011-2013 estimate, which dipped slightly from the original estimate released earlier. After IRS compliance efforts are taken into account, the estimated share of taxes eventually paid is 87% for 2014-2016.

The gross tax gap comprises three components:

Nonfiling (tax not paid on time by those who do not file on time, $39 billion),
Underreporting (tax understated on timely filed returns, $398 billion), and
Underpayment (tax that was reported on time, but not paid on time, $59 billion).

A particular challenge for tax gap estimation is the time it takes to collect compliance data, especially data on underreporting that come from completed examinations (audits). To address this issue, the current release includes estimated tax gap projections for Tax Years 2017-2019.

Based on the projections for 2017-2019, the estimated average gross tax gap is projected to be $540 billion per year. The associated voluntary compliance rate is projected to be 85.1 percent. The projection of enforced and other late payments is $70 billion, which yields a net tax gap projection of $470 billion. The associated non-compliance rate projection is 87.0 percent.

The gross tax gap nonfiling, underreporting, and underpayment component projections for Tax Years 2017-2019 timeframe are $41 billion, $433 billion, and $66 billion respectively.

As part of the larger effort to reduce the actual tax gap, the IRS will continue to fairly enforce the tax laws. In 2021, the latest year for which data is available, the IRS currently collected more than $4 trillion in taxes, penalties, interest and user fees.

Tax gap studies through the years have consistently demonstrated that third-party reporting of income significantly raises voluntary compliance with the tax laws. And voluntary compliance rises even higher when income payments are also subject to withholding. The IRS also has an array of other taxpayer service programs aimed at supporting accurate tax filing and helping address the tax gap. These range from working with businesses and partner groups to a variety of education and outreach efforts.

The voluntary compliance rate of the U.S. tax system is vitally important for the nation. A one-percentage-point increase in voluntary compliance would bring in about $40 billion in additional tax receipts.

The tax gap estimates provide insight into the historical scale of tax compliance and to the persisting sources of low compliance.

“Keeping the voluntary compliance rate as high as possible ensures that taxpayers believe our system is fair,” Rettig said. “The vast majority of taxpayers strive to pay what they owe on time. Those who do not pay their fair share ultimately shift the tax burden to those people who do, which fuels the tax gap. The IRS will continue to direct our resources to help educate taxpayers about the tax requirements under the law while also focusing on pursuing those who avoid their legal responsibilities.”

Estimating the tax gap; offshore, digital assets, other categories not fully represented

Given the complexity of the tax system and available data, no single approach can be used for estimating each component of the tax gap. Each approach is subject to measurement or nonsampling error; the component estimates that are based on samples are also subject to sampling error. For the individual income tax underreporting tax gap, Detection Controlled Estimation is used to adjust for measurement errors that results when some existing noncompliance is not detected during an audit. Other statistical techniques are used to control for bias in estimates based on operational audit data. Because multiple methods are used to estimate different subcomponents of the tax gap, no standard errors are reported. In addition, those reviewing this data should be mindful of these limitations when using these estimates.

Given available data, these are the best possible estimates of the tax gap components presented, although they do not represent the full extent of potential non-compliance. There are several factors to keep in mind:

The estimates cannot fully represent noncompliance in some components of the tax system including offshore activities, issues involving digital assets and cryptocurrency as well as corporate income tax, income from flow-through entities, illegal activities because data are lacking.
The tax gap associated with illegal activities has been outside the scope of tax gap estimation because the objective of government is to eliminate those activities, which would eliminate any associated tax.
For noncompliance associated with digital assets and other emerging issues, it takes time to develop the expertise to uncover associated noncompliance and for examinations to be completed that can be used to measure the extent of that noncompliance.

The IRS continues to actively work on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge.

Contact ATS

2023 401k Limit & 2023 IRA Limit

On October 26, 2022 / IRS

IR-2022-188, October 21, 2022 – 2023 401k Limit & 2023 IRA Limit

WASHINGTON — The Internal Revenue Service announced today that the amount individuals can contribute to their 401(k) plans in 2023 has increased to $22,500, up from $20,500 for 2022. The IRS today also issued technical guidance regarding all of the cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2023 in Notice 2022-55PDF, posted today on IRS.gov.

Highlights of changes for 2023

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500, up from $20,500.

The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch up contribution limit for individuals aged 50 and over is not subject to an annual cost of living adjustment and remains $1,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,500, up from $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,000, starting in 2023. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans is increased to $3,500, up from $3,000.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit all increased for 2023.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase out ranges for 2023:

For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000, up from between $109,000 and $129,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000. For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000; $54,750 for heads of household, up from $51,000; and $36,500 for singles and married individuals filing separately, up from $34,000.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.

Details on these and other retirement-related cost-of-living adjustments for 2023 are in Notice 2022-55PDF, available on IRS.gov.

Questions? Contact ATS

Can Grandparents Claim The Child Tax Credit?

On October 18, 2022 / IRS

Can Grandparents Claim The Child Tax Credit?

IR-2022-181, October 17, 2022

Tax Specialist Plymouth MI

WASHINGTON – The Internal Revenue Service reminded families today that some taxpayers who claim at least one child as their dependent on their tax return may not realize they could be eligible to benefit from the Child Tax Credit (CTC).

Eligible taxpayers who received advance Child Tax Credit payments last year should file a 2021 tax return to receive the second half of the credit. Eligible taxpayers who did not receive advance Child Tax Credit payments last year can claim the full credit by filing a 2021 tax return.

The IRS urges grandparents, foster parents or people caring for siblings or other relatives to check their eligibility to receive the 2021 Child Tax Credit. It’s important for people who might qualify for this credit to review the eligibility rules to make sure they still qualify. Taxpayers can use the Interactive Tax Assistant to check eligibility. Taxpayers who haven’t qualified in the past should also check because they may now be able to claim the credit. To receive it, eligible individuals must file a 2021 federal tax return.

What is the Child Tax Credit expansion?

The Child Tax Credit expansion, which is a part of the American Rescue Plan, increased the amount of money per child families can receive and expanded who can receive the payments.

The American Rescue Plan increased the Child Tax Credit from $2,000 to $3,600 per child for children under the age of six, from $2,000 to $3,000 for children over the age of 6 and raised the age limit from 16 to 17 years old.

The American Rescue Plan Act of 2021 expanded the Child Tax Credit for tax year 2021 only.

Who qualifies for the Child Tax Credit?

Taxpayers can claim the Child Tax Credit for each qualifying child who has a Social Security number that is valid for employment in the United States and issued by the Social Security Administration before the due date of their tax return (including an extension if the extension was requested by the due date).

To be a qualifying child for the 2021 tax year, the dependent generally must:

Be under age 18 at the end of the year.
Be their son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister or a descendant of one of these (for example, a grandchild, niece, or nephew).
Provide no more than half of their own financial support during the year.
Have lived with the taxpayer for more than half the year.
Be properly claimed as their dependent on their tax return.
Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid.
Have been a U.S. citizen, U.S. national or U.S. resident alien.

What are the eligibility factors?

Individuals qualify for the full amount of the 2021 Child Tax Credit for each qualifying child if they meet all eligibility factors and their annual income is not more than:

$150,000 if they’re married and filing a joint return, or if they’re filing as a qualifying widow or widower.
$112,500 if they’re filing as a head of household.
$75,000 if they’re a single filer or are married and filing a separate return.

Parents and guardians with higher incomes may be eligible to claim a partial credit. Claiming these benefits can result in tax refunds for many individuals. Individuals should file electronically and choose direct deposit to avoid delays and receive their refund faster.

Finding free tax return preparation

A limited number of Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE) program sites remain open and available to help eligible taxpayers get their tax returns prepared and filed for free by IRS trained and certified volunteers. Low- and moderate-income taxpayers as well as those age 60 and above can check to see if there is an available site in or near their community by using the VITA/TCE Site Locator.

IRS Free File available until Nov. 17 to help more people receive credits

The IRS Free File program, available only through IRS.gov and offered in partnership the tax software industry’s Free File Alliance, offers eligible taxpayers brand-name tax preparation software to use at no cost. The software does all the work of finding deductions, credits and exemptions for which the taxpayer qualifies. It’s free for most individual filers who earned $73,000 or less in 2021. Some of the Free File packages also offer free state tax returns to those who qualify. Taxpayers who earned more than $73,000 in 2021 and are comfortable preparing their own taxes can use Free File Fillable Forms. This electronic version of paper IRS tax forms is also used to file tax returns online.

To help more people claim a variety of tax credits and benefits, Free File will remain open for an extra month this year, until November 17, 2022.

The IRS is sending letters to more than 9 million individuals and families who appear to qualify for a variety of key tax benefits but did not claim them by filing a 2021 federal income tax return. Many in this group may be eligible to claim some or all of the 2021 Recovery Rebate Credit, the Child Tax Credit, the Earned Income Tax Credit and other tax credits depending on their personal and family situation. The special reminder letters, which will be arriving in mailboxes over the next few weeks, are being sent to people who appear to qualify for the Child Tax Credit, Recovery Rebate Credit (RRC) or Earned Income Tax Credit (EITC) but haven’t yet filed a 2021 return to claim them. The letter, printed in both English and Spanish, provides a brief overview of each of these three credits.

These and other tax benefits were expanded under last year’s American Rescue Plan Act and other recent legislation. Even so, the only way to get the valuable benefits is to file a 2021 tax return. Often, individuals and families can get these expanded tax benefits, even if they have little or no income from a job, business or other source. This means that many people who don’t normally need to file a tax return should do so this year, even if they haven’t been required to file in recent years.

People can file a tax return even if they haven’t yet received their letter. The IRS reminds people that there’s no penalty for a refund claimed on a tax return filed after the regular April 2022 tax deadline. The fastest and easiest way to get a refund is to file an accurate return electronically and choose direct deposit.

Questions? Contact ATS Advisors Today

Archive for the IRS Category