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Yikes! It's that Bad?- The 1040 tax instruction publication lays it all out

As taxpayers, it makes sense to understand how our government spends our money. Here are the most recent inflows and outflows as reported by the IRS in this year’s 1040 instruction booklet.



Why is the IRS Sending Me This?!?- IRS turns off some notices

In a recent announcement, the IRS is telling taxpayers it’s turning off some of its automated notices. Here is what you need to know.

Background

With the pandemic, incredibly late tax law changes from Congress, the congressional imposition on the IRS to send out three rounds of stimulus checks, and the requirement to create a new, automatic payment system of child tax credits has created a huge backlog at the IRS. In fact, there are over 6 million tax returns from last year that have still not been processed.

In the meantime, there are automated notices that go out to taxpayers that have not filed tax returns or corrected errors as deemed by IRS audit programming. To make matters worse, payments are being processed without an underlying tax return and the IRS is telling you they will return the money if you do not file your return. Penalties are imposed, there are demands for payment, even repeated notices to fix errors that have been fixed months ago!

Current situation

The IRS is now acknowledging the angst and hardship these notices are causing, at least for some taxpayers. So effective immediately, the IRS is turning off the following notices:

  • Unfiled Tax Return
  • Return Delinquency Notice
  • Balance Due Notices
  • Withholding Compliance Letter

Source: IR 2022-31

What you should know

Don’t fret. IRS notices almost always raise your blood pressure. So open the notice and ask for help.

If you receive a notice, reply to it. While the IRS says it is not necessary to reply, you should probably still do so. Your reply must be timely AND be sent with confirmation of date sent. You can use certified mail or express mail service with tracking information. You don’t want to get caught up in the IRS machine while they try to sort it out.

Compliance is required. While the IRS is turning off many notices, the penalties and interest will still accrue if you have not filed your tax return or owe tax. So file your tax return and pay the tax as it is still required.

E-file helps. While some forms must still be processed via mail, most individual tax returns can be sent via e-file. Continue to file your return digitally whenever possible. Unfortunately, handling these correspondence audits often requires a written response.

It is temporary. The IRS will turn these notices back on after the backlog of tax returns is brought under control.

Sanity will hopefully return and all future tax law changes will be made before the next tax year starts. Just don’t hold your breath and be quick to ask for help if you need it.



Common Tax Increase Surprises- I did not owe that last year!

Picture this: For the past few years you’ve received your tax return and have had a small but nice refund. Now imagine your surprise, when this year, you are required to send in a fairly big check to settle your tax bill. Believe it or not, this message is almost as hard to deliver to you as it is to hear it. Here are some situations to watch for that can increase your tax liability:

New tax laws. The multiple bills passed to pay out assistance from government programs must now be accounted for on this year’s tax return. While the goal of the legislation is to reduce taxes, there are several changes that could cause you to pay more taxes, including:

  • Repayment of excess economic stimulus checks.
  • New taxability of unemployment benefits.
  • Accounting for any small business loan and grant benefits.
  • The need to take required minimum distributions once again in 2021.

A child is no longer eligible. This year’s child tax credit is a big increase versus prior years. But if you already received the money through the advance child tax credit payment system, it will impact your refund this year. And as children get older they grow out of lots of things — clothes, interests and tax credits. Here are some age requirements for popular tax benefits:

  • Child and Dependent Care Credit: under age 13
  • Child Tax Credit: over age 17
  • Earned Income Tax Credit: under age 19 (24 if a qualified student)

Earnings with Social Security benefits. If you are recently retired, start collecting Social Security Benefits, and then begin working part-time, you are also in for a tax surprise. These extra earnings could not only make your Social Security benefits taxable, it could result in a reduction of benefits received.

Other life events. Other life events could provide a tax surprise for you. While some may have positive tax consequences, like a new birth, or becoming the head of household, others might surprise you and result in additional tax. Other common life events include retirement, death and entering/leaving school.

Capital gains surprises from mutual funds. Often sales of investments are a planned event. Unfortunately, many mutual funds sell assets and then you receive a capital gain statement with a surprise taxable event.

Want to avoid these surprises? Spend some time now reviewing your anticipated tax situation for 2021. By doing so, perhaps a planned pleasant surprise can be in store for you.



A Time to Organize- Diverse tax reporting makes this year a challenge

If your tax records are a bit of a mess, here are some ideas to help to get better organized.



IRS to Send Recap of Economic Impact and Child Tax Payments

The IRS recently announced it will be sending out a recap of payments sent to taxpayers for the multple rounds of Economic Impact Payments and Advanced Child Tax Payments. Here is what you need to know.

Economic Impact Payments

During 2021, the IRS issued millions of economic impact payments. In a recent announcement the IRS claims they will send Letter 6475 to all recipients of the money sent under these programs. Use this letter as a guideline to file your tax return. Letters are being sent out in late December and early January, so if you have not received yours, it should be coming shortly.

Advance Child Tax Payments

For the second half of 2021, the IRS paid out 50% of projected child tax credit payments to qualified households using their own formulations. Now the IRS is claiming they will be sending out a recap of those advance payments in Letter 6419 to account for them correctly on your tax return. As with the economic impact letters, you should receive yours in January.

Required Action

Wait for the letter. If at all possible, do not file your tax return until you receive the appropriate letter(s). Then provide them with other documentation to prepare your tax return.

Trust but verify. Do not assume the IRS letter is correct. Review your own records, ideally, prior to receiving the IRS letter(s). Keep BOTH the letters and confirmation of payments received. Both should be retained in your record keeping. File your tax return based on actual receipts.

Do not wait too long. While it makes sense to wait for these IRS letters prior to filing, do not wait too long. If one is not received, file your tax return based on what you actually received.

Clarity will help file a correct tax return. By providing both the letters AND documentation of actual payments, your tax return can not only be filed correctly, but can be filed in such a way that accurate reporting does not inadvertently create a computer generated audit from the IRS.

Source: IR 2021-255



2022 Mileage Rates are Here!- New mileage rates announced by the IRS

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
All rights reserved.



Leveraging Kiddie Tax Rules- Tax saving tips for parents AND grandparents

Now is the time to take action on reducing next year’s tax bill. One area to help reduce your tax obligation is leveraging your kids to the fullest by understanding the kiddie tax rules.

Background

The term kiddie tax was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2022 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,300 be taxed at their parent’s tax rate.

Applies to

  • Children under the age of 19
  • Full-time students under the age of 24 and providing less than half of their own financial support
  • Children with unearned incomes above $2,300

Who/What it does NOT apply to

  • Earned income (wages and self-employed income from things like babysitting or paper routes)
  • Children that are over age 18 and have earnings providing more than half of their support
  • Children over age 19 that are not full-time students
  • Gifts received by your child during the year

How it works

  • The first $1,150 of unearned income is generally tax-free
  • The next $1,150 of unearned income is taxed at the child’s (usually lower) tax rate

The excess over $2,300 is taxed at the parent’s rate either on the parent’s tax return

Planning thoughts

So while your child’s unearned income above $2,300 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.

Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.

Leverage gift giving. If your children are not maximizing tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.

Properly managed, the kiddie tax rules can be used to your advantage. But be careful, this part of the tax code can create an unwelcome surprise if not handled properly.



Postpone Taxes with a Like-Kind Exchange- The real estate boom creates opportunity

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

The like-kind exchange rule

A like-kind exchange involves swapping assets that are similar in nature. Since the passage of the Tax Cuts and Jobs Act in December 2017, like-kind exchanges are now generally limited to exchanges of property. Typically, an equal swap of property is rare. Some amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar property received in an exchange may be taxable.

Real estate exchanges

By using a like-kind exchange you can effectively leverage money you would need to pay for capital gains taxes and depreciation recapture tax into the next property. And with a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn’t a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

Not for the faint of heart

The like-kind exchange rules are very strict. For this reason, it is always best to hire an expert to advise you prior to exploring this tax saving technique. But when done properly, exchanges let you trade up in value without owing tax on a sale. Even better, there’s no limit on the number of times you can exchange a piece of property.



Plan Your 2022 Retirement Contributions

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this web page. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does Willis & Jurasek have any control over, or responsibility for, the content of any such Websites.
All rights reserved.



Tips to Maximize the Value of a Car Donation- A little mistake could cost you plenty

At the end of the year you will be inundated with commercials to donate a vehicle to charity. While it is one of the biggest contributions a taxpayer can make, if not done carefully, the tax deduction of a donated vehicle could be a lot lower than you think.

The rule

When you donate a vehicle, the value of your donation is either the fair market value of your vehicle when you donate it OR the value received by the charitable organization for your donation. Unfortunately, you do not choose the value of the donated vehicle.

  • If the organization uses the vehicle, or is in the business of using your vehicle to train others, you can deduct the fair market value of the vehicle.
  • If the charitable group simply resells your donated vehicle, your donation is limited to what the organization receives for your vehicle and NOT the usually much higher fair market value of the item.

What you should do

Select the organization wisely. Select an organization that will either use the vehicle themselves or will use it to train others. Examples of qualified organizations include groups that help single mothers obtain transportation to and from work or use the vehicles to deliver meals to seniors. Other organizations teach auto repair and body shop work to the unemployed. The cars then are given to other non-profits or needy folks. From the IRS perspective, a qualifying charitable use either;

  • makes significant intervening use of the vehicle or,
  • makes significant improvement to the vehicle that increases its value or,
  • donates the vehicle (or sells it at a below market rate) to a needy person that helps further the cause of the organization.

Special Caution: Be aware of national advertisers like KARZ4KIDS..they almost always limit your donation amount by what they can resell your car for…often below the fair market value. And before donating, know how, and be pleased with how, the funds are to be used.

Research the fair market value. Prior to donating your vehicle go to a reputable source and estimate the value of your vehicle. Online resources like Edmunds.com and kbb.com (Kelley Blue Book) are two reliable sites to do this. Also make a copy of your title and take pictures of your car prior to donating it to the charity to help support your fair market value claim.

Obtain the proper tax form. When donating your vehicle make sure the organization gives you a proper Form 1098-C at the time you provide your vehicle. Double check the value assigned to your donation form to ensure it meets or exceeds the estimated fair market value of your donation. Remember, if your valuation exceeds $5,000 you will need an approved appraisal.

Sell the vehicle and donate the cash. If you cannot find a charitable organization that will allow you to maximize your fair market value deduction, consider selling the vehicle and then donating the proceeds. There is a potential problem with this approach, however. Take care that you do not create an unplanned taxable capital gain with the transaction.

Note: These rules apply to other vehicle donations as well. This includes motorcycles, trucks, vans, buses, RV’s and other transportation vehicles.