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Employee Tax-Free Income

While most income received from your employer quickly ends up on a W-2 tax form at the end of the year, here are some common employee benefits that often avoid the impact of Federal taxes.

Health Benefits. While now reported on W-2’s, employer-provided health insurance premiums are currently not required to be reported as additional income by the employee. This includes premiums paid for the employee and qualified family members. In addition, the employee portion of premiums can be paid in “pre-tax” dollars.

Credit Card Airline “miles”. Credit card benefits like miles are not generally deemed as taxable income. So those miles earned on corporate credit cards that go to you as an individual are not likely to increase your tax bill.

Employee tuition reimbursement. Up to $5,250 of tuition reimbursed to you by your employer is not deemed to be additional taxable income.

Commuting expenses. You can generally exclude the value of transportation benefits you receive up to the following limits.

  • $270 per month for combined commuter highway vehicle transportation and transit passes.
  • $270 per month for qualified parking.
  • For a calendar year, $20 multiplied by the number of months for qualified bicycle commuting expense reimbursement.

Company Health Savings Account (HSA) Contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax.

Group Term Life Insurance. You can generally exclude the cost of up to $50,000 of group-term life insurance from your wages.

Small gifts. The IRS calls these “de minimis” benefits. Small-valued benefits are not included in income and could include things like the use of the company copy machine, occasional meals, small gifts, and tickets to a sporting event.



Inflation Spikes Social Security Checks for 2022

The Social Security Administration announced a whopping 5.9 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2022. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2021.

For those contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 2.9 percent this year, to $147,000. Here’s a recap of the key dollar amounts:

2022 Social Security Benefits – Key Information

What it means for you

  • Up to $147,000 in wages will be subject to Social Security taxes, an increase of $4,200 from 2021. This amounts to $9,114.00 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.
  • For all retired workers receiving Social Security retirement benefits, the estimated average monthly benefit will be $1,657 per month in 2022, an average increase of $92 per month.
  • SSI is the standard payment for people in need. To qualify for this payment, you must have little income and few resources ($2,000 if single, $3,000 if married).
  • A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2021 to 2022.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also a 0.9 percent Medicare wages surtax for single taxpayers with wages above $200,000 ($250,000 for joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.



Five Tax-Loss Harvesting Tips

Though the markets have been up strongly this year, your investment portfolio could have a few lemons in it. Using the tax strategy of tax-loss harvesting, you may be able to turn those lemons into lemonade. Here are five tips:

Tip #1: Separate short-term and long-term

Your investments are divided into short-term and long-term buckets. Short-term investments are those you’ve held a year or less, and their gains are taxed as ordinary income. Long-term investments are those you’ve held more than a year, and their gains are taxed at generally, lower capital gains tax rates. A goal in tax-loss harvesting is to use losses to reduce short-term gains.

Example: By selling stock in Alpha Inc., Sly Stocksale made a $10,000 profit. Sly only owned Alpha Inc. for six months, so his gain will be taxed at his ordinary income tax rate of 35 percent (versus 20 percent had he owned the stock more than a year). Sly looks into his portfolio and decides to sell another stock for a $10,000 loss, which he can apply against his Alpha Inc. short-term gain.

Tip #2: Follow netting rules

When tax-loss harvesting, use IRS netting rules on the realized gains and losses in your portfolio. Short-term losses must first offset short-term gains, while long-term losses offset long-term gains. Only after you net out each category can you use excess losses to offset other gains. Use this knowledge to your advantage to reduce your taxable income when selling investments.

Tip #3: Lower your ordinary income by $3,000

In addition to reducing capital gains tax, excess losses can also be used to offset up to $3,000 of ordinary income each year. If you still have excess losses after reducing both capital gains and ordinary income, you can carry these losses forward to use in future tax years.

Tip #4: Beware of wash sales

The IRS prohibits use of tax-loss harvesting if you buy a “substantially similar” asset within 30 days before or after selling it. Plan your sales and purchases to avoid this problem.

Tip #5: Consider administrative costs

Tax-loss harvesting comes with costs in both transaction fees and time spent. Reduce the hassle by conducting tax-loss harvesting once a year as part of your annual tax-planning strategy.

Remember, you can turn an investment loss into a tax advantage, but only if you know the rules.



File That Tax Return!- October extension deadline fast approaching

Friday, October 15 marks the extension deadline for filing your 2020 Form 1040 Tax return. Given all the recent tax legislation, numerous stimulus checks and COVID-related tax changes, there are more open tax return filings than ever!

If you have not filed a tax return and don’t think you need to file one, please reconsider. Billions of refunds go unclaimed each year by taxpayers that really should file a tax return.

Here’s a quick checklist of situations when filing a tax return might make sense even if you don’t have to:

  • You are due a refund. Without filing, the government could end up keeping these funds. So double check your stimulus check payments. Did you get them? Were they for the full amount? Preparing a tax return, even if not filed, is a good exercise to ensure you received the full benefit.
  • You paid tax on unemployment benefits. With the federal government making up to $10,700 of these benefits tax-free, you may be due a nice refund.
  • You had taxes withheld from your paychecks, but end up owing no tax for the year.
  • You are eligible for Health Insurance Premium Credits. Be aware of this possible benefit if you use the market exchange to purchase your health care insurance.
  • You are eligible for a refundable credit. This is true with the popular Earned Income Tax Credit, the Additional Child Tax Credit, and a portion of the American Opportunity Tax Credit.
  • Your state requires a federally filed tax return.
  • You want the filed tax return for your records.
  • You wish to start your audit time clock. Remember the audit time-frame never starts if you do not file your tax return.

Many taxpayers have trouble gathering accurate and complete information necessary to file their tax return. When they cannot get all the necessary information, they get stuck. Should this be your situation, please ask for help. Even a reasonably close tax filing that is later amended when more information becomes available is sometimes a better alternative than not filing at all.



How to Reduce Your Property Taxes

Market values of homes are skyrocketing and higher property tax bills are soon to follow. Prepare now to knock your property taxes back down to earth.

What is happening

Property taxes typically lag the market. In bad times, the value of your home goes down, but the property tax is slow to show this reduction. In good times, property taxes go up when you buy your new home, but these higher prices quickly impact those that do not plan to move.

To make matters worse, you can now only deduct up to $10,000 in taxes on your federal tax return. That figure includes all taxes – state income, property and sales taxes combined! Here are some suggestions to help reduce your property tax burden.

What you can do

If you dread the annual letter informing you that your property tax is going to go up again what can you do? Your best bet is usually to approach the assessor and ask for a property revaluation. Here are some ideas to successfully reduce your home’s appraised value.

Do some homework to understand the approval process to get your property revalued. It is typically outlined on your property tax statement.

Understand the deadlines and adhere to them. Most property tax authorities have strict deadlines. Miss one deadline by a day and you are out of luck.

Do some research BEFORE you call your assessor. Talk to neighbors and honestly assess the amount of disrepair your property may be in versus other comparable properties in your neighborhood. Call a few real estate professionals. Tell them you would like a market review of your property. Try to choose a professional that will not overstate the value of your home hoping to get a listing, but will show you comparable sales for your area. Then find comparable sales in your area to defend a lower valuation.

Look at your property classification in the detailed description of your home. Often times errors in this code can overstate the value of your home. For example, if you live in a condo that was converted from an apartment, the property’s appraised value could still be based on a non-owner occupied rental basis. Armed with this information, approach the assessor seeking first to understand the basis of the appraisal.

Ask for a review of your property. Position your request for a review based on your research. Do not fall into the assessor trap of defending your review request without first having all the information on your property. Meet the assessor with a specific value in mind. Assessors are used to irrational arguments, that a reasonable approach is often readily accepted.

While going through this process remember to be aware of the pressure these taxing authorities are under. This understanding can help temper your position and hopefully put you in a better position to have your case heard.



Those Pesky Records!- What do I need to keep?

Know when to hold them. Know when to toss them. Tax record retention basics can be found here.



Reminder: Third Quarter Estimated Taxes Due- Make your estimated tax payment now

If you have not already done so, please plan to make your second quarter estimated tax payment. The due date is Wednesday, September 15th.



Avoid Tax Traps with Loans to Friends and Family

Lending to friends and relatives can be tricky, and not only because of the stress it can place on your relationships. There are tax issues involved as well. If you have to lend money to someone close to you, here are some tips to do it right in the eyes of the tax code.

Charge interest

Yes, you should charge interest, even to friends and family. If you don’t charge a minimum rate, the IRS will imply interest in the loan and tax you for the interest income they assume you should be getting. This can occur even if you’re not actually getting a dime.

Charge enough interest

Not only should you charge interest, the amount must be reasonable in the eyes of the IRS. If it’s not, the IRS will imply interest at their minimum applicable federal rates (AFRs). To stay on the safe side, always charge the interest rate at or above these AFRs, available on the IRS website. The good news is these interest rates are low and almost always below the prime interest rate.

Know the exceptions

If you don’t want to charge interest, you don’t have to IF:

  • The money is a gift. In 2021, you and your spouse can each give up to $15,000 to an individual each year.

OR:

  • The loan is less than $10,000 and is not used to purchase income-producing property.

If you don’t charge interest and the loan is used to purchase income-producing property such as capital equipment or to acquire a business, special tax rules apply. In this case it’s good to ask for assistance.

Get it in writing

If you expect repayment, write out the terms of your loan. There are a variety of basic loan document formats online that you can use. Creating a loan document may seem unnecessarily formal when dealing with a friend or family member, but it’s important for two reasons:

  1. Document your tax code compliance. By documenting the terms and charging a stated interest rate, you can clearly show you are within tax code rules.
  2. Avoid misunderstandings. Creating a written document will make it clear that it is a real loan, not an informal gift. Your friend or relative will know that you expect to be paid back and when you expect repayment.


The $24,000 Tax Time Bomb- A key lesson within EVERY tax surprise

What follows is a true story. A story with a sad ending. But one that has a lesson for everyone. Stick with the story, with a high degree of certainty most tax surprises can be identified with a little help.

The ingredients

Background. Back in the 1970s, U.S. Savings Bonds were a popular savings alternative. Grand parents purchased them for kid’s college. Many used them to build funds for retirement. Even better, you paid ½ the face value and later (usually 20 years) the bonds matured at twice what you paid for them. So a $1,000 investment yielded $2,000 when it reached maturity.

Our ingredients. In our case, this tax bomb had the following ingredients:

  • Converted old Series E savings bonds with deferred interest;
  • Series HH savings bonds with annual taxable interest;
  • Owning uncashed savings bonds that no longer earn interest;
  • Little help from the bank; and
  • Confusing information from federal tax authorities about impending tax obligations.

The bomb is set

Joe purchased Series E saving bonds each year in the 1970s. With half down and promise of double value upon maturity, Joe amassed a nice $140,000 retirement fund. After 20 years the bonds matured. Joe did not yet need the money, so he converted them to Series H savings bonds. This effectively deferred the interest income on the old, Series E, bonds since the bonds were not cashed.

With the new Series H savings bonds, Joe paid federal income tax each year on the interest earned. Meanwhile the taxable interest from the series E bonds continued to be deferred.

The result? Joe thought he was paying tax on the interest each year…BUT there was a sleeping tax bill on interest of $70,000 just waiting until Joe cashed in his series H bonds!

The bomb explodes

Joe received word that his series H bonds would no longer pay interest. So he tells his grandson to go to a bank and cash in the bonds. Heck, why have bonds that no longer pay interest? And…it’s no big tax deal because he has been paying tax on his Series H bond interest each year. The grandson has financial power of attorney so he does as his grandfather asks.

Surprise! He receives a notice from the IRS saying he owes them $24,000! This includes plenty of penalties and tax.

Lessons for all of us

  • Never disregard 1099s or printed details. When the grandson cashed the bonds, if he looked closely on the face of the bonds, he may have noticed the deferred interest. But it would contradict what grandpa had told him. Further, his grandpa probably received a Form 1099 that was disregarded because he believed he was already paying the tax.
  • Old savings bonds can be confusing. There are many different issues and flavors of savings bonds. When you see any uncashed bonds, conduct the necessary research to understand your potential obligations. This is especially true for bonds past their maturity date.
  • Ask before you sell. Always understand the tax consequences BEFORE you sell any property. Even the most innocent of transactions can have their own tax time bomb. So call an expert before you buy or sell.
  • Tax planning matters. While Joe would always owe federal income tax when he cashed the bonds, he could have reduced his effective tax rate by cashing them over time instead of all in one year. In this case, it exposed a lot of income to a much higher tax rate. He could have saved over $10,000 in tax with a little planning!

Because neither the bank nor federal taxing authorities believe it is part of their duty to help you make knowledgeable tax decisions, you are on your own. This one-way street of knowledge makes having an expert on your side more important than ever!



The Marriage Penalty: Alive and Well in the Tax Code- Couples filing jointly still get the short end of the stick

There are a lot of positive things about getting married, but the IRS’ marriage penalty isn’t one of them. The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. It pops up again and again in the federal tax code. Thankfully, legislation in recent years is shrinking the problem, but it still exists. Here is what you need to know.

Tax Social Security benefits

Probably the worst example of the ongoing marriage penalty is imposed on older couples. Talk about insult! You make it to retirement as a couple and then get your Social Security taxed more quickly. This occurs because two single seniors start getting their Social Security retirement benefits taxed when their income exceeds $25,000. So the married threshold should be $50,000, right? Nope, it is $32,000. When you consider up to 85% of this benefit is taxable, is it a marriage penalty on couples that can least afford it!

Accelerating phase-outs

The tax code is filled with various income phaseouts for benefits, credits and deductions. Thankfully most now have the marriage penalty taken out, but it still exists in things like the Adoption Credit and Roth IRA contribution limits. But probably the worse example is that the earned income tax credit (EITC) phase-outs favor single versus married taxpayers. A single mother of three in 2021 can qualify for the EITC with income less than $51,464, while a married couple loses the EITC with combined income over $57,414. This is often one of the driving reasons for not marrying when you have lower income and children are in the home.

Affordable Care Act piles onto the marriage penalty

The Affordable Care Act also penalizes married couples with lower thresholds on its 0.9 percent wage surtax and 3.8 percent investment income tax. The income thresholds for these surtaxes are $200,000 for single filers and $250,000 for married couples filing jointly. As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry.

Even Itemizing deductions favors single taxpayers

One of the new provisions in the tax code that limits itemizing deductions is the $10,000 upper limit on taxes, like property taxes and sales taxes, that can be used for itemizing deductions for a single taxpayer. The limit for a married couple? Not $20,000. It is the same $10,000! Congress must not think a family may need a bigger place to stay or need to spend more for the extra family members.

The tax rate problem is now better

However, there is some good news on the marriage penalty front. Prior to law changes in 2017, most married couples paid higher tax rates than if they were two single people. This penalty is now eliminated for all but the highest earners. The marriage penalty now comes into play in the 34% tax bracket that begins with combined incomes well over $200,000. Most of us can see the results of this penalty in the news as celebrities conduct their tax planning and delay or avoid tying the knot.

The most import part of the marriage penalty is awareness of the problem. By knowing the tax pitfalls you can plan around them, and perhaps influence a change for the future.