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

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 This material may not be published, rewritten or redistributed without permission, except as noted here.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.
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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.

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.

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.
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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.

The savings limits for the ever-popular health savings accounts (HSA) are set for 2022. The new limits are outlined here with current year amounts noted for comparison. So plan now for your contributions.

What is an HSA?

An HSA is a tax-advantaged savings account whose funds can be used to pay qualified health care costs for you, your spouse and your dependents. The account is a great way to pay for qualified health care costs with pre-tax dollars. In fact any investment gains on your funds are also tax-free as long as they are used to pay for qualified medical, dental or vision expenses. Unused funds may be carried over from one year to the next. To qualify for this tax-advantaged account you must be enrolled in a high-deductible health plan (HDHP).

The limits

Note: An HDHP plan has minimum deductible requirements that are typically higher than traditional health insurance plans. To qualify for an HSA, your coverage must have out-of-pocket payment limits in line with the maximums noted above.

The key is to maximize funds to pay for your medical, dental, and vision care expenses with pre-tax money. By building your account now, you could have a next egg for unforeseen future expenses.

While each retirement plan has similar early withdrawal penalty exemptions, they are not all alike. Knowing these subtle differences within 401(k) plans can help you avoid a 10 percent tax penalty if you take money out of the plan prior to reaching age 59 1/2. This is true because a basic rollover of funds into a Traditional IRA is a readily available option to avoid the penalty. You should consider rolling over your 401(k) into an IRA prior to early distribution when:

• Using Retirement Funds for Qualified Higher Education Expenses. Want to use retirement funds to pay for college? Pull the funds out of an IRA and not another retirement account type or you could be subject to an additional 10 percent early withdrawal penalty. After rolling the funds into an IRA, the funds can be used penalty-free as long as they are for qualified educational expenses at a qualified school.
• Using Retirement Funds to Buy, Build, or Rebuild a First Home. You may use up to $10,000 of your IRA per person to purchase a first home and avoid paying the 10 percent early withdrawal penalty. If these same funds are pulled out of a 401(k) plan you could be subject to an additional federal tax of up to $1,000. So roll the funds to a Traditional IRA first, and save the tax.
• Using Retirement Funds to Pay for Medical Insurance. There is also a provision for an unemployed individual to use IRA funds to pay for medical insurance. This provision does not exist in 401(k)s, so to avoid the early withdrawal penalties, roll the money from your 401(k) into an IRA prior to using the funds to pay for your insurance premiums.

Remember, by rolling the funds prior to pulling the funds for pre-retirement distribution you are avoiding the early withdrawal penalties, but you must still pay the applicable income tax.

Bonus Retirement Plan Tips

Two other quirks in the retirement tax code to be aware of:

1. Early Distributions From a SIMPLE IRA Could Trigger a 25 Percent Penalty. The early distribution penalty of 10 percent increases to 25 percent for those in SIMPLE IRAs, if the withdrawal occurs during a two-year time period starting from your initial enrollment date in the SIMPLE plan. You may not roll your funds into another retirement plan type during this two year period to try to avoid the increased early withdrawal penalty.
2. Minimum Distributions are Required From ROTH 401(k)s but Not ROTH IRAs. In an unusual quirk in the tax code, if you have a ROTH 401(k) you are required to make minimum required distributions from this account like other 401(k)s and IRAs when you reach age 72. If, however, you roll the ROTH 401(k) funds into a ROTH IRA you are no longer subject to the minimum distribution rule requirements.

Pretending to be an IRS agent is one of the favorite tactics of scam artists, according to the Better Business Bureau. The con artists impersonate the IRS to either intimidate people into making payments over the phone, or to send misleading emails tricking people into sharing personal information digitally.

You can defend yourself against these scammers by knowing these simple rules:

Tip 1: Expect a letter first

In almost every case, the IRS will send you a letter via standard mail if they need to get in touch with you. This will alert you to expect future communication from the agency and instruct you on the best ways to get in touch with them.

What to do: If you get a letter from the IRS that is unexpected or suspicious, it should have a form or notice number searchable on the IRS website, www.irs.gov. If something doesn’t look right, you can call the IRS help desk at 1-800-829-1040 to question it.

Tip 2: Never over email

The IRS will never initiate contact with you using email. A common scammer trick is to send emails to taxpayers using accounts and graphics that imitate the agency’s logo. These emails may threaten imprisonment or fines if you don’t pay up, or promise an extra refund if you send money to “prepay” your taxes. Often the emails contain links to an official-looking fake website to collect payments. Clicking on them may also trigger the installation of virus programs on your computer.

What to do: Don’t respond to any email communications supposedly from the IRS. Don’t click on any links. Delete the email or forward it to phishing@irs.gov to help catch the scammers.

Tip 3: Proper phone call etiquette

After notification via the USPS, the real IRS may call to discuss options for handling delinquent taxes or an audit. A real IRS agent or a debt collector won’t demand immediate payment without giving you an opportunity to question or appeal the bill. Nor will they threaten lawsuits, arrest or deportation. Their tone should not be hostile or insulting. Finally, if they ask for payment, they should be asking you to make payments only to the United States Treasury.

What to do: If you get a call from the IRS or an IRS debt collector, politely ask for the employee’s name, badge number and phone number. They shouldn’t hesitate to provide this information. You should then end the call and dial the IRS at 1-800-366-4484 to confirm the person’s identity.

Tip 4: Check in-person visits

Ask the person for their credentials. Every IRS agent is able to produce two forms of credentials: a pocket commission card and a personal identity verification card issued by the Department of Homeland Security, also called an HSPD-12.

What to do: Never provide sensitive information nor confirm information they may have without first independently verifying they are legitimate representatives of the IRS. If you have concerns, call the IRS at 1-800-366-4484 to confirm the person’s identity.

You do not need to navigate this problem on your own. Call immediately for assistance. It is good to have a knowledgeable expert on your side.

With all the tax law changes over the past few years, here are some things that should trigger you to conduct a full tax planning session to ensure your tax bill is not higher than it needs to be.

1. You owed tax in 2020. Having a surprising tax bill is never fun. So if you owed taxes last year, project your current year obligation if you have not already done so.

2. Your household income is over $150,000 single and $200,000 joint. As your income grows, so does your tax bill. This occurs because tax rates increase, and tax benefits phase out. This includes things like; lower child tax credit amounts, increases in capital gains tax rates, higher income tax rates, medicare surtaxes plus more.

3. You are getting married or divorced. The tax penalty for being married is higher than ever. Are you prepared?

4. You have kids attending college next year. There are a number of tax programs that can help, you may wish to review your options and their impact on your tax return.

5. You have a small business. There are depreciation benefits, qualified business deductions, and numerous small business tax credits to consider. A review is especially important if you have a business that is a flow through entity like Sub Chapter S or LLC companies as these entities are taxed on your personal tax return..

6. You plan on selling investments. Capital Gains tax rates can now range from 0% to 37% (or even higher with the Net Investment Tax).

7. There are changes in your employer provided benefits. These changes could impact your taxable income this year.

8. You buy, sell or go through home foreclosure. There are great tax benefits within your home, but only if you know about them and plan accordingly.

9. You have major medical expenses. It is harder than ever to itemize deductions, but one way it possible to itemize is if you have a major medical expense. When this happens it is time to review ALL itemized deductions to minimize your taxes.

10. You recently lost or changed jobs. Understanding the tax impact of unemployment benefits is crucial.

11. You have not conducted a tax withholding review. To avoid under withholding penalties, you need to ensure your withholdings are sufficient.

12. Your estate has not been reviewed in the past 12 months. Recently passed estate laws and potential changes in these rules make an annual review a must.

If any of these triggers apply to you, please schedule a tax planning appointment.