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Is Money Raised Through Crowdfunding Taxable?

While many may not be familiar with the term “crowdfunding”, chances are you’ve stumbled across it on social media, perhaps even been asked to help support a friend’s charitable cause or some new business venture. Crowdfunding is basically a method for raising money – typically through the internet or an app – where individuals are asked to contribute financially to a specific project, goal or cause.

 Popular crowdfunding platforms like Kickstarter or Indiegogo can be used to leverage large groups of individuals, instead of banks or other lenders, to finance a new business or commercial project. Others like GoFundMe or Patreon cater more towards personal fundraising initiatives like paying for medical bills or supporting creative endeavors. There are also a number of crowdfunding platforms specifically designed for charities to help raise money in support of a specific cause.

 While crowdfunding can be a great way to raise needed funds, regardless of the purpose, there are significant tax implications you should be aware of. The Internal Revenue Service (IRS) has been keeping a close eye on this growing trend and of course, they want a piece of the action!

 How are Crowdfunding Earnings Taxed?

Under federal tax law, gross income includes all income received from any source unless it’s specifically excluded by law – such as money or property received as a gift. So, if crowdfunding contributions are made as a result of someone’s generosity, and without receiving or expecting any benefit in return, the amounts may be considered gifts and therefore not included in gross income. But there’s a LOT of grey area here and it’s highly recommended you consult with one of our licensed tax professionals to ensure you’re reporting income correctly.

 Currently, the Internal Revenue Code and IRS do not address crowdfunding specifically, leaving some question as to how this income should be treated for tax purposes. But in general, money raised through crowdfunding platforms must be reported as income in the year you receive it.

 If you’re using the accrual basis to calculate income, you must report earnings from a crowdfunding campaign when you earn it, at the time it’s owed to you or when you receive it –  whichever comes first. Just keep in mind, using the accrual method doesn’t allow you to postpone the recognition of income you’ve received!

 If a crowdfunding organizer solicits contributions on behalf of others, money raised by the organizer typically isn’t included in their gross income providing it’s distributed to those for whom the crowdfunding campaign was organized, and not to themselves. Additionally, contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee's gross income.

 One more important thing to note is that individual states may have their own rules and requirements around reporting crowdsourced income. Check with your state tax board to ensure you understand what those requirements are.

 Form 1099-K for Distributions of Money Raised Through Crowdfunding

Crowdfunding platforms, or their payment processors, may be required to report distributions of money raised if the amounts exceed certain reporting thresholds. If these thresholds are met, they’re required to file Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS. The crowdfunding platform or its payment processor must also furnish a copy of that form to the person to whom the distributions are made. However, the American Rescue Plan Act stipulates that Form 1099-K is not required if contributors to the crowdfunding campaign don’t receive goods or services in return for their contributions.

 Prior to 2022, the threshold to file and furnish a Form 1099-K was met if, during a calendar year, the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations. For calendar years beginning after December 31, 2021, the threshold was lowered and is met if, during a calendar year, the total of all payments distributed to a person exceeds $600 in gross payments, regardless of the number of transactions or donations.

 Often, a person receiving Form 1099-K for distributions of money raised through crowdfunding may not recognize the filer's name on the form. This can happen when the payment processor, and not the crowdfunding platform itself, issues the Form 1099-K where they are named as the filer on the form.

 Box 1 on the Form 1099-K will show the gross amount of the distributions made to a person during the calendar year, but issuance of a Form 1099-K doesn't automatically mean the amount reported on the form is taxable to the person receiving it. The income tax consequences really all depend on the facts and circumstances of a particular crowdfunding campaign and its financial distributions.

 Always Keep Good Records

Crowdfunding organizers and any person receiving money or some benefit from crowdfunding should keep complete and accurate records related to the fundraising and distribution of funds for at least three years. This includes receipts, payments, deposits, purchases, invoices, expenses and other financial records that in the event of an audit, can be used to support your reported income. You should keep them in an orderly fashion and in a safe place. For instance, many clients choose to organize records in a locked file cabinet by year and type of income or expense. Digital scanners can also help make saving documents electronically a breeze!

 We're Here to Help!

William D. Truax and his friendly team of Enrolled Agents (EAs) and licensed tax preparers have been helping individuals and business with their taxes for nearly 50 years. They understand how crowdfunding income must be reported on your tax return and the requirements for making distributions if you’re an organizer.

 If you have any questions about crowdfunding or would like help determining how to report related income on your tax return, please CONTACT US right away. We’re here to help!

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Tax Bracket & Standard Deduction Changes for 2023

Even though tax season is months away, it’s never too soon to begin planning ahead — especially as we see inflation continue to grow and chew away at household budgets. The IRS seems to have anticipated this scenario and is providing some relief for returns filed in 2023. These adjustments apply to more than 60 tax provisions including standard deductions, tax brackets and more.

 Here are some of the highlights you should be thinking about for your 2022 tax return…

 Standard Deduction

The standard deduction, which a vast majority of taxpayers claim, has been increased by $800 for married couples filing jointly – going from $25,100 in 2021 to $25,900 in 2022. For single filers and married individuals who file separately, the standard deduction will rise by $400 – from $12,550 to $12,950. For heads of households, the standard deduction will be $19,400 for tax year 2022 – $600 more than last year.

Beginning in 2022, the additional standard deduction amount for anyone who is 65 or older is $1,400 – up $50 from 2021. The deduction for an individual who can be claimed as a dependent by another taxpayer is limited to the greater of $1,150, or the sum of $400 and the individual's earned income (but not more than the standard deduction of $12,950 for 2022).

 Income Tax Brackets

Marginal tax rates for 2022 haven’t changed but the level of taxable income that applies to each rate has gone up. The top rate of 37% applies to income over $539,900 for individuals and heads of household and $647,850 for married couples who file jointly. The full list of tax rates and brackets for 2022 appears in the table below:

 Other Inflation Adjustments

Earned Income Tax Credit. For tax year 2022, the maximum Earned Income Tax Credit (EITC) amount is $6,935 for qualifying taxpayers who have three or more qualifying children – up from $6,728 for tax year 2021.

Child Tax Credit. Unless Congress takes action, the Child Tax Credit in 2022 will revert back to $2,000 per qualifying child, subject to phaseouts starting at income of $400,000 for joint filers and $200,000 for single taxpayers. At $440,000, joint filers receive no credit. The refundable portion of the Child Tax Credit adjusted for inflation will increase from $1,400 to $1,500 in 2022.

Alternative Minimum Tax. The Alternative Minimum Tax exemption for tax year 2022 is $75,900 and begins to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption begins to phase out at $1,079,800). The 2021 exemption amount was $73,600 and began to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption began to phase out at $1,047,200).

Transportation Fringe Benefit. For tax year 2022, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $280.

Health Savings Accounts. For tax years beginning in 2022, the dollar limitation for employee salary reductions for contributions to health flexible spending accounts increases to $2,850. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $570, an increase of $20 from taxable years beginning in 2021.

Foreign Earned Income. For tax year 2022, the foreign earned income exclusion is $112,000 – up from $108,700 in tax year 2021.

Taxes on Gifts. The annual exclusion on the gift tax rises for the first time in several years. From 2018 to 2021, $15,000 was the threshold before taxes applied on gifts. However, it rises to $16,000 in 2022, for returns filed in 2023.

 As you can see, there are quite a number of changes that may impact your 2022 tax return. It’s important to understand and take advantage of these wherever possible. If you have any question about these inflation adjustments or would like help filing your 2022 return, please CONTACT US right away. Our certified tax professionals are here to help!

 William D. Truax, E.A. and his friendly team of licensed tax preparers have been helping individuals and business owners with their tax returns for nearly 50 years. He is licensed to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court.

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Is Income from Your Side Hustle Taxable?

With inflation on the rise and taxpayers still recovering from the financial impacts of the pandemic, many are exploring alternate sources of income – a.k.a. the “side hustle”. Whether you’re a seasoned gig worker or selling handmade goods online to help pay the bills, there are some reporting and tax obligations you should be aware of to prevent any unexpected tax bills or penalties. 

The Internal Revenue Service (IRS) is paying close attention to this economic shift and wants to make sure you’re paying taxes on income that doesn’t come from a traditional 9 to 5 job!

Gig Economy Earnings Are Taxable

Basically, the “gig economy” allows individuals and groups to utilize technology advancements to arrange transactions and generate revenue from assets they possess (such as cars and homes), or services they provide (such as household chores or technology services). Think AirBnB, Uber or freelance websites like UpWork. Although this is a developing area of the economy, there are significant tax implications for the companies that offer these services, and the individuals who deliver them.

Generally, income earned from the gig economy is taxable and must be reported to the IRS including part-time, temporary and side work. Even if you’re paid in cash, earnings must still be reported on your tax return. Thankfully, taxpayers who participate in the gig economy may be able to deduct certain expenses. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 58.5 cents per mile for the first half of 2022 and 62.5 cents per mile for the second half of 2022. 

Generally speaking, any expenses which are “ordinary and necessary” for your outside activity are deductible.  In the world of taxation, “ordinary” means a type of expense which is reasonable for your business activity.  For example, large entertaining expenses might be “ordinary” for a sports agent, but not for a plumber. “Necessary” means genuinely helpful for running or expansion of the business activity. As an example here, workout tapes might be “necessary” for a personal trainer, but not so much for the plumber.

If a taxpayer rents out their home or apartment, but also lives in it during the year, special rules generally apply to their taxes. Taxpayers can use the Interactive Tax Assistant tool on IRS.gov, Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.

Depending on how much income you generate from your side hustle, you may need to make estimated tax payments every quarter. The U.S. tax system is considered “pay-as-you-go” which means taxpayers involved in the gig economy often need to make estimated tax payments throughout the year. These payments are due on April 15, June 15, Sept. 15 and Jan. 15. Taxpayers should use Form 1040-ES to calculate these payments.

Is Your Hobby Actually a Business?

From painting and pottery to car racing and horse breeding, many people enjoy hobbies that put a few extra bucks in their pocket. However, taxpayers who make money from a hobby must not only report that income on their tax return, they must also understand that many expense deductions available to actual businesses might not apply.

The IRS has some pretty strict guidelines on what hobby expenses are considered deductible – and whether or not a “hobby” may actually be a legitimate business. To determine whether your side hustle is simply a hobby or perhaps something a bit more, here’s a list of nine questions the IRS uses to make this determination:

Does the taxpayer carry on their hobby in a businesslike manner and maintain complete and accurate books and records?

Does the time and effort the taxpayer puts into their hobby suggest they intend to make it profitable?

Does the taxpayer depend on income from their hobby for their livelihood?

Are any losses due to circumstances beyond the taxpayer’s control (or normal in the startup phase of their type of business)?

If the hobby has been losing money, has the taxpayer changed their methods of operation in an attempt to improve profitability?

Does the taxpayer or their advisors have the knowledge needed to carry on the hobby as a successful business?

Was the taxpayer successful in making a profit in similar activities in the past?

Did the hobby turn a profit in 3 out of 5 consecutive years and if so, how much profit did it make?

Can the taxpayer expect to make a future profit from the appreciation of the assets used in their hobby?

The biggest tax limitation for a hobby is that you can’t deduct a loss from its activities. Most hobbies come with some sort of expense – be it equipment, supplies or educational fees. But the law says you can’t deduct those expenses beyond the amount of income you generate from your hobby.

Tax on Third Party Payments like PayPal or Venmo

If you take payments for your side hustle through a Third Party Settlement Organization (TPSO) like PayPal or Venmo, there is a new tax reporting rule that goes into effect for 2022. In general, a TPSO was required to file Form 1099-K with the IRS when annual payments to the recipient totaled more than $20,000 and there were more than 200 transactions. However, starting January 1, 2022, the $20,000/200 transaction rule came to an end. Instead, a 1099-K will have to be filed by a TPSO if a recipient is paid $600 or more during the year for goods and services, with no minimum number of transactions requirement. Thus, even a single transaction for $600 or more will require a 1099-K.

So, what does that mean for your side hustle? Well, starting this year if you received over $600 in payments from a TPSO like PayPal or Venmo, you're going to get a 1099 for that income. If you’re a sole proprietor, for example, you’ll likely need to file a Schedule C with your tax return to calculate and report your business income. A Form 1099-K can help you understand how much you received from clients through third party payment methods.

Note: receiving a 1099-K doesn’t necessarily mean you owe taxes on that money. For example, if friends or family members send you money through a TPSO to reimburse you for groceries, concert tickets or a night on the town, that wouldn’t be considered taxable income. However, even non-taxable 1099 income should be reported on your tax return, then shown as non-taxable.  Otherwise, the IRS computers will see that this 1099 income is “missing” from your tax return, assume it's taxable, and send you a letter charging tax on that “unreported” income.  Then you have a choice.  Take on the IRS and correct them, or just give up and pay tax on non-taxable money.

Keep Good Records

The type of side hustle you have can determine what records you need to keep for tax purposes. A good recordkeeping system should include a summary of your business transactions – typically documented in accounting journals or ledgers – and show your gross income, deductions and credits. At the very least, always keep track of any business or outside income, and any expenses related to that income.

Purchases, sales, bills, assets and other transactions you execute in your side hustle will generate a large amount of supporting documents. These documents contain information needed for your records and tax returns, therefore you should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. As much as it might be a pain, good record keeping is one of the easiest ways to ensure you don’t end up with an unexpected tax bill at the end of the year!

If you have any questions about the tax implications of your side hustle or what deductions may be available, please CONTACT US right away. Our certified tax professionals are here to help!

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Tips for Lowering Your Tax Bill Next Year

Now that the year is half over and we begin dreaming of the warm summer months ahead, what better time to start thinking about how to lower your tax bill for 2022! Waiting until the end of the year to get organized can often lead to frustration and costly mistakes – not to mention missed opportunities to take advantage of certain deductions, credits and relief you may qualify for. 

Planning now for your 2022 taxes may not only help reduce your overall tax burden but could help you gain control of your entire financial situation. Here are a few things you should consider doing now to help reduce your tax bill next year and ensure you’re prepared when tax day arrives!

File a tax extension? Don’t wait until the last minute! If you filed an extension for your business, your personal taxes or both, you'll need to file your tax return prior to September 15th for most businesses and October 17th for personal returns. Due to the volume of clients we have, please send us your tax documents and completed tax organizer as soon as possible (and no later than the 1st of those months or rush fees will apply). Even if you don't want to file the return until the actual deadline, providing your information early will ensure we have adequate time to prepare your tax returns and answer any questions you may have. 

Contribute to your IRA. The annual contribution limit to a traditional IRA for 2022 is $6,000, or $7,000 if you're age 50 or older. Your Roth IRA contributions may also be limited based on your filing status and income. Keep in mind, Roth IRA contributions aren't deductible!

Invest in Tax-Free Municipal Bonds. Municipal bonds can offer taxpayers a way to generate tax-free income in the form of interest payments from state and local governments. These debt securities help to finance projects such as roads, schools and other public works projects.

Tax-free municipal bonds may be more valuable to some investors than others, since the interest rates on these bonds tend to be low. So, higher earners may find them useful as a way to limit their state and federal tax liability, while people with more modest incomes might look for investments that grow their overall wealth faster, even without the tax benefits.

Pay Off Your Property Taxes Early. If you itemize deductions, the timing of your property tax payments can have a significant impact on the deduction received on your federal tax return. To claim a property tax deduction, the IRS requires you actually make the payment during the same year you report the deduction. When filing your 2022 tax return next year, you can only deduct the property taxes you paid on or between January 1, 2022 and December 31, 2022.

Take Advantage of Small Business Deductions. If you’re self-employed or own a small business, certain deductions can go a long way to reducing your tax liability each year. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

Some common business deductions include mileage and vehicle maintenance, meals, home office, travel, moving expenses and depreciated assets like computers and other equipment. 

Pay Your Estimated Taxes. If you’re self-employed or own a small business, you generally need to make estimated tax payments every quarter. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. If you don’t pay enough tax through withholding and estimated tax payments, or estimated tax payments are late, you could be charged a penalty – even if you are due a refund when you file your tax return!

Make a Gift to Your Favorite Charity. If you itemize deductions, donating to a tax-exempt charity before December 31st can usually be deducted on that year’s federal income tax return. It’s important to be sure any charity you are giving to is a qualified organization as only donations to eligible organizations are tax-deductible.

Increase the amount you set aside for next year’s Health Spending Account (HSA). The IRS increased HSA contribution limits for the 2022 tax year. An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,400) can contribute up to $3,650 — up $50 from 2021 — for the year to their HSA. The maximum out-of-pocket has been capped at $7,050. An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $2,800) can contribute up to $7,300 — up $100 from 2021 — for the year. The maximum out-of-pocket has been capped at $14,100.

While the suggestions above cover some of the tax savings opportunities you can take advantage of this summer, there are still dozens of other things you may want to consider. For example, using a credit card to pay deductible expenses before the end of the year may help increase your 2022 deductions – even if you don't pay your credit card bill until the new year. Other common practices include offloading bad stock, setting up a 529 college savings plan or stashing money in your company sponsored 401(k) plan. 

Whatever your unique tax situation, there are plenty of things you can still do before the end of the year to maximize available savings and reduce your taxable income. And the best part is… WE CAN HELP! Give us a call at (323) 257-5762 or email info@truax.net to schedule an appointment with one of our certified tax preparers.

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Changes to Meal and Home Office Deductions for 2022

Now that the April 17 tax deadline has passed and business owners look forward to the prosperous summer months ahead, we want to remind you about some recent changes to the tax code that could have an impact on your 2022 taxes.

 Businesses rely heavily on certain deductions to reduce their tax liability each year. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary, but you should understand what these terms mean when it comes to filing your tax return.

 Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. In some cases, you may not be allowed to deduct the expense at all! Therefore, it is important to distinguish usual business expenses from expenses that include the following.

 The expenses used to figure cost of goods sold

Capital expenses

Personal expenses

 Now that we’ve covered some basics, let’s take a look at some of the key highlights for the 2022 tax year you should be aware of…

 Enhanced Business Meal Deduction

 For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a qualified restaurant. Otherwise, the limit is usually 50% of the cost of the meal.

 To qualify for the higher limit, the business owner or an employee of the business must be present when food or beverages are provided. Moreover, the expense can’t be lavish or extravagant (yes, that means caviar and a bottle of Dom Perignon probably doesn’t count). Restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption.

 For this purpose, grocery stores, convenience stores and other businesses that primarily sell pre-packaged goods not intended for immediate consumption, don’t qualify as restaurants. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if they are operated under contract by a third party.

 For more information about this provision, as well as details on the special recordkeeping rules that apply to business meals, see IRS Publication 463, Travel, Gift, and Car Expenses.

 Home Office Deduction

 With a growing number of business owners now working from home after COVID (note - that's business owners and not employees), many qualify for the home office deduction, also known as the “deduction for business use of a home”. To qualify, a business owner must use a room or other identifiable portion of the home exclusively for business on a regular basis. Exceptions to the exclusive-use standard apply to home-based daycare facilities and to portions of the home used for business storage, where the home is the only fixed location for that business.

 Those eligible can figure the deduction using either the regular method or the simplified method. To choose the regular method, fill out and attach Form 8829, Expenses for Business Use of Your Home. In general, this form divides the expenses of operating the home between personal and business use. Direct business expenses are fully deductible, as they are for most businesses. On the other hand, the business portion of indirect expenses, such as real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs, is calculated on this form based on the percentage of the home used for business.

 Alternatively, instead of filling out the 44-line Form 8829, business owners can choose the simplified method, based on a 6-line worksheet found in the instructions to Schedule C, the tax form for sole proprietors. This method has a prescribed rate of $5 a square foot for business use of the home. The maximum deduction is $1,500, based on business use of at least 300 square feet.

 Though homeowners choosing the simplified option cannot depreciate the portion of their home used for business, they can still claim allowable home mortgage interest, real estate taxes and casualty losses as itemized deductions on Schedule A. These deductions don’t need to be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.

 For more information about the home office deduction and both methods for calculating it, see Publication 587, Business Use of Your Home.

  Business Use of Your Car

 If you use your vehicle solely for business purposes, then you may be able to deduct the entire cost of operating the vehicle. If you use it for both business and personal trips, you can only deduct the costs associated with business-related usage.

 There are two methods for deducting vehicle expenses, and you can choose whichever one gives you a greater tax benefit.

  Standard mileage rate: If you use your car for business, it’s important to track every last mile in order to take advantage of this important benefit. The deductible standard mileage rate for the cost of operating your car, van, pickup or panel truck for each mile of business use is 58.5 cents per mile in 2022. To calculate the deduction, multiply the miles driven for business during the year by a standard mileage rate.

Actual expense method. This method is used to track all the costs of operating a vehicle during the year – including gas, oil, repairs, tires, insurance, registration fees and lease payments. To calculate this deduction, multiply total operating costs by the percentage of miles driven for business. Note that you cannot switch from the actual expense method to the standard mileage method on the same vehicle.

 Both methods require that you track your business miles for the year – something many people find very challenging. You can keep a detailed log of your business miles, use an app to track your trips or reconstruct a mileage log using other documents, such as calendars or appointment books. If you keep a mileage log, clearly document the miles driven, time, place and business purpose of your trip.

 Note: you cannot count the miles driven while commuting between your home and your regular place of business. These costs are considered personal commuting expenses.

 There are dozens of other expenses a business can deduct on their tax return including depreciation, interest, travel, utilities, professional fees and more! However, not all businesses or expenses qualify so it’s very important to consult with an experienced and qualified tax preparer like Truax to make sure you’re taking full advantage of these benefits.

   William D. Truax, E.A. and his friendly team of licensed tax preparers have been helping businesses and self-employed individuals manage their taxes for nearly 50 years. He is licensed to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court.

 If you need assistance or have questions about how recent tax law changes may affect you, please contact us today for a FREE consultation. We’re here to help!

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Missed the Tax Deadline? What You Need to Know!

All too often, the April 15th federal tax return deadline arrives sooner than expected – causing frustration and anxiety as you scramble to get everything together at the last minute. Yes, a six-month extension is available from the IRS which defers your tax return filing deadline until October 15th. However, taxpayers are still responsible for paying late penalties on the unpaid tax that was due earlier in the year – as well as any unpaid taxes from prior years. The bottom line is, extension or not, failure to file and pay your taxes on time can be a costly decision!  

Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily!

The three most common penalties include:

Failure to file – when you don't file your tax return by the return due date or extended due date if an extension to file is requested and approved.

Failure to pay – when you don't pay the taxes reported on your return in full by the due date, April 15. An extension to file doesn't extend the time to pay.

Failure to pay proper estimated tax - when you don’t pay enough taxes due for the year with your quarterly estimated tax payments when required.

Before we dive in, here’s some good news for families who don't owe taxes to the IRS… you can still file your 2021 tax return and claim the Child Tax Credit for the 2021 tax year at any point until April 15, 2025, without any penalty!

Failure to File

If you owe tax and don't file on time, there's a penalty for not filing on time. The Failure to File penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25%. If your return was over 60 days late, there's also a minimum penalty for late filing. The minimum Failure to File penalty is $435 (for tax returns required to be filed in 2020, 2021 and 2022) or 100% of the tax required to be shown on the return, whichever is less. 

You must file your return and pay your tax by the due date to avoid interest and penalty charges. Often, you can borrow the funds necessary to pay your tax at a lower effective rate than the combined IRS interest and penalty rate.

 Failure to Pay

If you file a return but don't pay all tax owed on time, you'll generally have to pay a late payment penalty. The Failure to Pay penalty is 0.5% of the tax you didn’t pay for each month, or partial month that you don’t pay, after the due date. California has a similar penalty, but tacks on an additional 5% as of the first day after the tax was due.

Note: if you filed your tax return on time as an individual and you have an approved payment plan, the Failure to Pay Penalty is reduced to 0.25% per month (or partial month) during your approved payment plan.

The Failure to Pay penalty rate increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. Be aware that the IRS applies payments to the tax first, then any penalty, then to interest. Any penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month.

There are some exceptions to the general deadlines for filing a return and paying tax, such as:

If you're a member of the Armed Forces and are serving in a combat zone or contingency operation. Refer to Publication 3, Armed Forces' Tax Guide, for additional information and qualifications.

If you're a citizen or resident alien working abroad. Refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for details.

If you were a victim in certain disaster situations. In those situations, the IRS has the authority to extend filing and payment deadlines. Search keyword "disaster" on IRS.gov for more information.

 Failure to Pay Estimated Taxes

The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding from your employer or by making estimated tax payments if you’re self-employed or own a small business. If you don't pay your tax or you pay an insufficient amount of tax through withholding, you might also have to pay estimated taxes. 

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain high income taxpayers. For more information, refer to Publication 505, Tax Withholding and Estimated Tax.

Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.

The law allows the IRS to waive the penalty if:

You didn't make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or

You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

Finally, it's very important you review all IRS notices and bills in detail. If you believe there's an error, write to the IRS office that sent it to you within the time frame given or call the number listed on your notice or bill for assistance. You should provide photocopies of any records that may help the IRS correct the error. If they find a mistake was made, they'll make the necessary adjustment to your account and send you a corrected notice.

William D. Truax and his friendly team of EAs and licensed tax preparers have been assisting individuals and businesses with their taxes for nearly 50 years. He is licensed to represent taxpayers before the IRS and is also a member of the Bar of the United States Tax Court.

If you need assistance or have questions about a notice you’ve received or penalties you may owe, please contact us today for a FREE consultation. We’re here to help!

[williamtruax]

Protecting Your Financial and Personal Data

As the April 18th tax deadline quickly approaches, we’d like to remind taxpayers to remain vigilant in protecting their personal and financial data. Scams and schemes using the IRS as a lure can take on many variations, so securing your personal information is vital. This is particularly important this year as cybercrime is on the rise due to the Russian/Ukraine war which has resulted in a large spike in digital attacks across the U.S.

Sadly, thousands of people have lost millions of dollars and their personal information to tax scams. Scammers use the regular mail, telephone, or email to set up individuals, businesses, payroll and tax professionals. Even text messaging has become an increasingly popular method for luring people into believable scams. Below are some steps you can take to safeguard your important data.

 Protect Personal Information

 Treat personal information like cash – don’t hand it out to just anyone. Social Security numbers, credit card numbers, phone numbers, bank and even utility account numbers can be used to help steal a person’s money or open new accounts. Every time a taxpayer receives a request for personal information, they should think about whether the request is truly necessary. Scammers will do everything they can to appear trustworthy and legitimate, including posing as a friend, family member or work colleague.

 Avoid Phishing Scams

 The easiest way for criminals to steal sensitive data is simply to ask for it. Learn to recognize phishing emails, calls or texts that pose as familiar organizations such as banks, credit card companies or even the IRS. These ruses generally urge taxpayers to give up sensitive data such as passwords, Social Security numbers and bank account or credit card numbers. They are called phishing scams because they attempt to lure the receiver into taking the bait.

 Also, don’t assume internet advertisements, pop-up ads or emails are from reputable companies. If an ad or offer looks too good to be true, take a moment to check out the company behind it. Type the company or product name into a search engine with terms like “review,” “complaint” or “scam.”

 The IRS urges people to never download “security” software from a pop-up ad. A pervasive ploy is a pop-up ad that indicates it has detected a virus on the computer. Don’t fall for it. The download most likely will install some type of malware on the victim’s computer. Reputable security software companies do not advertise in this manner.

 Safeguard Personal Data in Daily, Online Activity

 Taxpayers should only share Social Security and bank account numbers when absolutely necessary. Occasionally businesses will request it when it is not essential – always ask what they need the information for and how it will be used. When in doubt, don’t give it out!

 If you do need to provide personal information, always do so over encrypted websites. Shopping or banking online should only be done on sites that use standard encryption protocols. One way to check is by looking for “https” at the beginning of a web address (the “s” stands for secure) and be sure “https” is on every page of the site.

 You should also take extra precautions when connecting to a public Wi-Fi network. Public Wi-Fi is convenient and often free, but it may not be safe. Hackers and cybercriminals can easily steal personal information from these networks. Always use a virtual private network when connecting to public Wi-Fi, if possible.

 Use Strong Passwords

 The longer the password, the tougher it is to crack. Use at least 10 characters; 12 is ideal for most home users. Mix letters, numbers and special characters. Try to be unpredictable – don’t use names, birthdates or common words. Don’t use the same password for many accounts and don’t share them on the phone, in texts or by email.

 Legitimate companies will not send messages asking for passwords. Receiving such a message probably means it’s a scam. Keep passwords in a secure place (not a post-it note on your computer) and consider using a password manager.

 Whenever it is an option for a password-protected account, users should also opt for a multi-factor authentication process. Multi-factor authentication is critical to protecting your password.

 It's also best practice to set password and encryption protections for wireless networks. If a home or business Wi-Fi is unsecured, it allows any computer within range to access the wireless network and potentially steal information from connected devices.  

 Use Security Software

 A good broad-based anti-malware program should provide protection from viruses, Trojans, spyware and adware. We encourage all our Clients to use an anti-malware program and always keep it up to date.

 Set security software to update automatically so it can be upgraded as new threats emerge. Also, make sure the security software is “on” at all times. Invest in encryption software to prevent unauthorized access by hackers or identity thieves. Educate children about the threats of opening suspicious web pages, emails or documents.

 Back Up Files

 No system is completely secure. That’s why it always a good idea to copy important files, including federal and state tax returns, onto a removable disc or a back-up drive, and store it in a safe place. Federal and state tax returns are important financial documents so guard them closely. People need them from time to time for home mortgages or college financial aid applications. These steps also can help taxpayers more easily prepare next year’s tax return. If storing sensitive tax and financial records on a personal computer, use a file encryption program to add an additional layer of security.

 You can forward suspicious IRS emails to phishing@irs.gov or report IRS-impersonation telephone calls at www.tigta.gov. If you are an identity theft victim whose tax account is affected, visit https://www.irs.gov/newsroom/taxpayer-guide-to-identity-theft for more information.

 William D. Truax and his friendly team of EAs and licensed tax preparers have been representing individuals and businesses across the country for nearly 50 years. They take privacy and protection of your information very seriously, using the latest security tools to help ensure personal and financial records are kept safe.

 Please feel free to CONTACT US for more information or to report a possible security issue. Our certified tax professionals are here to help!

[williamtruax]

Tax Reporting Requirements for Gig Work, Virtual Currency and Foreign Income

For most Americans, filing a tax return each year is a fairly straight forward process – albeit an often frustrating and tedious endeavor. However, with the changing economic and employment landscape, many are choosing to explore other income opportunities such as gig work, virtual currency trading and foreign investments. Of course, the Internal Revenue Service (IRS) is paying close attention to this shift and wants to make sure you’re paying your fair share of taxes on income that doesn’t come from a traditional 9 to 5 job.

Whether you’re a seasoned entrepreneur or just dabbling in alternative income sources to help pay the bills, there are some pretty significant reporting and tax obligations you should be aware of to prevent any unexpected tax bills or penalties. From working in the gig economy or making virtual currency transactions, to earning foreign-sourced income and holding certain foreign assets, the IRS wants a piece of the action and has every intention of enforcing these tax requirements. 

Let’s take a closer look at each category!

Gig Economy Earnings Are Taxable

Basically, the “gig economy” allows individuals and groups to utilize technology advancements to arrange transactions and generate revenue from assets they possess (such as cars and homes), or services they provide (such as household chores or technology services). Think AirBnB, Uber or freelance websites like UpWork. Although this is a developing area of the economy, there are significant tax implications for the companies that offer these services, and the individuals who deliver them. 

Generally, income earned from the gig economy is taxable and must be reported to the IRS including part-time, temporary and side work. Even if you’re paid in cash, earnings must still be reported on your tax return. Thankfully, taxpayers who participate in the gig economy may be able to deduct certain expenses. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 58.5 cents per mile for 2022.

If a taxpayer rents out their home or apartment, but also lives in it during the year, special rules generally apply to their taxes. Taxpayers can use the Interactive Tax Assistant tool on IRS.gov, Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.

Virtual Currency Transactions Are Taxable

With virtual currencies like Bitcoin becoming more mainstream in recent years, we often get asked if revenue from the sale or exchange of these digital dollars is taxable. The simple answer is, YES – virtual currency transactions are taxable by law just like transactions on any other property.

Of course, taxpayers who don't properly report virtual currency transactions could be audited and, where appropriate, be liable for penalties and interest. In extreme situations, taxpayers could even be subject to criminal prosecution for failing to properly report virtual currency transactions.

A transaction involving virtual currency includes, but is not limited to:

The receipt of virtual currency as payment for goods or services provided

The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift

The receipt of new virtual currency as a result of mining and staking activities

The receipt of virtual currency as a result of a hard fork (blockchain)

An exchange of virtual currency for property, goods or services

An exchange/trade of virtual currency for another virtual currency

The sale of virtual currency

Any other disposition of a financial interest in virtual currency

If an individual disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, they should check "Yes" at the top of Form 1040/1040-SR and use Form 8949 to calculate their capital gain/loss on Schedule D.

If they received any virtual currency as compensation for services or disposed of any virtual currency they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (i.e. W-2 wages on line 1 of Form 1040/1040-SR; inventory or services from Schedule C on Schedule 1). 

Reporting Foreign Sourced Income

A U.S. citizen or resident alien earning income in another country, regardless of where they live, is generally subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States. Foreign earned income such as wages and tips – and unearned income such as interest, dividends or pensions – are all taxable unless exempt by law or a tax treaty.

This income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.

Taxpayers working or serving in the military abroad are allowed an automatic 2-month extension to June 15 if both their tax home and abode are outside the United States and Puerto Rico. Remember though, even if you’re allowed an extension, interest will accrue on any tax not paid by the regular due date of April 18, 2022. The IRS recommends attaching a statement if one of these two situations apply.

Reporting Foreign Accounts and Assets

As mentioned in the previous section, federal law requires U.S. citizens and resident aliens to report their worldwide income. This includes income from foreign trusts, banks and other financial accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

In addition, certain taxpayers may also have to submit Form 8938, Statement of Foreign Financial Assets to their return. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds (see form instructions for more details).

Separate from reporting specified foreign financial assets on a tax return, taxpayers with an interest in, or authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time, must file Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Because of this threshold, taxpayers with foreign assets, even relatively small ones, should check if this filing requirement applies to them.

The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is the same as that of Form 1040. FinCEN grants filers who missed the original deadline an automatic extension until October 15, 2022, to file the FBAR. There is no need to request this extension.

If you have any questions about your tax obligations for gig work, virtual currencies or foreign income, please CONTACT US right away. Our certified tax professionals are here to help!

[williamtruax]

The 2022 Tax Season Has Arrived!

Not sure you’ll consider this good news or not, but the Internal Revenue Service (IRS) announced it is now accepting and processing 2021 federal income tax returns. This year brings additional challenges as the agency continues to process over 24 million returns from 2020 due to coronavirus stimulus checks, scaled-up child tax credit payments and widespread staffing shortages.

The IRS expects more than 70 percent of taxpayers will get tax refunds this year. Last year, 128 million refunds were issued, with an average refund of around $2,775. More than 150 million returns are expected to be filed so don't wait to get started on yours!

Below are some key things you need to know when filing your 2021 tax return.

Changes to Tax Filing Deadline

This year, the deadline to file individual and joint 2021 tax returns is Monday, April 18, 2022. Keep in mind, not only are returns due by that date, but so is any amount owing! Taxpayers requesting an extension will have until Monday, October 17, 2020 to file. For S-Corp & LLCs/Partnerships, the filing deadline is March 15, 2022.

If for some reason you won’t be ready to file by the deadline, you can always request an extension. However, just remember that filing an extension does not mean you have more time to pay your taxes. Any tax owed is still due by the original filing deadlines.

Also – please be aware that, if you want to take advantage of the CA Passthrough Entity Tax, the full tax must be paid no later than March 15th – there are no extensions.

Accuracy is Critical to Avoid Delays

When a tax return doesn’t match up with IRS records, it’s placed in the agency’s paper processing backlog – a complex traffic jam that’s been increasingly harder to move through amid the pandemic and IRS staffing challenges. That means taxpayers are likely to encounter delays if they make a mistake when they file. Taxpayers who wait until the last-minute risk making errors, especially if their records aren’t in good order. Here are a few things to keep in mind as you begin preparing your return:

Gather all necessary records, such as W-2s, 1099s, receipts, canceled checks and other documents that support an item of income, or a deduction or credit, appearing on a tax return.

Develop a system that keeps all important information together, including a software program for electronic records or a file cabinet for paper documents in labeled folders. Having all records readily at hand makes preparing a tax return easier.

Compile all year-end income documents, such as Form 1099-MISC, Form 1099-INT, Form 1099-NEC, Form 1099-G, Form 1095-A and certain government payments like unemployment compensation or state tax refund.

Electronic Filing and Direct Deposit Are the Fastest Way to Get a Refund 

Filing electronically with direct deposit and avoiding a paper tax return is more important than ever this year to avoid refund delays. If you need a tax refund quickly, save a tree and use software, a trusted tax professional like Truax or Free File on IRS.gov. For people with no tax return issues, the IRS anticipates most taxpayers will receive their refund within 21 days of when they file electronically if they choose direct deposit.

Reconcile Advance Child Tax Credit Payments

If you received advance Child Tax Credit payments, you need to file a 2021 tax return. You’ll need to compare the advance Child Tax Credit payments that you received with the amount of the Child Tax Credit that you can properly claim on your 2021 tax return. This includes people who successfully used the Non-Filer tool in 2021. The IRS will be sending you Letter 6419 with the total amount of advance Child Tax Credit payments you received in 2021. To avoid a processing delay, you’ll need to report the total amount and should keep an eye out for your Letter 6419 before you file. If you don’t have a letter or have questions about the amount you received, you can see the total advance Child Tax Credit payment amount using your IRS Online Account. 

Claim a Recovery Rebate Credit (Stimulus Payment)

Individuals who didn't qualify for the third Economic Impact Payment or didn’t receive the full amount may be eligible for the Recovery Rebate Credit based on their 2021 tax situation. Those eligible will need to file a 2021 tax return, even if they don't usually file, to claim the Recovery Rebate Credit. They will also need the total amount of their third Economic Impact Payment, including any supplemental or “plus-up” payments, to file their return accurately and avoid a processing delay. In early 2022, the IRS will send out Letter 6475 to provide the total amount of the third Economic Impact Payments that individuals received. Individuals can also get this information by logging in to their IRS Online Account.

What to do if your tax return from 2020 is still being processed. 

People whose tax returns from 2020 have not yet been processed can still file their 2021 tax returns. For anyone in this group filing electronically, here’s a critical point: taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return when they file electronically. For those waiting on their 2020 tax return to be processed, make sure you enter $0 (zero dollars) for last year’s AGI on the 2021 tax return.

Unemployment Compensation is Taxable 

Millions of Americans received unemployment compensation last year, and it’s fully taxable in 2021. The American Rescue Plan Act of 2021 allowed an exclusion of unemployment compensation of up to $10,200 for 2020 only. Remember for 2022, if no federal income tax is withheld from unemployment payments, it could mean an estimated tax payment should be made. For more information, review Tax Topic 418, Unemployment Compensation and Publication 525, Taxable and Nontaxable Income, on IRS.gov.

If you have any questions about completing your 2021 tax return or need additional info about the filling requirements, please CONTACT US right away. We know how stressful this time of year can be and our certified tax professionals are here to help!

[williamtruax]

What to Do Before the Tax Year Ends December 31st

For most taxpayers, Dec. 31st is the last day to take actions that will impact their 2021 tax returns. And with tax season just around the corner, we’d like to remind taxpayers there are several things they should do now to get ready for next year.

CHECK YOUR WITHHOLDING

Taxpayers should check their tax withholding before the end of the year as there are several new factors that could affect refunds in 2022. Taking a closer look at the taxes being withheld from your paycheck can help ensure the right amount is being taken out each period, either for tax refund purposes or to avoid an unexpected tax bill next year. You can use the IRS Withholding Calculator to estimate the amount you should have withheld and determine if you need to provide your employer with a new Form W-4.

RETIREMENT BENEFITS & CONTRIBUTIONS

Most workplace retirement account contributions should be made by the end of the year, but taxpayers can make 2021 IRA contributions until April 15, 2022. For 2021, the contribution limit to a 401(k) is $19,500 ($26,000 if you’re age 50 or older). For traditional and Roth IRAs, the combined contribution limit is $6,000 ($7,000 if age 50 or older).

Taxpayers who are over age 70 ½ are generally required to receive payments (required minimum withdrawals) from their individual retirement accounts and workplace retirement plans by the end of the year. However, a special rule allows those who reached 70 ½ in 2021 to wait until April 1, 2022 to receive them. This generally applies to the original owner of a traditional IRA, SIMPLE IRA, SEP IRA or a retirement plan, such as a 401(k) or 403(b). Roth IRAs do not have required minimum withdrawals.

RELOCATION AND NAME CHANGES

Taxpayers who have moved should tell the US Postal Service, their employers and the IRS. To notify the IRS, mail IRS Form 8822, Change of Address, to the address listed on the form’s instructions. For taxpayers who purchase health insurance through the Health Insurance Marketplace, they should also notify the Marketplace when they move out of the area covered by their current Marketplace plan. For name changes due to marriage or divorce, notify the Social Security Administration (SSA) so the new name will match IRS and SSA records. Also, notify the SSA if a dependent’s name changed in 2021. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

GATHER YOUR TAX RECORDS

While not the most exciting thing to do over your holiday break, organizing your tax records will make preparing a complete and accurate tax return much easier. This will help avoid errors that lead to processing delays and slow refunds. Having all needed documents on hand before taxpayers prepare your return helps them file it completely and accurately. These include:

Forms W-2 from employers

Forms 1099 from banks, issuing agencies and other payers including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan

Form 1099-K, 1099-MISC, W-2 or other income statement for workers in the gig economy

Form 1099-INT for interest received

Other income documents and records of virtual currency transactions

Taxpayers should keep copies of tax returns and all supporting documents for at least three years. Income documents can help taxpayers determine if they're eligible for deductions or credits. People who need to reconcile their advance payments of the child tax credit and premium tax credit will need their related 2021 information. Those who did not receive their full third Economic Impact Payments will need their third payment amounts to figure and claim the 2021 recovery rebate credit.

Taxpayers should also keep end of year documents including:

 Letter 6419, 2021 Total Advance Child Tax Credit Payments, to reconcile advance child tax credit payments

Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the recovery rebate credit

Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance premium tax credits for Marketplace coverage

VIEW YOUR IRS ACCOUNT ONLINE

Taxpayers can securely access and view their IRS tax information anytime through their individual online account. You can see important information when preparing to file your tax return or following up on balances and notices.

To access your information online, taxpayers must register through Secure Access. This is the agency's two-factor authentication process that protects personal info. Taxpayers can review the Secure Access page process prior to starting registration. Reviewing and updating your federal tax information regularly can help protect your sensitive financial data from criminals and other bad actors.

If you have questions about any of this information or what you can do to prepare for the 2021 tax season, please don’t hesitate to CONTACT US. We’re here to help!

[williamtruax]

Tax Tip: Deducting Non-Cash Charitable Donations for 2021

In our last article, Deducting Charitable Cash Contributions for 2021, we discussed the proper ways to deduct cash donations on your tax return. However, what if you’re making a non-cash donation such as food, clothing, household items or even a vehicle? The Internal Revenue Service (IRS) does allow taxpayers to deduct the value of these types of donations but have become increasingly restrictive over the years due to unscrupulous individuals claiming bogus or inflated charitable write-offs.

In this article, we’re going to focus on what taxpayers are currently allowed to deduct for non-cash donations and how to get the most from your charitable gift.

Make Sure You Select a Qualified Charity

It’s important to be sure any charity you are giving to is a qualified organization as only donations to eligible organizations are tax-deductible. Select Check, a searchable online tool available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. Churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in this database.

Determine the Value of Your Donated Property

To figure how much you may deduct for property that you contribute, you must first determine its fair market value on the date of the contribution. Fair market value (FMV) is the price that property would sell for on the open market and its value usually depends on the condition of the item. By law, a charity cannot tell you what your donated items are worth.

Determining the value of donated property would be a simple matter if you could rely only on fixed formulas, rules or methods. Unfortunately, it’s not that simple. Using such methods seldom results in an acceptable determination of FMV and there is no single formula that always applies when determining the value of property.

This is not to say that a valuation is only guesswork. You must consider all the facts and circumstances connected with the property such as its desirability, use and scarcity.

For example, donated furniture should not be evaluated at some fixed rate such as 15% of the cost of new replacement furniture. When the furniture is donated, it may be out of style or in poor condition, therefore having little or no market value. On the other hand, it may be an antique, the value of which could not be determined by using a generally accepted appraisal formula for that industry.

Goodwill Industries has published a handy Donation Value Guide that can help you determine the average prices for items donated in good condition. You should also refer to IRS Publication 561 - Determining the Value of Donated Property for more information.

Donating Food, Clothing, and Household Items

The IRS allows taxpayers to deduct the FMV of food, clothing or household items such as furniture, furnishings, linens, appliances and electronics. Any donated household item must be new or used but in good condition and as mentioned above, there is no fixed method for determining the value of these donated items.

If you have donations of property totaling over $500 for the year, your donations are subject to higher record-keeping standards than if your total is below $500. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with their tax return.

Donations of property totaling over $5,000 annually always require an appraisal. However, appraisals have to meet strict paperwork requirements and are easy to mess up. Check with us before you make any non-cash donation for which an appraisal might be required.

Car and Vehicle Donations

That’s right! Many taxpayers choose to donate cars, trucks, boats or even planes. In these cases, the value of your donation will be determined by how the charitable organization will be using the vehicle. The organization will provide you with paperwork describing how the vehicle was used and, if it was auctioned, what the selling price was. Be sure to obtain and keep this paperwork, even after you file your return. You might need it if the IRS contacts you and requests further information, or if you are audited by the IRS. 

Special reporting requirements generally apply to vehicle donations, and taxpayers wishing to claim these donations must attach any required documents to their tax return. The deduction for a vehicle donated to charity is usually limited to the gross proceeds from its sale and this rule applies if the claimed value is more than $500. The IRS has published a useful guide for taxpayers, A Donor's Guide to Car Donations: Publication 4303, A Donor's Guide to Car Donations, that you may want to check out.

Consult a Tax Professional

William D. Truax and his friendly team of Enrolled Agents (EAs) and licensed tax preparers have been helping individuals and business with charitable deductions for over 30 years. They understand how donations must be reported on your tax return and which qualify for a deduction.

If you have any questions about a charitable gift you’ve made or would like help determining how to report donations on your tax return, please CONTACT US right away.

[williamtruax]

Tax Tip – Deducting Charitable Cash Contributions for 2021

With #GivingTuesday coming up on November 30th, many taxpayers use this opportunity to show support for their favorite causes with a generous donation. Others choose to make charitable gifts throughout the year. Donating to a tax-exempt charity before December 31st can usually be deducted on that year’s federal income tax return. However, there are a few things you should know to help ensure you receive the full benefit of your cash donation.

Make Sure You Select a Qualified Charity

It’s important to be sure any charity you are giving to is a qualified organization as only donations to eligible organizations are tax-deductible. Select Check, a searchable online tool available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. Churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in this database.

Can I Deduct Donations if I Don't Itemize? 

Yes! Normally, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim gifts to charity. However, a recent change to tax law now allows for a limited deduction on 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. These individuals can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. For married individuals filing joint returns, the maximum deduction is increased to $600.

100% limit on eligible cash contributions made by itemizers in 2021 

If you are itemizing deductions, you’ll receive a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. In addition, recent tax law changes now permit electing individuals to apply an increased limit ("Increased Individual Limit"), up to 100% of their Adjusted Gross Income (AGI), for qualified contributions made during calendar-year 2021. Qualified contributions are contributions made in cash to qualifying charitable organizations. 

As with the new limited deduction for non-itemizers, cash contributions to most charitable organizations qualify, but cash contributions made either to supporting organizations or to establish/maintain a donor advised fund, do not qualify for this 100% limit. Cash contributions to private foundations and most cash contributions to charitable remainder trusts also do not qualify for the expanded limit.

Corporate Limit Increased to 25% of taxable income

For C corporations, tax law now allows them to apply an increased limit of 25% of taxable income for charitable contributions of cash they make to eligible charities during calendar-year 2021. Normally, the maximum allowable deduction is limited to 10% of a corporation's taxable income.

Keep Good Records 

Please be aware that special record keeping rules apply to any taxpayer claiming a charitable contribution deduction. This includes obtaining an acknowledgment letter from the charity before filing a return and retaining a cancelled check or credit card receipt for contributions of cash. Also, the name of the payer of the funds (the donor) on the proof of payment must match the name of the donor shown on the acknowledgment letter from the charity.

NOTE: For donations of property, additional record keeping rules apply and may include filing a Form 8283 and obtaining a qualified appraisal in some instances. More on this in our next newsletter!

We're Here to Help! 

William D. Truax and his friendly team of Enrolled Agents (EAs) and licensed tax preparers have been helping individuals and business with charitable deductions for over 30 years. They understand how donations must be reported on your tax return and which qualify for a deduction.

If you have any questions about a charitable gift you’ve made or would like help determining how to report donations on your tax return, please CONTACT US right away.

[williamtruax]

Starting a New Business? What You Need to Know

Starting your own business can be one of the most rewarding, exciting and profitable opportunities you'll ever experience. After all, who doesn’t want to be their own boss, call the shots and possibly establish a financial legacy? 

For many, entrepreneurship is the ultimate career goal. But coming up with a great business idea is only the first step. Actually starting your own company can be a complicated and overwhelming endeavor. In fact, 90% of all start-ups fail, often in the first year, due to poor planning and execution.

We’re not going to get into the specifics of how to make your business successful in this article, but we will go over some of the things you’ll need to get the ball rolling!

Choose a business structure.

When starting a new business, you must first decide what form of business entity to establish. Your form of business determines how your taxes will be figured and which income tax return form you have to file. This is a very important step! The most common forms of business are Sole Proprietorships, Partnerships, Corporations, S Corporations and Limited Liability Companies (LLC). 

Let’s have a look at these in more detail:

Sole Proprietorship: A sole proprietor is someone who owns an unincorporated business by themselves.

Partnership: A partnership is a relationship between two or more individuals to do trade or business. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business.

Corporation: In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take certain special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

S Corporation: S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.

Limited Liability Company: A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations - you should check with your state if you are interested in starting an LLC. Owners of an LLC are called “members”. Most states do not restrict ownership so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members, and most states also permit “single-member” LLCs, those having only one owner. These single-member LLCs are disregarded for federal tax purposes and their owners, rather than the LLC, pay tax on whatever profits they may realize.

Choose a tax year.

You must figure your taxable income on the basis of a tax year. A “tax year” is an annual accounting period for keeping records and reporting income and expenses. Generally, any entity in which the ultimate taxpayer is an individual (such as sole proprietorships, partnerships, LLCs and S corporations) must file on a calendar-year basis.  Other entities, notably C corporations, can file on a fiscal-year basis, if they so choose.  Here are definitions of calendar and fiscal year:

Calendar year - 12 consecutive months beginning January 1 and ending December 31.

Fiscal year - 12 consecutive months ending on the last day of any month except December.

Apply for an employer identification number (EIN).

An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is used to identify a business entity. Generally, businesses need an EIN for tax purposes, opening a business bank account, etc. You can apply for an EIN in various ways but the easiest is to apply online using a free service offered by the Internal Revenue Service (IRS). You should also check with each state in which you plan to do business or from which you may be deriving income to see if you need a state number or charter.

Verify State Income Tax Requirements.

Most states tax income having its source within their borders, and their definition of “having its source within their borders” can be quite broad. For example, many states now tax service income as being located where the consumer of the service is located, not the provider. So, you might have a service business in Texas which has no location, assets or employees anywhere but Texas, but has some clients in California. In a case like this, California may require you to file a tax return and pay tax on all the income you derive from your California clients. If you are in a retail-type business (even an internet business), many states now also have income tax thresholds regarding sales occurring in their state. Exceed a certain number of transactions or a certain dollar value of transactions in their state and you become subject to their taxation, even if you never set foot in that state.

State income taxation is becoming an increasingly complex area. If you will have a business which has customers or does business in more than one state, it's a good idea to get professional advice about how best to comply with state income tax laws.

Have All Employees Complete These Forms.

Federal law requires that every employer who hires an individual for employment in the U.S. must complete Form I-9, Employment Eligibility Verification. Form I-9 will help you verify your employee's identity and employment authorization. In addition, you’ll need to have any employees complete Form W-4 so the correct federal income tax can be withheld from their pay. Employees should consider completing a new Form W-4 each year and when their personal or financial situation changes. Here are a couple links with more info:

Form I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services

Form W-4 Employee's Withholding Allowance Certificate

 Pay business taxes.

As a new business owner, it’s important to understand your federal, state and local tax requirements. This will help you file your taxes accurately and make payments on time. The form of business you operate determines what taxes you must pay and how you pay them. The following are some of what you'll need to look out for:

Income Tax

Self-Employment Tax

Employment Taxes

Sales Taxes

As you can see, new business owners can have a variety of tax responsibilities and you don’t want to ignore them as you begin your exciting new venture! Granted, it can all seem a bit daunting at first, but it is something which you can deal with – lots of others have done so successfully. Don't let this rat's maze of taxation keep you away from your goal.  

If you have questions about starting your own business or would like assistance getting things setup, please CONTACT US today. Our certified tax professionals and business managers are here to help!

[williamtruax]

4 Things to Know About the October 15th Tax Extension Deadline

With the October 15th personal tax extension deadlines just a few weeks away, we wanted to share some important information you should consider when filing your tax returns. 2020 was a tumultuous and historic year that saw many changes to tax law and new incentives surrounding the pandemic. So, if you haven’t filed your 2020 taxes yet, now’s the time!

First, let’s have a look at the upcoming deadlines you should be aware of.

INDIVIDUAL DEADLINES

Oct 15: FINAL tax deadline for individuals who filed for an extension

Oct 15: Deadline to re-characterize 2020 Roth IRA conversions. If you converted a traditional IRA to a Roth during 2020 and paid tax on the conversion with your 2019 return (doing so could save you money if the IRA lost money since the time of the original conversion)

Next, let’s look at four things you should consider when filing your 2020 tax return.

Penalties & Interest May Be Due - Section 6651(a)(2) of the federal tax code specifies the deadline to actually pay your tax liability due for the year and there is no extension. If you fail to pay the balance owed for the year, you will be subject to a penalty of 0.5% for every month or fraction of a month that the tax payment is outstanding. The total penalty is capped at 25% of the total tax due but that penalty will keep mounting every month until you reach the maximum penalty (in about 50 months). On top of that, if you didn't extend and filed after the April 15th deadline plus pay your taxes late, you'll be charged both the late payment and late filing penalties for each month or fraction of a month they are late. That’s no small chunk of change!

Help Is Available If You Can't Pay - The best thing to do is file your taxes and pay the amount due by the filing date. If it’s not possible to pay the full amount there are a few options:

Apply for a payment plan

In a few special cases, you might be able to make an offer for a settlement, or Offer in Compromise

In severe cases where you have far too much debt, including tax debt, you might have to file for bankruptcy

Receiving a Refund -The Internal Revenue Service (IRS) issues 9 out of 10 tax refunds in less than 21 days. The easiest way to check on a refund is by using “Where’s My Refund?,” an online tool available on IRS.gov or through the IRS2Go app. Updates to “Where's My Refund?” ‎on both IRS.gov and the IRS2Go mobile app are made once each day – usually overnight. Even though the IRS issues most refunds in less than 21 days, it’s possible a refund may take longer for a variety of reasons, including when a return is incomplete or needs further review. Bear in mind, the IRS only gives you 3 years from the original filing deadline to submit your return & claim your refund. If no action is taken by then, Uncle Sam gets to keep your money!

You May Have More Time to File - U.S. citizens and resident aliens who live and work outside the U.S. and Puerto Rico can write a letter to the IRS requesting a final two-month extension until December 15, 2021 to file their 2020 tax returns and pay any tax due. This is a discretionary extension and not automatically granted so it should only be used as a last resort. In addition, military service members and eligible support personnel serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any tax due. This includes those serving in Iraq, Afghanistan and other combat zones.

If you have any questions about upcoming tax deadlines or would like help filing your return, please CONTACT US right away. Our certified tax professionals are here to help!

 NOTE: Due to the high volume of tax returns we process at this time of year, please contact us or send in your completed organizers right away. Otherwise, we may not have enough time to complete your return by the October 15th deadline.

[williamtruax]

Tax 101: Individual Retirement Accounts (IRAs)

It’s no secret that saving for retirement is a good idea. While social security may offer some financial benefits upon retirement (providing it’s even still around!), the distribution amounts are typically a fraction of the money needed to survive and more importantly, enjoy, your golden years. 

For this reason, most people contribute some portion of their income to a retirement savings account. While these come in a variety of different flavors, including the popular employer-sponsored 401k and 403b plans, one of the most common is the Individual Retirement Account (IRA).

An IRA is designed to enable employees and the self-employed to save for retirement. They were first introduced in 1974 and have become a popular retirement savings vehicle for generations of investors. Most taxpayers who work are eligible to start a traditional IRA, Roth IRA or add money to an existing account.

Contributions to a traditional IRA are usually tax deductible, and distributions are generally taxable. To count towards your 2021 tax return, contributions must be made by April 15, 2022. Taxpayers can file their return claiming a traditional IRA contribution before the contribution is actually made. However, the contribution must then be made by the April due date of the return… so don’t forget!

The same combined contribution limit applies to both Roth and traditional IRAs. However, while Roth IRAs are subject to the same general rules as traditional IRAs, there are a few exceptions:

You cannot deduct contributions to a Roth IRA

If you satisfy the requirements, qualified distributions are tax-free

You can make contributions to your Roth IRA after you reach age 70 ½

You can leave amounts in your Roth IRA as long as you live

The account or annuity must be designated as a Roth IRA when it is set up

How Much Can I Contribute?

Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2021. For someone who was 50 years of age or older at the end of 2021, the limit is increased to $7,000. Qualified contributions to one or more traditional IRAs are deductible up to the contribution limit or 100 percent of the taxpayer’s compensation, whichever is less.

For 2021, if a taxpayer is covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is generally reduced, possibly to zero, depending on the taxpayer’s modified adjusted gross income. 

Even though contributions to Roth IRAs are not tax deductible, the maximum permitted amount of these contributions begins to phase out for taxpayers whose modified adjusted gross income is above a certain level. 

Saver’s Credit 

While contributions to a Roth IRA are not tax deductible, qualified distributions are tax-free. In addition, low and moderate-income taxpayers making these contributions may also qualify for the Saver’s Credit. 

The Saver’s Credit, also known as the Retirement Savings Contributions Credit, is often available to IRA contributors whose adjusted gross income falls below certain levels. 

Consult a Tax Professional 

While the brokerage firm managing your IRA should be able to provide general information about the account and their own internal policies, state and federal laws that apply to retirement accounts are constantly changing. We know the rules, understand tax law and have the most current information about what contribution and distribution options may be available for your specific situation.

If you have questions about IRAs or would like help determining your contribution limit, please contact us today for a FREE consultation. Our certified tax professionals are here to help!

 Information in this article sourced from the IRS and FINRA.

[williamtruax]

Why Taxpayers Should Have an IRS Online Account

In light of the recent global ransomware and data breaches we’ve all been reading about in the news, securing your financial data has become an ongoing necessity. From long computer passwords, two-factor authentication and the latest anti-virus software, taxpayers must use a variety of tools in order to fend off cyber criminals.

Even with these security measures in place, it’s still considered best practice to regularly review your financial accounts to ensure everything looks the way it should. Your bank and investments accounts are a great place to start, but we also recommend setting up an online account at IRS.gov. It’s a great way to monitor suspicious activity with your federal tax return among other great tools to keep you in the loop.

Taxpayers can securely access and view their IRS tax information anytime through their individual online account. You can see important information when preparing to file your tax return or following up on balances and notices. Here are some of the benefits and features of this online system:

 What Information Can I View?

Payoff amounts, which are updated for the current day

Balances for each tax year for which you owe taxes

Payment history

Key information from your most current tax return as originally filed

Payment plan details if you have one

Digital copies of select IRS notices

Economic Impact Payments if you received any

Your address on file

 What Else Can I Do?

Select an electronic payment option

Set up an online payment agreement

Get a copy of your transcript

 New authorization feature

The new the "authorization" option for IRS Online Accounts allows taxpayers to control who can represent them before the IRS or view their tax records. They can also approve and electronically sign Power of Attorney and Tax Information Authorization requests from their tax professional.

Your balance will update no more than once every 24 hours, usually overnight. Taxpayers should also allow 1 to 3 weeks for payments to show up in the payment history.

To access your information online, taxpayers must register through Secure Access. This is the agency's two-factor authentication process that protects personal info. Taxpayers can review the Secure Access page process prior to starting registration. 

Reviewing and updating your federal tax information regularly can help protect your sensitive financial data from criminals and other bad actors. If you have any questions about how to setup an IRS Online Account or about keeping your tax and financial data secure, please CONTACT US. Our certified tax professionals are here to help!

[williamtruax]

Tips to Cut Your Tax Bill This Summer

Between vacations, BBQs and lazy days at the beach, most people don't include “taxes” on their summer agenda. But, waiting until the end of the year to get organized can often lead to frustration and costly mistakes. Scheduling a mid-year tax planning review now can help save time later and have a positive impact on your 2021 return.

Planning now for your 2021 taxes may not only help reduce your overall tax burden but could help you gain control of your entire financial situation. Here are a few tips you should consider to help reduce your tax bill and ensure you’re prepared when Tax Day arrives!

File a tax extension? Don’t wait until the last minute! If you filed an extension for your business, your personal taxes or both, you'll need to file your tax return prior to September 15th for most businesses and October 15th for personal returns. Due to the volume of clients we have, please send us your tax documents and completed tax organizer as soon as possible (and no later than the 1st of those months or rush fees will apply). Even if you don't want to file the return until the actual deadline, providing your information early will ensure we have adequate time to prepare your tax returns and answer any questions you may have. 

Check your tax withholding. Summer is a perfect time to double check tax withholding from your employer. Be tax ready! Do a Paycheck Checkup to see if you’re withholding the right amount of tax from your paycheck. Too little could mean an unexpected tax bill or penalty. Making sure you have the correct amount being withheld from your paycheck can help avoid costly mistakes at tax time!

Decide whether itemizing is still the best option. The 2017 tax law changes greatly increased the standard deduction to $24,400 for married couples filing jointly or qualifying widowers (up from $12,7000 in 2017) and $12,200 for single filers (up from $6,350 in 2017). Married filing separately is now $12,000 (up from $6,350 in 2017) and Head of Household is $18,000 (up from $9,350 in 2017). It also modified or discontinued some itemized deductions. Almost everyone who usually itemizes is affected by changes introduced by this law. Many individuals who itemized in previous years may now find it more beneficial to take the now higher standard deduction - and may have a simpler time filing their taxes!

Deductions for state and local income, sales and property taxes have also been modified and are now limited to a combined, total deduction of $10,000 ($5,000 if married filing separately). Anything above this amount is not deductible.

Making the standard deduction instead of itemizing may make tax preparation simpler and could save you money in the long run. However, you could also be leaving money on the table depending on factors including health expenses, mortgage interest and charitable giving. Ask your tax preparer which is the better option for your specific situation.

Contribute to your IRA. The annual contribution limit to a traditional IRA for 2019, 2020, and 2021 is $6,000, or $7,000 if you're age 50 or older. Your Roth IRA contributions may also be limited based on your filing status and income. Keep in mind, Roth IRA contributions aren't deductible! You can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan). However, if you or your spouse is covered by an employer-sponsored retirement plan and your income exceeds certain levels, you may not be able to deduct some or all of your contribution.

Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). That start date also applies to company plans, but workers who own less than 5% of their company and continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50 percent of the amount of the RMD not withdrawn.

Make a gift to your favorite charity or even family members. Charitable gifts such as cash or appreciated stock are still tax-deductible if you itemize, but not if you take the standard deduction. As implemented in the CARES Act, non-itemizers may deduct up to $300 of qualified cash charitable contributions for 2021.

Increase the amount you set aside for next year’s Health Spending Account (HSA). The IRS increased HSA contribution limits for the 2021 tax year. An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,400) can contribute up to $3,600 — up $50 from 2020 — for the year to their HSA. The maximum out-of-pocket has been capped at $7,000. An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $2,800) can contribute up to $7,200 — up $100 from 2020 — for the year. The maximum out-of-pocket has been capped at $14,000.

While the suggestions above cover many of the larger tax savings opportunities you can take advantage of this summer, there are still dozens of smaller things you may want to consider. For example, using a credit card to pay deductible expenses before the end of the year may help increase your 2021 deductions – even if you don't pay your credit card bill until the new year. Other common practices include offloading bad stock, setting up a 529 college savings plan or stashing money in your company sponsored 401(k) plan. 

Whatever your unique tax situation, there are plenty of things you can still do before the end of the year to maximize available savings and reduce your taxable income. And the best part is… WE CAN HELP! Give us a call at (323) 257-5762 or email info@truax.net to schedule an appointment with one of our Enrolled Agents or certified tax preparers.