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Income Tax Filing Season Starts This Week

Tax filing season officially started for individuals on Monday, January 23rd, when the IRS begins accepting and processing 2022 income tax returns. To prepare, the IRS performed system, form, and instruction updates, as well as other readiness work. That should help tax filing season run more smoothly. Reaching the IRS should also run more smoothly because more than 5,000 new telephone assistors and more in-person staff were added to help support taxpayers.

More than 168 million individual tax returns are expected to be filed this tax season, with the vast majority of those coming before the April 18th tax deadline. This year, people have three extra days after the usual April 15th deadline to file because of the weekend and the District of Columbia’s Emancipation Day holiday, which falls on Monday, April 17th. Taxpayers requesting an extension will have until Monday, October 16th, to file.

The IRS is also accepting business returns and individual returns from taxpayers who are eligible to use the IRS’s Free File program at IRS.gov. Free File allows taxpayers who made $73,000 or less in 2022 to file their taxes electronically for free using software provided by commercial tax filing companies. Find IRS Free File partners at https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free

The IRS has three tips to help your tax filing season go more smoothly:

  1. Have the right information before filing. The IRS encourages individuals to have all the information they need before filing a complete and accurate return. Organize and gather your 2022 tax records including W-2 and 1099 earning statements, investment income, student loan interest, charitable contributions, mortgage interest, real estate and personal property taxes, and business financial records.
  1. File electronically. Taxpayers are urged to file returns electronically as soon as they have the tax documentation that they need to file a complete and accurate return. Filing early is a good idea for several reasons. First, processing volumes are lower, resulting in faster refunds. Filing early also gets ahead of potential scammers filing a fraudulent tax return with a valid tax ID number. 
  1. Use direct deposit for all refunds. Electronic tax refunds and payments are the safest and fastest method for financial transactions with federal and state tax agencies. Your tax preparer can usually set them up using authorized tax software. Tax agency websites include links for payments via bank account or credit card. Be aware that credit card payments usually include a fee and that these sites don’t have a refund option.

Starting this week, taxpayers are expected to file more than 168 million individual 2022 income tax returns. The IRS wants this filing season to go as smoothly as you do, so they’ve hired extra taxpayer assistance staff and prepared their systems. Want answers to frequently asked questions and more details? Check it out here https://www.irs.gov/newsroom/irs-sets-january-23-as-official-start-to-2023-tax-filing-season-more-help-available-for-taxpayers-this-year.

The Truth About New IRS Funding

Have you or someone that you know complained about being on hold “forever” when calling the IRS or experiencing the hassle of correcting a tax error? Well, you might want to keep that pain in mind when you read that the 118th Congress opened 2023 with a bill to roll back the $80 million in new IRS funding that was passed as a part of the Inflation Reduction Act of 2022.

Some politicians apparently want to quickly fulfill, or make a gesture to fulfill, a campaign promise to prevent the IRS from getting additional funding. Their stated goal? To save ordinary taxpayers from nuisance audits by all of the additional IRS agents that will be hired with those additional funds. The real plan for that $80 million? Investing in IRS systems and services.

The irony is that the IRS, part of the Department of the Treasury, is vested with administering the tax laws that are passed by Congress. Sure, IRS responsibilities include compliance oversight of the tax law to make sure the government collects funds to pay for the federal budget, also passed by Congress. 

But the IRS does a lot more. They maintain the systems, operations, and staff necessary to provide forms, instructions, taxpayer assistance, and all of the other resources needed for annually processing 261 million tax returns, collecting $4.1 trillion in tax revenue, and issuing 600.1 million refunds totaling more than $1.1 trillion (per the 2021 IRS Data Book https://www.irs.gov/pub/irs-pdf/p55b.pdf). 

No small task.

Even with its existing annual budget of approximately $14 billion, IRS systems are outdated. Its workforce capacity is stretched, especially after the impacts from COVID. Its staff is aging, many nearing retirement. Funding from the Inflation Reduction Act of 2022 will be targeted to invest in services and technology to make tax filing easier for you. But it won’t happen overnight – this is a 10-year plan to finally bring the IRS into the 21st century.

Bottom line, if you want quicker call response and issue resolution from the IRS, not to mention user-friendly systems, get behind the approximately $80 million in new IRS funding that was passed as a provision of the Inflation Reduction Act of 2022. Like any other business or operation, the IRS needs long term investment to sustain itself.

Want to know more about how the IRS is funded and where its budget goes? It’s all here at 

https://www.irs.gov/statistics/soi-tax-stats-irs-operations-and-budget.

New IRS Standard Mileage Rates for 2023

Do you use your personal vehicle for business, charitable, or medical purposes? If the answer is “yes,” you could qualify for an income tax deduction. Most taxpayers use the IRS Standard Mileage Rate to deduct qualified vehicle expenses. Alternatively, you can deduct total actual vehicle expenses if that amount is higher – and you track all of the fuel, repair, and maintenance expense records. Whether you deduct the standard mileage rate or actual expenses, you must track your miles driven during the year.

The standard mileage rate per mile for qualified vehicle use is determined each year by the IRS based on data about the cost of operating and maintaining a vehicle, including passenger cars, vans, pickups, and panel trucks. In recent years, the rate per mile has risen and fallen based on the price of gasoline. With gas prices up significantly since 2020, the IRS recently issued the new standard mileage rates for 2023 that reflect those higher gas prices. 

Beginning on January 1, 2023, the standard mileage rates are:
 

  • 65.5 cents per mile driven for business use, up 3.0 cents from the adjusted rate that was effective for the last six months of 2022
  • 22 cents per mile driven for medical or moving purposes, the same as the adjusted rate that was effective for the last six months of 2022
  • 14 cents per mile driven for charitable purposes to serve a qualified tax-exempt organization. The charitable rate is set by statute, so it doesn’t change.

Using the standard mileage rate can really add up to a substantial tax deduction. Remember that you always have the option of calculating the actual costs of using your vehicle and deducting the higher of the two options. Also, you can choose the standard mileage rate one year and actual expenses the next year, whichever is more beneficial for you. 

No matter which of the two expense methods you choose, you must track your overall mileage driven during the year, and track the miles by category (e.g., business and personal). And if you use more than one vehicle, mileage must be tracked for each vehicle you use for business, charitable, or medical purposes.

Tax deductions for using your vehicle involves a lot of tracking, but the effort can be worth it. You can use mileage tracking apps to help. Once you get your tracking system down, you’ll see that those mileage deductions can add up and reduce the bottom line on your taxes. Want to know more about tax deductions related to the use of your vehicle? Check out the IRS website at https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2023-business-use-increases-3-cents-per-mile.

Don’t Forget Your IRA Distribution

If you were born in 1950 or earlier, it’s time to start calculating the Required Minimum Distribution (RMD) for 2022 from your traditional IRAs, 401(k) plans and other pre-tax retirement plans. Traditional retirement plan contributions are generally made with pre-tax funds and the earnings are tax deferred. But the tax rules don’t allow for those retirement funds to remain untaxed indefinitely. Tax rules for traditional IRA distributions ensure that Uncle Sam gets his share of those funds eventually.

Here are important facts about IRA distributions:

  1. Required Minimum Distribution (RMD) Rules

RMDs are minimum amounts that many retirement plan and IRA account owners must generally withdraw annually after they reach age 72, even if they are still working. Account owners can delay taking their first RMD until April 1 following the later of the calendar year in which they reach age 72 or, in a workplace retirement plan, retire. RMDs are taxable income and may be subject to a 50% penalty if not timely taken. Account holders reaching age 72 in 2022 must take their first RMD by April 1, 2023, and the second RMD by December 31, 2023, and each year thereafter.

  1. Retirement Plan Distributions 

For beneficiaries of 401(k), 403(b) and 457(b) plans; profit-sharing and other defined contribution plans; and defined benefit plans, the first RMD is due by April 1 of the later of the year they reach age 72, or the participant is no longer employed (if allowed by the plan). A 5% owner of the employer must begin taking RMDs at age 72. RMDs may not be rolled over to another IRA or retirement plan.

  1. Inherited IRA Distributions for Non-Spouse Beneficiaries

Traditional IRAs that are inherited by someone other than the owner’s spouse must be distributed within ten years of the inheritance, not over the life of the beneficiary. Distributions now must be taken within a ten-year period after inheritance. This rule, enacted as part of the 2019 Secure Act, eliminated the options for non-spouse beneficiaries to use inherited traditional IRAs as part of his or her own retirement planning.

Tax rules are complicated and can be hard to follow. Plus, the rules are always changing. The rules about taking distributions from traditional IRAs, 401(k) plans and other pre-tax retirement plans have changed over the years, most recently in 2019. Forgetting to take a required IRA distribution means paying a 50% penalty, even if you didn’t know the rule.

Want to know the IRA distribution rules? The IRS has them for you at https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals. Need help figuring out the tax rules? Get detailed tax advice that fits your situation from a qualified tax professional. You can find one near you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

Reflect on 2022 to Plan for 2023

The end of one year and the beginning of another is the perfect time to pause and savor your successes. Spend time celebrating both your business and your personal accomplishments from 2022, month by month. Sure, it’s fun; but it’s also practical. Reflecting on your 2022 achievements can help form the genesis of your plans during 2023. You know what they say…a goal without a plan is just a dream

Whether you are expanding, launching a new brand, or maintaining the status quo, 2023 will be different than 2022. That means updating goals and making a new plan. Starting is always the hardest part, so begin by identifying one overarching change you want to achieve by the end of the year. 

Want more customers, higher cash flow, or a new worker? Focus on achieving that one change, then break it down into manageable pieces. Put those pieces together and you’ve got a plan to achieve it. Not sure how? Just follow these three planning tips to achieve your goals for 2023:

  1. Gather the Numbers

Quantify all the applicable aspects of your goals. This task will require some research and could entail making estimates and assumptions. For example, how many more customers do you want? Can you quantify the additional income and cost of serving more customers? What about how much a new worker would cost and how much additional income they could generate? The more numbers you can nail down, the better.

  1. Be Realistic

Keep market conditions and your resource capacity in mind when setting growth and other goals. It’s important to be realistic to ensure that your goals are achievable. Setting unrealistic objectives is not only discouraging, but it can also result in allocating resources – aka time and money – on activities that are unlikely to succeed. Better to target those resources on realistic, achievable goals.

  1. Adjust As Needed

No matter how well you research the numbers and focus on what’s realistic, any view of future events is imperfect, as we’ve seen with COVID-19. Market conditions and other factors that you depended on when setting your goals could change. Periodically assess progress on meeting your objectives. Are you on track? Why or why not? Based on those answers, you may need to make some adjustments.

The end of 2022 is the perfect time to reflect on and savor your successes, then use that warm feeling to plan your achievements for 2023. Don’t let your goals turn into the dreams you never achieved. Follow these three planning tips to establish a 2023 plan to turn those dreams into your reality. 

Is That Donation Deductible?

People don’t always make charitable donations because they are tax deductible. But if you do, you only have ten days left to report them on your 2022 income tax return. And it’s important to make sure that those donations are eligible for a tax deduction. 

Knowing when a donation is deductible isn’t always easy. There can be a lot of confusion about the meaning of terms like “qualified charity” and “donation”. To help clarify all that, we answer three questions about charitable donations and when they are tax deductible:

  1. What is a Qualified Charity?

Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. Crowd funding, political contributions and association dues are not included. Except for religious organizations, qualified charities must apply for and be granted Tax Exempt Status by the IRS. Tax Exempt organizations have annual IRS reporting requirements. A list of qualified charities is posted in the IRS’ “Tax Exempt Organizations Search” tool at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search.

  1. What is a Donation?

Donations can be financial or non-financial items such as clothing, household goods, vehicles, stock, or real estate. Financial donations to a qualified charity are a deductible, reduced by the value or anything received in exchange, such as a meal. In general, clothing and household items can only be deducted if they are in good usable condition. The deduction amount is based on the “thrift shop” value. Donated vehicles, art work and other non-financial donations valued at more than $500 are subject to more rules and limits.

  1. What Donations are Deductible?

Financial and non-financial donations must be acknowledged contemporaneously in writing by the charity. Acknowledgements reflect which organization received the donation and when to support any deduction taken. Donations of $250 or more must be supported by a letter from the charity stating the date and amount of the donation, the charity’s reduced by the value of anything in received by the donor in return, such as a fundraising dinner.

Many taxpayers to donate to charity, whether it’s deductible or not. But if that tax deduction is important to you, it’s important to know what donations are eligible for a tax deduction. Once you understand the terms, you’ll be all ready to report charitable donations on your 2022 income tax return. Want more details? The IRS website has them for you right here https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions.

Last Minute Tax Tips for 2022

Just about two weeks left to go before the year ends. Wow! You’ve probably been meaning to do some 2022 tax planning for months now, but life got in the way. Is it too late? Believe it or not, there’s still time to implement some planning moves that can improve your tax situation for 2022. 

Here are four last minute tax tips you can jump on and still enjoy the holidays:

  1. Make HSA contributions If you are an eligible individual under the health savings account (HSA) rules for December 2022, you are considered eligible for the entire year and can make a full year’s deductible contribution for 2022. The maximum contribution provides a deduction of $3,600 for individual coverage and $7,200 for family coverage. Taxpayers aged 55 or older also get an additional $1,000 catch-up amount.
  1. Nail down stock losses Consider realizing losses for stock you planned to divest anyway. Those losses can offset gains from other stock or investment asset sales. Losses that exceed gains are deductible up to $3,000 for individuals and married couples filing jointly, or up to $1,500 for married taxpayers filing separately. Any losses above the deduction limit can be carried forward to the next year to offset 2023 capital gains or other income.
  1. “Bunch” deductible contributions and/or payments of medical expenses Many taxpayers who itemized deductions before the 2017 Jobs and Tax Cut Act no longer benefit from doing so because the standard deduction was increased, and many itemized deductions have been cut back or abolished. A bunching strategy can help you get around these new limits — by accelerating or deferring discretionary medical expenses and/or charitable contributions into the year where they will exceed the standard deduction and do some tax good.
  1. Use IRAs to make charitable gifts If you are age 70½ or older, own IRAs, and are thinking of making a charitable gift, consider arranging for the gift to be made with a qualified charitable contribution, a direct transfer from the IRA trustee to the charitable organization. The transferred amount, up to $100,000, isn’t included as gross income or a deduction on your tax return. A qualified charitable contribution is a particularly good idea for retired taxpayers who don’t need all their required minimum distribution (RMD) for living expenses.

Yes, it’s late in the year for 2022 tax planning, but not entirely too late. Implementing one or more of these four last minute tax tips can improve your tax situation for 2022. That will make the holidays even merrier, won’t it?

Paying What You Owe to the IRS 

Taxpayers can’t always pay the balance due when they file their income tax return. Some individuals, for whatever reason, have an outstanding tax balance from one or more prior tax years. The IRS computer automatically sends those taxpayers a notice of the amount due, any penalties, and the accrued interest on the outstanding tax balance. Notices keep coming from the IRS computer until the taxpayer pays or takes other action to address the balance due.

If an IRS notice reporting a tax balance due arrives in your mailbox, don’t panic. Open it right away and read it carefully. Compare the notice with your tax records to make sure that there is not an error. Even if the notice is due to an IRS mistake, you need to respond to the notice to request a correction of your tax records. 

But how can you pay if the notice is accurate, and you do owe more in taxes? The IRS offers several payment options, depending on your situation:

  1. Pay Now – This is a great option if you can do it, especially with higher interest rates (e.g., 7% for first quarter 2023). Paying the full balance online does not involve a fee if you can have the balance due debited from your bank account. Credit card payments are an option, but the fees are high. Read the fine print first before making your decision. https://www.irs.gov/payments/online-payment-agreement-application
  1. Short Term Payment Plan – If you can pay the amount due in 120 days or less and the total amount due is less than $100,000, this could be the best option for you. No set-up fee is charged, and you can pay via direct debit from the bank account of your choice. The application process differs based on the tax liability outstanding. Applications for higher amounts require a more thorough review to determine if assets can be liquidated to pay the taxes due. https://www.irs.gov/payments/online-payment-agreement-application 
  1. Installment Agreement – If you need more than 120 days to pay, this option requires a set-up fee of between $31 and $225. Installment Agreements may require some financial information from you, depending on the tax amount due. Again, applications for higher amounts require more review. https://www.irs.gov/payments/payment-plans-installment-agreements#costs
  1. Offer in Compromise – The IRS wants to collect all taxes due but does not want to create a financial burden on taxpayers. An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if paying your full tax liability would create a financial hardship. See if you qualify at https://www.irs.gov/payments/offer-in-compromise.

Taxpayers who receive an automated past due notice from the IRS shouldn’t panic. After checking it over to make sure it is correct, they should go to https://www.irs.gov/payments and review the payment options available based on the amount due and ability to pay. The worst thing to do is to ignore the notice. With interest on unpaid balances accruing an annual rate of 7%, time only makes the problem more expensive.