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Tax Tips for Service Members and Veterans

The recent passing of Veteran’s Day reminds us that tax season and the filing deadline will be here before we know it. We are also reminded that women and men serving in the armed forces or who are military service veterans face unique and sometimes complex tax situations that can be challenging to navigate.

The IRS knows that service members and their families don’t have extra time to look for what information to collect and all the latest rules to file a complete and accurate federal income tax return. That could result in those members of the military, veterans, and their families missing out on tax benefits specifically for them.

The IRS has online tax resources and information designed to help members of the military community easily find the essential information needed to prepare for the upcoming tax filing season. Their site is one-stop shopping to make preparing for tax season easy. Here is what’s available:

  1. The main page for tax information for members of the military, veterans, and their families is at https://www.irs.gov/individuals/military. This should be your first stop to find links to helpful information, resources, services, and publications. 
  1. Taxpayers need to know their official military status to be eligible for certain benefits. Some benefits extend to contractors or members of support organizations working in a combat zone. See all of the details at https://www.irs.gov/individuals/military/eligibility-for-military-tax-benefits
  1. Women and men serving in a combat zone may also qualify for a tax exclusion and/or a special earned income tax credit, leading to a larger tax refund. Information about qualifying are found at https://www.irs.gov/individuals/military/tax-exclusion-for-combat-service and at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/military-and-clergy-rules-for-the-earned-income-tax-credit
  1. Military members and qualifying veterans can prepare and efile their income tax returns on MilTax for free https://www.militaryonesource.mil/financial-legal/tax-resource-center/miltax-military-tax-services/. Taxpayers who do not qualify for MilTax have other options to prepare and e-file their federal taxes for free. Most military installations offer free income tax assistance.

Veteran’s Day reminds us of the military community and the unique and challenging tax situations that they need to navigate. The IRS has resources to help members of the military community easily find the essential information needed to learn about and take advantage of tax benefits specifically for them. Check out the Armed Forces’ Tax Guide for comprehensive rules and guidance at https://www.irs.gov/forms-pubs/about-publication-3.

New Retirement Contribution Limits for 2023

Retirement plan contributions are often fully or partially tax deductible, depending on the taxpayer’s circumstances. So, it’s natural to think about doing a retirement savings review at year-end and at tax filing time. With only six weeks left in 2022, taxpayers are looking to maximize their retirement saving opportunities before year-end and for 2023. Good timing, since the IRS recently announced the 2023 contribution dollar limits for IRAs and for employer retirement plans.

Individuals who earn taxable earned income, aka compensation, during the year are eligible to contribute to a retirement plan, such as a traditional or Roth Individual Retirement Account (IRA) or an employer-provided retirement plan, like a 401(k) or 403(b). The tax rules for figuring out the tax savings from retirement plan contributions are complicated, and they apply differently to different taxpayers, depending on their marginal tax bracket.

One set of tax rules that applies to all taxpayers is retirement plan contribution dollar limits. Every year, the IRS publishes the dollar contribution limit by retirement plan type. Some years there is no dollar adjustment, but there’s no way to know without checking. Here are the 2023 contribution limits for IRAs and many employers’ retirement plans:

Traditional and Roth IRAs

Total contributions made to all of a taxpayer’s traditional and Roth IRAs for 2023 can’t be more than total taxable compensation for the year, up to $6,500. The limit increases to $7,500 for taxpayers who are age 50 or older, to help those taxpayers who have a shorter time until retirement and need to “catch-up” on contributions to fund their future income needs. Traditional IRAs are tax deductible under certain circumstances related to employer-provided retirement plans and taxable income amounts. Roth IRA contributions are not currently tax deductible, but withdrawals made after age 59½ of monies held for five years or longer are not taxable.

Employer Retirement Plans

Employer-sponsored plans, like a 401(k) or a 403(b), are types of qualified profit sharing plan that allow employees to contribute a portion of their wages on a pre-tax basis to an individual account. The employee contribution limit increased to $22,500 for 2023, up from $20,500 for 2022. The employer may also contribute to employees’ accounts; however, employer contributions do not impact employee contribution limits.

Year-end and tax filing time are the perfect times to do a retirement savings review. With only six weeks left in 2022, there’s a lot of complicated rules to learn to determine the tax savings based on new retirement plan contribution dollar limits. Even more complicated, those rules apply differently to taxpayers with different income levels and for different retirement plan types. It’s all too much detail to include here. Good news – the IRS website has everything that you need to know about retirement plan options, contribution limits and tax savings at https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans.

IRS Expands Service Capacity

Some news reports (and some politicians) would have you believe that IRS budget increases approved by Congress will result in revenue agents knocking on taxpayer doors, asking questions, and demanding money. Those scare tactics are far from reality. Much of those budget increases will go to upgrading systems and adding service staff, both much needed investments to expand IRS service capacity.

Next tax filing season, the IRS hopes to improve on its 10% answer rate for taxpayer calls during last filing season. The Internal Revenue Service recently announced that it passed the 4,000 milestone for hiring new customer service representatives. These service reps were hired over the last several months and are being trained to provide help to taxpayers, including answering phone questions. All part of a much wider IRS improvement effort partially funded by the Inflation Reduction Act funding approved in August 2022. 

The IRS continues to recruit across the country, with a goal to add another 1,000 customer service representatives by the end of the year, bringing the total of new hires to 5,000. Plans are to have most new employees in place for the start of the 2023 tax season. Others will join as their training is completed in the following weeks. The IRS anticipates almost all of the new staff training will be completed by Presidents Day 2023, when they traditionally see the highest phone volumes.

That all sounds positive but remember that some of the new IRS staff will replace retiring workers, therefore not increasing the overall workforce capacity. Taxpayers should continue to first visit IRS.gov for information related to their tax questions. The site is relatively easy to navigate. Answers and general information about many frequent questions are linked from the home page and can usually be found much faster than by calling. Plus, taxpayers can bookmark the page and refer back to it as many times as necessary.

If you’re looking for a career (or career change) but a customer service representative position is not a good fit for you, the IRS is also working to hire people for other positions throughout the agency, like in Information Technology and compliance – all with a goal of improving IRS work quality and capacity. Even if you never thought of working for the IRS before, it could be a great option. They certainly aren’t going out of business or running out of work anytime soon.

The IRS is expanding service capacity with its recent budget increase by hiring 5,000 new customer service representatives and other positions across the country. More positions will be available in coming weeks and months. Interested in a career change? Check out the opportunities at USAJOBS.gov.

Now It’s the Employee Retention Credit Scam

In case you’re keeping count, this is my sixth blog in 2022 about scams being perpetrated on vulnerable taxpayers to steal their money and financial information. From phishing to ransomware to IRS impersonator calls, scammers adapt to any method that works. Scammers also take advantage of current events where they can cash in, like those involving donations, like natural disasters, and tax programs, like the Employer Retention Credit (ERC). 

The ERC is a refundable tax credit for eligible businesses who continued paying employees while shutdown or suffered significant declines in gross receipts due to the COVID-19 pandemic. Eligible business taxpayers can claim the ERC on their federal employment tax return, IRS Form 941.

Scammers jumped on this money making opportunity, contacting employers by email, phone, and text to “help” them get the ERC, even if the employer doesn’t qualify. The scam works by charging an upfront fee, whether or not the employer gets the ERC. Businesses should be wary of advertised schemes to file for the ERC and recognize direct solicitations promising tax savings that are too good to be true.

To be eligible for the ERC, employers must have:

  1. Fully or partially suspended operations due to orders from a government authority that limited business activity, travel, or meetings due to COVID-19 during 2020 or the first three quarters of 2021, 
  2. Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021, OR
  3. Qualified as a recovery start-up business for the third or fourth quarters of 2021.

Also, for any quarterly payroll reporting period, eligible employers cannot claim the ERC on wages that were reported as payroll costs for Payroll Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.

Falling for an ERC scam can be very expensive. Taxpayers are always responsible for the information reported on their income tax return. Improperly claiming the ERC could result in repaying the credit, plus penalties and interest. And that’s on top of the scammer’s fee.

Scammers and unscrupulous third parties can be persuasive. It’s their job. So don’t feel bad or cast blame if you or a business owner you know fell for the ERC scam. Good news – it’s not too late to fix the situation. Employers who filed for the ERC in error, intentionally or under the advice of an unscrupulous third party or scammer, should file amended employment tax returns for the applicable reporting periods.

Want to know more about the Employee Retention Credit and see if your business is eligible? It’s all right here on the IRS website – https://www.irs.gov/coronavirus/employee-retention-credit.

Texting Scams on the Rise

I’ve posted blogs to warn readers of email scams, ransomware, IRS impersonator calls, and other methods that criminals use to get your money or your personal information. Well, if scammers can’t get your valuables one way, they try another. Last month, the IRS issued a warning to taxpayers that IRS-themed texting scams are on the rise, aimed at stealing personal and financial information.

So far in 2022, the IRS has identified and reported thousands of fraudulent domains tied to multiple MMS/SMS/text scams (known as smishing) targeting taxpayers. Smishing campaigns target mobile phone users, and the scam messages often look like they’re coming from the IRS, offering lures like fake COVID relief, tax credits or help setting up an IRS online account. 

In recent months, and especially in the last few weeks, IRS-themed smishing has increased exponentially. In the latest activity, the scam texts often ask taxpayers to click a link where phishing websites will try to collect their information or potentially send malicious code onto their phones. The IRS has taken numerous steps to warn people of this ongoing threat, including posting a video about how to avoid IRS text message scams.

So, what can you do to defend yourself against all that smishing? Your phone is only as safe as your security practices. All it takes is one click to open the door to a scammer masquerading as a trusted sender. 

Believe it or not, these four no-cost tips can help you avoid falling for a smishing scam:

  1. Scrutinize all electronic requests for a payment or fund transfers, even from a trusted party.
  1. Ignore text messages, emails, or phone calls asking you to update or verify your account information and go to the company’s website to see if something needs your attention.
  1. Never click on links or open attachments embedded in a text unless you are expecting it from a known, trusted source.
  1. Be extra suspicious of messages that urge immediate action.

If scammers can’t get you one way, they try another, like your smartphone. Consequently, testing scams are on the rise. The IRS is warning taxpayers about an increase in IRS-themed texting scams to steal your personal and financial information. Thousands of taxpayers have been victims to this scam so far in 2022. Following the four no-cost tips listed above will help you avoid falling for a smishing scam.

Finding a Tax Preparer for Next Filing Season

The chill of fall is in the air and it’s time to buy Halloween candy. Before you know it, 2022 will be over and the April tax filing deadline will be looming. The way time is flying, it’s not too early to look for a tax preparer for the next filing season, assuming that you don’t have a tax pro already. There are many tax professionals to choose from, but it’s a challenge to make sure you find someone who is knowledgeable, experienced, and dependable. You also want someone with whom you feel comfortable confiding your financial details.

So, how do you find a tax preparer for next filing season? You can ask friends, hit the Internet, or head to the local tax preparation office. Plan to interview two or three recommended tax preparers, starting with these four questions:

  1. How Do You Keep Up with Tax Law Changes?

Tax laws are constantly changing. We saw it a few years ago with the 2017 Tax Cuts and Jobs Act, and more recently with the COVID relief laws. It’s important to work with a tax preparer who keeps up with all those changes, so you don’t have to. A qualified tax preparer will describe attending conferences, webinars, or other methods to stay current.

  1. What Experience and Credentials Do You Have?

Tax preparation is an unregulated industry where anyone can participate, so asking about years of experience. Training and education are essential. Preparers with professional credentials, such as a CPA or Enrolled Agent (EA), are required to complete annual continuing education requirements and follow ethical and professional standards. 

  1. How Do You Communicate with your Clients?

Does the tax preparer meet regularly with clients? Is she or he available to you if a tax-related question or issue comes up? Make sure you feel comfortable with the tax preparer’s style, manner, and process. If not, keep looking. You’ll be sharing a lot of personal information so you must be comfortable.

  1. Are You Available After the Tax Deadline?

Make sure the preparer is available. Some tax preparers only work on a seasonal basis. Taxpayers should consider whether the tax return preparer will be around after the filing deadline has passed. Taxpayers should do this because they might need the preparer to answer questions about the preparation of the tax return.

If you feel the chill in the fall air, it’s just a few months until next tax filing season. Need help finding a tax preparer to help you out? The IRS has a website for you with tips and tools – https://www.irs.gov/tax-professionals/choosing-a-tax-professional and a directory of federal tax return preparers with credentials and specified qualifications – https://irs.treasury.gov/rpo/rpo.jsf.

IRS Increases Focus on Cryptocurrency Transactions

It’s impossible to miss advertisements or news headlines urging you to get on the cryptocurrency bandwagon. Or, alternatively, warning you about the risks of trading in crypto. Whether you’re excited or scared by cryptocurrency, the IRS defines it as an asset that is subject to the same capital gains and loss rules as a security. That means that if you sell cryptocurrency or receive it in payment for goods or services, you are required to report that transaction on your income tax return. Oh, and pay income taxes on the income.

You’ve been required to answer a question about cryptocurrency transactions on your tax return since 2019. IRS forms for 2022 ask for more information about receiving, selling, or exchanging crypto to help the tax agency track down taxpayers who should be reporting income or capital gains. They are also ramping up investigations of customer records from digital currency brokers. So much for crypto being anonymous and untraceable!

Last month, there was an enthralling article from CNBC.com about how the IRS is making cryptocurrency reporting compliance a high priority. In 2021, Congress passed the $1.2 trillion bipartisan infrastructure law, with a provision requiring tax reporting for digital currency brokers starting in 2023. The IRS will use that information to match against tax returns filed by applicable crypto customers. It’s beyond likely that some of the funds from the recently passed Inflation Reduction Act of 2022 will augment the IRS’ resources to do all that matching and following up on unpaid taxes.

Regardless of which companies report activity to the IRS, you should be proactive about reporting any cryptocurrency income. That includes this year and any past year when you sold, exchanged, or received cryptocurrency. If you haven’t reported cryptocurrency income on past tax returns, you should take corrective action ASAP. It’s much better to come forward and file an amendment than for the IRS to audit you for not reporting crypto. It’s also a good idea to consult a qualified tax professional.

If you want more details about IRS actions to track down taxpayers who have not reported cryptocurrency transactions on their tax return, read the full article here. It’s worth the time. https://www.cnbc.com/2022/09/26/what-the-latest-irs-crypto-tax-records-summons-means-for-investors.html

Want to know more about how the IRS defines cryptocurrency? Check out their link here. It goes into a lot of detail about reporting requirements that could come in handy after you read the CNBC.com article. https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies

Tax Checklist for Closing a Business

Some businesses are considering permanently closing their doors because of persistent inflation on top of more than two years of COVID-19. Results from a June 2022 survey conducted by Digital.com of 1,000 small businesses with 500 or fewer employees show that inflation – and rumblings of a recession – are making about 65% of small businesses look seriously at closing their business.

Closing a business is a tough decision that creates a lot of work. That includes a “Tax Checklist” of responsibilities to alert the IRS and others not to expect more money or reporting from your business. Figuring it all out can be confusing. Fortunately, the IRS has a webpage to help business owners and self-employed individuals navigate tax steps when closing a business, including instructions, links, and forms for:

  1. Filing a Final Return and Related Forms

You must file a final return for the year you close your business. The type of return you file and related forms you need will depend on the type of business you have (e.g., sole proprietor or partnership). 

  1. Take Care of Your Employees

If you have employees, you must pay them any final wages owed, make final federal tax deposits, and report employment taxes. You must also provide an IRS Form W-2, Wage and Tax Statement, to each employee. 

  1. Pay the Tax You Owe

Whether it’s by check or online, all income and employment taxes must be paid in full. 

  1. Report Payments to Contract Workers

If you have paid any unincorporated contractors at least $600 during the calendar year in which you close your business, you must report those payments on IRS Form 1099-MISC.

  1. Cancel Your EIN and Close Your IRS Business Account

The employer identification number (EIN) assigned to your business is the permanent federal taxpayer identification number for that business. The IRS will not close your business account until you have filed all necessary returns and paid all taxes.

  1. Keep Your Records

How long you need to keep your business records depends on the type of document. Generally, tax records should be kept for four years, and copies of tax returns should be kept permanently.

If inflation is making you think about whether to continue or close your business, a Tax Checklist will help identify tasks that need to be done. No matter your business type, the IRS’ “Closing a Business” webpage https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business will help you navigate what to do after making the tough decision to close.