Category: Tax Credits

30 May 2023
Covid-19, IRS, News, Tax Credits, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

AGGRESSIVE EMPLOYEE RETENTION CREDIT PROMOTERS

Business Owners & Managers Be Careful!

 


You may be planning to apply for the Employee Retention Credit … tax credit that could add up to a maximum credit of $26,000 per employee. Perhaps you already have done so.

You’re aware of, and perhaps responded to, solicitations by third-party advisers urging business owners to engage them to navigate the shoals of applying for the Employee Retention Credit (ERC). Typically an added inducement is the promise of no up-front fees … just a share of the credit your company receives from the IRS.

In this year’s annual Dirty Dozen summary, the IRS posted the following:

Employee Retention Credit claims

Taxpayers should be aware of aggressive pitches from scammers who promote large refunds related to the Employee Retention Credit (ERC). The warning follows blatant attempts by promoters to con ineligible people to claim the credit. The IRS highlighted these schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits. These promotions can be based on inaccurate information related to eligibility for and computation of the credit. Additionally, some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.

In this article, we offer a summary of the ERC requirements and benefits. Additionally, we’ll share some cautionary thoughts for those of you who are contemplating or have already enlisted the services of a third-party ERC adviser.

What is the ERC?

The ERC is a refundable payroll tax credit rewarding businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021.

The credit may be as much as $5,000 per employee in 2020 and up to $7,000 per employee per quarter (for the first three quarters) in 2021. That could add up to a maximum credit of $26,000 per employee.

Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.

Employer Eligibility: An employer is eligible for the ERC if it:

  • Sustained a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 and orders from an appropriate governmental authority or,
  • Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 or,
  • Qualified in the third or fourth quarters of 2021 as a recovery startup business.

Click here for more detail on each of the above eligibility requirements.

Filing Deadlines: Employers have until April 15, 2024, to file Form 941-X for the eligible quarters in 2020; and until April 15, 2025, for eligible quarters in 2021.

Note: Wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can’t be claimed for the ERC in any tax period.

Employers … Be Careful!

Third-party advisers are typically new operations put together to capitalize on the preparation of ERC applications for employers. Lack of experience along with aggressive marketing often results in improper advice regarding employer eligibility and computing the amount of credit claimed.

Employers must become aware of the risks associated with engaging third-party promoters. Here are four critical concerns to be addressed:

  • Often, third-party advisers do not make it clear to employers that they will need to amend their business’s federal income tax return for the corresponding period because any payroll taxes used in the computation of the credit are no longer deductible.
  • Receipt of the refund from the IRS does not preclude the agency from examining the employment tax return and disallowing the credit. Employers are always responsible for the accuracy of the information reported on their tax returns. Improperly claiming the ERC could result in repayment of the credit, plus penalties and interest.
  • Employers that have received the ERC may be an audit target given the anticipated expansion of new IRS agent hires.
  • In the event the IRS disallows the ERC claim, fees paid to third-party companies may not be refundable.

Employers Considering Engaging a Third-party Adviser

Here are performance criteria to help evaluate the value a prospective adviser brings to the strength of your company’s ERC qualifications, filing efforts and subsequent follow-up.

At your request, a legitimate capable adviser will:

  1. Describe its history as tax advisers including whether the practice is exclusively devoted to ERC claims.
  2. Detail their policy to provide audit defense plus refund fees if all or part of the ERC claim does not survive an IRS audit.
  3. Not claim a high IRS audit success rate as the IRS audit program is so new that success claims are meaningless.
  4. Demonstrate a solid understanding of the facts and circumstances of your business operations before the pandemic as well as during each quarter of the pandemic … with special attention to the wage limits during the first three quarters of 2021?
  5. Prepare a written account of the specific state or local governmental orders your business was subject to and a description of the impact of each on your business operations.
  6. Review with you any circumstances pertinent to your ERC claim where the IRS guidance regarding ERC eligibility is unclear and that the adviser’s interpretation may prompt scrutiny by the IRS.
  7. Not present a sense of urgency for you to act by asserting the available funding for ERC claims is fast being depleted. Not so!  See above for filing claims deadlines.
  8. Make it clear to you that qualified wages applied in ERC computations are no longer deductible on your business income tax return?

Employers Who Already Engaged a Third-party Adviser and Filed an ERC Claim

If you now have second thoughts about the advice that led up to your ERC claim filing, your best next step is to seek counsel from an independent tax adviser to review the merits of your claim and the adequacy of your documentation.

If your independent review results in the recommendation to amend or withdraw your ERC filing (Form 941-X), you may be able to sidestep interest and penalties … along with the time, expense and stress of an IRS audit.

Alternatively, if your independent review delivers written opinion that your claim has a solid foundation based on relevant ERC tax law … at the very least you will be able to demonstrate your intent to honestly pursue support of your claim with appropriate facts.

Have Immediate Questions or Concerns?

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.
We’ll respond promptly.

16 Jan 2023
IRS, News, Tax Credits, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

IRS BOOSTS MILEAGE RATE BY NEARLY 5%

Vehicles Used for Business Qualify for Tax Savings of 65.5 Cents Per Mile

Tax Break for taxpayers who drive an automobile, van, pickup or panel truck for business, charitable, medical or moving purposes. 

Effective January 1, 2023, taxpayer-drivers who fit the above profile enjoy a 3 cents bump in the mileage rate … up from the 62.5 cents midyear increase in 2022. The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile … clearly more expensive in recent months.

Here’s a quick summary of the expanded IRS provisions:

  • 65.5 cents per mile driven for business use.
  • 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the  Armed Forces.
  • 14 cents per mile driven in service of charitable organizations … unchanged from 2022.

Notably, the new mileage rates apply to qualifying vehicles regardless of how they are powered … gasoline, diesel, electric and hybrid … all good-to-go.

Keep in mind that choosing the standard mileage rate is optional. Taxpayers retain the alternative to calculate the actual costs of operating their vehicle if it has been used for business more than 50% of the time. That said, the standard rate generally must be used in the first year the car is operated for business use as described above. In subsequent years, either the standard mileage rate or itemized expenses may be preferred.

Note: Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

Have Immediate Questions or Concerns?

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.
We’ll respond promptly.

19 Dec 2022
IRS, News, Tax Credits, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

GET READY FOR TAX-TIME!

Learn About 4 Changes and 8 ‘To-Do’ Actions

Here we are in the closing days of December 2022. In addition to enjoying the Holiday Season, it’s also an excellent time to get ready to visit with your tax-preparer to make year-end, tax savings decisions. Your objectives: lower your tax bill and boost your retirement savings.

In this issue, we’ll start with a recap of changes in the tax code that may affect you, followed by a checklist to prepare for a smooth tax season.

4 Changes that Affect 2022 Federal Tax Returns

  1. If you received third party payments in tax year 2022 for goods and services that exceeded $600, expect to receive your Form1099-K by January 31,2023.
  2. The following tax credits will return to 2019 levels … reduced from tax year 2021 … Child Tax Credit; Earned Income Tax Credit and Child & Dependent Care Credit. Affected taxpayers will receive a significantly smaller refund.
  3. If you file your taxes taking a standard deduction, you may not take an above-the-line deduction for charitable donations.
  4. For tax year 2022, the American Rescue Plan Act of 2021 temporarily expanded eligibility for the Premium Tax Credit by eliminating the rule that a taxpayer with household income above 400% of the federal poverty line cannot qualify for a premium tax credit.

Tax-time 8-Item ‘To-Do’ List

  1. Paycheck Checkup: Make sure the right amount of tax is withheld from your earnings. If not, you need to submit a new Form W-4, Employee’s Withholding Certificate to your employer. All taxpayers should check, but especially those who fit the following profiles:
  • Are a two-income family or someone with multiple jobs
  • Work a seasonal job or only work part of the year
  • Claim the child tax credit
  • Have dependents age 17 or older
  • Itemized your deductions in previous tax years
  • Have high income or a complex tax return
  • Had a large tax refund last year
  • Had a tax bill last year
  • Received unemployment at any time during the year
  • Experienced a significant life-changing event, e.g., marriage, childbirth, adoption, home purchase.

A quick way to make sure you are having the right amount of tax taken out of your pay is to use the IRS Tax Withholding Estimator. It will help you to lessen year-end tax bills or estimate your refund.

Important! If you have a substantial portion of income not subject to withholding, (e.g., self-employed, investors, retirees, those with interest, dividends, capital gains, alimony, and rental income), you may need to pay quarterly installments of estimated tax.

2. Unemployment Compensation: You may be one of millions of Americans currently receiving unemployment compensation … or did so earlier this year. If that’s the case, it’s important for you to know that the IRS considers unemployment benefits as taxable income.

Withholding is voluntary. That said, you may choose to have a flat 10 percent withheld from your benefits to cover all or part of your tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request (PDF) and give it to the agency paying the benefits. Do not send it to the IRS. If the payor has its own withholding request form, use that form instead.

If you don’t choose voluntary withholding, or if the withholding isn’t enough, you can make quarterly estimated tax payments. Fourth quarter 2022 payments will be due on January 17, 2023.

As an unemployment benefit recipient, expect to receive a Form 1099-G, Certain Government Payments (PDF) from the agency paying the benefits. The form will show the amount of unemployment   compensation you received during 2022 as well as any federal income tax withheld. This information, along with your W-2 income, will be included in your 2022 federal tax return.

Note: Unlike some other states, the Commonwealth of Virginia does not tax unemployment earnings.

3. Other Types of Payments to Check for Withholding: The IRS urges taxpayer to check the following sources of payments to check for withholding:

  • Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
  • Railroad unemployment compensation benefits
  • Disability benefits paid as a substitute for unemployment compensation

4. Investment Gains/Losses: If you own stocks, bonds, mutual funds or other investments … check with your investment advisor to determine any realized gains or losses that may affect your tax status.

5. Make your charitable contributions … before the end of the year to ensure your deduction.

6. Remember your RMDs if you are 72 years of age or older: Your required minimum distribution (RMD) must be withdrawn before December 31. Failure to do so may result in a 50% penalty. RMDs are applicable to the following retirement plans: Traditional IRAs, Simplified Employee Pension (SEP) IRAs, Rollover IRAs, most 401(k) and 403(b) plans, as well as most small business accounts.

7. Check if you have contributed to tax-advantaged accounts: Contributions to Health Savings Accounts, IRAs, 401(k)s and 529 Plans provide significant tax savings. Important: Be aware of deadlines to contribute as they vary depending on the plan.

8. You may want to consider a Roth conversion: You and your tax advisor/preparer may decide to convert your existing IRA to a Roth IRA. The deadline to do so is December 30, not December 31.

Have Immediate Questions or Concerns?

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.
We’ll respond promptly.

19 Nov 2022
Anything, Estate Planning, News, Retirement, Tax Credits, Tax Law Pearson & Co, PC 0 comment

OPPORTUNITY TO ACCELERATE YOUR RETIREMENT SAVINGS

401(k) and IRA Contribution Limits Increased

 

Contribution limits for 401(k)s, 403(b)s, 457(b)s, IRAs, Roth IRAs, HSAs, FSAs, SIMPLE IRAs, and SEP-IRAs are all indexed to inflation. While the contribution limits don’t go up every year, you will generally see an increased contribution every year or two.

The inflation rate is now running at a 40-year high. That triggered the IRS to announce significant jumps in allowed contributions for tax year 2023. More specifically:

  • Taxpayers under age 50 can contribute to their 401(k), 403(b), most 457 and the federal government’s Thrift Savings Plan accounts … increases to $22,500 for 2023 … a $2,000 bump over 2022 limits.
  • Notably, taxpayers 50 and older win a further concession … a $3,000 boost to $30,000 annually. That number includes a $7,500 so-called catch-up contribution, up from $6,500 in 2022.

Participants in qualifying plans can reduce their 2023 tax bill by
increasing the amount they contribute pre-tax to retirement accounts.

Here’s a summary of the key provisions of the changes for 2023.

401(k) Plans – Annual Contribution Limits

  • Employees under age 50 – $22,500, up $2,000 from 2022.
  • Employees 50 and older – $30,000 (Includes $7,500 catch-up contribution, up from $6,500)
  • If the Plan permits, additional after-tax employee contributions may be made to top-out the total employer/employee contribution limits – employees under age 50, $66,000; 50 and older, $73,500.

IRA – Annual Contribution Limits

  • Increased to $6,500 from $6,000
  • Participants 50 and older can make an additional $1,000 catch-up contribution.

Note: You can’t make a tax-deductible contribution to an IRA unless you have no workplace retirement plan, or your income is below certain limits. For 2023, the deduction will phase out for single taxpayers earning between $73,000 and $83,000 (up from $68,000 to $78,000) … and for married couples filing jointly earning $116,000 to $136,000 (up from $109,000 and $129,000 respectively).

If your spouse is covered by a workplace plan and you’re not, your deduction for an IRA phases out between $218,000 and $228,000 in 2023, up from $204,000 to $214,000 in 2022.

Roth IRA – Annual Contribution Limits

  • Increased to $6,500 from $6,000
  • Participants 50 and older can make an additional $3,000 catch-up contribution.

Note: The income phase-out for contributions to a Roth IRA for singles and heads of household will be $138,000 to $153,000 respectively in 2023, up from $129,000 to $144,000. For married couples filing jointly, the phase-out range will be $218,000 to $228,000, up from $204,000 to $214,000 this year.

Simple IRA Accounts – Annual Contribution Limits

  • Increased to $15,500, up from $14,000
  • If the Plan permits, employee participants 50 and older can make an additional $3,500 catch-up contribution, up from $3,000 in 2022.
  • Employee participation in other employer plans is limited to a combined annual contribution of $22,500.

Saver’s Credit

Low and moderate-income workers may add to their retirement fund value via federal tax credits that deliver a 100% reduction in the taxpayer’s tax-bill. Eligible workers may enjoy a tax credit in a range of 10% to 50% of contributions made to an IRA or employer sponsored retirement plan.

Note: The credit gradually reduces and phases out as a taxpayer’s income rises. In 2023, the credit will phase out at $73,000 for married couples filing joint tax returns (up from $68,000); $36,500 for singles and couples filing separately (up from $34,000); and $54,750 for heads of household (up from $51,000).

SEP IRAs – Annual Contribution Limits
(Self-employed & Small Business Owners)

  • Increased to $66,000 from 2022 limit of $61,000
  • Self-employed persons may contribute up to 20% of earnings up to $330,000, up from $305,000.

For more on how the above applies to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

20 Sep 2022
Anything, Business, IRS, News, Tax Credits, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

INFLATION REDUCTION ACT

Key Tax Provisions … a Summary

The Inflation Reduction Act, was signed into law on Aug. 16. It includes numerous tax provisions that relate to both businesses and individuals … including clean-energy-related tax incentives, and expanded funding for IRS enforcement.

This month’s article offers a summary outline of key provisions of the Act.

Business

Individuals

Internal Revenue Service

The foregoing outlines key provisions of the Inflation Reduction Act as it applies primarily to small businesses and individuals. There are many other provisions that apply to larger entities that are renewable energy oriented and measures to address potential climate change issues.

For more on how the above applies to your circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately

20 Jul 2022
IRS, News, Tax Credits, Tax Form Guidance, Tax Law, Uncategorized Pearson & Co, PC 0 comment

2 ENHANCED TAX BREAKS APPLY FOR REST OF THIS YEAR

Meal Deductions Extended & Mileage Rates Increased

The Internal Revenue Service has announced two tax savings benefits … the extension of the 100% deduction for the cost of business-related food and beverages purchased from a restaurant plus an increase in the allowable mileage rate deduction. Learn more below.

Enhanced Business Meal Deduction – Here’s What Businesses Need to Know

Beginning in 2021, businesses are permitted to deduct the full cost of business-related food and beverages purchased from a restaurant. That enhanced deduction is continued for tax year 2022 … a sizable increase in tax savings from the usual limit – 50% of the cost of qualifying meals.

Here are the qualification requirements to benefit from the enhanced deduction:

  • The business owner or an employee of the business must be present when food or beverages are
  • Meals must be from restaurants, which includes businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption.
  • The cost of the meal can include taxes and tips.
  • The cost of transportation to and from the meal isn’t part of the cost of a business meal.
  • Payment or billing for the food and beverages occurs after December 31, 2020, and before January 1, 2023
  • The expense cannot be lavish or extravagant. An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances. Meal expenses won’t be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels, or resorts.

Note: Grocery stores, convenience stores and other businesses that mostly sell pre-packaged goods not for immediate consumption, do not qualify as restaurants. The same holds true for employer-operated eating facilities, even if they operate under contract by a third party.

Business owners may be able to deduct the costs of meals and beverages provided during an entertainment event if either of these apply:

  • the purchase of the food and beverages occurs separately from the entertainment
  • the cost of the food and beverages is separate from the cost of the entertainment on one or more bills, invoices, or receipts.

Mileage Rate Increased

Effective July 1, the standard mileage rate for the final 6 months of 2022 has been increased by 4 cents per mile to 62.5 cents per mile. Likewise, the new rate for deductible medical or moving expenses (available for active-duty members of the military) is increased by 4 cents to 22 cents for the remainder of this year.

“The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” said IRS Commissioner Chuck Rettig. “We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

Additionally, other items comprise the calculation of mileage rates as well … such as depreciation, insurance and various fixed and variable costs.

Midyear increases in the optional mileage rates are rare. The last time the IRS made such an increase was in 2011.

Note: For travel from January 1 through June 30, 2022,
taxpayers should use the rates set forth in Notice 2022-03 PDF.

See the chart below for a quick reference to the increases described above.

For more on how these tax breaks apply to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

20 Jun 2022
Work Opportunity Tax Credit
Employment, IRS, News, Tax Credits, Tax Law, Uncategorized Pearson & Co, PC 0 comment

SMALL BUSINESS OWNERS AND HIRING MANAGERS

Tax Relief to Attract & Retain Qualified Workers

Work Opportunity Tax Credit

Attracting and retaining quality workers has never been more challenging. You may identify with the most recent statistics of the labor struggle faced by “Main Street” employers:

  • Fifty-two percent of small business owners who responded to a survey, report that it was harder to find qualified people to hire in Q1 2022 … a 50% jump from Q4 2021
  • Twenty-nine percent of small business owners said they have open positions vacant for at least three months, with no success in attracting workers.
  • Likewise 77% of small businesses with more than 50 employees anticipate turnover to likely be a significant problem by year-end.

OK. Enough of the recruiting and retention crisis facts. This article is not to rehash the obvious. Our intent is to offer a potential solution to attract and retain qualified workers … many of whom are demanding increases in compensation to consider accepting a position or remaining employed.

The Work Opportunity Tax Credit (WOTC)

WOTC Defined: The work opportunity tax credit (WOTC) is a federal business tax credit designed to increase employment opportunities for American job seekers who consistently experience barriers to employment. Said workers are deemed “targeted groups” such as veterans, public assistance recipients, or ex-felons.
(More detail in a bit.)

The Consolidated Appropriation Act, 2021 authorized the extension of the Work Opportunity Tax Credit (WOTC) until December 31, 2025.

Eligible Businesses: Any business, regardless of size or industry, may be eligible to claim tax credits under the WOTC program. Notably, there’s no limit to the number of individuals employers can hire as part of the program. That means there’s no cap on the amount of credits that they can claim.

The WOTC credit amount can be as much as $9,600 for each qualified new hire. The maximum credit is determined by the employee’s target group equal to a percentage of the eligible employee’s wages. Additionally, the employee must work at least 120 hours for the employer to receive the credit.

WOTC Target Groups: The new employee must belong to one of the following WOTC target groups:

Work Opportunity Tax Credit

Take These 3 Steps to Take Advantage of the WOTC

Click here for more details at the Department of Labor website.

  1. Connect with a qualified job candidate. American Job Centers can help!
    State Workforce Agencies (SWAs) are authorized to administer the WOTC certification process. SWAs coordinate with American Job Centers and partnering agencies – such as vocational rehabilitation agencies, city and county social service offices, the Veterans Administration and others – to help employers connect with skilled job seekers who may be members of WOTC targeted groups.
  2. File a WOTC certification request with your state workforce agency.
    Employers must apply for and receive a certification verifying that the new hire is a member of a targeted group before they can claim the tax credit. To verify whether a job applicant is a first-time, qualifying member of a targeted group, employers must submit IRS Form 8850, together with ETA Form 9061 or ETA Form 9062, to the state workforce agency in which your business is located within 28 calendar days after the new hire’s start date.
  3. Receive a WOTC certification for eligible new hires and claim the credit after their first year of employment.
    If the new hire meets the eligibility requirements for a WOTC targeted group, you will receive a certification (ETA Form 9063) from your state workforce agency. Taxable employers can claim the WOTC as a general business credit against their income taxes. Tax-exempt employers who hire qualified veterans can claim the WOTC against their payroll taxes. Generally, the credit is 40% of qualified wages for individuals who work 400+ hours in their first year of employment. For more information about claiming the credit, see the instructions on the IRS.gov website.

Claiming the Credit & Limitations

  • Employers claim the tax credit for the year that that the credit was awarded … not the year the employee was hired.
  • The business must have a tax liability against which to use the credit.
  • A taxable business may apply the credit against its business income tax liability.
  • For qualified tax-exempt organizations, the credit is limited to the amount of employer Social Security tax owed on wages paid to all employees for the period the credit is claimed.
  • Unused credit can be carried back one year and carried forward for 20 years.

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help. Give us a call or drop an email. We’ll respond immediately!

18 May 2022
2022 Tax Laws
IRS, Tax Credits, Tax Form Guidance, Uncategorized Pearson & Co, PC 0 comment

11 MAJOR TAX CHANGES FOR 2022 YOU NEED TO KNOW

Learn How Your Tax Bill May Be Affected

2022 Tax LawsThe old saying that the only thing constant is change … and that certainly applies annually to the U.S. tax code. That said, it’s no surprise that 2022 taxes will differ from last tax year. Here’s a rundown on how those revisions may affect your taxes come next filing season.

1.  Tax Brackets Increase

Your tax bracket triggers the calculation of your tax bill. Each year, the IRS adjusts these brackets to keep pace with inflation. The objective is to prevent “bracket creep” … where the rate of inflation drives a tax payer into a higher tax bracket.

Note: With higher-than-expected inflation, some taxpayers may pay more in 2022, even with the adjustments referred to above.

The table below shows federal tax brackets for 2022. The “Tax Rate” column refers to your Marginal Tax Rate … how much you would pay on one more dollar of taxable income. For example, if you’re a single filer with $30,000 of taxable income, you would be in the 12% tax bracket. If you had $41,000 of taxable income, however, most of it would still fall within the 12% bracket, but the last few hundred dollars would land in the 22% tax bracket. Your marginal tax rate would be 22%.

Rule of Thumb: About a 3% inflation-adjusted increase over 2021.

2022 Tax Brackets

2.    Standard Deduction Increase

You will likely choose the standard deduction which doubled with the passing of the Tax Cuts and Jobs Act to compensate for the loss of personal exemptions. The 2022 standard deductions for all filing statuses are as follows:

Single: $12,950 (up from $12,550 in 2021)

Head of Household: $19,400 (up from $18,800)

Married Filing Jointly: $25,900 (up from $25,100)

Married Filing Separately: $12,950 (up from $12,550.

3.    Capital Gains Tax Increase

Capital gains taxes are assessed on profits realized from the sale of an asset. Short-term gains are taxed as ordinary income. Long-term gains are those on assets you’ve held for at least a year. The long-term income thresholds have been increased for 2022 as illustrated in the following table.

Capital Gains Tax Rates

4.    Earned Income Tax credit

The earned income tax credit (EIC or EITC) is a refundable tax credit for low and moderate-income workers. The amount depends on income and the number of children. Note: People without kids can qualify. For 2022, the earned income credit range will be $560 to $6,935, depending on income and the number of children … a reduction from the range in 2021.

5.    Alternative Minimum Tax (AMT) Increase

The single taxpayer exemption for tax year 2022 increased to $75,900. That maximum exemption begins to phase out when taxpayer income reaches $539,900. The exemption for married couples filing jointly is $118,100 and begins to phase out at $1,079,800.

6.    Estate Tax Exemption Limits and Gift Tax Limits Rise

The federal estate tax exemption rises to $12.06 million from $11.7 million in 2022. The gift tax annual exclusion … the amount you can give each person before you use up some of the estate tax exemption (or owe gift taxes) … increases to $16,000 from $15,000.

7.    HSA Contribution Limits Increase

Health savings accounts let you save money in a special tax-advantaged account for future medical expenses. In 2022, the amount you can reserve increases to $3,650 for self-only coverage (up from $3,600 in 2021) and $7,300 for taxpayers with family coverage (up from $7,200).

8.    Traditional IRA Income Restrictions Rise

Contribution limits for IRAs remain unchanged at $6,000 if you are under 50 years old and $7,000 if you are 50 or older.

There are changes for IRAs in 2022 for taxpayers covered by an employer-sponsored plan. If you’re covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.

Note: Your modified AGI is the sum of your adjusted gross income (AGI), your tax-exempt interest income, and specific deductions added back. The IRS uses MAGI to establish whether you qualify for certain tax benefits.

Filing Status Chart

9.    Increased Income Limits for Contributions to a Roth IRA

Contributions to Roth IRAs are restricted to taxpayers with income that exceeds specific limits.

Single filers: For 2022, your maximum contribution is reduced when your modified adjusted gross income is $129,000 (up from $125,000 in 2021) and eliminated at $144,000 (up from $140,000).

Joint filers: Your maximum contribution is reduced when your modified adjusted gross income is $204,000 (up from $198,000) and eliminated at $214,000 (up from $208,000).

10.    Employer-Sponsored Retirement Contribution Limits Increase

The contribution limit for elective deferrals to 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan increases to $20,500 for 2022. The total amount that can be contributed to a plan by you and your employer combined rises to $61,500 from $58,000 in 2021. However, the amount of the catch-up contribution for taxpayers aged 50 and older remains at $6,500.

11.    Child Care Tax Credit

The provisions for this credit expired December 31, 2021, and not renewed for tax year 2022.

Have Immediate Questions or Concerns!

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.  We’ll respond promptly.

26 Feb 2022
Pearson & Co CPAs
IRS, Tax Credits, Tax Form Guidance Pearson & Co, PC 0 comment

JUST WHEN YOU THOUGHT ‘TIS THE SEASON’ 2021 GREETINGS WERE OVER

‘Tis Tax Season 2022 … So, Time to Get Ready!

Pearson & Co CPAs

In this article, you’ll learn how to best comply with this year’s annual tax filing event with a minimum of frustration and effort. Whether you choose a do-it-yourself (DIY) approach or engage the expert advice of a tax preparation professional, here are 5 critical items to complete your 2021 tax return in a timely manner.

1.  Timing is Key

The IRS started accepting 2021 tax returns on January 24, 2022. To revisit a history of last filing season, the IRS had a huge inventory of tax returns waiting to be processed. The pandemic was and is a factor in delays in processing … coupled with the need to manually process more than 10 million electronically filed returns that contained errors. As of December 2021, the IRS remained backlogged with 9.3 million returns.

Lesson: A sense of urgency to file early is desirable to avoid delays in your 2021 return being processed and the potential for a wait on tax refunds you are due. Whether you intend to be a self-preparer in 2022 or not, it’s a good idea to prepare for the tax season sooner rather than later. To better understand your individual situation, consider contacting a tax professional to answer your specific questions.

2.  Organize Your Paperwork

Be sure to have all your 2021 tax information in hand before filing.  That way you, your tax-preparer and the IRS will avoid processing delays that could stall your receipt of a tax refund.

Here’s a list of common documents you may need to file your taxes:

  • W-2s from employers
  • 1099s from anyone who paid you miscellaneous, contract, or other relevant funds
  • Documents showing medical, educational, childcare, or other expenses, especially if you’re itemizing
  • Statements regarding investments or mortgage interest payments
  • Receipts for itemized expense deductions.
  • Deductible charitable donations over $300 for individual filers; $600 for married couples filing jointly.
  • Advance Child Tax Credit payments
  • Recovery Rebate Credit (stimulus payment)
  • Unemployment compensation
  • Health Insurance Marketplace Statements
  • State tax refund
  • Retirement plan contributions and distributions
  • Health Savings Account contributions

The above is not a complete list of tax filing documents you may need to deal with. Additionally, there are limitations and exclusions on many. Again, engaging a tax professional may save you hours of research and preparation time while better ensuring accuracy in filing your return.

3.  Dependent Information

Assemble the names and Social Security numbers of all dependents you claim on your tax return. Note: Only one taxpayer may claim the same child as a dependent in the same tax year. For example, if you’re divorced, work with your ‘ex’ to agree on which parent will claim a child or children for the 2021 tax year.

4.  Expedite Your Filing & Tax Refund

The filing deadline to submit 2021 tax returns or an extension to file and pay tax owed is Monday, April 18, 2022, for most taxpayers. Electronic filing and direct deposit are the way to go for the fastest refund. Filing electronically with direct deposit and avoiding a paper tax return is more important than ever this year to avoid refund delays. For optimal tax return processing, do not file on paper – use software, a trusted tax professional or Free File on IRS.gov. For people with an error-free tax return, the IRS anticipates most taxpayers will receive their refund within 21 days of when they file electronically and choose direct deposit.

5.  Need More Time?

Clearly, there’s a lot that goes into preparing to file your return. If you are running out of time or have not gathered all the information you will need, you can file an extension for your return. This gives you an additional six-month window for filing your federal tax return … until Monday, October 17, 2022.  to file. Note: An extension doesn’t apply to your tax payment. If you wait until later to pay your taxes, you might still owe penalties and interest.

Don’t feel like you can handle the job on your own? Engage a tax professional. You’ll likely save time and frustration … plus accelerate your refund and minimize your tax bite.

Have Immediate Questions or Concerns!

Pearson & Co stand ready to help as needed. A phone call or email is all it takes.  We’ll respond promptly.

09 Dec 2021
Get Ready for Tax Time
IRS, Tax Credits, Tax Law Pearson & Co, PC 0 comment

GET READY FOR TAX-TIME!

GET READY FOR TAX-TIME!
Avoid Shock of Owing More Than You Expected

Get Ready for Tax Time

With all the distractions and turmoil triggered by the pandemic, it may seem surprising that the fourth quarter of 2021 is upon us … and that means limited time to do a “Paycheck Checkup” to make sure the right amount of tax is withheld from your earnings.

What to Do

Your objective is to determine if there is a need to adjust your withholding. If that proves to be the case, your next step is to submit a new Form W-4, Employee’s Withholding Certificate to your employer. All taxpayers should check, but especially those who fit the following profiles.

  • Are a two-income family or someone with multiple jobs
  • Work a seasonal job or only work part of the year
  • Claim the child tax credit
  • Have dependents age 17 or older
  • Itemized your deductions in previous tax years
  • Have high income or a complex tax return
  • Had a large tax refund last year
  • Had a tax bill last year
  • Received unemployment at any time during the year
  • Experienced a significant life-changing event, e.g. marriage, childbirth, adoption, home purchase.

A quick way to make sure you are having the right amount of tax taken out of your pay is to use the IRS Tax Withholding Estimator. It will help you to lessen year-end tax bills or more optimistically estimate a refund.

Important! If you have a substantial portion of income not subject to withholding, (e.g. self-employed, investors, retirees, those with interest, dividends, capital gains, alimony, and rental income), you may need to pay quarterly installments of estimated tax.

Note: Pearson & Co is as close as a phone call or email away to assist you.

Unemployment Compensation

You may be one of millions of Americans currently receiving unemployment compensation … or did so earlier this year. If that’s the case, it’s important for you to know that the IRS considers unemployment benefits as taxable income.

Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act approved by Congress and signed by the President earlier this year. So, consider having taxes withheld now and avoid owing when you file your 2021 return.

Withholding is voluntary. That said, you may choose to have a flat 10 percent withheld from your benefits to cover all or part of your tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request (PDF), and give it to the agency paying the benefits. Do not send it to the IRS. If the payor has its own withholding request form, use that form instead

If you don’t choose voluntary withholding, or if the withholding isn’t enough, you can make quarterly estimated tax payments. Fourth quarter 2021 payments will be due on January 15, 2022.

As an unemployment benefit recipient, expect to receive a Form 1099-G, Certain Government Payments (PDF) from the agency paying the benefits. The form will show the amount of unemployment compensation you received during 2021 as well as any federal income tax withheld. This information, along with your W-2 income, will be included on your 2021 federal tax return.

Note: Unlike some other states, the Commonwealth of Virginia does not tax unemployment earnings.

Other Types of Payments to Check for Withholding

The IRS urges taxpayer to check the following sources of payments to check for withholding:

  • Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
  • Railroad unemployment compensation benefits
  • Disability benefits paid as a substitute for unemployment compensation

Investment Gains/Losses

If you own stocks, bonds, mutual funds or other investments … be sure to check with your investment advisor to determine any realized gains or losses that may affect your tax status.

Child Tax Credit Payments

If you received Child Tax Credit payments during 2021, you will need to compare those amounts with the amount allowable to claim on your 2021 tax return. In January 2022, the IRS will send you Letter 6419 to provide the total amount of advance Child Tax Credit payments that you received in 2021. You may be eligible for a credit if you have not received the full amount to which you are entitled. Alternatively, you may need to repay some or all excess payments you received.

Recovery Rebate Credit

If you didn’t qualify for the third Economic Impact Payments or did not receive the full amount, you may be eligible for the Recovery Rebate Credit for reimbursement upon filing your 2021 tax return. In January 2022, the IRS will send you Letter 6475 to provide the total amount of the third Economic Impact Payment and any Plus-Up payments that you received.

Have Immediate Questions or Concerns?
Pearson & Co stands ready to help as needed.
A phone call or email is all it takes.

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