Highlights of College Savings Plans (Sec 529 Plans)
The Qualified State Tuition Plan, often referred to as the Sec 529 Plan, is a tax-beneficial incentive for parents, grandparents, and others to save money for an individual’s future college tuition and fees. There is no federal tax deduction for making contributions. But the tax benefit of these plans is that the earnings within the plan accumulate tax-deferred and then are tax-free when withdrawn if used for college tuition and related qualified expenses. Let’s take a simplified example.
Example: Jo’s parents establish a 529 plan when she is age 5, and contribute $10,000 to the plan. The $10,000 is invested in mutual funds that pay dividends of $400 per year. The tax on the dividends is deferred until the time when funds are withdrawn from the plan, and only payable if the distribution isn’t used for eligible education expenses. Let’s say that Jo enters college in 13 years and with the dividends earned over those years and an increase in the value of the original $10,000 to $15,000, the account is worth $20,200. Jo’s tuition and related expenses for her first semester is $25,000. The entire $20,200 is withdrawn to pay those expenses, so none of the dividends received and none of the $5,000 gain in the value of the account will be taxable. If Jo’s parents were in a 24% tax bracket, the tax savings by investing in the 529 plan compared to putting $10,000 in a regular brokerage account will be at least $1,530. The benefit would be compounded if more than $10,000 was contributed to the 529 plan.
Contributions - To maximize the tax benefits of a plan, it should be established for a child as soon after birth as possible when funds are available for contribution. For tax purposes, there is no limit on the amount that can be contributed, but contributions are considered gifts and each individual contributing to a plan would have to file a gift tax return if the gift exceeds the annual inflation-adjusted gift tax exclusion, which is $16,000 for 2022 (up from $15,000 for years 2018 through 2021).
A special gift provision permits a contributor to contribute up to 5 times the annual gift tax exclusion amount to a qualified tuition account in a single year and treat the contribution as having been made over the five-year period beginning with the calendar year in which the contribution is made. Why would someone want to do this? Because by front-loading the contributions, they would accelerate the accumulation of earnings within the account. When making 5 years’ worth of 529 plan contributions in one year, a gift tax return is required in the year of contribution. If the contributor dies within the 5-year period, any amount contributed that is applicable to the years within the five-year period remaining after the year of the contributor’s death are able to be included in the contributor’s gross estate for estate tax purposes.
Although the income and gift tax laws don’t cap how much can be contributed to a qualified tuition plan, the 529 plans do limit the maximum amount that can be contributed per beneficiary based on the projected cost of a college education, and the maximum amount will vary between plans, though most have limits in excess of $200,000, with some topping $475,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow.
Modifications – Since originating these plans, Congress has continued to modify the purpose of the plans by allowing plan funds to be used for more than just college tuition and fees. Over the years, they have allowed plan funds to be spent on additional expenses, including books, supplies, equipment, reasonable room and board, and computer technology.
More recently, the following qualified expenses were added:
Elementary and Secondary School Tuition Expenses – The Tax Cuts and Jobs Act (2017) included a provision that treats withdrawals from 529 plans for elementary or secondary school (kindergarten through grade 12) tuition expenses as qualified expenses. However, the annual withdrawal for each beneficiary is limited to $10,000 (regardless of the number of 529 plans in the beneficiary’s name). This special $10,000 amount applies only for tuition (not books, supplies, room and board, etc.) paid to public, private or religious schools.
Be Cautious – Since the greatest tax benefit and primary goal of these plans is accumulating tax-deferred investment income, which then can be withdrawn tax-free to pay qualified education expenses, using these funds too early will not achieve that desired goal. Thus, you should carefully consider whether to use the funds for elementary and secondary school education expenses or to wait and tap the account for post-secondary education, with the latter choice maximizing investment income.
Apprenticeship Expenses – The category of qualified expenses was expanded by the Secure Act to include fees, books, supplies, and equipment required to participate in registered apprenticeship programs certified by the Secretary of Labor under Sec 1 of the National Apprenticeship Act, effective for distributions made in years after 2018.
Repayment of Student Loans – Another Secure Act addition to 529 plan qualified expenses is effective for distributions after 2018 of up to $10,000–a lifetime limit–that may be used to pay the principal and interest on qualified higher education loans of the designated beneficiary or a sibling of the designated beneficiary. To prevent double-dipping, Sec 529 plan distributions used to pay interest on the education loan cannot be used for the above-the-line deduction allowed for student loan interest.
In addition to 529 plans Congress has also provided tax credits to help fund a child’s college education, though the rules for these credits aren’t entirely straight-forward. For example, one favorable twist of the tax code allows a grandparent (or others) to directly pay to the educational institution the child’s tuition without being subject to the gift limitations or reporting. On top of that, assuming the child is a dependent of their parent, the parent may qualify for a higher education credit even though the grandparent paid the tuition. The parent’s eligibility depends on their income, since the credits phase out once the adjusted gross income of the individual claiming the credit exceeds an amount based on filing status and the type of credit claimed.
If you need assistance with long-term education planning, give your tax consultant a call soon!
Writing Off Your Business Start-Up Expenses
New business owners, especially those operating small businesses, may be helped by a tax provision allowing them to deduct up to $5,000 of the start-up expenses and $5,000 of organizational costs in the first year of the business’s operation. These types of expenses not deductible in the first year of the business must be amortized (deducted) over 15 years. If a taxpayer who incurred start-up expenses does not make the election, the start-up costs must be capitalized, meaning that the expenses can only be recovered upon the termination or disposition of the business.
Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.
Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs.
Examples of qualified start-up costs include:
Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
Wages paid to employees and their instructors while they are being trained;
Advertisements related to opening the business;
Fees and salaries paid to consultants or others for professional services; and
Travel and other related costs to secure prospective customers, distributors, and suppliers.
For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for, or preliminary investigation of, the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.
Qualifying Organizational Cost - include fees for legal services, such as for drafting LLC documents, partnership agreements, corporate charter and by-laws; incorporation fees; temporary directors' fees; and organizational meeting costs.
Phaseout - As with most tax benefits, there is always a catch. Congress put a cap on the amount of expenses that can be claimed as a deduction under this special election. Here’s how to determine the deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months.
Example: Eligible start-up expenses are $6,000 and the business began on July 1, 2022. On the business’s 2022 tax return, the deduction for start-up expenses will be $5,033 ($5,000 + ($1,000/180 x 6 months)).
If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceeds $50,000.
For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)), plus the remaining $53,000 of costs would be amortizable over 180 months. These limits are applied separately for the start-up and organizational costs.
The election to deduct start-up and organizational costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.
The decision to write off these expenses should take into consideration other tax benefits available in the first of year of the business, including bonus depreciation and Sec 179 expensing, the Sec 199A deduction, and the overall result in the first year of the business.
If you are starting a business, it may be appropriate to formulate a business plan in advance. Setting up an appointment with your tax advisor would definitely be beneficial to you and the business!
Gambling and Tax Traps
Although gambling may seem to be a recreational activity for many taxpayers it is not for the government. They look at it as a source of tax revenue and as one might expect, the government takes a cut if a gambler wins. What makes matters worse, tax laws do not allow recreational gamblers to claim a loss in excess of their winnings. There are far more tax issues related to gambling than one might expect, and they may impact taxes in more ways than one might believe. Here is a rundown on the many issues:
Reporting Winnings – Taxpayers must report the full amount of their gambling winnings for the year as income on their 1040 returns. Gambling income includes, but is not limited to, winnings from lotteries, raffles, lotto tickets and scratchers, horse and dog races, and casinos, as well as the fair market value of prizes such as cars, houses, trips, or other non-cash prizes. The full amount of the winnings must be reported, not the net after subtracting losses. The exception to the last statement is that the cost of the winning ticket or winning spin on a slot machine is deductible from the gross winnings. For example, if a gambler put $1 into a slot machine and won $500, they would include $499 as the amount of their gross winnings, even if they had previously spent $50 feeding the machine.
Frequently, gamblers with winnings only expect to report those winnings included on Form W-2G. However, while that form is only issued for “Certain Gambling Winnings,” the tax code requires all winnings to be reported. All winnings from gambling activities must be included when computing the deductible gambling losses, which is generally always an issue in a gambling loss audit.
If winnings at one time hit certain levels, the government requires the gambling establishment to collect an individual’s Social Security number and report their winnings to Uncle Sam on a Form W-2G. Gambling establishments will issue a Form W-2G if the winnings are:
$1,200 or more on a slot machine or from bingo.
$1,500 or more on a keno jackpot.
More than $5,000 in a poker tournament.
$600 or more from all other games, but only if the payout is at least 300 times the wager.
TAX TRAP #1 – The way the tax laws work, gambling winnings are included in a taxpayer’s adjusted gross income (AGI), while losses are an itemized deduction. Since winnings and losses can’t be netted, the full amount of the winnings ends up in a taxpayer’s adjusted gross income (AGI). The AGI is used to limit other tax benefits, as discussed later. So, the higher the AGI, the more other tax benefits may be limited.
If the winnings minus the wager exceed $5,000 and the winnings are at least 300 times the wager, the gambling establishment is required to withhold 24% of the proceeds, which they then pay over to the government. The lucky taxpayer then claims this amount, which will be included on the W-2G form in box 4, as income tax withheld on their 1040 form. Some states may also require state income tax to be withheld. Taxpayers who have big gambling winnings on which tax isn’t withheld should consider making estimated tax payments to avoid underpayment of tax penalties.
Reporting Losses – A taxpayer may deduct gambling losses suffered in the tax year as a miscellaneous itemized deduction but only to the extent of that year's gambling gains.
TAX TRAP #2 – If a taxpayer does not itemize their deductions, they can’t deduct their losses. Thus, individuals taking the standard deduction will end up paying taxes on all of their winnings, even if they had a net loss.
Documenting Losses – The next logical question is: how to document gambling losses if audited? Taxpayers shouldn’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on acceptable documentation to verify losses. They indicate that an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, this diary should contain at least the following information:
(1) The date and the type of specific wager or wagering activity,
(2) The name of the gambling establishment,
(3) The address or location of the gambling establishment,
(4) The names of other persons (if any) present with the taxpayer at the gambling establishment, and
(5) The amounts won or lost.
Save all available documentation, including items such as losing lottery and keno tickets, checks, and casino credit slips. Also save any related documentation such as hotel bills, plane tickets, entry tickets, and other items that would document a taxpayer’s presence at a gambling location. If a taxpayer is a member of a slot club, the casino may be able to provide a record of electronic play. Affidavits from responsible gambling officials at the gambling facility may prove helpful. With regard to specific wagering transactions, winnings and losses might be further supported by:
Keno – Copies of keno tickets purchased by the taxpayer and validated by the gambling establishment.
Slot Machines – A record of all winnings by date and time that each machine was played.
Table Games – The number of the table at which the taxpayer was playing as well as casino credit card data indicating whether credit was issued in the pit or at the cashier's cage.
Bingo – A record of the number of games played, the cost of tickets purchased, and the amounts collected on winning tickets.
Racing – A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.
Lotteries – A record of ticket purchase dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winning statements.
Gambling Sessions - There is a concept of gambling “sessions” where the IRS allows netting of gain and losses. However, the record-keeping requirements are so stringent that they make its application extremely limited, and it is not covered in detail in this article. The concept basically allows gamblers to net gains and losses from gambling sessions. However, a gambling session is very limited in scope. It must be the same type of uninterrupted wagering during a specific uninterrupted period of time at a specific location. Thus, if a taxpayer entered a casino and played slots for an hour, then switched to craps for the next hour, that would be two separate gambling sessions. If a taxpayer entered Casino #1 and played slots for an hour and then went to Casino #2 and continued to play slots, that would be two separate gambling activities because two locations were involved. Plus, all of that must be adequately documented.
Charity Raffles – The IRS considers raffles, bingo, lotteries, etc., to be gambling, even if the sponsor of the activity is a charitable organization. So, winnings and losses are treated the same as for any other gambling activity, and the amounts paid to buy raffle or lottery tickets or to play bingo or other games of chance are not deductible as a charitable contribution.
SIDE EFFECTS OF GAMBLING
Social Security Income – For taxpayers receiving Social Security benefits, whether those benefits are taxable depends upon the taxpayer’s income (AGI) for the year. The taxation threshold for Social Security benefits is $32,000 for married taxpayers filing jointly, $0 for married taxpayers filing separately, and $25,000 for all other filing statuses. If the sum of AGI (before including any SS income), interest income from municipal bonds, and one-half the amount of SS benefits received for the year exceeds the threshold amount, then 50–85% of the SS benefit is taxable.
TAX TRAP #3 – If an individual’s gambling winnings push their AGI for the year over the threshold amount, the gambling winnings—even if they had a net loss—can cause up to 85% of their Social Security benefits to become taxable.
Health Insurance Subsidies – Lower income individuals who purchase their health insurance from a government marketplace are given a subsidy in the form of a tax credit to help pay the cost of their health insurance. Most people eligible for the tax credit use it to reduce their monthly health insurance premiums. That tax credit is based upon the AGIs of all members of the family. The higher the family income, the lower the subsidy becomes.
TAX TRAP #4 – The addition of gambling income to a family’s income can result in significant reductions in the health insurance subsidy, requiring families to pay more for their health insurance coverage for the year. Additionally, if the subsidy was based upon estimated income for the year, if the family’s premiums were reduced by applying the subsidy in advance, and if they subsequently had some gambling winnings, then they could get stuck with paying back some or all of the subsidy when they file their return for the year.
Medicare B & D Premiums – If a taxpayer is covered by Medicare, the amount they are required to pay (generally withheld from their Social Security benefits) for Medicare B premiums for 2021 is normally $148.50 per month and is based on their AGI two years prior. However, if that AGI was above $88,000 $176,000 for married taxpayers filing jointly), the monthly premiums can increase to as much as $504.90. If they also have prescription drug coverage through Medicare Part D, and if their AGI exceeds the $88,000 /$176,000 threshold, the monthly surcharge for Part D coverage will range from $12.30 to $77.10. The normal monthly premium amount, the AGI thresholds, and the Part D monthly surcharge vary from year to year, and for 2022 are $170.10, $91,000/$182,000, and $12.40 respectively.
TAX TRAP #5 – The addition of gambling winnings to AGI can result in higher Medicare B & D premiums.
Online Gambling Accounts – If an individual has an online gambling account, there is a good chance that the account is with a foreign company. All U.S. persons with a financial interest or signature authority over foreign accounts with an aggregate balance of over $10,000 anytime during the prior calendar year must report those accounts to the Treasury by the April due date for filing individual tax returns or face draconian penalties.
TAX TRAP #6 – Regardless of whether an individual is a gambling winner or loser, if their online account was over $10,000 at any time during the year, they will be required to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts), commonly referred to as the FBAR. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. The $10,000 and $100,000 penalty amounts are subject to adjustment for inflation, and after January 21, 2022, are $14,489 and $144,886, respectively.
Parents As Dependents - If a taxpayer claims someone as a dependent – say, their mother – and Mom happens to hit a jackpot at the local casino, they may end up being unable to claim her as a dependent for the year if the gambling winnings push Mom’s income over the annual gross income limit for claiming her.
Other Limitations – The aforementioned are the most significant “gotchas.” Numerous other tax rules limit tax benefits based on AGI, as discussed in gotcha #1. These include medical deductions, certain casualty losses, child and dependent care credits, the Child Tax Credit, and the Earned Income Tax Credit, just to name a few.
If you have questions related to gambling winnings, losses and potential tax traps please contact your tax expert! And remember, these posts are for educational purposes only, please talk with your own preparer to understand how these rules apply to your specific situation.
Toss Your Paystub Every Week? Maybe It’s Time To Take a Closer Look
What you do with your paystub often depends on how you get paid. If you have direct deposit there’s a good chance that you just rip the entire thing up without a glance, confident in the fact that the money is in your bank account and all is good in your world. If you deposit your check, you probably rip off the bottom without a glance and toss it on your way into the bank or at the drive-through window. But the fact that you’ve been paid doesn’t mean that the information on your paystub isn’t important. There are good reasons for taking a closer look at the information that’s provided, and for understanding what it all means.
The most important reason to double-check your paystub is to make sure that you’re being paid correctly and that the right amount of money is being withheld on your behalf by your employer. You know better than anybody what your income is supposed to be, and mistakes do happen, but you won’t know if you don’t check. Plenty of people have found out the hard way – at tax time – that their employer hasn’t been withholding the amount that they wanted them to, and they end up with a shortfall that they have to make up.
Another good reason for looking at your paystub is to understand exactly where your money is going and what it is funding. We all remember the shock of receiving our first paycheck and finding out that it came to far less than what we thought it would be based on our salary or hourly wages. We were told it was taxes … but do you know what that really means? The information provided below should provide a better understanding of what those deductions from your gross income are, and where they are going.
Breakdown of Paystub Information:
Unfortunately, there is no one set format for paystubs. In fact, some states don’t even require employers to provide their employees with the specifics of where their money is going each week. For those who do receive paper records of their withholding amounts and more, here’s what you’re likely to find, and what it means.
Wages – This is one of the most important pieces of information on your paystub. Whether you are paid a salary or an hourly basis, the wage portion of your paystub will provide you with what the gross amount is that you’re being paid, what portion of those wages are taxable, and what your net income/check amount is. Most stubs will reflect both the wages for the pay period and the year-to-date totals.
Taxes – Every citizen is obligated to pay a portion of their income to the federal government, as well as any applicable state and local taxes. This money is used to pay for both services and administrative costs. Deductions will also be taken for the FICA tax that pays into the Social Security Administration and Medicare. Though the taxpayer may not currently be benefiting from these programs, the idea is that everybody will be eventually, and those who are working pay for those who no longer are.
Non-Taxed Deductions – Most paystubs will also reflect deductions taken from your pay for items that are not taxable. This may include contributions to a 401(k) retirement account or money that you direct into other pre-tax accounts.
Benefits – If you receive benefits such as health insurance, life insurance, sick time, and vacation time, your employer may provide information on your paystub about how much they pay on your behalf, or how much you have elected to pay for options such as a specific level of insurance coverage.
Additional Deductions – You may also see deductions taken for other items that you have requested, such as Health Savings Account contributions, parking passes, childcare expenses, and more. All of these line items should be for selections that you have agreed to. If you do not recognize an expense, it’s a good idea to check with your Human Resources department and ask them to identify it.
Knowing what you’re earning and where your money goes is just the first step to economic stability and understanding. If you or your spouse needs help filling out a new W-4 for their employer, contact your tax preparer now! Don’t wait until the end of the year, it will be too late!
Understanding Tax Lingo
When discussing taxes, reading tax related articles or instructions one needs to understand the basic lingo and acronyms used by tax professionals and authors to be able to grasp what they are saying. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms.
Inflation Adjustments – The standard deductions, tax rates, amounts that can be contributed to retirement plans, virtually all amounts claimed as deductions and credits are annually adjusted for cost-of-living changes from the prior year or other base year as required by the tax code. Thus, when determining an amount, care should be taken to determine the year-specific amount. The numbers used in this article are for the year 2021.
Filing Status—Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you qualify for the more beneficial head of household status. A special status applies for some widows and widowers.
Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:
pay more than one half of the cost of maintaining his or her home, a household that was the principal place of abode for more than one half of the year of a qualifying child or certain dependent relatives, or
pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.
A married taxpayer may be considered unmarried for the purpose of qualifying for head of household status if the spouses were separated for at least the last six months of the year, provided the taxpayer wanting to qualify for the head of household status maintained a home for a dependent child for over half the year.
Surviving spouse (also referred to as qualifying widow or widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The main benefit of this status is that the widow(er) can use the more favorable married joint tax rates rather than the head of household or single rates. In the year the spouse passed away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return, which would then also require the surviving spouse to use the married separate status for that year.
If a taxpayer is married to a non-resident alien, the taxpayer has two options: file as married separate reporting only their income, deductions and credits or elect to file a joint return with the spouse including the world-wide income of both of them on a joint return.
Adjusted Gross Income (AGI)—AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before certain below-the-line deductions and the standard or itemized deductions). The most common adjustments are penalties paid for early withdrawal from a savings account, and deductions for contributing to a traditional IRA or self-employment retirement plan. Many tax benefits and allowances, such as credits, certain adjustments, and some deductions are limited by the amount of a taxpayer’s AGI.
Modified AGI (MAGI)—Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited.
Taxable Income—Taxable income is AGI less deductions (either standard or itemized). Your taxable income is what your regular tax is based upon using a tax rate schedule specific to your filing status. The IRS publishes tax tables that are based on the tax rate schedules and that simplify the tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999. The tables for 2021 have not been released yet, but those for 2020 can be found in the 1040 instructions beginning on page 66.
Marginal Tax Rate (Tax Bracket)—Not all of your income is taxed at the same rate. The amount equal to your standard or itemized deductions is not taxed at all. The next increment is taxed at 10%, then 12%, 22%, etc., until you reach the maximum tax rate, which is currently 37%. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 24% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $240 in federal tax ($1,000 x 24%). Your marginal tax bracket depends upon your filing status and taxable income.
Taxpayer & Dependent Exemptions – In the past, taxpayers were able to qualify for an exemption amount for the filer, spouse if filing jointly and each dependent, which was also subtracted from AGI to determine taxable income. However, beginning in 2018 and through 2025 the deduction for the exemption amounts has been suspended and replaced with a higher standard deduction and child tax credit.
Qualified Child—A qualified child is one who meets the following tests:
(1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;
(2) Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;
(3) Is younger than the taxpayer;
(4) Did not provide over half of his or her own support for the tax year;
(5) Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and
(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).
Dependents— Even though there’s currently no deduction for dependent exemptions, there are still some significant tax benefits for taxpayers who are able to claim a dependent. To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five of the following dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount an individual can make and still qualify as a dependent if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.
Qualified Child—A qualified child is one who meets the following tests:
(1) Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;
(2) Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;
(3) Is younger than the taxpayer;
(4) Did not provide over half of his or her own support for the tax year;
(5) Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and
(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).
Deductions— A taxpayer generally can choose to itemize deductions or use the standard deduction. The standard deductions is illustrated below.
Filing Status Standard Deduction
Single $12,550
Head of Household $18,800
Married Filing Jointly $25,100
Married Filing Separately $12,550
The standard deduction is increased by multiples of $1,700 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,350. The extra standard deduction amount is not allowed for elderly or blind dependents. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction. The standard deduction of a dependent filing his or her own return will oftentimes be less than the single amount shown above.
For 2021 only, taxpayers claiming the standard deduction are also allowed to deduct from their AGI up to $300 ($600 for joint filers) of cash contributions made to qualified charitable organizations. Normally, charitable contributions are deductible only when itemizing the deductions described next.
Itemized deductions generally include:
(1) Medical expenses, limited to those that exceed 7.5% of your AGI.
(2) Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes, but limited to a total of $10,000 for the year.
(3) Interest on qualified home acquisition debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses).
(4) Charitable contributions, generally limited to 60% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI. For 2020 and 2021 the limit was increased to 100% of AGI for cash contributions.
(5) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.
Alternative Minimum Tax (AMT)—The AMT is another way of being taxed that has often taken taxpayers by surprise. Even though the AMT was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum amount of tax, it sometimes snares lower income taxpayers. Your tax must be computed by the regular method and also by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.
The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.
Itemized deductions:
Taxes are not allowed at all for the AMT.
Interest paid for loans to purchase non-conventional homes such as motor homes and boats is not allowed as an AMT deduction but is deductible for regular tax. For years 2018–2025, interest paid on home equity debt is also not allowed for either AMT regular tax purposes. LEE: you had put red shading on this whole paragraph
Nontaxable interest from private activity bonds is tax free for regular tax purposes, but some is taxable for the AMT.
Statutory stock options (incentive stock options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.
Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.
A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers.
Your tax will be whichever is the higher of the tax computed the regular way and by the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom-line tax and raise a question of possible AMT. Fortunately, due to tax reform that increased the AMT exemption amounts and the phaseout thresholds, fewer taxpayers are paying AMT. Tax Tip: If you were subject to the AMT in the prior year, you itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be taxable in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not included in the subsequent year’s income.
Tax Credits—Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are some commonly encountered credits that are based simply on the number or type of your dependents or your income. These and another popular credit are outlined below.
Child Tax Credit—Thanks to the American Rescue Plan Act, the child tax credit for one year only (2021) has been increased to $3,000 for a child under age 18 ($3,600 if under age 6), up from $2,000 in 2020. Unlike other years, the credit is fully refundable and there is no requirement for the taxpayer to have earned income.
The credit has two phaseouts for higher income taxpayers. Phaseout is $50 for each $1,000 of MAGI above the thresholds. The threshold phases out the increase in child credit for 2021 over $2,000 per child. The first phaseout threshold is $150,000 for married filing joint filers, $112,500 for those filing as head of household and $75,000 for others. The second phaseout applies to the $2,000 portion of the credit with thresholds of $400,000 for married filing taxpayers and $200,000 for others.
Congress mandated that the IRS estimate this credit for taxpayers based upon their 2020 returns and pay half of the estimated credit in monthly installments beginning July 2021. Taxpayers will need to reconcile the advance payments with the actual credit determined when they complete their 2021 return; repayment of excess advance amounts may be required depending on AGI.
Dependent Credit – A nonrefundable credit is also available to taxpayers with a dependent who isn’t a qualifying child. The $500 dependent credit is not refundable and subject to the second phaseout discussed above for child tax credits.
Earned Income Credit—This is a refundable credit for a low-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $10,000 is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. To find out more info about the EIC, see the IRS website.
Residential Energy-Efficient Property Credit—This credit is generally for energy-producing systems that harness solar, wind, or geothermal energy, including solar-electric, solar water-heating, fuel-cell, small wind-energy, and geothermal heat-pump systems. These items currently qualify for a 26% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2022.The credit rate reduces to 22% in 2023 The credit expires after 2023.
Withholding and Estimated Taxes—Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:
90% of the current year’s tax liability; or
100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability.
If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.
As always folks, don’t trust anything from the internet. These posts are meant to inform and educate, not to advocate for any position. Always reach out to your own tax preparer for your own advice!
Tax Benefits When Saving for College Education
A common question among parents is, “How might I save for a child’s post-secondary education in a tax beneficial way?” The answer depends on how much the education is expected to cost and how much time is left until the child heads off to college or a university or enters an apprenticeship program.
The amount of funds that will be required will depend upon whether your child will be attending a local college, attending a local college and then transferring into a university, going straight to a university, or beginning an apprentice program. If the child will be attending college or an apprenticeship locally, you generally only need to be concerned about tuition, books, and other class materials, and the child can live at home, whereas the child attending a university, unless it is local, will add housing and food costs on top of substantially higher university tuition. Another factor is whether the student will leave school after obtaining a bachelor’s degree or will be doing graduate studies for an advanced degree.
When the time comes, your child may qualify for a scholarship or grant, but you can’t depend on that when working out a college savings plan.
The federal tax code has two beneficial savings plans to use. Neither plan provides a tax benefit to making the original contributions. The benefit is that growth due to appreciation of the investments, if any, and earnings (dividends and interest) are tax-free when withdrawn for qualified education expenses. Thus, the sooner each plan is started, the better, because it will have more years to grow in value.
Both savings plans allow the funds to be used for kindergarten education and above. However, these plans provide tax-free accumulation, and the more the funds are used for expenses at lower levels of education, the less tax benefits they will provide. Careful consideration should be given to using these savings plans for anything other than post-secondary education.
More tax benefits will be gained by front-loading the contributions and thus having a larger amount for which the growth and earnings can be compounded. You should also be aware that anyone, not just you, can make a contribution to the child’s college savings plans. So if your child has any well-heeled grandparents, other relatives, or friends who would like to help, they can also contribute.
The two savings plans currently available for college savings are the Coverdell Education Savings Account and the Qualified Tuition Plan, most commonly referred to as a Sec. 529 plan (529 denotes the section of the tax code that governs it).
Coverdell Education Savings Account – This type of plan only allows up to $2,000 in contributions per year, which generally rules it out as a practical method for college savings, other than as a supplement to other means of saving.
Sec. 529 Plan – This approach is likely your best option. State-run Sec. 529 plans allow significantly larger amounts to be contributed; multiple people can each contribute up to the gift tax limit each year without being subjected to gift tax reporting. This limit is $15,000 for 2021, and it is periodically adjusted for inflation; in 2022, it will increase to $16,000. A special rule allows contributors to make up to five years of contributions in advance (for a total of $75,000 in 2021 and $80,000 in 2022).
Sec. 529 plans allow taxpayers to put away larger amounts of money, limited only by the contributor’s gift tax concerns and the intended plan’s contribution limits. There are no limits on the number of contributors and no income or age limitations. The maximum amount that can be contributed per beneficiary (the intended student) is based on the projected cost of college education and will vary among the states’ plans. Some states base their maximum on an in-state four-year education, but others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits over $200,000, with some topping $530,000. Generally, additional contributions cannot be made once an account reaches that level, but this doesn’t prevent the account from continuing to grow.
Taxpayers are not limited to participating in the 529 plan offered by their state of residence and can shop around for the plan with the best growth potential and highest maximum contribution.
When the time comes for college, the distributions will be part earnings/growth in value and part contributions. The contribution part is never taxable, and the earnings part is tax-free if used to pay for qualified college expenses. In addition, the portion of the distribution representing the return on the contributions, if used for qualified education expenses, will qualify for the American Opportunity Tax Credit, which can be as much as $2,500, provided your income level does not phase it out.
Gifts – In addition to the annual gift tax exclusion, a donor may make gifts (with no specific dollar limitation), which are totally excluded from the gift tax when making payments directly to an educational institution for tuition. This includes both college and private primary education. However, these gifts can only pay for tuition, which does not include books, supplies, or room and board. It is critical that the payments be made directly to the educational institution for them to be excluded from the gift tax. Reimbursement paid to the donee will not qualify.
The tuition exclusion is often overlooked yet can be beneficial. For instance, a grandparent can use the tuition gift to reduce their estate while helping a grandchild pay for tuition and giving the child’s parents an education credit at the same time.
For additional details or assistance in planning for a child’s higher education, please call your tax preparer.
2022 IRS Interest Rate Hike
The 2022 IRS Interest Rate Hike Will Go Live April 1st
If you are required to pay quarterly estimated income tax, an upcoming change in interest rates being imposed by the IRS may have a direct impact on you. Effective April 1st, 2022, corporations and self-employed filers who submit quarterly estimated taxes will see a hike in the interest rates that the agency charges for both overpayments and underpayments.
The new rates will be:
4% for underpayments;
6% for large corporate underpayments
4% for overpayments (3% in the case of a corporation)
1.5% for the portion of a corporate overpayment exceeding $10,000
Though these changes will not affect you if you calculate your liability correctly and pay on time each quarter, those taxpayers who have an outstanding balance or who are otherwise out of compliance with their tax obligation need to remember that the longer they take to address the situation, the more their obligation will grow as their liabilities accrue interest at a rate of 3%.
If you have questions on how the new rates will affect you, feel free to contact us today.
Can’t Pay Your Taxes? Here Are Some Payment Options
Although most (74% in 2020) American taxpayers receive a refund each year when they file their income tax returns, there are those who for one reason or another end up owing. Of those who owe Uncle Sam many don’t have the means to pay what they owe by the return due date (usually in April).
Generally, tax due occurs when a wage earner has under-withheld on his or her payroll or a self-employed individual failed to make adequate estimated tax payments during the year. This can be a huge problem for those who are unable to pay their liability.
It is generally in your best interest to make other arrangements to obtain the funds for paying your 2021 taxes rather than be subjected to the government’s penalties and interest for payments made after April 18, 2022. Here are a few options to consider.
· Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
· Home Equity Loans and HELOCs - Use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount. Unfortunately, obtaining these loans takes time, so if you anticipate that you’ll need funds from such a loan to pay your taxes that are due in April, you should get the application process started right away.
· Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay a credit card discount fee (the fee charged by the credit card company), you will have to pay the fees due and pay the higher credit card interest rates.
· Short-Term Payment Plan – If you can fully pay the tax owed within 180 days and owe less than $100,000 including tax, penalties, and interest, you can apply for a short-term payment plan online at the IRS web site. You won’t be charged a set-up fee but will still have to pay penalties and interest until the balance owed is fully paid. Setup fees will be charged if you apply for a payment plan by phone, mail, or in-person instead of online.
· IRS Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate. There is a user fee to set up the payment plan. However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
· Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement lifestyle and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.
Filing Extensions – Don’t mistake the ability to apply for an extension of time to file your tax return as also being an extension to pay any tax liability. It is not and does not grant you an extension of time to pay. The penalties and interest on the amount due will continue to apply as of the original due date of the return.
Enforced Collections - If the taxes cannot be paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:
Issuing a Notice of Levy on salary and other income, bank accounts or property (IRS can legally seize property to satisfy the tax debt)
Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes.
Issuing a Summons to the taxpayer or third parties to secure information to prepare unfiled tax returns or determine the taxpayer’s ability to pay.
Note: To collect delinquent tax debts, certain federal payments (vendor, OPM, SSA, federal salary, and federal employee travel) disbursed by the Department of the Treasury, Bureau of Fiscal Service (BFS)) may be subject to a levy through the Federal Payment Levy Program (FPLP).
Fresh Start Initiative - The IRS also has what is called the “Fresh Start” initiative to offer more flexible terms in its existing Offer-in-Compromise program which, under certain circumstances allows taxpayers to settle their tax debt for reduced amounts. This enables financially distressed taxpayers to clear up their tax problems faster than in the past. While resolving tax problems might previously have taken four or five years, taxpayers may now be able to resolve their problems in as little as two years.
If you have questions about the payment options or an offer-in-compromise, please call your tax preparer. Don’t just ignore your tax liability because that is the worst thing you can do.
Tax Treatment of Reverse Mortgages
With inflation on the rise and medical care costs escalating, what options do seniors have for keeping up, especially if they have a mortgage on their home and their retirement income is only barely covering their mortgage payments and other necessities, with little left over for some enjoyment in their golden years, without relying on help from family?
One choice may be a reverse mortgage, which would allow the homeowner(s) to borrow against the equity they have built up in their home over the years. The loan is not due until the homeowner passes away or moves out of the home. If the homeowner dies, then the homeowner’s heirs can pay off the debt by selling the house, and any remaining equity goes to them. If the loan balance at that time is equal to or more than the home’s value, then the repayment amount is limited to the home’s worth. Generally, the reverse mortgage won’t be due as long as at least one homeowner lives in the home as their primary home.
In order to be eligible for this loan, the borrower must be at least 62 years of age and have equity in the home. The reverse mortgage must be a first trust deed. Thus, any existing loans would have to be paid off with separate funds or with the proceeds from the reverse mortgage. The amount that can be borrowed is based on the borrower’s age, current interest rates, appraised value of the home, and government-imposed lending limits. The older the borrower, the greater the amount that can be borrowed and the lower the interest rate.
The borrower can take the loan as a lump sum, as a line of credit, or in equal monthly payments for a fixed number of years or for as long as the borrower lives in the home. In addition, the money generally can be used for any purpose, without restrictions. As is the case with other loans, the reverse mortgage loan is not taxable, regardless of the payment method. The borrower retains the title to the home and must continue to pay property taxes and homeowner insurance as well as maintain the property. Thus, property taxes – within the $10,000 annual SALT limitation – that the borrower pays will continue to be tax deductible if the borrower itemizes deductions.
One question that always comes up when discussing reverse mortgages is whether the interest will be deductible. Consider the following factors when determining whether reverse mortgage interest is deductible, when it is deductible, and by whom:
Interest (regardless of type) is not deductible until paid. A reverse mortgage loan does not need to be repaid as long as the borrower lives in the home. Therefore, the interest on a reverse mortgage is not deductible by anyone until the loan is paid off.
Generally, reverse mortgages are classified as equity loans, and under the 2017 tax-reform rules of the Tax Cuts and Jobs Act (TCJA), equity debt interest is not deductible during the years 2018 through 2025. (In years before 2018, the deductible equity debt interest was limited to the interest accrued on the first $100,000 of debt, and equity debt interest was not deductible by taxpayers subject to the alternative minimum tax.)
There are exceptions for when the reverse mortgage is used to pay off an existing acquisition debt loan. If the reverse mortgage was used to refinance an existing home-acquisition loan, then when the reverse mortgage loan is paid off, a prorated portion of the accrued interest will be deductible home-acquisition debt interest.
The mortgage interest deduction is limited to what would have been deductible each year if the borrower had paid it and accrues until the loan is paid off, at which time it is deductible.
So, who deducts the interest when the loan is paid off?
Borrower – If the borrower pays off the loan while still living, then the borrower can deduct the sum of the interest he or she would have been entitled to deduct each year had it been paid, subject to the limitations discussed in 1 and 2 above.
Estate – If the estate pays off the mortgage after the borrower has passed away, then the estate would deduct the interest on its income tax return. The deductible amount would be the sum of the interest that the borrower would have been entitled to deduct each year had he or she paid it, subject to the limitations discussed in 1 and 2 above.
Beneficiary – If the beneficiaries who inherit the home pay off the mortgage, then they would be able to deduct the interest as an itemized deduction on their personal 1040 income tax returns. The deductible amount would be the sum of the interest the borrower would have been entitled to deduct each year had he or she paid it, subject to the limitations discussed in 1 and 2 above.
Reverse mortgages have brought financial security to many seniors so that they can live a comfortable life. If you are a senior who is struggling with your finances, then carefully explore your options, including the possibility of a reverse mortgage. Keep in mind, however, that some reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high, especially if you don’t plan to be in your home for a long time or only need to borrow a small amount. Here’s a comparison between some aspects of reverse mortgages and home equity loans:
Before taking out a reverse mortgage, you should carefully consider all of your options, such as selling the home, taking out a conventional mortgage, taking in room renters, and renting out the home while living elsewhere. This may also be something you will want to discuss with family members.
If you need assistance or have questions about how a reverse mortgage might affect your tax situation, please call your tax preparer or other financial advisors.
Does Your Business Need to File Forms 1099-NEC or 1099-MISC?
If you use independent contractors to perform services for your business, for each one that you pay $600 or more for the year, you are required to issue the worker and the IRS a Form 1099-NEC no later than January 31, 2022, for 2021 payments.
Generally, a 1099-NEC is not required to be issued if the independent contractor or service provider is a corporation. However, payments to attorneys for legal fees of $600 or more must be reported, even if the attorney operates as a corporation.
To properly complete the form, you’ll need the individual’s name and tax identification number. But it isn’t unusual to, say, hire a repairman early in the year to whom you pay less than $600, and then use the repairman’s services again later and have the total for the year exceed the $600 limit. If you overlooked getting the information, such as the individual’s complete name and tax identification number (TIN), needed to file the 1099-NEC for the year, you may have difficulty getting the information after the fact. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.
IRS Form W-9 is provided by the government as a way for you to obtain the data required to file the 1099s for your contract workers and service providers. This data includes the person’s name, address, type of business entity and TIN (usually a Social Security number or an Employer Identification Number), plus certifications as to the ID number and citizenship status, among others. It also provides you with verification that you complied with the law should the independent contractor provide you with incorrect information. We highly recommend that you have a potential independent contractor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen on the IRS’ website and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS. The W-9 was last revised by the IRS in October 2018, so if you have older blank W-9s that you give to your service providers, you may want to print copies of the latest version (including the instructions) and discard the older unused forms.
To avoid a penalty, the government’s copies of the 1099-NECs must be sent to the IRS by January 31, 2022, along with transmittal Form 1096. They must be submitted on magnetic media or on optically scannable forms. However, a business that files more than 250 information returns (such as 1099s, W-2s, and 1095s) in a calendar year is required to file them electronically. The 250-return requirement may be lowered to 100 if proposed regulations are finalized by the IRS, but the change wouldn’t be effective until 2023.
In some cases, for payments of $600 or more, you may need to file Form 1099-MISC, which is used to report rents, certain prizes, and awards, and income your business paid other than that includible on Form 1099-NEC or payable to employees. The 2021 Form 1099-MISC must be provided to the income recipient by January 31, 2022, and to the IRS by February 28 (March 31 if filed electronically) accompanied by transmittal Form 1096.
This firm provides 1099 preparation services. If you need assistance or have questions, please give your own tax preparer a call.