Getting Ready for the 2023 Tax Filing Season
Filing your 2022 tax return promises to be just as complicated as always; however, there are steps that taxpayers can take right now to ensure their tax filing experience goes smoothly. Let’s take a look at what’s new for 2022 and some key items taxpayers should consider before they file.
What’s New
No above-the-line charitable deductions. During COVID, taxpayers could take up to a $600 charitable donation tax deduction on their tax returns. However, in 2022, those who take a standard deduction may not take an above-the-line deduction for charitable donations.
More people may be eligible for the Premium Tax Credit. For tax year 2022, taxpayers may still qualify for temporarily expanded eligibility for the premium tax credit. Please call if you want more information about this topic.
Reporting rules changed for Form 1099-K. Taxpayers should receive Form 1099-K, Payment Card and Third Party Network Transactions, by January 31, 2023, if they received third party payments in tax year 2022 for goods and services that exceeded $20,000 and 200 transactions.
Taxpayers should remember that most income is taxable, including unemployment income, refund interest, and income from the gig economy and digital assets. As such, they must still report all income on their tax return unless it’s excluded by law, whether they receive a Form 1099-K, a Form 1099-NEC, Nonemployee Compensation, or any other information return.
Some tax credits return to 2019 levels. This means that affected taxpayers will likely receive a significantly smaller refund compared with the previous tax year. Changes include amounts for the Child Tax Credit (CTC), Earned Income Tax Credit (EITC), and Child and Dependent Care Credit.
- Those who received $3,600 per dependent in 2021 for the CTC will, if eligible, get $2,000 for the 2022 tax year.
- For the EITC, eligible taxpayers with no children who received roughly $1,500 in 2021 will now get $500 in 2022.
- The Child and Dependent Care Credit returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021.
Refunds may be smaller in 2023. Taxpayers will not receive an additional stimulus payment with a 2023 tax refund because there were no Economic Impact Payments for 2022. In addition, taxpayers who don’t itemize and take the standard deduction won’t be able to deduct their charitable contributions.
Eligibility rules changed to claim a tax credit for clean vehicles. There are several changes taxpayers should be aware of, such as the tax credit is generally available only for qualifying electric vehicles for which final assembly occurred in North America (final assembly requirement) and a transition rule for vehicles purchased before August 16, 2022. Taxpayers who want to take advantage of this tax credit should call the office for assistance in determining eligibility.
Gather 2022 Tax Documents
The best way to prepare for tax filing is to gather important tax documents – either electronic or paper – and keep them in one place. These documents include but are not limited to: Forms W-2 from employers, Forms 1099 from banks or other payers, Form 1099-K from third-party payment networks, Form 1099-NEC for nonemployee compensation, Form 1099-MISC for miscellaneous income, or Form 1099-INT if you were paid interest, as well as records documenting all digital asset transactions.
Typically, year-end forms arrive by mail or are available online mid-to-late January. Taxpayers should carefully review each income statement for accuracy and contact the issuer to correct information that needs to be updated.
Ensuring their tax records are complete before filing helps taxpayers avoid errors that lead to processing delays. When they have all their documentation, taxpayers can file an accurate return and avoid processing or refund delays or IRS letters.
Sign Up for or Into an Online Account
An IRS Online Account lets taxpayers securely access their personal tax information, including tax return transcripts, payment history, certain notices, prior year adjusted gross income, and power of attorney information. Filers can log in to verify if their name and address are correct. They should notify the IRS if their address has changed. They must notify the Social Security Administration of a legal name change to avoid a delay in processing their tax return.
Renew Expiring Tax ID Numbers
Taxpayers should ensure their Individual Tax Identification Number (ITIN) hasn’t expired before filing a 2022 tax return. Those who need to file a tax return should now submit a Form W-7, Application for IRS Individual Taxpayer Identification Number to renew their ITIN. Taxpayers who fail to renew an ITIN before filing a tax return next year could face a delayed refund and may be ineligible for certain tax credits. Applying now will help avoid the rush and refund and processing delays in 2023.
Avoid Refund Delays and Understand Refund Timing
Many different factors can affect the timing of a refund after the IRS receives a return. Although the IRS generally issues most refunds in less than 21 days, taxpayers should not rely on receiving a 2022 federal tax refund by a certain date. As such, making major purchases or paying bills is not wise until the refund is received. Some returns may require additional review and may take longer to process if IRS systems detect a possible error, the return is missing information, or there is suspected identity theft or fraud.
Also, taxpayers should be aware that the IRS cannot issue refunds for people claiming the EITC or Additional Child Tax Credit (ACTC) before mid-February. The law requires the IRS to hold the entire refund – not just the portion associated with EITC or ACTC.
Use Direct Deposit for Faster Refunds
The fastest way to get a tax refund is by filing electronically and choosing direct deposit. Direct deposit is faster than waiting for a paper check in the mail. It also avoids the possibility that a refund check could be lost, stolen, or returned to the IRS as undeliverable.
Prepaid debit cards or mobile apps may allow direct deposit of tax refunds. They must have routing and account numbers that can be entered on a tax return. Taxpayers can check with the mobile app provider or financial institution to confirm which numbers to use.
Last Quarterly Payment for 2022 Due January 17, 2023
Taxpayers may need to consider estimated or additional tax payments due to non-wage income from unemployment, self-employment, annuity income, or even digital assets. The Tax Withholding Estimator on IRS.gov can help wage earners determine if they need to consider an additional tax payment to avoid an unexpected tax bill when they file.
Get Help From a Tax Professional
Filing taxes is inevitable for most people, and with tax law becoming more complex with every passing year, there’s no better time to get ready than right now. Call today and find out how a professional tax preparer can help.
Individual Taxpayers: Tax Changes for 2023
Every year, it’s a sure bet that there will be changes to current tax law, and this year is no different. From standard deductions to health savings accounts and tax rate schedules, here’s a checklist of tax changes to help you plan the year ahead.
Individuals
In 2023, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion. The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2022; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025.
Standard Deduction
In 2023, the standard deduction increases to $13,850 for individuals (up from $12,950 in 2022) and to $27,700 for married couples (up from $25,900 in 2022).
Alternative Minimum Tax (AMT)
In 2023, AMT exemption amounts increase to $81,300 for individuals (up from $75,900 in 2022) and $126,500 for married couples filing jointly (up from $118,100 in 2022). Also, the phaseout threshold increases to $578,150 ($1,156,300 for married filing jointly). Both the exemption and threshold amounts are indexed annually for inflation.
“Kiddie Tax”
For taxable years beginning in 2023, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax” is $1,250. The same $1,250 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” For example, one of the requirements for the parental election is that a child’s gross income for 2023 must be more than $1,250 but less than $12,500.
Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay the account owner’s current or future medical expenses, their spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2023, a qualifying HDHP must have a deductible of at least $1,500 for self-only coverage or $3,000 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $7,500 for self-only coverage and $15,000 for family coverage.
Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): The Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP).
Self-only coverage. For taxable years beginning in 2023, the term “high deductible health plan” for self-only coverage means a health plan that has an annual deductible that is not less than $2,650 and not more than $3,950, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $5,300.
Family coverage. For taxable years beginning in 2023, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $5,300 and not more than $7,900, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $9,650.
AGI Limit for Deductible Medical Expenses
In 2023, the deduction threshold for deductible medical expenses is 7.5 percent of adjusted gross income (AGI), made permanent by the Consolidated Appropriations Act, 2022.
Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2023, the limitation is $480. Persons more than 40 but not more than 50 can deduct $890. Those more than 50 but not more than 60 can deduct $1,790, while individuals more than 60 but not more than 70 can deduct $4,770. The maximum deduction is $5,960 and applies to anyone more than 70 years of age.
Medicare Taxes
The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2023, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax.
Foreign Earned Income Exclusion
For 2023, the foreign earned income exclusion amount is $120,000 up from $1112,000 in 2022.
Long-Term Capital Gains and Dividends
In 2023, tax rates on capital gains and dividends remain the same as 2022 rates (0%, 15%, and a top rate of 20%); however, threshold amounts have increased: the maximum zero percent rate amounts are $44,625 for individuals and $89,250 for married filing jointly. For an individual taxpayer whose income is at or above $492,300 ($553,850 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $44,625 and below $492,300 for single filers).
Estate and Gift Taxes
For an estate of any decedent during calendar year 2023, the basic exclusion amount is $12.92 million, indexed for inflation (up from $12.06 million in 2022). The maximum tax rate remains at 40 percent. The annual exclusion for gifts increases to $17,000.
Individuals – Tax Credits
Adoption Credit
In 2023, a nonrefundable (only those individuals with tax liability will benefit) credit of up to $15,950 is available for qualified adoption expenses for each eligible child.
Earned Income Tax Credit
For tax year 2023, the maximum Earned Income Tax Credit (EITC) for low, and moderate-income workers and working families increases to $7,430 (up from $6,935 in 2022). The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credit
For 2023, the child tax credit reverts to $2,000 per child, age 17 or younger. The refundable portion of the credit increases to $1,600 in 2023, so that even if taxpayers do not owe any tax, they can still claim the credit. A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older).
Child and Dependent Care Tax Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2023. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners (AGI of $43,000 or more), the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.
Clean Vehicle Tax Credit
The Inflation Reduction Act makes several additional changes to the electric vehicle tax credit that will take effect starting January 1, 2023. Vehicles eligible for the Clean Vehicle Tax Credit now include both EVs (electric vehicles) and FCEVs (fuel cell electric vehicles) but must meet two requirements to be eligible for the tax credit. The critical minerals component refers to sourcing requirements for critical mineral extraction, processing, and recycling. The battery components requirement refers to vehicles that include a traction battery that has at least seven kilowatt-hours (kWh).
Vehicles that meet critical mineral requirements are eligible for $3,750 tax credit, and vehicles that meet battery component requirements are eligible for a $3,750 tax credit. Vehicles meeting both requirements are eligible for a nonrefundable tax credit of up to $7,500; however, there are additional additional requirements regarding manufacturer suggested retail price (MSRP) thresholds for modified adjusted gross income (MAGI).
Individuals – Education
American Opportunity Tax Credit and Lifetime Learning Credit
The maximum credit is $2,500 per student for the American Opportunity Tax Credit. The Lifetime Learning Credit remains at $2,000 per return. Both credits phase out for taxpayers with modified adjusted gross income between $80,000 and $90,000 (between $160,000 and $180,000 for joint filers). To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
While the phaseout limits for Lifetime Learning Credit increased, taxpayers should note that the qualified tuition and expenses deduction was repealed starting in 2022.
Interest on Educational Loans
In 2023, the maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $75,000 ($150,500 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $90,000 ($185,000 joint filers).
Individuals – Retirement
Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases to $22,500. Contribution limits for SIMPLE plans also increase to $15,500. The maximum compensation used to determine contributions increases to $330,000 (up from $305,000 in 2022).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $73,000 and $83,000.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $116,000 and $136,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $218,000 and $228,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $138,000 and $153,000 for singles and heads of household, up from $129,000 to $144,000. For married couples filing jointly, the income phase-out range is $218,000 and $228,000, up from $204,000 to $214,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Saver’s Credit
In 2023, the AGI limit for the Saver’s Credit (also known as the Retirement Savings Contribution Credit) for low and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000 in 2022; $54,700 for heads of household, up from $51,000 in 2022; and $36,500 for singles and married individuals filing separately, up from $34,000 in 2022.
Businesses: Important Tax Changes in 2023
Here’s what small business owners need to know about tax law changes and inflation adjustments for the year ahead.
Standard Mileage Rates
In 2023, the rate for business miles driven is 65.5 cents per mile, up 3 cents from the midyear increase setting the rate for the second half of 2022.
Section 179 Expensing
In 2023, the Section 179 expense deduction increases to a maximum deduction of $1,160,000 of the first $2,890,000 of qualifying equipment placed in service during the current tax year. This amount is indexed to inflation for tax years after 2018. The deduction was enhanced under the TCJA to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems. Also, of note is that costs associated with the purchase of any sport utility vehicle, treated as a Section 179 expense, cannot exceed $28,900.
Bonus Depreciation
Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and years beyond.
Qualified Business Income Deduction
Eligible taxpayers are able to deduct up to 20 percent of certain business income from qualified domestic businesses, as well as certain dividends. To qualify for the deduction business income must not exceed a certain dollar amount. In 2023, these threshold amounts are $182,100 for single and head of household filers and $364,200 for married taxpayers filing joint returns.
Research & Development Tax Credit
Starting in 2018, businesses with less than $50 million in gross receipts can use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well.
Work Opportunity Tax Credit (WOTC)
Extended through 2025 (The Consolidated Appropriations Act, 2022), the Work Opportunity Tax Credit is available for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire.
Employee Health Insurance Expenses
For taxable years beginning in 2023, the dollar amount of average wages is $30,700 ($28,700 in 2022). This amount is used for limiting the small employer health insurance credit and for determining who is an eligible small employer for purposes of the credit.
Business Meals and Entertainment Expenses
Taxpayers who incur food and beverage expenses associated with operating a trade or business are able to deduct 100 percent (50 percent for tax years 2018-2020) of these expenses for tax years 2022 and 2023 (The Consolidated Appropriations Act, 2022) as long as the meal is provided by a restaurant.
Employer-provided Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees in 2023, the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $300. The monthly limitation for qualified parking is $300.
Tax Season is Right Around the Corner
While this checklist outlines important tax changes for 2023, additional changes in tax law are likely to arise during the year ahead. Don’t hesitate to contact the office if you have any questions about your tax situation or want to get a head start on tax planning for your small business in the year ahead.
Highlights of the Secure 2.0 Act of 2022
The $1.66 trillion Consolidated Appropriations Act, 2023 was signed into law on December 29, 2022 by President Biden. Included in the 4,155 page bill is the SECURE Act 2.0 of 2022, which contains a number of tax provisions relating to retirement.
Let’s take a look at the highlights:
Automatic Enrollment in Retirement Plans
Employers starting new retirement plans in tax year 2025 or later would be required to automatically enroll their employees in 401(k) and 403(b) plans. Employees would set aside not less than 3 percent but not more than 10 percent of their paycheck. There would be an automatic one percent increase yearly until the employee participant reaches 10 percent. Employees can set aside as much as 15 percent. The new tax provision doesn’t apply to businesses in existence less than 3 years. Furthermore, existing businesses with retirement plans in place, employers with fewer than 10 employees, and church and government plans are exempt from the new law.
Starter 401k Plans. For tax years after December 31, 2023, the new law allows employers with no retirement plans to establish starter 401k plans. Workers would be enrolled automatically, contributing at least 3 percent. Catch-up contributions are allowed for workers aged 50 and up.
Federal Match for Saver’s Credit
Starting in 2027, lower to middle income taxpayers contributing to a traditional IRA or a 401(k) at their workplace would be eligible for a 50 percent matching contribution of up to $2,000 from the federal government. The federal matching contribution will be directly deposited into their IRS or 401(k) account. Saver’s must be aged 18 or older and contribute more than $100 to receive the match. Dependents, full-time students, and nonresident aliens (unless treated taxable as a resident) are not eligible. The match phases out between $41,000 and $71,000 for joint filers, $20,500 to $35,500 for single filers and $30,750 to $53,250 for heads of households.
Emergency Savings Funds and 401k Withdrawals
Emergency Savings Plans. Employers are now able to set up emergency savings plans for employees that are linked to their retirement accounts. Employees would be allowed to contribute 3 percent of their salary or a maximum of $2,500 to the emergency account.
401k Withdrawals for Emergency Personal Expenses Another option employers can offer is a one-time withdrawal from their employees’ 401k plans. Employees would be permitted one (1) distribution per calendar year for a maximum amount of $1,000. This tax provision goes into effect in 2024.
Student Loan Payments Count as Retirement Contributions
Starting in 2024, employees that make student loan payments to loan servicers qualify for matching contributions from their employer to a retirement plan – even if the employees themselves do not make contributions of their own.
Part-time Workers
Starting in 2025, part-time workers are eligible to participate in their employer’s 401(k) retirement plans after two years instead of three (SECURE Act 2.0, 2019). Each 12-month period for which the employee has more than 500 hours of service shall be treated as a year of service.
IRA Catch-up Contributions
Indexed to inflation. For taxable years beginning after December 31, 2023, the $1,000 catch-up contribution amount will be indexed to inflation with the amounts rounded down to the nearest multiple of $100.
Higher catch-up contributions. Starting in taxable years after December 31, 2024, catch-up contributions for workers aged 60, 61, 62, and 63 increase to $10,000 or 150 percent of the regular catch-up amount that year, whichever is greater. Cost of living adjustments will be in effect for years after December 31, 2024.
Required Minimum Distributions (RMDs) Increase to Age 73
For individuals who reach age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age for starting RMDS is 73. For individuals who attain age 74 after December 31, 2032, the applicable age is 75. The new rules apply to distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after such date.
Roth IRAs
New Rules for Roth 401ks. Effective January 1, 2023, employers have the option to let employees choose between having a company match in a Roth 401k or a regular 401k. Under current law, employer matching contributions must go into a regular 401k even if a taxpayer puts money in their Roth 401k.
Catch-up Contributions for Higher Earners. Starting in 2024, catch-up contributions for workers aged 50 and up who earn more than $145,000 must be put into a Roth retirement account, rather than a traditional pretax retirement account such as a 401k. The $145,000 threshold amount will be indexed for inflation starting in 2025 and rounded down to the lowest multiple of $5,000.
Special Rules for 529 rollovers. Starting in 2024, 529 college savings plans that have been maintained for at least 15 years can be rolled over to a Roth IRA. The rollover must be trustee to trustee and there is a $35,000 lifetime limit per account beneficiary.
Help is Just a Phone Call Away
If you have questions about any of the tax provisions in the SECURE 2.0 Act or 2022, or any other tax-related topic, do not hesitate to contact the office.
Standard Mileage Rates for 2023
Beginning on January 1, 2023, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be as follows. These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.
- 65.5 cents per mile driven for business use, up 3 cents from the midyear increase setting the rate for the second half of 2022.
- 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, consistent with the increased midyear rate set for the second half of 2022.
- 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2022.
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil.. The rate for medical and moving purposes is based on the variable costs.
Impact of the Tax Cuts and Jobs Act. Taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Taxpayers can use the standard mileage rate but generally must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses.
Leased vehicles. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.
Please contact the office if you have any questions about standard mileage rates or which driving activities you should keep track of as the new tax year begins.
Reporting of $600 Third-party Payments Delayed
Due to concerns regarding the implementation timeline, reporting thresholds for third-party settlement organizations that were set to take effect on January 1, 2023, have been delayed. As such, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan of 2021.
Instead, calendar year 2022 will be a transition period for implementation of the lowered threshold reporting for third-party settlement organizations (TPSOs) including Venmo, PayPal and CashApp that would have generated Form 1099-Ks for taxpayers. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements. This change under the law is important because tax compliance is higher when amounts are subject to information reporting, like the Form 1099-K.
Taxpayers should note, however, that the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions remains in effect. Taxpayers should also know that the law is not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or holiday gifts, or paying a family member or another for a household bill.
Background
The American Rescue Plan of 2021 changed the reporting threshold for TPSOs. The new threshold for business transactions is $600 per year; a change from the previous threshold of more than 200 transactions per year, exceeding an aggregate amount of $20,000. Under the law, beginning January 1, 2023, a TPSO is required to report third-party network transactions paid in 2022 with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions. TPSOs report these transactions by providing individual payee’s an IRS Form 1099-K, Payment Card and Third-Party Network Transactions.
Transition Period
The transition period delays the reporting of transactions in excess of $600 to transactions that occur after calendar year 2022. It is intended to facilitate an orderly transition for TPSO tax compliance, as well as individual payee compliance with income tax reporting. A participating payee, in the case of a third-party network transaction, is any person who accepts payment from a third-party settlement organization for a business transaction.
Taxpayers who may have already received a 1099-K as a result of the statutory changes, should know that the IRS is working rapidly to provide instructions and clarity so that taxpayers understand what to do. Additional details on the delay will be available in the near future along with additional information to help taxpayers and the industry; however, don’t hesitate to call the office with any immediate concerns or questions.
Watch Out for Holiday Gift Card Scams
There’s never an off-season when it comes to scammers and thieves who want to trick people into scamming them out of money, stealing their personal information, or talking them into engaging in questionable behavior with their taxes. While scam attempts typically peak during tax season, taxpayers need to remain vigilant all year long. As such, it is once again time to remind taxpayers that while gift cards make great presents for loved ones, they cannot be used to pay taxes.
Nonetheless, that doesn’t stop scammers from targeting taxpayers by asking them to pay a fake tax bill with holiday gift cards. Scammers may also use a compromised email account to send emails requesting gift card purchases for friends, family, or co-workers.
How the Scam Works:
- The most common way scammers request gift cards is over the phone through a government impersonation scam. However, they will also request gift cards by sending a text message, email, or through social media.
- A scammer posing as an IRS agent will call the taxpayer or leave a voicemail with a callback number informing the taxpayer that they are linked to some criminal activity. For example, the scammer will tell the taxpayer their identity has been stolen and used to open fake bank accounts.
- The scammer will threaten or harass the taxpayer by telling them that they must pay a fictitious tax penalty.
- The scammer instructs the taxpayer to buy gift cards from various stores.
- Once the taxpayer buys the gift cards, the scammer will ask the taxpayer to provide the gift card number and PIN.
How to Know if it’s Really the IRS calling:
The IRS will never:
- Call to demand immediate payment using a specific payment method such as a gift card, prepaid debit card, or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
- Demand that taxpayers pay taxes without the opportunity to question or appeal the amount they owe. All taxpayers should be aware of their rights.
- Threaten to bring in local police, immigration officers, or other law enforcement to have the taxpayer arrested for not paying.
- Threaten to revoke the taxpayer’s driver’s license, business licenses or immigration status.
If You’ve Been Targeted by a Scammer:
- Contact the Treasury Inspector General for Tax Administration to report a phone scam. Use their IRS Impersonation Scam Reporting webpage. They can also call 800-366-4484.
- Report phone scams to the Federal Trade Commission. Use the FTC Complaint Assistant on FTC.gov. They should add “IRS phone scam” in the notes.
- Report threatening or harassing telephone calls claiming to be from the IRS to [email protected]. Please include “IRS phone scam” in the subject line.
Tax Credit for Hiring Long-term Unemployed Workers
With many businesses facing a tight job market, employers should know about a valuable tax credit available to them for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment. If your business is hiring right now, the Work Opportunity Tax Credit (WOTC) may help.
Background
Legislation enacted in December extended the WOTC through the end of 2025. This long-standing tax benefit encourages employers to hire workers certified as members of any of ten targeted groups facing barriers to employment. Millions of Americans have been out of work at one time or another since the pandemic began, but one of these targeted groups is long-term unemployment recipients who have been unemployed for at least 27 consecutive weeks and have received state or federal unemployment benefits during part or all of that time.
Eligible Employees
The other groups include certain veterans and recipients of various kinds of public assistance, among others. Specifically, the 10 groups are:
- Temporary Assistance for Needy Families (TANF) recipients,
- Unemployed veterans, including disabled veterans,
- Formerly incarcerated individuals,
- Designated community residents living in Empowerment Zones or Rural Renewal Counties,
- Vocational rehabilitation referrals,
- Summer youth employees living in Empowerment Zones,
- Supplemental Nutrition Assistance Program (SNAP) recipients,
- Supplemental Security Income (SSI) recipients,
- Long-term family assistance recipients,
- Long-term unemployment recipients.
Qualifying for the Credit
To qualify for the credit, an employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency (SWA). Do not submit this form to the IRS.
Form 8850 must be submitted to the SWA within 28 days after the eligible worker begins work. Eligible businesses claim the WOTC on their federal income tax return. It is generally based on wages paid to eligible workers during the first year of employment. The credit is first figured on Form 5884, Work Opportunity Credit, and then is claimed on Form 3800, General Business Credit.
Though the credit is not available to tax-exempt organizations for most groups of new hires, a special rule allows them to claim the WOTC for hiring qualified veterans. These organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations.
If you’re a small business owner who wants to take advantage of this tax saving credit, but aren’t sure you qualify, help is just a phone call away.
Get Paid Faster in 2023: Use These QuickBooks Tools
Have you had a chance to analyze how your cash flow fared in 2022? If not, you probably got caught up in a lot of year-end tasks. But once the holidays are over and you’ve turned the calendar page to 2023, it’s time to start thinking about how you can accelerate your receivables next year.
You’ve probably already tried to encourage your customers to pay faster. But have you really explored all of the ways QuickBooks offers to understand and improve your cash flow? One way to get a quick look at how you’re doing is to look at your Payments Snapshot. Click Snapshots in the toolbar, then click the Payments tab. Look at the Invoice Payment Status chart and the List of Customers Who Owe Money. Run the A/R Aging report.
How are you doing right now? If the answer is not as good as you’d like, then maybe it is time to make plans to improve your cash flow in 2023. Here are four ways QuickBooks can help you get paid faster:
1. Send statements to past-due customers.
Maybe including a customer message on invoices that says something like, “Thanks for your order! We appreciate your prompt payment” will nudge them a bit. But if you’ve sent one or two invoices and still haven’t heard from some customers, consider sending Statements in QuickBooks.
There are two occasions when you might send statements to customers. Sometimes, they just want a record of their invoices and payments for a specific date range. But they can also be effective in reminding customers that they still owe you money.
Figure 1: You can indicate which group of customers should be sent statements in QuickBooks.
Open the Customers menu and select Create Statements . Verify the Statement Date and choose between your two options. You can either create statements that include all transactions (invoices and payments) for a given period or you can just create statements for customers who have open transactions that are more than X days past due. In the next box, select the group of customers who should receive statements. A panel to the right (not pictured) contains more options. When you’re done, you can Preview, Print , and/or E-mail the statements.
Tip: Did you know you can automate statement distribution? Please call for help setting this up.
2. Make your invoices the best they can be and send them out promptly.
If you haven’t explored QuickBooks’ options for customizing your invoices, now’s the time to do it. Open the Lists menu and select Templates . Double-click on a form whose Type is Invoice . Click Manage Templates and click on one to highlight it. You’ll see the template in the right pane. Click Copy and give it a new name (so you don’t overwrite the original) in the Template Name field. Click OK to open the Basic Customization window, where you can customize the template.
As you make changes, they’ll be reflected in the template image. Click Additional Customization for more fine-tuning. Click OK when you’re done to add your new template to the available list. Please contact the office if you have any questions.
3. When payments go past due, assess finance charges.
You may hate to do this, but it might be the only way to get the attention of some customers. QuickBooks allows the Admin to create finance charge invoices. Open the Edit menu and select Preferences. Click Finance Charges and then the Company Preferences tab to open the window pictures below. Complete the fields and click OK.
Warning: Some jurisdictions don’t allow you to charge finance charges on overdue finance charges. Make sure you understand local laws before checking that box.
Figure 2: These are your options when assessing finance charges.
To see who should be invoiced for finance charges, open the Customers menu and select Assess Finance Charges. Change the Assessment Date if necessary, and a list of delinquent customers opens in a table, along with their Overdue Balance and Finance Charge. Click in the first column of each customer you’re charging to create a checkmark, then click Assess Charges. QuickBooks will create a separate invoice for finance charges. If you leave the customer’s row unchecked in the table so no invoice is generated, you can include the charges on the next statement.
Warning: This process can be complicated, so please call if you need assistance.
4. Let your customers pay online via credit card or bank transfer (ACH).
Enough said. This is the best way to get your customers to pay faster. Call if you need help getting set up with QuickBooks Payments.
Make “Improve Cash Flow” a goal for 2023.
With the start of the new year, you’re probably juggling a lot of obligations along with your professional and personal lives, but try to take some time to think about these suggestions – or possibly revisit this column later in the month.
Tax Due Dates for January 2023
During January
All employers – Give your employees their copies of Form W-2 for 2022 by January 31, 2023. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting.
January 3
Employers – Payment of deferred employer share of social security tax from 2020. If the employer deferred paying the employer share of social security tax or the railroad retirement tax equivalent in 2020, 50% of the deferred amount of the employer share of social security tax was due by January 3, 2022. The remaining 50% of the deferred amount of the employer share of social security tax is due by January 3, 2023. Any payments or deposits made before January 3, 2022, were first applied against the payment due by January 3, 2022, and then applied against the payment due on January 3, 2023.
January 10
Employees – who work for tips. If you received $20 or more in tips during December 2022, report them to your employer. You can use Form 4070, Employee’s Report of Tips to Employer.
January 17
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2022.
Individuals – Make a payment of your estimated tax for 2022 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2022 estimated tax. However, you do not have to make this payment if you file your 2022 return (Form 1040 or Form 1040-SR) and pay all tax due by January 31, 2023.
Employers – Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2022.
Farmers and Fisherman – Pay your estimated tax for 2022 using Form 1040-ES. You have until April 18 to file your 2022 income tax return (Form 1040 or Form 1040-SR). If you do not pay your estimated tax by January 17, you must file your 2022 return and pay all tax due by March 1, 2023, to avoid an estimated tax penalty.
January 31
Employers – Give your employees their copies of Form W-2 for 2022. If an employee agreed to receive Form W-2 electronically, have it posted on a website and notify the employee of the posting. File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2022.
Payers of nonemployee compensation – File Form 1099-NEC for nonemployee compensation paid in 2022.
Individuals – who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 17, you may choose (but are not required) to file your income tax return (Form 1040 or Form 1040-SR) for 2022 by January 31. Filing your return and paying all tax due by January 31, 2023, prevents any penalty for late payment of the last installment. If you cannot file and pay your tax by January 31, file and pay your tax by April 18.
Employers – Federal unemployment tax. File Form 940 for 2022. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 10 to file the return.
Farm Employers – File Form 943 to report social security and Medicare taxes and withheld income tax for 2022. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Certain Small Employers – File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2022. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2022 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return.
Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2022. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
Employers – Nonpayroll taxes. File Form 945 to report income tax withheld for 2022 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
Payers of Gambling Winnings – If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.
Businesses – Give annual information statements to recipients of certain payments made during 2022. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date only applies to certain types of payments.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
