When you filed your federal tax return this year, were you surprised to find you owed money? You might want to change your withholding so that this doesn’t happen again next year. You might even want to adjust your withholding if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan.

Adjust if necessary

Taxpayers should periodically review their tax situations and adjust withholding, if appropriate.

The IRS has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the child credit, the dependent credit and the repeal of dependent exemptions. You can access the IRS calculator here: https://www.checkpointmarketing.net/newsletter/linkShimRadar.cfm?key=91853187G3971J9375272&l=73525

Life changes

There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

• Adjusted your withholding last year, especially in the middle or later part of the year,
• Owed additional tax when you filed your 2021 return,
• Received a refund that was smaller or larger than expected,
• Got married or divorced,
• Had a child or adopted one,
• Purchased a home, or
• Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payments for 2022 are due on September 15, 2022, and January 16, 2023.)

Plan ahead now

There’s still time to remedy any shortfalls to minimize taxes due for 2022, as well as any penalties and interest. Contact us if you have any questions or need assistance. We can help you determine if you need to adjust your withholding.

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When you take withdrawals from your traditional IRA, you probably know that they’re taxable. But there may be a penalty tax on early withdrawals depending on how old you are when you take them and what you do with the money.

Important: Once you reach a certain age, you must start taking required minimum distributions from your traditional IRAs to avoid a different tax penalty. Previously, the required beginning date (RBD) was April 1 of the year after the year in which you turn 70½. However, a 2019 law changed the RBD to 72 for individuals who reach age 70½ after 2019.

But what if you want to take an “early” withdrawal, defined as one taken before age 59½? You’ll be hit with a 10% penalty tax unless an exception applies. This 10% early withdrawal penalty tax is on top of the regular income tax you’ll owe on the distribution.

Exceptions to the general rule

Fortunately, there are several exceptions to the early withdrawal penalty tax if you use the money for certain things. Common examples include:

• Paying for medical costs that exceed 7.5% of your adjusted gross income,
• Withdrawals up to the amount of qualified higher education expenses for you, your spouse, or the children or grandchildren of you or your spouse, and
• Withdrawals to buy or build a first home for a parent, grandparent, yourself, a spouse, or you or your spouse’s child or grandchild. This exception for first-time home purchases is subject to a lifetime limit of $10,000. A first-time homebuyer is someone who hasn’t had an ownership interest in a home in the last two years before buying a new home.

There’s also an exception to the early withdrawal penalty tax if you take annuity-like annual withdrawals under IRS guidelines. If distributions are made as part of a series of “substantially equal periodic payments” over your life expectancy or the life expectancies of you and your designated beneficiary, the tax doesn’t apply.

Be careful with rollovers

Be aware that the early withdrawal penalty may come into play if you’re moving funds out of an account. You can roll over funds from one IRA to another tax-free so long as you complete the rollover within 60 days. What if you miss the deadline? You may owe tax and the early withdrawal penalty if you’re younger than age 59½. (The IRS may waive the penalty if there are extenuating circumstances.)

We can help

We can tell you if you’re eligible for the exceptions described above or other exceptions to the 10% early withdrawal penalty tax. Be sure to keep good records so you can prove your eligibility.

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Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children.

While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if:

1. The child hasn’t reached age 18 before the close of the tax year, or
2. The child’s earned income doesn’t exceed half of his or her support and the child is age 18 or is a full-time student age 19 to 23.

The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial.

If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax.

Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates.

Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.

Possible saving vehicles

The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:

• Securities and mutual funds oriented toward capital growth;
• Vacant land expected to appreciate in value;
• Stock in a closely held family business, expected to become more valuable as the business expands, but pays little or no cash dividends;
• Tax-exempt municipal bonds and bond funds;
• U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in or an election to recognize income annually is made.

Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as:

• Traditional and Roth IRAs, which can be established or contributed to if the child has earned income;
• Qualified tuition programs (also known as “529 plans”); and
• Coverdell education savings accounts.

A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.

If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return.

Two reporting options

Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax.

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Sales and registrations of electric vehicles (EVs) have increased dramatically in the U.S. in 2022, according to several sources. However, while they’re still a small percentage of the cars on the road today, they’re increasing in popularity all the time.

If you buy one, you may be eligible for a federal tax break. The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles including passenger vehicles and light trucks. The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

Be aware that not all EVs are eligible for the tax break, as we’ll describe below.

The EV definition

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For example, Tesla and General Motors vehicles are no longer eligible for the tax credit. And Toyota is the latest auto manufacturer to sell enough plug-in EVs to trigger a gradual phase out of federal tax incentives for certain models sold in the U.S.

Several automakers are telling Congress to eliminate the limit. In a letter, GM, Ford, Chrysler and Toyota asked Congressional leaders to give all electric car and light truck buyers a tax credit of up to $7,500. The group says that lifting the limit would give buyers more choices, encourage greater EV adoption and provide stability to autoworkers.

The IRS provides a list of qualifying vehicles on its website and it recently added some eligible models. You can access the list here: https://www.irs.gov/businesses/irc-30d-new-qualified-plug-in-electric-drive-motor-vehicle-credit.

Here are some additional points about the plug-in electric vehicle tax credit:

• It’s allowed in the year you place the vehicle in service.
• The vehicle must be new.
• An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

These are only the basic rules. There may be additional incentives provided by your state. If you want more information about the federal plug-in electric vehicle tax break, contact us.

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If you’ve recently begun receiving disability income, you may wonder how it’s taxed. The answer is: It depends.

The key issue is: Who paid for the benefit? If the income is paid directly to you by your employer, it’s taxable to you just as your ordinary salary would be. (Taxable benefits are also subject to federal income tax withholding. However, depending on the employer’s disability plan, in some cases they aren’t subject to Social Security tax.)

Frequently, the payments aren’t made by an employer but by an insurance company under a policy providing disability coverage. In other cases, they’re made under an arrangement having the effect of accident or health insurance. In these cases, the tax treatment depends on who paid for the insurance coverage. If your employer paid for it, then the income is taxed to you just as if it was paid directly to you by the employer. On the other hand, if it’s a policy you paid for, the payments you receive under it aren’t taxable.

Even if your employer arranges for the coverage (in a policy made available to you at work), the benefits aren’t taxed to you if you (and not your employer) pay the premiums. For these purposes, if the premiums are paid by the employer but the amount paid is included as part of your taxable income from work, the premiums will be treated as paid by you. In these cases, the tax treatment of the benefits received depends on the tax treatment of the premiums paid.

Illustrative example

Let’s say Max’s salary is $1,000 a week ($52,000 a year). Additionally, under a disability insurance arrangement made available to him by his employer, $10 a week ($520 annually) is paid on his behalf by his employer to an insurance company. Max includes $52,520 in income as his wages for the year ($52,000 paid to him plus $520 in disability insurance premiums). Under these facts, the insurance is treated as paid for by Max. If he becomes disabled and receives benefits under the policy, the benefitsaren’t taxable income to him.

Now assume that Max includes only $52,000 in income as his wages for the year because the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans. In this case, the insurance is treated as paid for by the employer. If Max becomes disabled and receives benefits under the policy, the benefits are taxable income to him.

There are special rules if there is a permanent loss (or loss of the use) of a member or function of the body or a permanent disfigurement. In these cases, employer disability payments aren’t taxed, as long as they aren’t computed based on amount of time lost from work.

Social Security disability benefits 

This discussion doesn’t cover the tax treatment of Social Security disability benefits. They may be taxed to you under the rules that govern Social Security benefits.

Needed coverage

In deciding how much disability coverage you need to protect yourself and your family, take the tax treatment into consideration. If you’re buying the policy yourself, you only have to replace your “after tax” (take-home) income because your benefits won’t be taxed. On the other hand, if your employer is paying for the benefit, keep in mind that you’ll lose a percentage of it to taxes. If your current coverage is insufficient, you may want to supplement the employer benefit with a policy you take out on your own. Contact us if you’d like to discuss this issue.

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It’s not just businesses that can deduct vehicle-related expenses on their tax returns. Individuals also can deduct them in certain circumstances. Unfortunately, under current law, you may not be able to deduct as much as you could years ago.

For years prior to 2018, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. The changes were a result of the Tax Cuts and Jobs Act (TCJA), which could also affect your tax benefit from medical and charitable miles.

Fortunately, if you’re eligible to deduct driving costs, the IRS just increased the standard amounts for the second half of 2022 due to the high price of gas.

Current vs. past limits 

Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. But the deduction was subject to a 2% of adjusted gross income (AGI) floor, which meant that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. However, for 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends miscellaneous itemized deductions subject to the 2% floor.

If you’re self-employed, business mileage can be deducted from self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.

Miles driven for a work-related move prior to 2018 were generally deductible “above the line” (that is, itemizing wasn’t required to claim the deduction). But for 2018 through 2025, under the TCJA, moving expenses are deductible only for active-duty members of the military.

Miles driven for health-care-related purposes are deductible as part of the medical expense itemized deduction. For example, you can include in medical expenses the amounts paid when you use a car to travel to doctors’ appointments. For 2022, medical expenses are deductible to the extent they exceed 7.5% of your AGI.

The limits for deducting expenses for charitable miles driven haven’t changed, but keep in mind that the charitable driving deduction can only be claimed if you itemize. For 2018 through 2025, the standard deduction has been nearly doubled so not as many taxpayers are itemizing. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).

Different mileage rates

Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The 2022 rates vary depending on the purpose:

• Business. 62.5 cents for July 1 to December 31, 2022, and 58.5 cents for January 1 to June 30, 2022.
• Medical. 22 cents for July 1 to December 31, 2022, and 18 cents for January 1 to June 30, 2022.
• Moving for active-duty military. 22 cents for July 1 to December 31, 2022, and 18 cents for January 1 to June 30, 2022.
• Charitable. 14 cents.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.

Get help 

Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your tax planning.

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