2022 Year-End Tax Planning Advice

Everything we do is focused on the core belief that we succeed in life by helping others succeed.
This letter is one complimentary piece of our intense planning and research effort throughout the year to help
in your success. Feel free to share it with anyone you know who could benefit.

Update on the latest at IRS

The latest bill out of congress gives IRS $80 billion in new funding and the authorization to hire 80,000 more employees. When you consider they currently have 77,000 employees you can see how much of a change this is. They are even promising that 85% of you will get to talk to someone when you call the IRS phone numbers in 2022 compared to the 15% who made it through during the 2021 tax filing season. (How did we ever get to the place where only answering 85% of your customer calls was an improvement????) The great news is as of May 2022 the IRS was caught up on all the semi-trailers of unopened mail. That means if you mailed something to them, they have at least opened it. The biggest backlog today is any paper filed tax returns which often include amended returns. When IRS keys those paper returns they have a 22% error rate. The IRS announced they hope to have all the error-free paper returns processed by the end of 2022!!!!

In 2020 and 2021 50% of all households paid no income tax. Compare that to the top 10% which had adjusted gross income of at least $154,589 for a married couple and they paid 70.81% of all the federal tax. When you look at the IRS hiring another 80,000 employees to monitor and administer the tax laws you can see where their efforts will be targeted. Since 50% already pay no tax, their efforts will be focused on those who pay tax rather than those who don’t. Watch your mail for your “valentine” from IRS. Don’t blame them, they are simply doing their job to administer the tax laws put in place by our government. (Just remember, no one ever said tax law was FAIR!!!! Also remember the quote from years ago where US District Court judge Leaned Hand ruled “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury”). Our position on all this is simply that every new tax law is job security for us as we try to make sense of the changes and simply help our clients legally minimize the tax they owe.

Here are some of the current IRS audit targets:

• Unreported crypto/virtual currency transactions.
• S corp tax returns—looking at shareholder basis and seeing if distributions are properly taxed.
• Partnerships—excess losses deducted by partners, distributions from the partnership that should have been taxable, and looking a professionals to see they are properly taxing income from their LLC.
• IRS field audits will start back up. The pandemic had forced IRS to do audits through correspondence only and those days are over. Get your kitchen table cleared for your visit from your friendly IRS agent.
• Look out for the penalties: When they find something in an audit, be prepared for the penalties. IRS assessed $37.3 billion in penalties last year.
• More enforcement of backup withholding. Make sure you have a signed W-9 form for any business you treat as an independent contractor and issue a 1099. The W-9 is your only protection against IRS saying they owe back taxes and you should have withheld tax from their payment and sent it to the government.
• Audits of child care providers to make sure they are reporting all their income and looking at deductions for business use of the home.

When the IRS does an audit and finds unreported income they use that data to project the unreported income of everyone. Based on the assessments issued in the latest IRS audit data they project the unreported income to be $398 billion dollars per year. (Now you know why they do audits and why we offer our Comprehensive IRS Audit Protection Service as an optional fee when we prepare your tax return. They focus not just on what is on the return but also what is not on the return.)

What tax laws expired at the end of 2021?

• The larger child tax credit of $3,000 drops back to $2,000.
• The dependent care credit limits drop from a 50% credit back to the old 20% credit and qualified daycare costs drop from $8,000 per child back to $3,000 per child.
• The higher earned income credit drops back to the 2020 rules.
• The cap on deductions for cash contributions to charity drops from 100% of AGI back to the old 60% of AGI.
• The deduction for mortgage insurance premiums expired 12/31/21.
• During the pandemic individuals 72 and over got to skip their required minimum distribution from their retirement accounts. The distribution is required again in 2022.
• The 1099 reporting threshold for online sales drops from $20,000 in 2021 to $600 in 2022. Many people who sell or collect income through Venmo, EBAY, ETSY, Craigslist, Facebook Marketplace, etc will get 1099-k forms showing the total sales and the seller will be required to report the sales and the cost on their personal tax returns.

New deductions and credits for 2022:

• Energy credits everywhere:

  • Energy Efficient Home credit-nonbusiness: The credit had expired and is now renewed with a lifetime limit of 30% of qualifying expenditures up to $1,200 in credits up from the old $500 lifetime limit. (Therefore if you already used the $500 lifetime limit you now get an extra $700 in credits if you buy the right items). Items that qualify for the credit are insulation, air sealing material, exterior windows, exterior doors and skylights certified by the manufacturer as qualified energy efficiency improvements. The $1,200 limit is divided up into no more than $600 for windows, $500 for doors, etc.
  • Residential energy property credit: Property that qualifies for the credit includes heat pumps, water heaters, central AC units, water heaters, hot water boiler heating systems, biomass wood stoves, etc. The credit is 30% of what you spend and is limited to $600 per item. The credit for heat pumps, biomass stoves, and boilers is limited to $2,000.
  • Home energy audits: The first $150 you spend on home energy audits no qualifies for the credit.
  • Roofing materials lost out: The new rules specifically exclude metal and asphalt roofing and ceiling fans as not qualifying for energy credits.
  • Residential Clean Energy Credit: Solar electric, solar water heating (not to heat swimming pool), fuel cells, wind, and geothermal energy systems including battery energy storage systems qualify for 30% tax credit on the entire cost of the system. Fuel cell credits are limited to $500 per ½ kilowatt.

• Rebates for Energy Efficient Heat Pumps and Appliances:

  • There are two programs (HOMES and HEEHR) both start in 2023. Homeowners will be able to collect a maximum of $14,000 in rebates which phases out as income goes up. These will be administered through state government and there are no guidelines out yet. Products that will qualify include electric panels, electric stove, electric wiring, heat pump, heat pump clothes dryer, heat pump water heater, insulation, induction ranges, etc.

• Clean vehicle credits (electric vehicles):

  • Electric vehicles purchased before August 17, 2022 come under the old rules. The new rules after August 17 require the electric vehicle to be assembled in North America and critical minerals in the battery must come from the US. The government is working on providing a list of vehicles that meet the definition of assembled in North America. Many of the rules start 1/1/23 or later so make sure you know the details before you buy anticipating a credit.

• New electric vehicles:

  • The dealer who sells the vehicle must report the purchase to the IRS on some sort of 1099.
  • The vehicle must have a MSRP under $80,000 for vans, SUVs, and trucks and under $55,000 for all other vehicles. As your income goes up you lose the ability to claim the credit.

• Used electric vehicles:

  • Credit is limited to lesser of $4,000 or 30% of the purchase price.
  • As your income goes up you lose the ability to claim the credit.
  • Used vehicle must be bought from a dealer (no private party sales) and purchase price cannot exceed $25,000.
  • The transfer must be the first ownership transfer since August 16, 2022.
  • Buyer must not have had a used electric vehicle credit in the last 3 years.
  • The VIN number is required to claim the credit on your personal tax return so IRS can track the vehicles.

• Commercial electric or hydrogen vehicles:

  • Credit is 30% of the cost unless there is also a gas engine and then credit is 15%.
  • Credit cannot exceed $7,500 for vehicles under 14,000 lb and $40,000 for all other vehicles.

Fantasy Sports Winnings:

If you bet online you will most likely get a 1099 report this year from sites like FanDuel, etc. IRS has announced this is treated like gambling income which means the income is taxable and the losses are only deductible if you can itemize deductions on your personal return.

Two Mileage Rates for 2022:

In recognition of increasing gas prices the IRS allowable mileage rate for the first six months of 2022 is 58.5 cents per mile and effective July 1 it increases to 62.5 cents per mile.

Reminder to get Master Limited Partnership investments out of your IRA:

These investments issue a K-1 and are considered a trade or business. If the combined total of all the k-1s issued to the IRA shows over $1,000 in business income, then the IRA has to file an income tax return (form 990-T) and pay tax on this unrelated trade or business income (UBIT). That is why we always advise do not buy a master limited partnership in your IRA.

New Corporate Transparency Act Filing (Watch Out For This One!!!!):

This law is an attempt to crackdown on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. Small businesses that are LLCs and corporations must file a FinCEN with the Department of the Treasury’s Financial Crimes Enforcement Network. The required information on the form includes the beneficial owner’s full legal name, date of birth, and residential street address as well an identifying number from a legal document such as a driver’s license. Violations for not filing can result in a $500 per day penalty up to $10,000 and two year in prison. The final rules came out September 2022 and are effective January 1, 2024. New corporations, LLCs and other entities will have to comply with the filing requirement within 14 days of being formed. Existing entities will have one year to comply. The reporting requirements will apply to almost every small business that is not a sole proprietorship or general partnership. Companies with over 20 full time employees and $5 million in gross receipts are exempt. A beneficial owner is someone who owns 25% or more of the entity or exercises substantial control over the company.

Don’t Forget To Pay Your Kids:

Self-employed business owners can pay their children under the age of 18 and there is no social security or unemployment tax on those wages. You can pay those children the same amount you would pay another person to do the job. The big benefit is the parent takes a tax deduction saving income tax and social security tax while the child can have $12,950 in wages and pay no income tax. That is a huge savings and the children can use the money for things parents aren’t required to provide such as college education, etc.

New International Tax Reporting Required for All Partnerships and S corps:

In an effort to catch unreported foreign income the IRS added 15 pages to all partnership and S corp tax returns. The only way to avoid filling out all the additional required information is to send a notice to all partners/shareholders by Jan 15 stating the partnership/corporation has limited foreign activity and the partners/shareholders will not receive a schedule K-3 unless they request the schedule. If you get one of these notices in the mail there is nothing you need to do unless you have substantial foreign income on your personal return. For those who have substantial foreign income, they have 30 days to notify the partnership/S corp they will need the entity to fill out the additional 15 pages including the schedule K-2 & K-3. (Don’t you just love government! Who thinks this stuff up????)

What is happening with Missouri?

Missouri minimum wage:

Back in 2018 MO passed their own minimum wage which was higher than the federal minimum wage. The state minimum wage increases every year through 2023. For 2022 the minimum is $11.15 and for 2023 the new minimum wage is $12.00. Tipped employees must receive at least half the minimum wage. With the recent high inflation and shortage of workers minimum wage will most likely be a nonissue in the next few years.

Pass Through Entity Tax (PTE):

Missouri became one of 30 states that have now passed a law to allow partnerships and S corporations to pay state income tax at the entity level and get around the deduction limitation for state income tax as an itemized deduction on the personal tax return. The Missouri law is effective for tax years ending Dec 31, 2022. Missouri still is designing the forms to report and pay PTE so very little is known about how this will work. Since state taxes are limited to $10,000 including property tax as an itemized deduction, allowing the business to pay the state tax and take a full deduction is a big benefit. Every state is a little different in how this works but MO law says you make the election each year when you file the tax return so you can decide each year if PTE makes sense for your business. The big difference is the business entity pays the state tax and not the individual so if you paid state estimates on your personal return you will most likely get a refund and the business entity will owe tax. (For most businesses this will be a tax savings & every partnership and S corp should look at this.)

MOScholars tax credits:

There is a tax credit equal to 100% of your donation up to 50% of your state tax liability. Donors must reserve credits through the MOScholars online system, then make a contribution to a specified Educational Assistance Organization (EAO). Very little has been published on the rules for this and how you find an EAO to donate to but the credit is 100% of your donation so it is worth some digging if you have an interest in helping education.

Inflation hits everyone:

In 2022 the highest inflation most of us have ever seen hit our business the same as everyone else. As our competitors increased wages to attract good people, we did the same to be fair to the great staff we have. Every other cost from software to technology support went up. We normally tried to keep our fee increases around 3% for tax preparation to keep up with inflation. This year with inflation in excess of 8% we are trying to hold the line but our fee increases for tax preparation will be double what they have been in the past. Most clients can expect a $50 increase in tax preparation fees on their individual tax return. Partnerships and corporations will see a bigger increase because those fees are normally higher. We don’t like it
any better than you do but we wanted to inform you ahead of time because no one likes surprises.

A special announcement.

Going forward our office will be closed between Christmas and New Years to allow our staff to spend time with family before the tax filing season (December 26 through January 2 this year). We appreciate your understanding and wish all of you a blessed and happy holiday season.  Please reach out to us before the holidays regarding any year end planning needed.

One Last Thanks—To Our Valued Clients

Without you we would not be here today. We are passionate about helping you achieve success.

We are both honored and humbled to serve you. THANK YOU!!!!!!!