In this Edition
January 10, 2023
6 Key Tax Q&As for 2023
PODCAST: Tax Implications of Selling a House
Are You at Risk for Investment Fraud?
How to Minimize the S Corporation LIFO Recapture Tax
Tax Calendar
The Standard Business Mileage Rate Is Going Up in 2023
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Right now, you may be more concerned about your 2022 tax bill than you are about how to handle your personal finances in the new year. However, as you deal with your annual tax filing, it’s a good idea to also familiarize yourself with pertinent amounts that may have changed for 2023.
Not all tax figures are adjusted for inflation. And even if they are, during times of low inflation the changes may be slight. When inflation is higher, as it currently is, the changes are generally more substantial. In addition, some tax amounts can change only with new tax legislation.
Here are six commonly asked (and answered) Q&As about 2023 tax-related figures:
1). How much can I contribute to an IRA for 2023?
If you’re eligible, you can contribute up to $6,500 a year to a traditional or Roth IRA (up from $6,000 in 2022). If you’re age 50 or older, you can make another $1,000 “catch-up” contribution.
2). I have a 401(k) plan through my job. How much can I contribute to it?
For 2023, you can contribute up to $22,500 to a 401(k) or 403(b) plan. You can make an additional $7,500 catch-up contribution if you’re age 50 or older. (These figures for 2022 were $20,500 and $6,500, respectively).
3). I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?
In 2023, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners and other domestic employees has increased to $2,600 for 2023 (up from $2,400).
4). How much do I have to earn in 2023 before I can stop paying Social Security on my salary?
The Social Security tax wage base is $160,200 for 2023, up from $147,000 for 2022. That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)
5). I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2023?
The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2023, the standard deduction amount is $27,700 for married couples filing jointly (up from $25,900 for 2022). For single filers, the amount is $13,850 (up from $12,950) and, for heads of households, it’s $20,800 (up from $19,400).
So, if the total amount of your itemized deductions (such as charitable gifts and mortgage interest) is less than the applicable standard deduction amount, you won’t itemize for 2023.
6). How much can I give to one person without triggering a gift tax return in 2023?
The annual gift exclusion for 2023 is $17,000 (up from $16,000 in 2022). This amount is only adjusted in $1,000 increments, so it typically increases only every few years.
These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact us.
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Randy Juedes, CPA
D 715.748.1346
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Tax Implications of Selling a House
Basis is the amount your home is worth for tax purposes. When you sell your home your gain or loss is determined by subtracting its current basis from the sale price.
In this episode, Jeff Dvorachek brings light to some misconceptions of taxable home sale gain and the calculation of a home's basis.
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Are You at Risk for Investment Fraud?
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Many perpetrators of investment fraud know how to push the right psychological buttons to entice their “marks” to buy worthless or nonexistent securities. You can mitigate the risks by asking a few questions, performing some research and consulting with trusted advisors.
Beware
Be alert for these common scams:
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Pyramid and Ponzi. The con artist promises high returns, often in a short period, yet there’s no actual investment product. Instead, the scheme relies on continually recruiting new participants whose money is used to pay “returns” to earlier participants. As the scheme grows, it becomes increasingly difficult to attract enough new investors and pay old ones. Eventually, it collapses and most participants lose everything.
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Pump and dump. Fraudsters use false or misleading statements to recruit investors and boost the price of an obscure and usually low-priced stock. When the stock rises to a certain level, the crooks dump their shares and disappear. The stock price plummets, leaving investors with nearly worthless holdings.
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Advance fee. Individuals holding a failed investment are targeted. A fraudster may offer, for example, to take a losing stock off your hands for an attractive price provided you pay an up-front fee. Once you pay the fee, the thief vanishes.
Know the Signs
Be suspicious of investments that offer guaranteed returns or remarkably consistent returns even during turbulent times. Avoid unregistered securities sold by unlicensed individuals or investments that lack documentation (for example, a prospectus).
You can verify a professional’s credentials with the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and state securities agencies. If you’re tempted to invest with an unknown “broker” or buy an unfamiliar stock, FINRA’s website offers a variety of points to double-check before engaging in the transaction.
Most investments must be registered before they can be sold to the public, so plug the security’s name into the SEC’s EDGAR database. Keep in mind that registration alone doesn’t guarantee that an investment is legitimate or appropriate.
Defend!
Ultimately, the best defense against investment fraud is to work with financial advisors you know and trust. If you receive a “hot tip,” always run it by at least one trusted advisor before plunking down any money.
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Dave Fochs, CPA
D 507.252.6688
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Tax Tip Tuesday - Video Short
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New Year's Tax Resolutions
This week, Jessica helps you work out some tax strategies that you can implement in your New Year's Resolution.
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How to Minimize the S Corporation LIFO Recapture Tax
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If you’re considering converting your C corporation to an S corporation, be aware that there may be tax implications if you’ve been using the last in, first out (LIFO) inventory method. That’s because of the LIFO recapture income that will be triggered by converting to S corporation status. We can meet to compute what the tax on this recapture would be and to see what planning steps might be taken to minimize it.
Inventory Reporting
As you’re aware, your corporation has been reporting a lower amount of taxable income under LIFO than it would have under the first in, first out (FIFO) method. The reason: The inventory taken into account in calculating the cost of goods sold under LIFO reflects current costs, which are usually higher.
This benefit of LIFO over FIFO is equal to the difference between the LIFO value of inventory and the higher value it would have had if the FIFO method had been used. In effect, the tax law treats this difference as though it were profit earned while the corporation was a C corporation. To make sure there’s a corporate-level tax on this amount, it must be “recaptured” into income when the corporation converts from a C corporation to an S corporation. Also, the recapture amount will increase the corporation’s earnings and profits, which can have adverse tax consequences down the road.
Soften the Blow
There are a couple of rules that soften the blow of this recapture tax to some degree.
- The increase in tax imposed on the C corporation in its final tax year because of the LIFO recapture may be paid over a four-year period.
- The basis of the corporation’s inventory will be increased by the amount of income recognized. So, the net effect may be one primarily of timing — because of the basis increase, the corporation may realize less income in later years, though only if there are decrements in the adjusted LIFO layer.
We can help you gauge your exposure to the LIFO recapture tax and can suggest strategies for reducing it. Contact us to discuss these issues in detail.
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Curt Bach, CPA
D 715.307.7631
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Individual taxpayers’ final 2022 estimated tax payment is due.
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Employers must file 2022 Forms W-2 (“Wage and Tax Statement”) with the Social Security Administration and provide copies to their employees.
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Employers must file (paper or electronic) 2022 Forms 1099-NEC (“Nonemployee Compensation”), reporting nonemployee compensation payments, along with the related Form 1096 (“Annual Summary and Transmittal of U.S. Information Returns”), and provide copies to recipients.
Most employers must file Form 941 (“Employer’s Quarterly Federal Tax Return”) to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2022. If an employer’s tax liability is less than $2,500, he or she can pay it in full with a timely filed return. If an employer deposited the tax for the quarter in full and on time, he or she has until February 10 to file the return. Employers who have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944 (“Employer’s Annual Federal Tax Return”).
Employers must file Form 940 (“Employer’s Annual Federal Unemployment (FUTA) Tax Return”) for 2022. If an employer’s undeposited tax is $500 or less, he or she can either pay it with the return or deposit it. If it is more than $500, he or she must deposit it. However, if an employer deposited the tax for the year in full and on time, he or she has until February 10 to file the return.
Employers must file Form 943 (“Employer’s Annual Federal Tax Return for Agricultural Employees”) to report Social Security, Medicare and withheld income taxes for 2022. If an employer’s tax liability is less than $2,500, he or she can pay it in full with a timely filed return. If an employer deposited the tax for the year in full and on time, he or she has until February 10 to file the return.
Employers must file Form 945 (“Annual Return of Withheld Federal Income Tax”) for 2022 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, etc. If an employer’s tax liability is less than $2,500, he or she can pay it in full with a timely filed return. If an employer deposited the tax for the year in full and on time, he or she has until February 10 to file the return.
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Employers must file 2022 Form 1099-MISC (“Miscellaneous Income”) reporting certain payments to certain persons, along with the related Form 1096 (“Annual Summary and Transmittal of U.S. Information Returns”), and provide copies to recipients.
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Calendar-year partnerships and S corporations must file or extend 2022 tax returns. If the return is not extended, this is also the last day for those types of entities to make 2022 contributions to pension and profit-sharing plans.
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The Standard Business Mileage Rate Is Going Up in 2023
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Although the national price of gas is a bit lower than it was a year ago, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up in 2023. The IRS recently announced that the 2023 cents-per-mile rate for the business use of a car, van, pickup or panel truck is 65.5 cents. These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.
In 2022, the business cents-per-mile rate for the second half of the year (July 1 – December 31) was 62.5 cents per mile, and for the first half of the year (January 1 – June 30), it was 58.5 cents per mile.
How Rate Calculations Are Done
The 3-cent increase from the 2022 midyear rate is somewhat surprising because gas prices are currently lower than they have been. On December 29, 2022, the national average price of a gallon of regular gas was $3.15, compared with $3.52 a month earlier and $3.28 a year earlier, according to AAA Gas Prices. However, the standard mileage rate is calculated based on all the costs involved in driving a vehicle — not just the price of gas.
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, including gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear, as it did in 2022.
Standard Rate Versus Actual Expenses
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.
The Standard Rate Can’t Always Be Used
There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2023 — or claiming 2022 expenses on your 2022 income tax return.
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Amanda Farley, CPA
D 920.337.4554
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The Hawkins Ash CPAs internship program offers budding college accounting students the opportunity to gain real world experience in public accounting. Interns work side-by-side with senior staff and partners.
We offer a spring, tax season program and summer audit program. Selected candidates will:
- Prepare tax returns and supporting workpapers for individual, S-corporations, C-corporation, trusts and personal property
- Gain hands-on experience in both tax and audit work, as well as related software applications
- Develop the skills to become a trusted business advisor for clients and associates
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More Resources from CPA-HQ
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Do You Qualify for the QBI Deduction? And Can You Do Anything by Year-End to Help Qualify?
Owners of pass-through businesses may be able to save tax with the valuable QBI deduction by taking certain steps at year-end.
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Year-end Spending Package Tackles Retirement Planning, Conservation Easements
President Biden has signed the Consolidated Appropriations Act of 2023. Here's a summary of the sprawling year-end spending “omnibus” package includes two important new laws that could affect your financial planning.
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Choosing a Business Entity? Here Are the Pros and Cons of a C Corporation
If you’re starting a new business, you may wonder if you should operate as a C corporation, an S corporation or another entity. Here’s a summary of what will happen if you choose a C corporation.
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