December 2022 Newsletter

With the hustle and bustle of the holiday season, it’s easy to overlook that tax season is right around the corner. To help you make the most of potential tax saving moves before the end of 2022, this month’s newsletter features several year-end tax cutting ideas. Also get tips on how to protect yourself from identity thieves during the upcoming tax season.

Please feel free to forward this newsletter to someone who may be interested in a topic and call with any questions you may have.

Year-End Tax Cutting Ideas

Here are moves you can make to reduce your taxable income. But the year is quickly coming to a close, so plan accordingly.

• Tax loss harvesting. If you own stock outside a tax-deferred retirement plan, you can sell your under-performing stocks by December 31st and use these losses to reduce any taxable capital gains. If your net capital losses exceed your gains, you can net up to $3,000 against other income such as wages. Losses over $3,000 can be used in future years.
• Selling appreciated assets. Planfully sell appreciated assets in the tax year that helps you the most. While this strategy may be hard to accomplish this late in the year, it is still worthy of consideration. To do this, estimate your current year taxable income and compare it to next year’s projected income. Then sell the appreciated asset in the year that will yield the lowest tax. Remember to account for the 3.8% net investment income tax in your estimates.
• Max out pre-tax retirement savings. The deadline to contribute to a 401(k) plan for a 2022 taxable income reduction is December 31st. So if your employer’s plan allows it, consider making a last-minute lump sum contribution. For 2022, you can contribute up to $20,500 to a 401(k), plus another $6,500 if you’re age 50 or older. Even better, you have until April 18, 2023, to contribute up to $6,000 into a traditional IRA. And as long as your income does not exceed phaseout limits, you can reduce your taxable income on your 2022 tax return.
• Bunch deductions so you can itemize. If your personal deductions are near the following standard deduction amounts for 2022: $12,950 for singles, $19,400 for head of household, and $25,900 for married filing joint, consider bringing some of 2023’s spending into 2022 so you can itemize this year. For most, the easiest way is to do this is to make 2023’s planned charitable contributions before the end of 2022. You can also include gifts of appreciated stock where you get to deduct the fair market value without paying capital gains tax.
• Review health spending accounts. If you participate in a Health Savings Account (HSA), try to maximize your annual contribution to reduce your taxable income. Remember, these funds allow you to pay for qualified health expenses with pre-tax dollars. More importantly, unlike Flexible Spending Accounts (FSA), you can carry over all unused funds into future years. If you do have an FSA, you can carry forward a maximum of $570 from 2022 into 2023. The deadline for contributing to your Health Savings Account (HSA) and still getting a deduction for the 2022 tax year is April 18, 2023. The maximum contribution for 2022 is $3,650 if single and $7,300 for married couples.

While the year is quickly coming to an end, there is still time to reduce your 2022 tax liability, but only if you act now.

Identity Thieves Love Tax Season

The vast amount of information shared online during tax season makes it a haven for identity thieves, and they’re doing everything they can to take advantage of the opportunity! Here are several ways that identity thieves are targeting you, common signs of ID theft and steps to take if you become a victim.

How Identity Thieves Target You

• Impersonating the IRS. Thieves calling you and claiming to be the IRS will try and intimidate you into making an immediate payment using a gift card or wire service. Remember, the IRS will physically mail you a letter as a means of first contact. And the IRS will never call you to demand an immediate payment.
• Filing a fraudulent tax return. Identity thieves often try to file a tax return using your Social Security number before you do. So consider filing your tax return as quickly as you can to beat identity thieves at their own game.
• Phishing schemes. Be on the lookout for unsolicited emails, texts and social media posts that prompt you to share personal and financial information. These messages could also contain viruses, spyware or other malware that could infect your electronic devices.

Common signs of ID theft

Here are some of the common signs of identity theft according to the IRS:

• In early 2023, you receive a refund before filing your 2022 tax return.
• You receive a tax transcript you didn’t request from the IRS.
• A notice that someone created an IRS online account without your consent.
• You find out that more than one tax return was filed using your Social Security number.
• You receive tax documents from an employer you do not know.

Other signs of identity theft include:

• Unexplained withdrawals on bank statements.
• Mysterious credit card charges.
• Your credit report shows accounts you didn’t open.
• You are billed for services you didn’t use or receive calls about phantom debts.

What you can do

If you discover that you’re a victim of identity theft, consider taking the following action:

• Notify creditors and banks. Most credit card companies offer protections to cardholders affected by ID theft. You can generally avoid liability for unauthorized charges exceeding $50. But if your ATM or debit card is stolen, report the theft immediately to avoid dire consequences.
• Place a fraud alert on your credit report. To avoid long-lasting impact, contact any one of the three major credit reporting agencies—Equifax, Experian or TransUnion—to request a fraud alert. This alert covers all three of your credit files.
• Report the theft to the Federal Trade Commission (FTC). Visit identitytheft.gov or call 877-438-4338. The FTC will provide a recovery plan and offer updates if you set up an account on the website.
• Please call if you suspect any tax-related identity theft. If any of the previously mentioned signs of tax-related identity theft have happened to you, please call to schedule an appointment to discuss next steps.

Shrink Your Tax Bill in 2023

Here are several strategies to consider to shrink your tax bill in 2023.

Consider life events. Consider whether any of the following key events may take place in 2023, as they may have potential tax implications:

• Purchasing or selling a home
• Refinancing or adding a new mortgage
• Getting married or divorced
• Incurring large medical expenses
• Changing jobs
• Welcoming a baby

Manage your retirement. One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. Now is a good time to review your retirement account funding. Here are the contribution limits for 2023:

• 401(k): $22,500 ($30,000, Age 50+)
• IRA: $6,500 ($7,500, Age 50+)
• SIMPLE IRA: $15,500 ($19,000, Age 50+)
• Defined Benefit Plan: $66,000

Look into credits. There are a variety of tax credits available to most taxpayers. Take a look at those you currently use and determine whether you qualify for them again next year. Here are some worth reviewing:

• Child Tax Credit
• Earned Income Tax Credit
• Premium Tax Credit
• Adoption Credit
• Elderly and Disabled Credit
• Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)

Assess your income. Forecast how your 2023 income will compare to your 2022 income, then review your most recent tax return and find your effective tax rate by dividing your total tax by your gross income. Then apply that rate to your new income. This will give you a rough estimate of next year’s tax obligation.

To avoid getting stuck with an unexpected tax bill, consider scheduling several tax planning sessions throughout the year. Remember, some tax saving ideas may require funding on your part. It is best to identify them now so you can save the cash necessary to take advantage of them throughout 2023.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

November 2022 Newsletter

Social Security recipients got some great news about their benefits. Learn more in this newsletter about the cost-of-living increase for 2023. Also read about several tax court cases and what they might mean for your situation, how to raise a financially savvy child, and how to avoid gift card fraud during the upcoming holiday season. Please feel free to forward this newsletter to someone who may be interested in a topic and call with any questions you may have.

Social Security to See Significant Adjustment for 2023

Your 2023 Social Security Benefits
Find out how your benefits have changed

Average Retirement Benefits
Starting January 2023

• All workers in 2022: $1,681/mo
• All workers in 2023: $1,827/mo (+$146)
• The 2023 maximum Social Security retirement benefits for a worker retiring at full retirement age: $3,627/mo

An 8.7% cost of living increase for Social Security retirement benefits and SSI payments begins with December 2022 benefits (payable in January 2023).

Increase your Social Security retirement benefits by 5 to 8% per year when you delay applying until you’re age 70.

Social Security Revenues & Expenditures

Revenue Sources = $1.09 trillion

• 3.5% – Taxation of benefits
• 6.4% – Interest
• 90.1% – Payroll taxes

Expenditures = $1.14 trillion

• 0.6% – Administrative expenses
• 0.4% – Railroad Retirement financial interchange
• 99.0% – Benefit payments

SOURCE: 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Table Il.B1.

2023 Social Security & Medicare Tax Rates

If you work for someone else…

• Your employer pays 7.65%
• You pay 7.65%

If you’re self-employed…

• You pay 15.3%

NOTE: The above tax rates are a combination of 6.2% for Social Security and 1.45% for Medicare. There is also a 0.9% Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures.

• 165+ million people work and pay Social Security taxes
• Social Security has provided financial protection for Americans since 1935

Social Security Payments Explained

• Social Security (SS) retirement benefits are for people who have paid into the Social Security system through taxable income.
• Social Security Disability (SSD or SSDI) benefits are for people who have disabilities but have paid into the Social Security the system through taxable income.
• Supplemental Security Income (SSI) benefits are for adults and children who have disabilities, plus limited income and resources.

Maximum SSI Payments

How does Social Security work?

• When you work, you pay taxes into Social Security.
• The Social Security Administration uses your tax money to pay benefits to people right now.
• Any unused money goes into Social Security trust funds and is borrowed by the government to pay for other programs.
• Later on when you retire, you receive benefits.

Here’s how you qualify for retirement benefits

When you work and pay Social Security taxes, you earn credits toward benefits. The number of credits you need to earn retirement benefits depends on when you were born.

• If you were born in 1929 or later, you need 40 credits (10 years of work) to receive retirement benefits
• You receive one credit for each $1,640 of earnings in 2023
• 4 credits maximum per year

Did you know you can check your benefits status before you retire?

• You can check online by creating a my Social Security account on the SSA website. If you don’t have an account, you’ll be mailed a paper Social Security statement 3 months before your 61st birthday.
• It shows your year-by-year earnings, and estimates of retirement, survivors and disability benefits you and your family may be able to receive now and in the future.
• If it doesn’t show earnings from a state or local government employer, contact them. The work may not be covered within Social Security.

Sources: SSA.gov

Tax Court Corner

Here’s a roundup of several recent tax court cases and what they mean for you.

Thou Shalt Not Commingle Funds

(Vorreyer, TC Memo 2022-97, 9/21/22)

Don’t let sloppy record keeping prevent you from deducting legitimate business expenses. The Tax Court agreed with the IRS that business expenses must first be deducted on that business’s tax return before flowing to the owner’s tax return.

Facts: A married couple, the sole shareholders of an S corporation, operated a family farm in Illinois. In 2012 they paid the farm’s utility bills of $21,000 and property taxes of $109,000 from their personal funds, then deducted these payments on their individual Form 1040 tax return as business expenses.

Even though the utility and property tax bills were legitimate business expenses, the deduction was disallowed because the expenses should have first been deducted on the farm’s S corporation tax return, then flowed through to the shareholder’s individual tax return.

Tax Tip: To pay an expense on behalf of your business, first make a capital contribution to your business, then have your business pay the expense. Then include this expense on your business’s tax return.

Adding Tax Insult to Injury

(Dern TC Memo 2022-90, 8/30/22)

Payments received to settle a physical injury or illness lawsuit are generally considered non-taxable income. But you better be sure that the lawsuit you file is actually to compensate for a physical injury or illness, and not something else.

Facts: Thomas Dern, a sales representative for a paint products company in California, was hospitalized for acute gastrointestinal bleeding and a subsequent heart attack. When the company fired him because he could no longer do his job, he sued for wrongful termination. The parties eventually reached a settlement.

Dern argued in Tax Court that his illness led to his firing, and therefore the settlement should be classified as non-taxable income. The payment he received, however, was to settle a discrimination lawsuit and not a physical injury. The settlement therefore did not qualify to be non-taxable income.

Tax Tip: Pay attention to the tax consequences of settlement payments so you don’t get surprised with an unexpected tax bill.

You’re Stuck With the Standard Deduction

(Salter, TC Memo 2022-49, 4/5/22)

Facts: Shawn Salter, a resident of Arizona, requested and received a distribution of $37,000 from his retirement plan after being laid off from his job in 2013. Salter failed to file a tax return for 2013, so the IRS created a substitute tax return for him using the standard deduction of $6,500 for a single taxpayer. The IRS also assessed an early withdrawal penalty of 10% on the distribution.

Salter, arguing that the distribution was to pay for medical expenses which aren’t subject to the 10% early withdrawal penalty, eventually did file a 2013 tax return with $25,000 of itemized medical expenses. The Tax Court disallowed the $25,000 of itemized deductions, stating that once a substitute return is created by the IRS using the standard deduction, the taxpayer can no longer claim itemized deductions for that year.

Tax Tip: Try to avoid a situation where the IRS files a substitute tax return on your behalf. Once this happens, you have no choice but to use the standard deduction for that tax year.

Raising a Financially Savvy Child

If you have children or grandchildren, you have an opportunity to give them a jump-start on their journey to becoming financially responsible adults. While teaching your child about money and finances is easier when you start early, it’s never too late to impart your wisdom. Here are some age-relevant suggestions to help develop a financially savvy young adult:

• Preschool – Start by using dollar bills and coins to teach them what the value of each is worth. Even if you don’t get into the exact values, explain that a quarter is worth more than a dime and a dollar is worth more than a quarter. From there, explain that buying things at the store comes down to a choice based on how much money you have (you can’t buy every toy you see!). Also, get them a piggy bank to start saving coins and small bills.
• Grade school – Consider starting an allowance and developing a simple spending plan. Teach them how to read price tags and do comparison shopping. Open a savings account to replace the piggy bank and teach them about interest and the importance of regular saving. Have them participate in family financial discussions about major purchases, vacations and other simple money decisions.
• Middle school – Start connecting work with earning money. Start with activities such as babysitting, mowing lawns or walking dogs. Open a checking account and transition the simple spending plan into a budget to save funds for larger purchases. If you have not already done so, now is a good time to introduce the importance of donating money to a charitable organization or church.
• High school – Introduce the concept of net worth. Help them build their own by identifying their assets and their current and potential liabilities. Work with them to get a part-time job to start building work experience, or to continue growing a business by marketing for more clients. Add additional expense responsibility by transferring direct accountability for things like gas, lunches and the cost of going out with friends. Introduce investing by explaining stocks, mutual funds, CDs and IRAs. Talk about financial mistakes and how to deal with them when they happen by using some of your real-life examples. If college is the goal after high school, include them in the financial planning decisions. Tie each of these discussions into how it impacts their net worth.
• College – Teach them about borrowing money and all its future implications. Explain how credit cards can be a good companion to a budget, but warn them about the dangers of mismanagement or not paying the bill in full each month. Discuss the importance of their credit score and how it affects future plans like renting or buying a house. Talk about retirement savings and the importance of building their retirement account.

Knowing about money — how to earn it, use it, invest it and share it — is a valuable life skill. Simply talking with your children about its importance is often not enough. Find simple, age-specific ways to build their financial IQ. A financially savvy child will hopefully lead to a financially wise adult.

‘Tis the Season for Gift Card Fraud

With supply chain snarls still plaguing parts of the U.S. economy, many consumers are turning to gift cards as the holiday present of choice this year. In fact, according to the website Research and Markets, the United States gift card industry is expected to reach $188 billion in 2022.

Why is gift card fraud such a problem?

Because of the small dollar amounts involved, gift card fraudsters face a low probability of prosecution. It’s also easy to convert gift card value to cash or merchandise. In other words, this kind of fraud is relatively risk-free and easy to pull off.

In one common scam, a crook goes to a retail establishment, grabs a handful of gift cards from an out-of-the-way stand or kiosk, and records the card numbers using a magnetic strip reader. After returning the cards, the crook heads home and repeatedly checks balances on the merchant’s website until the numbers are activated.

The thief then spends or transfers the money on the card before the legitimate buyer or gift recipient has a chance to use it. Less sophisticated scammers may simply scratch off the card’s coating and replace it with a sticker, hoping the buyer won’t notice.

You can scam-proof your gift card experience by following these tips:

• Don’t pick the front card. Crooks are impatient. They often return compromised cards to the most accessible place on the rack. Select your gift card from the middle of the rack.
• Buy gift cards online. Purchase cards online, directly from the business that issued them. This reduces the potential tampering risk.
• Inspect packaging. If you purchase gift cards in person at a store, examine the cards for signs of tampering. It’s safer to buy from stores that keep gift cards behind the counter or in well-sealed packaging.
• Register the card. If a card issuer lets you register on their website, do it. You’ll be able to check your balance regularly and identify any abuse.
• Don’t give out card information to callers claiming to be from government agencies, tech companies, utilities or other businesses. Only scammers ask you to pay fees, back taxes or bills for services with gift cards.
• Don’t buy gift cards from online auction sites. They could be counterfeit or stolen, according to the Federal Trade Commission.

If you think you’ve been scammed, contact the store directly and report incidents to local law enforcement.

Customer Retention Metrics You Need to Know

Your business’s ability to retain customers is one of the most important components to sustained growth and profitability. Here are the three retention metrics useful for every business owner.

• Retention rate. Most customer retention is measured over a set period of time, typically one year. To determine your rate, take a look at the number of customers who ordered from you last year. Then see what percent of them order at least once from you over the current year. If you measure this percent each month you can see how your retention builds throughout the year. The key is to compare your retention rate to the same period in prior months and years. A rising rate means you are on the right track; a shrinking rate means you need to make changes. According to the Harvard Business Review, a 5% increase in your retention rate increases profits by 25% to 95%!
  
  Example: Cut’em Nail Salon starts the year with 700 active clients. They add 300 new customers during the year, and their active client base is 800 at the end of the year. On the surface things look good, right? This increase of 100 clients is over 14%! But when you calculate the retention rate, it is 71.4% (800 clients minus 300 new clients means 500 of last year’s clients still use Cut’em. 500 divided by 700 equals 71.4%). What happened to the 200 customers that did not return? Cut’em doesn’t know if this is good or bad news, as it only makes sense when comparing it to the last few years’ retention performance.
• Existing customer revenue percentage. Core customers almost always contribute the most to your profitability. But how much? To figure out your returning customer revenue percentage, start with a list of revenue by customer for the last 12 months. Identify the returning customers and add up revenue attributed to them. Divide that number by your total revenue. Use this information to balance your spending between new customer acquisition and retaining your core customers. If you are like most businesses, you will realize there is tremendous value in spending more time and effort on retention, even when your business is full!
  
  Part 2 Cut’em Nail Salon Example: Assume the nail salon’s total revenue is $1 million and the revenue from the 500 returning clients is $900,000. In this case, the core customers represent 90% of the revenue but only 62.5% (500 divided by 800) of the customers!
• Most valuable customers. Now identify which customers spend the most and buy the most often. Odds are, many of your top customers have similar characteristics. In the end, your goal is to keep these customers happy and get more just like them!
  
  Part 3 Cut’em Nail Salon Example: In the example above, the average revenue per client is $1,250 per client or over $100 per month ($1 million divided by 800 clients). If the top 20 clients represent $100,000 in revenue or $5,000 per client, you can quickly see how important they are!

The key take away is that sustained growth and profitability comes from the core customers you retain each year. And the best place to start is to calculate and understand your retention numbers and their trend.

6 Ways to Cut Your Everyday Expenses

Many people dream of making more money, but cutting expenses can have the same effect. Identify unnecessary expenses with these six money-saving ideas and help free up some cash:

1. Eliminate late fees. Most late fees are the result of being too busy, traveling or simply forgetting. Fortunately, late fees are almost entirely avoidable if you have a plan. A lot of people only think of credit card late fees, but they can also show up in many places including utility bills, subscriptions and registration fees. Take a look at your bills and identify the kinds of charges you’re getting. Scheduling automatic payments should help you avoid late fees going forward. And if you get one, call and try to get it canceled. It just might work!
2. Cancel unnecessary subscriptions. Subscriptions are popping up everywhere. They include everything from weekly shaving products to video and music streaming services. With so many options, it’s easy to double up on services or forget to cancel one that you were planning to use for just a short time. Review all your monthly subscriptions and cancel the ones that are no longer providing value.
3. Minimize interest expense. Paying for day-to-day expenses with a credit card to rack up points to use for airfare or other perks is a great cash management tool, but the interest that builds up if you don’t pay it off every month negates the perks and creates an extra expense. If you find yourself in a situation with multiple credit card balances, consider a consolidation loan with a lower interest rate.
4. Be selective with protection plans. With virtually every purchase, the store or website offers to sell you insurance in the form of a protection plan. And for good reason — they’re profitable to them and not you! Insurance should be reserved for things you can’t live without like your health and your home. Pass on the protection plan for your toaster.
5. Review your deductibles. A deductible is a set amount you pay before your insurance kicks in to cover the cost of a claim. The higher the deductible, the lower your monthly premium. If you have enough in savings to cover a higher deductible when disaster strikes, raising the deductible may save you some money on a month-to-month basis.
6. Try a little DIY. If you own a house, you know it’s just a matter of time before something breaks or stops working. When this happens, don’t instantly reach for the phone to call a repairman. Repair videos are in endless supply online. An easy fix will often do the job. Simple fixes can lead to big savings, especially since repair services charge minimums and fuel surcharges.

While some ideas take a little more analysis to understand the true benefits, many are just the result of paying attention. Taking a proactive approach can provide a big boost to your budget.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE have any control over, or responsibility for, the content of any such Websites. All rights reserved.

October 2022 Newsletter

In this month’s newsletter, read about several planning strategies to consider as time is winding down to implement tax cutting measures for 2022.

Also read about ideas to improve your personal cash flow and the ingredients of a successful business partnership.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

Still Time to Reduce any Tax Surprises!

Consider conducting a final tax planning review now to see if you can still take actions to minimize your taxes this year. Here are some ideas to get you started.

• Review your income. Begin by determining how your income this year will compare to last year. Since tax rates are the same, this is a good initial indicator of your potential tax obligation. However, if your income is rising, more of your income could be subject to a higher tax rate. This higher income could also trigger phaseouts that will prevent you from taking advantage of certain deductions or tax credits formerly available to you.
• Examine life changes. Review any key events over the past year that may have potential tax implications. Here are some common examples:
  • Purchasing or selling a home
  • Refinancing or adding a new mortgage
  • Getting married or divorced
  • Incurring large medical expenses
  • Changing jobs
  • Welcoming a baby
• Identify what tax changes may impact you. Some of the major changes this year include the lowering of the child tax credit and the lowering of dependent care credit for working couples. This year also marks the first year in the last two with no pandemic related payments. If you think this could impact your situation it may make sense to conduct a tax planning review.
• Manage your retirement. One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. So now is a good time to review your retirement account funding options. If you are not taking full advantage of the accounts available to you, there is still time to make adjustments.
• Look into credits. There are a variety of tax credits available to most taxpayers. Spend some time reviewing the most common ones to ensure your tax plan takes advantage of them. Here are some worth reviewing:
  • Child Tax Credit
  • Earned Income Tax Credit
  • Premium Tax Credit
  • Adoption Credit
  • Elderly and Disabled Credit
  • Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)
• Avoid surprises. Your goal right now is to try and avoid any unwanted surprises when you file your tax return. It’s also better to identify the need for a review now versus at the end of the year when time is running out. And remember, you are not required to be a tax expert. Use the tips here to determine if a review of your situation is warranted.

Ideas to Improve Your Personal Cash Flow

One of the most common reasons businesses fail is due to lack of proper cash flow. The same is often true in many households. Here’s how this concept of cash flow applies to you along with some ideas to improve it.

Cash flow defined

Cash flow equals cash coming in (wages, interest, Social Security benefits) and cash going out in the bills you pay and money you spend. If more is coming in than going out, you have positive cash flow. If the opposite is true, you have negative cash flow. Unfortunately, calculating and forecasting cash flow can get complicated. Some bills are due weekly, others monthly. A few larger bills may need to be paid quarterly or annually.

Create your cash flow snapshot

Before improving your cash flow, you need to be able to visualize it. While there are software tools to generate a statement of cash flow, you can also take a snapshot of your cash flow by creating a simple monthly spreadsheet:

• Type each month across the top of the spreadsheet with an annual total.
• Note all your revenue (cash inflows), then create a list of expenses (cash outflows) in the left-hand column.
• Enter your income and bills by month. Create a monthly subtotal of all your inflows. Do the same for your cash outflows. Then subtract the expenses from income. Positive numbers? You have positive cash flow. Negative numbers? You have negative cash flow.
• Create a cumulative total for the year under each month to see which months will need additional funds and which months will have excess funds.

Ideas to improve your cash flow

• Identify your challenges. See if you have months where more cash is going out than is coming in to your bank account. This often happens when large bills are due. If possible, try to balance these known high-expense months throughout the course of the year. Common causes are:
  • Holidays
  • Property tax payments
  • Car and homeowners insurance
  • Income tax payments
  • Vacations
• Build a reserve. If you know there are challenging months, project how much additional cash you will need and begin to save for this in positive cash months.
• Cut back on annuities. See what monthly expense drivers are in your life. Can any of them be reduced? Can you live with fewer cell phone add-ons? How about cutting costs in your cable bill? Is it time for an insurance review?
• Shop your current services. Some of your larger bills may create an opportunity for savings. This is especially true with home and car insurance.
• Create savings habits to add to cash flow. Consider paying a bill to yourself in your cash outflows. This saved money is a simple technique to create positive cash flow each month to build an emergency reserve.

Ingredients of a Successful Business Partnership

Like a bundle of sticks, good business partners support each other and are less likely to crack under strain together than on their own. In fact, companies with multiple owners have a stronger chance of surviving their first five years than sole proprietorships, according to U.S. Small Business Administration data.

Yet sole proprietorships are more common than partnerships, making up more than 70 percent of all businesses. That’s because while good partnerships are strong, they can be a challenge to successfully get off the ground. Here are some of the ingredients that good business partnerships require:

• A shared vision. Business partnerships need a shared vision. If there are differences in vision, make an honest effort to find common ground. If you want to start a restaurant, and your partner envisions a fine dining experience with French cuisine while you want an American bistro, you’re going to be disagreeing over everything from pricing and marketing to hiring and décor.
• Compatible strengths. Different people bring different skills and personalities to a business. There is no stronger glue to hold a business partnership together than when partners need and rely on each other’s abilities. Suppose one person is great at accounting and inventory management, and another is a natural at sales and marketing. Each is free to focus on what they are good at and can appreciate that their partner will pick up the slack in the areas where they are weak.
• Defined roles and limitations. Before going into business, outline who will have what responsibilities. Agree on which things need consensus and which do not. Having this understanding up front will help resolve future disagreements. Outlining the limits of each person’s role not only avoids conflict, it also identifies where you need to hire outside expertise to fulfill a skill gap in your partnership.
• A conflict resolution strategy. Conflict is bound to arise even if the fundamentals of your partnership are strong. Set up a routine for resolving conflicts. Start with a schedule for frequent communication between partners. Allow each person to discuss issues without judgment. If compromise is still difficult after a discussion, it helps to have someone who can be a neutral arbiter, such as a trusted employee or consultant.
• A goal-setting system. Create a system to set individual goals as well as business goals. Regularly meet together and set your goals, the steps needed to achieve them, who needs to take the next action step, and the expected date of completion.
• An exit strategy. It’s often easier to get into business with a partner than to exit when it isn’t working out. Create a buy-sell agreement at the start of your business relationship that outlines how you’ll exit the business and create a fair valuation system to pay the exiting owner. Neither the selling partner nor the buying partner want to feel taken advantage of during an ownership transition.

Maximize Your College Financial Aid With These FAFSA Tips

A brand new Free Application for Federal Student Aid (FAFSA) made its debut on October 1st, featuring 60% fewer questions and a host of other changes that aim to increase the likelihood that you can qualify for financial aid.

As you prepare to complete this year’s application, here are some tips to maximize your FAFSA eligibility for financial aid.

• File the FAFSA early. More than a dozen states award financial aid on a first-come, first-serve basis. Students who file the FAFSA in October tend to get more than twice as much grant aid on average as students who file the FAFSA later. Even better, by completing the FAFSA early you can time your financial requests to colleges with their varied due dates.
• Minimize income in the base year. 2021 is the base tax year when filling out the FAFSA for the 2023-2024 school year. If you’ve already filed your 2021 tax return, consider filing an amended Form 1040 if there were deductions you may have overlooked that could reduce your income. Otherwise, file this knowledge away to best position your income for future years.
• Reduce the amount of reportable assets. While assets aren’t weighted as heavily as income on the FAFSA, they could still affect overall financial aid eligibility. To decrease the amount of reportable assets, consider using cash in your bank accounts to pay down unsecured debt such as credit cards and auto loans, or maximizing retirement plan contributions. Keep in mind that certain assets aren’t considered when determining financial aid eligibility. This includes the home you live in, the value of life insurance, and most retirement plans.
• Use 529 plans wisely. 529 plan owners will impact how the funds are reported on the FAFSA. If the account owner is a grandparent or relative, the funds are not counted on the FAFSA until the money is used. So timing the use of these funds is important. And remember if the account owner is a parent or the student, the balance of 529 plans is considered an asset of the parent on the FAFSA.
• Spend a student’s money first. If a student does have cash saved or other assets, consider withdrawing money from student assets first before touching parent assets, since student assets are assessed at a higher rate than parent assets.
• Plan for the American Opportunity Tax Credit (AOTC). If your family is eligible for the AOTC, try spending up to $4,000 in tuition and textbook expenses using cash. The AOTC’s maximum tax credit of $4,000 will be worth more dollar-for-dollar rather than using a $4,000 tax-free distribution from a 529 plan.

Planning for Future Care: A Financial Dilemma

Long-term care costs that drain your nest egg is a financial pothole that is hard to avoid. Here are some ideas to help manage this hazard.

How much is needed

Here’s how much money you’ll need for three different types of senior living arrangements according to Genworth’s 2021 Cost of Care Survey:

• In-home care – $4,957 to $5,148 monthly; $59,484 to $61,776 annually
• Community and assisted living – $1,690 to $4,500 monthly; $20,280 to $54,000 annually
• Nursing home facilities – $7,908 to $9,034 monthly; $94,896 to $108,408 annually

The traditional source of payment problems

Too many people unfortunately think that Social Security, Medicare and health insurance will cover the costs of long-term care. While about half of adults age 50 and over believe that Medicare will cover the cost of long-term care services, according to an AARP survey, the reality is that Medicare provides very limited coverage for long-term care.

What you can do

Here are some suggestions for how you can care for yourself and your loved ones when you need it.

• Review long-term care insurance. While it’s hard to find a cost-effective policy, long-term care insurance helps pay for several types of services ranging from in-home care to nursing homes. It can be difficult to qualify for long-term care insurance, however. Policy underwriters require you to answer questions and possibly complete an exam to determine medical eligibility.
  Some employers offer long-term care insurance that is purchased at group rates. If your company offers coverage, it may be a better alternative than purchasing a policy on your own.
• Take advantage of tax benefits. Long-term insurance premiums may be tax deducible. Tax-qualified polices are considered a medical expense and the premiums are listed as an itemized deduction. For more information, speak with an insurance agent specializing in long-term care policies as well as your tax professional.
• Research long-term care costs in your state. The cost of long-term care services varies by state, type of services required, and type of services preferred. Knowing the cost of long-term care available in your area is a good starting point in the planning process.
• Leverage life insurance. Certain life insurance policies with an early withdrawal for terminal illness or care needs can be an alternative to long-term care insurance. And if structured properly, it can also have tax-free status when used.

Before taking steps for your care as you age, please talk to qualified experts. While long-term care is costly, so is making the wrong decision on how you are going to fund it.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

August 2022 Newsletter

This month’s letter includes a review of five ways to take advantage of IRA accounts to reduce your tax burden. All done with plenty of time to implement the ideas before the end of the year. Plus tips to improve your credit score.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

5 Great Things to Know about IRAs

IRA’s can be a powerful tool to lower taxes all while saving for retirement or other predetermined uses. Here are five fairly unreported things to know about IRA’s.

1. A nonworking spouse can have an IRA. If your spouse doesn’t work, you may still be able to open and contribute to an IRA for your spouse, assuming that you work and file a joint tax return. This can be a great way to help reduce your taxable income each year.
2. Even children can have IRAs. If your child has earned income, you can open and contribute to an IRA. Just ensure you can document the earnings. While your child can contribute their own earnings, many parents will help keep track of things like babysitting money, then match those earnings in either a traditional or ROTH IRA. Often the ROTH IRA is preferred, because the future earnings could be tax free! Your child’s IRA is managed by an adult until the child is old enough for the account to be transferred to their name.
3. You may still contribute to an IRA if you have a 401(k) or similar program at work. As long as you do not exceed the income limits, it is ok to have both an IRA as well as other forms of retirement savings plans. It’s simply important to know your options and plan accordingly.
4. Non-deductible contributions may be made. If you exceed IRA income phaseouts, contributions to your IRA may not reduce your taxable income for the year. But you may still want to make after-tax contributions to a non-deductible IRA. Remember, while you are taxed on the contributions to a non-deductible IRA, the earnings can still grow tax-deferred.
5. It’s not just for retirement. With traditional IRAs, if you withdraw funds before the age of 59 1/2 you may be subject to income tax AND an early withdrawal penalty. But there are exceptions to this rule. These include withdrawals for a first time home purchase, major medical bills, college costs, birth/adoption and many others. However, it is important to know the rules BEFORE you withdraw the funds.

Tax rules surrounding IRAs are vast and complex. But within the rules are numerous situations that if you know they exist, can help you plan for a more tax-efficient future.

Tips to improve your credit score

Credit scores are used to determine interest rates on mortgages, car loans and even the amount you pay for insurance premiums. Because of this, it is a good idea to review ways to improve yours. Here are some ideas:

• Look for errors on your credit report. The place to start is a review of your credit reports. You are entitled to get a free copy of your credit report every 12 months from each credit reporting company: Equifax, Experian and TransUnion. So get a copy of your report and review it for accuracy. Aggressively follow up to correct any errors using the process outlined by each credit reporting company.
• Pay bills on time. The easiest way to improve your credit is to have a string of on-time payments for all bills reported to the credit agencies. This is the most important part of your credit score equation. So while reviewing your credit report, pay special attention to who is reporting your payments and note if any are delayed. Then gather all your monthly bills, identify the due dates, and take advantage of automated tools to ensure the payments are always on time.
• Get credit card utilization as low as possible. The amount of credit you’re using at any given time is called your credit utilization, and is the second-biggest factor in your credit score next to paying on time. For example, if your credit card limit is $5,000 and your balance is $3,000, your credit utilization is 60%. Try to reduce this percentage to no more than 20%. You can do this by spending less, paying off as much of your balance as possible, or increasing your credit limits.
• Sign up for score-boosting programs. A newer way to help improve your credit is to include information on your credit report that normally isn’t reported. Programs like Experian Boost and UltraFICO help you add bills such as rent, utility, and cell phone payments to your credit report, and to analyze how you use your checking, savings or money market accounts. Be aware that these program may ask for access to you bank accounts and could easily work against you if the reporting has a negative impact on your credit if there is a billing problem.
• Avoid requests for new credit. Trying to open a new credit or loan account could lower your score by as much as 10 points. The more inquiries made by creditors who are trying to assess your creditworthiness when trying to open a new account, the more impact it has on your credit score. If you notice a number of vendors are making inquiries, you can always turn off this function with credit agencies. Just remember to turn it back on if you are actively refinancing your mortgage or looking for other credit. While in the long-term your score can be maximized by having a diverse mix of different types of credit accounts, in the short-term adding new accounts will negatively affect your score.

How quickly you can raise your credit score obviously depends on your individual situation, but following these tips will lead to a higher credit score sooner rather than later.

Ideas When Reviewing Franchise Agreements

Buying a franchise may seem like an easy way to get into business, but there are many things to consider before you make a commitment. Here are some thoughts.

Background

A franchise agreement is basically a contract between you and an owner (franchisor) which allows you to use the owner’s trademark, trade name, business systems, advertising support, and business know how. In exchange for this right, you pay fees (often a portion of your business revenues) to the franchisor. As with any business relationship, specific obligations and benefits can vary dramatically.

Some franchisors offer a full range of services to help you get started, including training, site selection, marketing plans, and products. Others give you little more than the legal right to use their name or symbol, after which you are on your own.

Where to begin

Initial and ongoing expenses vary widely among franchises, so determine all your costs before you invest. For example, some franchisors require franchisees to pay for licensing fees, building renovations, equipment purchases, operations manuals, real estate leases, and other start-up costs. Other franchisors may require you to pick up such costs as training, insurance, and advertising. So review the agreement to fully understand your obligation.

Doing your due diligence

Understand any restrictions on competing with other franchisees or selling your business. While the agreement will lay out your legal obligations, talk to other franchisees of the franchisor that you are considering. Do they get the training and ongoing support outlined in the agreement? Is the promised advertising actually delivered and is it very effective? If you hear extensive complaints, you should probably keep looking.

Remember the Document is a Required Disclosure

The franchise disclosure document is a legal document the Federal Trade Commission requires franchisors to provide to prospective franchisees before selling a franchise. There are 23 different sections that a franchisor is required to disclose, from potential litigation or bankruptcy issues, to initial fees, other fees and financial statements. Don’t get overwhelmed, as the entire document can run several dozen pages. This document can contain a treasure trove of information. And any omission is a potential legal liability to the franchisor, so it is worth your time to be thorough in your review.

As always, it’s a good idea to seek professional advice before investing in a new business.

Debit Card Smarts

Save money and potential headaches with these debit card tips:

• Only use in-network ATMs. All debit cards are also ATM cards and used by many to access cash. One of the most common fees appears when you use an out-of-network ATM.
  What you can do: Understand the ATM fees charged by your bank. Only choose a bank that provides free ATM withdrawals for in-network locations. Look at the back of your debit card to see what ATM networks are considered in-network. Then use only those ATMs.
• Fraud protection benefits are different. Most credit cards provide zero liability on any unauthorized charges. Debit cards also provide protection against fraudulent purchases, but there may be limitations depending on which financial institution issued your card. According to federal law, here is the maximum amount of fraudulent transactions you’ll be responsible for depending on when you notify your bank that your card is lost or stolen:
  What you can do: Immediately notify your financial institution as soon as you realize that your debit card is lost or stolen. Frequently review transactions online to identify any unknown charges. Also check with your bank to verify the liability coverage and the timing required to report fraud on your debit card.
  • Immediately notify your bank before any unauthorized charges are made: Zero liability
  • Within two business days: Up to $50
  • After two business days but within 60 days: Up to $500
  • Fail to notify within 60 days: Unlimited
• Have multiple ways to access your cash. If your debit card gets lost or stolen, have another way to pay bills until your new debit card is issued. This is especially true if you’re traveling.
  What you can do: Ask your bank about its options for issuing multiple debit cards for the same checking account. If you’re opening an account other than a free checking account, ask about potential fees, service charges and balance limitations.
• A debit card is not always the best payment method. Remember that a debit card provides financial access to your bank account. If it goes bad, your ability to pay other bills can be affected. For example, a stolen debit card may require you to lock your checking account. What does that mean for your other outstanding payments, like your mortgage, vehicles or utilities? Your financial life can be thrown into chaos.
  What you can do: Avoid using a debit card on websites that are targets for scammers. Avoid using it for air travel given all the recently cancelled flights, as you could easily empty your checking account while trying to get refunds. Consider having a separate bank account as a backup in case the account linked to your debit card needs to be shut down.

While debit cards are quickly overtaking checks and cash as the most popular method of payment, it is important to evolve your use of them to maximize their benefit to you.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

July 2022 Newsletter

This recent run of inflation has caused many people to rethink how and where to store their cash. While many are understandably having second thoughts about having too much cash in accounts that have a lower or almost non-existent interest rate, there’s been a renewed interest in making sure you’ve got enough cash immediately available in case of emergencies.

Keep reading to learn how your bank accounts can work together as a team to provide the security and value you’re looking for.

Also read about tax surprises to be on the lookout for, how your business mileage deduction just became more valuable, and tips to deal with the shrinkflation phenomenon while you’re shopping.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

Layering Your Bank Accounts

Time for the classic banking approach to make a comeback?

For years, savings and checking accounts provided very little in the way of interest income. In our current inflationary times, however, interest rates are on the rise. What is also on the rise is the comeback of traditional banking products. Here is a review of how your bank accounts traditionally work together as a team to provide you the best security and value for your money.

The checking account: 30 days of funds

• Primary Purpose: Checking accounts enable financial transactions. So store enough money here to pay immediate expenses. With checking accounts, you’re allowed numerous withdrawals and unlimited deposits. The tradeoff for having an account where cash is available at a moment’s notice is usually a much lower (or practically non-existent) interest rate.
  
  Action Item: Determine what your 30-day cash needs are and limit the available cash in your checking account to this amount. Also consider setting up a link to another account. Most banks allow this so you do not have overdraft fees. Consider looking for a checking account that also allows an automatic sweep function of excess funds into a higher-interest savings account.

Basic savings account: 2 to 6 months of funds

• Primary Purpose: To store your money in a secure location so you can use it to pay periodic expenses that are expected over the next 2 to 6 months. This is also where many store their emergency fund. While these accounts typically pay only a modest amount of interest, their safety and reliability make savings accounts a great choice for stashing cash you want available sometime within the next 12 months. This is often also your overdraft buffer in case your checking account gets overdrawn.
  
  Action Item: Calculate your anticipated periodic expenses over the next 6 months, and limit the cash in your savings account to this amount. You don’t want the balances too high, as you can typically get better interest in other bank products AND if a thief gets access to your debit card, you can limit the damage they do if this savings account is linked to your checking account.

Higher-interest bank accounts: Lots of choices

• Primary Purpose: There are several types of bank accounts for storing your money beyond what you need for short-term expenses. High-yield savings accounts, money market accounts, and certificates of deposit (CD’s) all provide at least 10x the interest return compared to a regular savings account. But in return for a higher interest rate, there are rules that govern how long you need to leave your money untouched in these accounts.
  
  Action Item: Review your bank’s alternatives for longer-term savings. Pay attention to interest rates and how often they adjust with the market. If CD’s are your bank’s strength, consider building a ladder of expiration dates to make your money more available. On high-yield accounts, the interest rate often increases with higher balances, so know what products these are. It’s also a good idea to talk to your banker to review your options.

When you’re trying to decide where to keep your money, there are also tax ramifications to consider. So keep this in mind as you review how your bank accounts work together as a team.

Watch for These Tax Surprises

Our tax code contains plenty of opportunities to cut your taxes. There are also plenty of places in the tax code that could create a surprising tax bill. Here are some of the more common traps.

• Home office tax surprise. If you deduct home office expenses on your tax return, you could end up with a tax bill when you sell your home in the future. When you sell a home you’ve been living in for at least 2 of the past 5 years, you may qualify to exclude from your taxable income up to $250,000 of profit from the sale of your home if you’re single or $500,000 if you’re married. But if you have a home office, you may be required to pay taxes on a proportionate share of the gain.
  
  For example, let’s say you have a 100-square-foot home office in your house that is 2,000 square feet (your office is therefore 5% of your house’s overall area). Since your home office occupies 5% of your house, you may have to pay taxes on 5% of the gain when you sell it.
  
  Even worse, if you claim depreciation on the business use of your home, this could add even more to your tax surprise. This added tax hit courtesy of depreciation surprises many unwary users of home offices.
• Kids getting older tax surprise. Your children are a wonderful tax deduction if they meet certain qualifications. But as they get older, many child-related deductions fall off and create an unexpected tax bill. And it does not happen all at once.
  
  As an example, one of the largest tax deductions your children can provide you is via the child tax credit. If they are under age 17 on December 31st and meet several other qualifications, you could get up to $2,000 for that child on the following year’s tax return. But you’ll lose this deduction the year they turn 17. If their 17th birthday occurs in 2022, you can’t claim them for the child tax credit when you file your 2022 tax return in 2023, resulting in $2,000 more in taxes you’ll need to pay.
• Limited losses tax surprise. If you sell stock, cryptocurrency or any other asset at a loss of $5,000, for example, you can match this up with another asset you sell at a $5,000 gain and – presto! You won’t have to pay taxes on that $5,000 gain because the $5,000 loss cancels it out. But what if you don’t have another asset that you sold at a gain? In this example, the most you can deduct on your tax return is $3,000 (the remaining loss can be carried forward to subsequent years).
  
  Herein lies the tax trap. If you have more than $3,000 in losses from selling assets, and you don’t have a corresponding amount of gains from selling assets, you’re limited to the $3,000 loss.
  
  So if you have a big loss from selling an asset in 2022, and no large gains from selling other assets to use as an offset, you can only deduct $3,000 of your loss on your 2022 tax return.
• Planning next year’s tax obligation tax surprise. It’s always smart to start your tax planning for next year by looking at your prior year tax return. But you should then take into consideration any changes that have occurred in the current. Solely relying on last year’s tax return to plan next year’s tax obligation could lead to a tax surprise.

Please call to schedule a tax planning session so you can be prepared to navigate around any potential tax surprises you may encounter on your 2022 tax return.

Shrinkflation is Upon Us!

Be aware, be prepared

Inflation is upon us, and a hidden gem used by companies to combat price increases is often hidden from the unaware. It’s called shrinkflation. Here’s what you need to know about this hidden price hike and what you can do to cope with its effects.

Defining shrinkflation

Shrinkflation is the technique of downsizing a product or ingredients to lower costs. In many cases the retail price of something will not change, but the amount of product in the package is lowered. Common techniques include putting less in a package or changing the amount of a high-cost ingredient in the product.

And the changes are often subtle. Would you realize the amount in a box is lowered by 1/2-an-ounce if the box stays the same size? Or that your cereal has fewer raisins in it than a month ago?

Edgar Dworsky, a former assistant attorney general in Massachusetts, recently spoke with the Consumer Federation of America about changes he’s been tracking in grocery isles. Here are some recent examples of shrinkflation:

• Kimberly-Clark’s Cottonelle Ultra Clean mega rolls of toilet paper are reduced from 340 sheets to 312
• Keebler’s Chips Deluxe with M&Ms packages are now 9.75 ounces, down from 11.3 ounces
• Gatorade’s 32-ounce bottles are now 28 ounces
• Cadbury is reducing the size of its popular chocolate bar by 10%

Knowledge is key

While many manufacturers are transparent about these changes as they combat inflation, it is not as apparent to spot when you are shopping. Here some are suggestions to help you identify and combat shrinkflation.

• Focus on unit cost. Instead of focusing on the price of the product, look for the unit cost of the item. Grocery stores can be very helpful in this area, as most tags will show a common unit of measure below the items for sale. If you shop at a store that doesn’t provide this information, you can still calculate the unit price using the information printed on the front of a product’s package.
• Compare the packages. When you replenish your popular shopping items, spend a minute to compare the product with the last one you purchased. Make a mental note if the packaging or number of items in the package is changing.
• Have alternatives. Perhaps it is time to try another toilet paper brand, or choose a different cookie. Many store brands are a great alternative to the market leaders.
• Offset shrinkflation with deals. This includes reviewing featured items at different shopping locations, looking at a store’s weekly flyer for deals, loading up on favorite items when they are on sale, participating in a store’s loyalty program, and looking for coupons using online services.

Remember, inflation is here and everyone needs to cope with it, including manufacturers. But by being aware, you can retain some control to reduce inflation’s impact on you and your family.

Your Business Mileage Deduction Just Became More Valuable

Your business mileage tax deduction just became more valuable for the rest of 2022 after a recent announcement by the IRS.

Starting July 1st, the IRS’s business mileage rate is increasing by 4 cents, to 62.5 cents per mile, while the medical and moving mileage is also increasing by 4 cents, to 22 cents per mile. The previous mileage rates still apply through June 30th.

Here are some tips to make the most of your business’s vehicle expense deduction.

• Don’t slack on recordkeeping. You won’t be able to take advantage of the increased mileage rates without proper documentation. The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.
• Keep track of both mileage and actual expenses. The IRS generally lets you use one of two different methods to track vehicle expenses – the standard mileage rate method or the actual expense method. But even if you use the standard mileage method you can still deduct other expenses like parking and toll fees. So keep good records.
• Consider using standard mileage the first year a vehicle is in service. If you use standard mileage the first year your car is placed in service, you can then choose which expense tracking method to use in subsequent years. If you initially use the actual expense method the first year your car is placed in service, you’re locked in to using actual expenses for the duration of using that car in your business. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate the first year.
• Don’t forget about depreciation! Depreciation can significantly increase your deduction if you use the actual expense method. For heavy SUVs, trucks, and vans with a manufacturer’s gross vehicle weight rating above 6,000 pounds, 100% bonus depreciation is available through the end of the 2022 tax year if the vehicle is used more than 50% for business purposes. Regular depreciation is available for vehicles under 6,000 pounds with annual limits applied.

Please call if you have any questions about maximizing your business’s vehicle expense deduction.

The IRS Announces Tax Scams

Compiled annually, the IRS lists a variety of common scams that taxpayers can encounter. This year’s list includes the following four categories.

• Pandemic-related scams. Criminals are still using the COVID-19 pandemic to steal people’s money and identity with phishing emails, social media posts, phone calls, and text messages.
  
  All these efforts can lead to sensitive personal information being stolen, and scammers using this to try filing fraudulent tax returns. Some of the scams people should continue to be on the lookout for include Economic Impact Payment and tax refund scams, unemployment fraud leading to inaccurate taxpayer 1099-Gs, fake employment offers on social media, and fake charities that steal taxpayers’ money.
• Offer-in-compromise mills. Offer-in-compromise (OIC) mills make outlandish claims about how they can settle a person’s tax debt for pennies on the dollar. Often, the reality is that taxpayers are required to pay a large fee up front to get the same deal they could have gotten on their own by working directly with the IRS. These services tend to be more visible right after the filing season ends while taxpayers are trying to pay their recent bill.
• Suspicious communication. Every form of suspicious communication is designed to trick, surprise, or scare someone into responding before thinking. Criminals use a variety of communications to lure potential victims. The IRS warns taxpayers to be on the lookout for suspicious activity across four common forms of communication: email, social media, telephone, and text messages. Victims are tricked into providing sensitive personal financial information, money, or other information. This information can be used to file false tax returns and tap into financial accounts, among other schemes.
• Spear phishing attacks. Criminals try to steal client data and tax preparers’ identities to file fraudulent tax returns for refunds. Spear phishing can be tailored to attack any type of business or organization, so everyone needs to be skeptical of emails requesting financial or personal information.

What you can do

If you discover that you’re a victim of identity theft, consider taking the following action:

• Notify creditors and banks. Most credit card companies offer protections to cardholders affected by ID theft. Generally, you can avoid liability for unauthorized charges exceeding $50. But if your ATM or debit card is stolen, report the theft immediately to avoid dire consequences.
• Place a fraud alert on your credit report. To avoid long-lasting impact, contact any one of the three major credit reporting agencies—Equifax, Experian or TransUnion—to request a fraud alert. This covers all three of your credit files.
• Report the theft to the Federal Trade Commission (FTC). Visit identitytheft.gov or call 877-438-4338. The FTC will provide a recovery plan and offer updates if you set up an account on the website.
• Please call if you suspect any tax-related identity theft. If any of the previously mentioned signs of tax-related identity theft have happened to you, please call to schedule an appointment to discuss next steps.

Understanding Tax Credits Versus Deductions

Tax credits are some of the most valuable tools around to help cut your tax bill. But figuring out how to use these credits on your tax return can get complicated very quickly. Here’s what you need to know.

Understanding the difference

To help illustrate the difference between a credit and a deduction, here is an example of a single taxpayer making $50,000 in 2022.

• Tax Deduction Example: Gee I. Johe earns $50,000 and owes $5,000 in taxes. If you add a $1,000 tax deduction, he’ll decrease his $50,000 income to $49,000, and owe about $4,800 in taxes.
  
  Result: A $1,000 tax deduction decreases Gee’s tax bill by $200, from $5,000 to $4,800.
• Tax Credit Example: Now let’s assume G.I. Johe has a $1,000 tax credit versus a deduction. Mr. Johe’s tax bill decreases from $5,000 to $4,000, while his $50,000 income stays the same.
  
  Result: A $1,000 tax credit decreases your tax bill from $5,000 to $4,000.

In this example, your tax credit is five times as valuable as a tax deduction.

Too good to be true?

Credits are generally worth much more than deductions. However there are several hurdles you have to clear before being able to take advantage of a credit.

To illustrate, consider the popular child tax credit.

Hurdle #1: Meet basic qualifications

You can claim a $2,000 tax credit for each qualifying child you have on your 2022 tax return. The good news is that the IRS’s definition of qualifying child is fairly broad, but there are enough nuances to the definition that Hurdle #1 could get complicated. And then to make matters more complicated…

Hurdle #2: Meet income qualifications

If you make too much money, you can’t claim the credit. If you’re single, head of household or married filing separately, the child tax credit completely goes away if you exceed $240,000 of taxable income. If you’re married filing jointly, the credit disappears above $440,000 of income. And then to make matters more complicated…

Hurdle #3: Meet income tax qualifications

To claim the entire $2,000 child tax credit, you must owe at least $2,000 of income tax. For example, if you owe $3,000 in taxes and have one child that qualifies for the credit, you can claim the entire $2,000 credit. But if you only owe $1,000 in taxes, the maximum amount of the child tax credit you could claim is $1,400.

Take the tax credit…but get help!

The bottom line is that tax credits are usually more valuable than tax deductions. But tax credits also come with lots of rules that can be confusing. Please call to schedule a tax planning session to make sure you make the most of the available tax credits for your situation.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

June 2022 Newsletter

With your 2021 tax return now filed, the last thing you may want to do is start thinking about your 2022 tax return! The best way to lower your tax bill for next year, however, is to start looking for tax cutting strategies as soon as possible.

In this month’s newsletter, read about some tax planning tips to help you lower your 2022 taxes. Also read about tax implications if you have a side hustle, money management tips for couples, and how to make your child’s summer break a tax break!

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

Start Your Tax Planning NOW!

Keeping your taxes as low as possible requires paying attention to your financial situation throughout the year. Now that you’ve filed your 2021 tax return, here are some tips for getting a head start on tax planning for your 2022 return:

• Check your paycheck withholdings. Now is a good time to check your tax withholdings to make sure you haven’t been paying too much or too little. The IRS has an online tool that will help you calculate how much your current withholdings match what your final tax bill will be. Visit https://apps.irs.gov/app/tax-withholding-estimator.
  
  Action step: To change how much is withheld from your paycheck in taxes, fill out a new Form W-4 and give it to your employer.
  
  
• Defer earnings. You could potentially cut your tax liability by deferring your 2022 income to a future year via contributions to a retirement account. For 2022, the 401(k) contribution limit is $20,500 ($27,000 if 50 or older); $6,000 for both a traditional and Roth IRA ($7,000 if 50 and older); or $14,000 for a SIMPLE IRA ($17,000 if 50 and older).
  
  Action step: Consider an automatic transfer from either your paycheck or checking account to your retirement account so you won’t have to think about manually making a transfer each month.
  
  
• Plan withdrawals from retirement accounts to be tax efficient. Your retirement accounts could span multiple account types, such as traditional retirement accounts, Roth accounts, and taxable accounts like brokerage or savings accounts. Because of this you should plan for your withdrawals to be as tax efficient as possible.
  
  Action step: One way to structure withdrawals is to pull from taxable accounts first, and leave Roth account withdrawals for last. Another approach would be to structure proportional withdrawals from all retirement accounts that would lead to a more predictable tax bill each year.
  
  
• Net capital gains with capital losses. If you have appreciated investments you’re thinking about selling, take a look through the rest of your portfolio to see if you have other assets that you could sell for a loss and use to offset your gains. Using the tax strategy of tax-loss harvesting, you may be able to take advantage of stocks that have underperformed.
  
  Action step: Make an appointment with your broker to look over your portfolio to see if there are any securities you may want to sell by the end of 2022.
  
  

Tax planning can potentially result in a lower bill from the IRS if you start taking action now. Please call if you have questions about your tax situation for 2022.

Hustling for Extra Income – Don’t forget the taxman!

From supplementing their current income to replacing income that was lost because of layoffs, the pandemic or other reasons, many people have started side hustles over the past 2 years to help make ends meet.

If you currently have a side hustle, don’t forget about the tax implications from earning extra money. Here are several ideas to help you stay on top of your side hustle’s taxes:

• All income must be reported. Income from side hustles can come from a variety of sources. Regardless of where the money comes from or how much it is, it is supposed to be reported on your tax return. If you do work for a company, expect to receive a 1099-NEC or 1099-MISC if you are an independent contractor, or a W-2 if you’re an employee.
• Keep good records and save receipts. Being organized and having good records will do two things: ensure accurate tax reporting and provide backup in the event of an audit. Log each receipt of income and each expense. Save copies of receipts in an organized fashion for easy access. There are multiple programs and apps to help with this, but a simple spreadsheet may be all that you need.
• Make estimated payments. If you are running a profitable side business, you will owe additional taxes. In addition to income tax, you might owe self-employment tax as well. Federal quarterly estimated tax payments are required if you will owe more than $1,000 in taxes for 2022. Even if you think you will owe less than that, it’s a good idea to set a percentage of your income aside for taxes to avoid a surprise when you file your 2022 return.
• Don’t fall into the hobby trap. You won’t be allowed to deduct any expenses if the IRS determines that your side hustle is a hobby instead of a business. To make sure your side hustle is deemed a business by the IRS, you should show a profit during at least three of the previous five years.
• Get professional tax help. There are many other tax factors that can arise from side income such as business entity selection, sales taxes, state taxes, and more. Please call to set up a time to work through your situation and determine the best course of action for your side hustle.

Money Management Tips for Couples

Couples consistently report finances as the leading cause of stress in their relationship. Here are a few tips to avoid conflict with your long-term partner or spouse.

• Be transparent. Be honest with each other about your financial status. As you enter a committed relationship, each partner should learn about the status of the other person’s debts, income and assets. Any surprises down the road may feel like dishonesty and lead to conflict.
• Frequently discuss future plans. The closer you are with your partner, the more you’ll want to know about the other person’s future plans. Kids, planned career changes, travel, hobbies, retirement expectations — all of these will depend upon money and shared resources. So discuss these plans and create the financial roadmap to go with them. Remember that even people in a long-term marriage may be caught unaware if they fail to keep up communication and find out their spouse’s priorities have changed over time.
• Know your comfort levels. As you discuss your future plans, bring up hypotheticals: How much debt is too much? What level of spending versus savings is acceptable? How much would you spend on a car, home or vacation? You may be surprised to learn that your assumptions about these things fall outside your partner’s comfort zone.
• Divide responsibilities, combine forces. Try to divide financial tasks such as paying certain bills, updating a budget, contributing to savings and making appointments with tax and financial advisors. Then periodically trade responsibilities over time. Even if one person tends to be better at numbers, it’s best to have both members participating. By having a hand in budgeting, planning and spending decisions, you will be constantly reminded how what you are doing financially contributes to the strength of your relationship.
• Learn to love compromising. No two people have the same priorities or personalities, so differences of opinion are going to happen. One person is going to want to spend, while the other wants to save. Vacation may be on your spouse’s mind, while you want to put money aside for a new car. By acknowledging that these differences of opinion will happen, you’ll be less frustrated when they do. Treat any problems as opportunities to negotiate and compromise.

Make Your Child’s Summer Break a Tax Break

As a busy working parent, you may be on the lookout for activities that are available for your kids this summer. There may be a solution that’s also a tax break: Summer camp!

Using the Child and Dependent Care Credit, you can be reimbursed for part of the cost of enrolling your child in a day camp this summer.

Am I eligible?

1. You, and your spouse if you are married, must both be working.
2. Your child must be under age 13, your legal dependent, and live in your residence for more than half the year.

Tip: If your spouse doesn’t work but is either a full-time student, or is disabled and incapable of self-care, you can still qualify for the credit.

How much can I save?

For 2022, you can claim a maximum credit of $1,050 on up to $3,000 in expenses for one child, or $2,100 on up to $6,000 in expenses for two or more children.

What kind of camps?

The only rule is: no overnight camps.

The credit is designed to help working people care for their kids during the work day, so summer camps where kids stay overnight aren’t eligible for this credit.

Other than that, it doesn’t matter what kind of camp: soccer camp, chess camp, summer school or even day care. All of these are eligible expenses for this credit.

Other ways to use this credit

While summer day camp costs are a common way to use this credit, any cost to provide care for your children while you are working may be eligible.

For example, you can use this credit to pay a qualified day care center, a housekeeper or a babysitter to take care of your child while you are working. You can even pay a relative to care for your child and claim the credit for that expense, as long as the relative isn’t your dependent, minor child or spouse.

This is just one of many possible tax breaks related to children and dependents. Please call if you have questions about this credit, or if you’d like to discuss any other tax savings ideas.

Six Simple Ideas to Help Your Small Business

Here are six ideas to help your business grow and thrive this summer.

1. Understand your cash flow. One of the biggest causes of business failure is lack of understanding cash flow. At the end of the day, you need enough cash to pay your vendors and your employees. If you run a seasonal business you understand this challenge. The high season sales harvest needs to be ample enough to support you during the slow non-seasonal periods.
   
   Recommendation: Create a 12-month rolling forecast of revenue and expenses to help understand your cash needs.
   
   
2. Know your pressure points. When looking at your business, there are a few big items that drive your business success. Do you know the top four drivers of your financial success or failure? By staying focused on the key drivers of your business, success will be easier to come by.
   
   Recommendation: Look at last year’s tax return and identify the key financial drivers of your business. Do the same thing with your day-to-day operations and staffing.
   
   
3. Inventory matters. If your business sells physical product, you need a good inventory management system. This system doesn’t have to be complex, it just needs to help you keep control of your inventory. Cash turned into inventory that becomes stuck as inventory can create a major cash flow problem.
   
   Recommendation: Develop an inventory system with periodic counts to ensure you do not have shrink or theft issues, and that can help identify when you need to take action to liquidate old inventory.
   
   
4. Know your customers. Who are your current customers? Are there enough of them? Where can you get more of them? How loyal are they? Are they happy? Several large customers can drive your company’s growth or create tremendous risk should they take their business to a competitor.
   
   Recommendation: Know who your target audience is and then cater your business toward them and what they are looking for in your offerings.
   
   
5. Know your point of difference. Once you know who your target customer is, understand why they buy your product or service. What makes you different from other businesses selling a similar item?
   
   Recommendation: If you don’t know what makes your business better than others, ask your key customers. They will tell you. Then take advantage of this information to generate new customers.
   
   
6. Develop a great support team. Successful small business owners know they cannot do it all themselves. Do you have a good group of support professionals helping you? You need accounting, tax, legal, insurance, and employment help along with your traditional suppliers.
   
   Recommendation: Conduct an annual review of your resources. Be prepared to review your suppliers and make improvements where necessary.
   

While libraries are filled with small business advisory books, sometimes focusing on a few basic ideas can help improve your business’s outlook. Please call if you wish to discuss your situation.

Make Your Cash Worth More!

Banking tips to help you cash in

Your cash is parked in a bank account. Do you know if it’s making or losing you money? Here are some ideas to help you make the most of your banked cash:

• Understand your bank accounts. Not all bank accounts are created equal. Interest rates, monthly fees, minimum balances, direct deposit requirements, access to ATMs, other fees and customer service all vary from bank to bank and need to be considered. Start by digging into the details of your accounts. There may be some things you’ve been unnecessarily living with like ATM fees or monthly account charges. Once you have a handle on your current bank, conduct research on what other banks have to offer.
• Know your interest rates. As a general rule, the more liquid an account, the lower the interest rate. Checking accounts offer the lowest rates, followed by savings accounts, which yield lower rates than Certificates of Deposits. Maximizing your earnings is as simple as keeping your cash in accounts with higher interest rates. The overall interest rate earned between all your accounts should usually be higher than the inflation rate, which is generally around 2 percent during normal times. But in the midst of high inflation like we are currently experiencing, your combined interest rate may have a difficult time beating the inflation rate.
• Make smart moves. There are a couple of things to take into account when making transfers. First, federal law allows for only six transfers from savings and money market accounts per month. If you exceed this number, you’ll be hit with a penalty for each transaction that exceeds six transfers. Second, if you invest in longer-term investments like CDs or bonds, there are penalties for withdrawing funds before the maturity date. So make sure you can live without the funds for the duration of the term.
• Stay diligent. Putting together a cash plan is just the start. The key to success is to be persistent. Besides losing out on potential earnings, mismanaging your cash can result in hefty overdraft fees. The more attention you devote to your cash, the more your money will grow.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

May 2022 Newsletter

With tax season now in the rear view mirror for most of us, it’s time to start thinking about how to minimize your taxes on next year’s tax return.

It’s time to get a start on your tax planning by learning about the tax consequences of different types virtual transactions, from cryptocurrency and non-fungible tokens to internet marketplaces and online courses.

Also read about maximizing your working-from-home opportunity, avoiding surprising fees while on vacation, and a great article explaining how taxes work for those picking up a summer job.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

Tax Consequences of Virtual Transactions

As social distancing turns convenience into necessity, the number and types of activities moving to the internet is exploding. It’s important to remember that these virtual events often trigger real-world tax implications.

Here are some things to keep in mind:

• Internet marketplaces – Proceeds of sales of goods and services on internet marketplaces can be taxable income. That’s true whether you’re a hobbyist or running an online business. Depending on your level of activity, tax rules may limit your deductions. Internet sales may also be subject to sales or use taxes, which vary by state. If the platform is considered a Marketplace Facilitator, sales taxes are collected by the marketplace itself and remitted to the appropriate taxing entities. In other cases, that responsibility may fall on you. So you need to know the difference.
• The IRS is watching – New reporting requirements require more reselling activity to be reported to the IRS. So if you resell your sporting event tickets or concert tickets using an online tool, expect the platform to ask you for information about yourself, including your Social Security number. Why? E-bay, StubHub, Ticketmaster and similar platforms must now report a lot of this activity to the IRS via new Form 1099-K reporting rules!
• Online courses – Social media platforms are loaded with advertisements for how-to courses on every conceivable topic – including how to create your own online course. If you decide to share your knowledge in a particular subject matter by developing and selling an online course, proceeds can be subject to income tax. Sales and use taxes may also be due on the purchases of these courses in some jurisdictions.
• Crowdfunding – If you use crowdfunding platforms like Kickstarter or Indiegogo to raise funds for your business venture or project, the money you receive can be taxable. If you provide a reward in exchange for different amounts, the funds you receive are treated as sales proceeds. Crowdfunding transactions may also be subject to state sales and use taxes. If backers of your venture receive equity in your startup company, those transactions may not be taxable as income, but they are regulated by the Security and Exchange Commission.
• Online fundraising – Funds you receive through an online fundraising campaign to pay for medical bills, disaster recovery or other personal expenses generally are treated as nontaxable gifts. Donations to such campaigns may even qualify as deductible charitable contributions by the donors.
• Social media influencers – It may seem like fun to develop a significant following on social media, but capitalizing on that audience through product endorsements and other influencing activities is treated as business income. Endorsement payments are taxable and so is the value of any products received in exchange for reviews or brand placements in social media posts.
• Virtual currency – Payments you receive in the form of virtual currency for goods and services are treated similar to cash transactions and are included in your gross income at fair market value. But to add a level of complexity, that virtual currency is also considered property, which can result in taxable gains or losses. So you will also need to attach the fair market value to that virtual currency as of the receipt date of the currency. Then when you use the currency you will need to track a gain or loss on that future transaction.

Please call if you need help sorting out the tax implications of any virtual activity or transaction.

Maximizing Your Working From Home Opportunity

Flexible working arrangements appear to be here to stay. But the benefits of working from home also come with the challenge of maintaining an appropriate work-life balance and a high level of productivity. Here are several ideas to consider if you’ll be continuing to work from home, either full-time or occasionally:

• Divide your day into sections. Consider dividing your day into segments based on projects and asking for several hours of quiet time. If you have a family, it’s easier to manage 2 to 3 hours of uninterrupted time rather than 8 to 10 hours at a time.
  
  Action step: Get an electronic calendar, share it with your family and co-workers, and actually use it! An up-to-date calendar will help you, your family and your co-workers know when you are busy.
• Create an urgent/important matrix for your to-do list. A never-ending to-do list can quickly rob you of your work-life balance. An urgent/important matrix can help you decide which items need done today, and which items are ok to push into the future.
  
  Action step: The next time someone approaches you with a small project that needs to get done as soon as possible, have that person help you decide where to place that task in your matrix. If the task truly needs to be completed ASAP, the two of you can decide which of your current priorities can be pushed into the future.
• Over-communicate with your boss. Heading off phone calls and e-mails from your boss asking about a project’s status will save valuable time for both of you in the quest of work-life balance. Consider being proactive about sharing any information that your boss might want to know.
  
  Action step: A summary e-mail sent to your boss once a week could serve as a quick touch point about project updates instead of sending multiple e-mails throughout the week.
• Create and review your own space.  Even if you live by yourself, try to separate your work environment from your non-work environment. By now, most work-at-home employees have their routine, but it should still be reviewed periodically.
  
  Action step: Clock your work time a couple of days each month. See how many hours you are giving your employer. Adjust you home work day to either be more productive or take some of your personal time back. Working too much or not enough can both create long-term complications.
• Continue to leverage in-office opportunities. Do not overlook the power of periodically connecting with other team members. Many employers are providing alternative work spaces for those who wish to connect with fellow employees.
  
  Action step: Take advantage of these in-office opportunities. This is especially important if your supervisor and other decision makers are in the office. Remember, human interaction is still a powerful tool for developing relationships and creating work synergy.

Working from home is part of the new norm. Be sure to work closely with your employer to make sure this arrangement remains a win-win opportunity for both of you.

Watch Out! Vacation Costs That Sneak Up on You

Going on vacation is a time to get away, relax and enjoy new experiences. But if you don’t pay close attention, extra costs can sneak up on you like tiny money-stealing ninjas. Here are eight sneaky vacation costs.

1. Covert airfare increases. Airline pricing algorithms are programmed to store your browsing history to see if you’ve been looking at flights. If you have, they will bump up the price. Before searching, clear your internet history and switch to private (or incognito) mode on your web browser. When you are finally ready to book the flight, do so using a different computer from a new location to avoid this artificial price increase.
2. Stealthy fees. The nightly base rate for a fancy resort or self-rental often compares favorably to a standard hotel in the same location. This can be an intentional pricing tactic used to get their property on the initial search results page. Don’t be fooled! These same places often add a daily resort fee or high cleaning cost on to your bill. The extra fees might be worth it to you, but it’s better to understand the full cost of the stay before making your reservation.
3. Bait and switch. In the self-rental marketplace, a property management service may feature a great-looking rental, but when you try to book it, it is not available. They then try to switch you to a less desirable property. Even worse, a single property can be listed on numerous services so that property you think you reserved is actually already rented to someone else!
4. Useless rental car insurance. Rental car companies will try to sell you insurance to cover damages you may cause during the rental period. The auto insurance you already have many times will extend to the rental car. In these cases, the extra insurance isn’t necessary. Before renting a car, check with your insurance company to see if a rental will be covered.
5. Bloated baggage fees. You probably already know that airlines may charge for checking in a bag, but did you know they will charge extra if a bag is too heavy? Exact weight can vary by airline or location, so check the weight limits before you go and weigh any heavy bags using a bathroom scale.
6. Crafty parking costs. Downtown hotels in big cities charge as high as $75 per night for parking! Research alternative parking options near your hotel or compare the cost of using ride share options before committing to the hotel rate.
7. Extra driver charges. Rental car companies will charge an extra daily fee to have a second driver listed on the rental. If possible, commit to one person to handle all the driving on your vacation.
8. Tricky foreign transaction fees. Traveling abroad and paying an extra fee for every purchase will add up in a hurry. Before you go, check your credit cards, bank accounts and cell phones to see if they charge foreign transaction fees. If they do, shop for another card, account or cell phone that doesn’t charge fees.

Everyone expects to pay for their vacation, but with a little planning you can avoid dealing with unpleasant surprises during your vacation!

Summer Jobs and Taxes – The tax man wants their share!

Now is the time to prepare for the not-so-pleasant part of having a summer job – paying taxes! Here’s what you can expect depending on what type of job you have this summer.

• The employee. A job at a retail store or restaurant generates earned income that is subject to payroll and income taxes. Paying taxes as an employee is super easy, as all necessary taxes will be withheld from your paycheck. You may need to file a tax return if wages and tips are more than $12,950, which is the standard deduction for single taxpayers in 2022.
• The family business. A job at a family business will also generate earned income that is subject to payroll and income taxes. If you are under age 18, receive reasonable compensation for a legitimate job, and the business is either a sole proprietorship or an LLC, you could qualify for an exemption from Social Security, Medicare, and federal unemployment taxes.
• The entrepreneur. A job such as mowing lawns, working on computers or dog walking will generate earned income that is subject to income taxes. You will also have to pay a 15.3% self-employment tax on all profits. Paying taxes as an entrepreneur or business owner also involves making payments to the IRS, either electronically or via check, throughout the year.
• The domestic worker. Performing chores such as babysitting and cleaning for neighbors may trigger the household employee rules, also known as the nanny tax. This can be good news, as these jobs are typically exempt from Social Security and Medicare taxes when paid to workers under age 18 who are considered household employees.

What you need to do

Here are some suggestions for understanding how taxes will affect your summer job:

Explain how taxes are withheld. If you are an employee, take one of your paychecks and review how each dollar amount is calculated. This will also help you understand the different types of taxes, including federal and state income taxes, Social Security taxes and Medicare taxes.

Set up a savings account. If you have your own business, you’ll need to set aside a certain percentage of the money you earn to pay the IRS. An easy way to do this is by transferring a certain portion of the money into a savings account. Pay attention to the quarterly estimated due dates throughout the year – April 15th, June 15th, September 15th and January 15th. These are the deadlines for you to send tax payments to the IRS.

Lower your tax bill. Consider opening an IRA that can help you start saving for the future while potentially lowering your taxes. This helps establish a healthy savings habit while understanding it is possible to pay less in taxes!

Please call if you have questions about taxes and how they apply to your summer job.

The Home Gain Exclusion: Make Sure You Qualify!

Across the country, many homeowners are cashing out to multiples over list price, especially since one of the largest tax breaks available to most individuals is the ability to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. Here is what you need to know.

Background

As long as you own and live in your home for two of the five years before selling your home, you qualify for this capital gain tax exclusion. Here are the official hurdles you must jump over to qualify for this tax break:

• Main home. This is a tax term with a specific definition. Your main home can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
• Ownership test. You must own your home during two of the past five years.
• Residence test. You must live in the home for two of the past five years.
• Other nuances:
  • You can pass the ownership test and the residence test at different times.
  • You may only use the home gain exclusion once every two years.
  • You and your spouse can be treated jointly OR separately depending on circumstances.

When to pay attention

You live in your home for a long time. The longer you live in your home, the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gain prior to selling their home.

You have old home gain deferrals. Prior to the current rules, home gains could be rolled into the next home purchased. These old deferred gains reduce the cost of your current home and can result in a capital gains tax.

Two homes into one. Newly married couples with two homes have a potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.

Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the available amount of gain exemption.

You are helping an older family member. Special rules apply to the elderly who move out of a home and into assisted living and nursing homes. Prior to selling property, it is best to review options and their related tax implications.

You do not meet the five-year rule. In some cases you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.

Other situations. There are a number of other exceptions to the home gain exclusion rules. This includes foreclosure, debt forgiveness, inheritance, and partial ownership.

A final thought

The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine any gain on your property. Keep all sales records, purchase records, improvement costs, and other documents that support your home’s capital gain calculation.

Making Your Home Office a Tax Deduction

The home office deduction is a great tax break for the millions of Americans who are now working from home, either occasionally or full-time. But there’s one huge catch…you can’t be an employee!

That’s right, if you’re working from home for an employer, you normally can’t deduct your office expenses.

Here’s a quick look at the basic requirements to be able to deduct your home office expenses, along with some suggestions for how to qualify for the deduction and turning your home office into a tax planning opportunity:

The basics

There are two requirements for having a tax-deductible home office:

• Your home office is only used for business purposes. Your home office must be used exclusively for operating your business. It can’t double as the family media center or living room. To meet this requirement, set up your office in a separate area of your house. Then if you get audited by the IRS, there is no doubt that your office is used exclusively for business purposes.
• Your home office is your primary place of business. You need to demonstrate that your home office is the primary place you conduct your business. The IRS has clarified that you can meet clients and conduct meetings at separate office locations, but your home office must be the only location where your administrative work is completed. So if you meet with clients or work on any part of your business away from your home office, keep a journal of each specific activity undertaken and describe how it doesn’t violate the primary place-of-business rule.

Looking at these two criteria, everyone that is now required to work from home probably meets both qualifications.

Qualifying for the deduction

While it usually makes little sense to move from an employee to a contractor simply to get a home office deduction, too many ignore the move when it could be available to them. Here are some ideas.

• Become an independent contractor. The easiest way to deduct your home office expenses is by switching from being an employee to an independent contractor. With a number of firms cutting pay and benefits due to the pandemic, it may be worth exploring. If you can meet the IRS requirements for becoming an independent contractor, it may be worth doing the math by considering all the deductions your home office may make available to you and comparing them to the cost of lost benefits as an employee.
• Start a side business. If becoming an independent contractor for your current employer isn’t an option, consider starting a side business. You can deduct all business-related expenses on your tax return, including your home office expenses. If you go this route, ensure your home office is in a different location in your home than your other work space.
• Consider your entire household. Even if you don’t qualify for the home office deduction, maybe someone else living in your home does qualify. So look into your options to see if a family member can take advantage of the home office deduction.

Figuring out how to properly deduct your home office can be a lot more complicated than it appears. If you need help, please call.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

April 2022 Newsletter

Welcome to tax month! We’ve included ideas to manage your emergency fund while in our new inflationary environment and a dozen money topics every young person should understand prior to leaving the nest.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

Protect Your Emergency Fund From Inflation

Most financial experts suggest keeping three to six months worth of household expenses in savings to help in case of emergency. But with record inflation, that task just got a lot harder to accomplish as virtually every safe place to put your emergency funds will not provide interest rates that keep pace with inflation. But that does not mean you cannot increase the rate of return on these funds.

Here are some ideas to reduce the impact of inflation on your emergency funds.

• Actively monitor your savings account rate. Earlier this year the Federal Reserve increased interest rates for the first time since 2018. In addition, the head of the Federal Reserve is suggesting there may be several of these rate increases in the next twelve months. This should increase the interest you can earn on the cash in your emergency account.What you need to know: Not all savings accounts are created equal. When the Fed increases the interest rate, your saving account rate should also go higher…immediately. But this is not always the case. If your bank is slow to raise your savings rate, be willing to monitor and shift funds to a bank that does. Just make sure the funds are still FDIC insured and are kept at a reputable bank.
• Take a look at Series I Savings Bonds. Series I Savings bonds are issued and backed by the U.S. government and feature two interest rate components: a fixed rate and an inflation rate. The fixed rate is set when the bond is issued and never changes during the life of the bond. The inflation rate resets semi-annually based on the Consumer Price Index.What you need to know: You must hold an I bond for at least 12 months before redeeming it. And although you can redeem it after one year, you’ll have to pay a penalty worth the interest of the previous three months if you redeem the bond within five years. And remember, you must be prepared to pay the penalty if you need the funds for an emergency.
• Creative use of Roth IRA funds in an emergency. Roth IRAs are funded with after-tax dollars. Because of this, early removal of the initial contribution is tax and penalty free. If you dip into the earnings, however, you will not only be subject to income tax, but also may be subject to a 10% early withdrawal penalty.What you need to know: Use of a Roth IRA is often a creative way to fund your emergency account while achieving higher returns with conservative investment choices, but it is not for the faint of heart. If you get this one wrong, it could cost you in taxes, penalties and lost fund value in a bear market. Prior to removing funds from any IRA, it makes sense to conduct a tax planning session.

Please call if you have questions about how to reduce the impact of inflation on your emergency fund.

Common April Tax Questions Answered!

The individual tax deadline of April 18th (yes, this year it’s April 18th!) is fast approaching. Here are answers to five common questions that taxpayers typically ask in April.

1. What happens if I don’t file on time?
   There’s no penalty for filing a tax return after the deadline if you are set to receive a refund. However, penalties and interest are due if taxes are not paid on time or a tax extension is not requested AND you owe tax.To avoid this problem, file your taxes as soon as you can because the penalties can pile up pretty quickly. The failure-to-file penalty is 5 percent of the unpaid tax added for each month (or part of a month) that a tax return is late.
2. Can I file for an extension?
   If you are not on track to complete your tax return by April 18th, you can file an extension to give you until Oct. 17, 2022 to file your tax return. Be aware that this is only an extension of time to file — not an extension of time to pay taxes you owe. You still need to pay all taxes by April 18th to avoid penalties and interest.So even if you plan to file an extension, a preliminary review of your tax documents is necessary to determine whether or not you need to make a payment when the extension is filed.
3. What are my tax payment options?
   You have many options to pay your income tax. You can mail a check, pay directly from a bank account with IRS Direct Pay, pay with a debit or credit card (for a fee), or apply online for an IRS payment plan.No matter how you pay your tax bill, finalize your tax payment arrangements by the end of the day on April 18th.
4. When will I get my refund?
   According to the IRS, 90 percent of refunds for returns that are e-filed are processed in less than 21 days. You could end up waiting several months, however, if you paper file your return. The IRS is still processing a backlog of several million paper-filed tax returns from last year.You can use the Where’s My Refund?feature on the IRS website to see the status of your refund. The refund information is usually available 24 hours after receiving confirmation that your e-filed tax return was accepted by the IRS.
5. I hear the IRS is still backlogged with last year’s tax returns. Is this true?
   Yes. Late changing tax legislation created tons of extra work for the IRS, all while the pandemic played havoc on staffing. During a testimony made to Congress, the Director of the IRS claims the backlog will be cleared up by the end of the year…assuming no major demands for are made on their resources.

Help Your High School Student Become Money Smart

A dozen great topics!

Often lost in the race to get kids through high school and on to life in the real world are basic financial skills. Here are a dozen financial concepts to consider explaining to your kids before graduating high school.

1. How bank accounts work. While there are numerous online applications, consider using a good ol’ check register when teaching the basics of how to track and reconcile bank account activity.
2. How credit cards work. Emphasize to your child that credit card spending actually creates a loan. Go through a monthly statement together and show how interest is calculated and stress the need to never carry a balance from month to month by showing how long it takes to pay off the debt with minimum payments.
3. Tax basics. When your child receives their first paycheck, walk through their paystub to explain Social Security and Medicare taxes, federal income tax withholdings, and state tax withholdings. If they receive a Form 1099 instead of a paycheck, consider opening a savings account and explain that they will need to set aside a certain percentage of their money to pay the IRS.
4. The power of a retirement account. Explain the advantages of long-term savings tools like an IRA. The wise saver can turn into a self-made millionaire by starting their retirement savings at a young age.
5. How credit scores work. Consider explaining how credit scores work and the importance of keeping their score at the highest level possible. If your child is like many young adults who currently doesn’t have a credit score, consider downloading your own credit report and walk through it with them.
6. Spend within your means. Saving first before spending is a simple concept that is becoming a lost art. Help your child understand this by setting their sights on something they want, and then help them save money to buy it.
7. The art of saving. Part of spending within your means implies that your child has healthy savings habits. Walk your child through the techniques that work for you. Perhaps it is setting up a separate savings account or automatic transfers from a paycheck.
8. The strength of investing. The most valuable investment a young person can make is in themselves. Whether it’s a college degree or a trade school diploma, your child can build tremendous value with skills that will provide a positive financial return each year.
9. Understanding of stocks and mutual funds. With an understanding of investments, consider teaching your child some of the basic investments available to them. Stocks and mutual funds are the most common, but also consider explaining bonds, CD’s, annuities and other investments.
10. Budgeting. Help your child create a basic budget, then help them track their savings and spending against this budget.
11. Cash flow. The hard way to learn the lesson of cash flow is when bill collectors are calling and there simply isn’t money to pay them. When creating an initial budget, show your child the flow of funds each month.
12. Calculation of net worth. Assets (what you own) minus liabilities (what you owe others) equals net worth. Every person has a net worth…even a child. So help them understand theirs and periodically calculate it.

The Benefits of Being a Sole Proprietor

Many start-up businesses move from hobby status to a business when they start to make a profit. The tax entity typically used is a sole proprietorship. Taxes on this business activity type flow through your personal tax return on a Schedule C. This business form has many benefits. Here are some to consider:

• You can hire your kids and decrease your tax bill. As a sole proprietor, you can hire your kids and avoid paying Social Security and Medicare taxes for their work. While there are exceptions, this can generally save your small business over 7.65% on their wages.
• Your kids can benefit, too. Any income your kids earn that’s less than $12,950 isn’t taxed at the federal level. So this is a great way to build a tax-free savings account for your children. Remember, though, that their work must reflect actual activity and reasonable pay. So consider hiring your kids to do copying, act as a receptionist, provide office clean up, advertising or other reasonable activities for your business.
• Fewer tax forms and filings. As a sole proprietor, your business activity is reported on a Schedule C within your personal Form 1040 tax return. Other business types like an S corporation, C corporation or a partnership must file separate tax returns, which makes tax compliance a lot more complicated.
• More control over revenue and expense. You often have more control over the taxable income of your small business as a sole proprietor. This can provide more flexibility in determining the timing of some of your revenue and business expenses, which can be used as a great tax planning tool.
• Hire your spouse. If handled correctly, a spouse hired as an employee can work to your advantage as a sole proprietor. As long as the spouse is truly an employee of the business, the sole proprietor can benefit as a member of their employee’s (spouse’s) family benefits. This can include potential medical expense reimbursements.
• Funding a retirement account. You can also reduce your business’ taxable income by placing some of the profits into a retirement account like an IRA. As a sole proprietor, you can readily manage your marginal tax rate by controlling the amount you wish to set aside in this pre-tax retirement account.
• It’s not all roses. While there are many benefits of running your business as a sole proprietor, don’t forget the drawbacks. One of the most significant drawbacks is the lack of personal legal protection, which is a feature in other business forms like corporations and Limited Liability Companies. Most sole proprietors address this with proper business insurance, so do not overlook the need to find coverage for yourself.

Please call if you have questions about your sole proprietor business.

Knocking Down Scholarship Barriers

There’s plenty of money available for you to pursue a post-secondary education for either you or your child! Here are several barriers that could be getting in the way of securing money to pay for school.

Common misconceptions

Scholarships are only for top scholars and athletes. Many of the splashy news stories are certainly about high-profile students who snag a fully-paid-for scholarship. There are an unbelievable number of scholarships, however, that do not take grades or athletic ability into consideration whatsoever.

Scholarships are only for students attending college. Enrollment in vocational and trade schools has nearly doubled since 2000, according to the National Center for Education Statistics. And the good news for prospective students is that scholarships for vocational and trade schools are just as plentiful as scholarships for four-year colleges and universities.

You have to be a great writer. Winning scholarships is more often about what you write than how you write. And for some scholarships, following the application’s directions and answering the questions that are asked is more important than how well you write.

You have to be a high school student. Scholarships aren’t just for soon-to-be high school graduates. Many schools have degree programs – and corresponding scholarships – aimed at older adults who are looking to learn new skills or make a transition in their career. Scholarships are also available for graduate students.

Finding scholarships takes too much time. Yes, you’ll need to invest a certain amount of time to find and apply for scholarships, but finding financial aid may not require as much of a time investment as you may think with tons of available online tools.

What to do

• Follow the directions! You’d be surprised how many applicants don’t read or follow the rules of the scholarships. Take the time to read through all instructions, and thoughtfully answer the questions that are asked.
• Apply every year by January. For every year that you’re attending a post-secondary school, consider setting aside some time in the fall and early winter to complete scholarship applications for the upcoming school year. Many applications need to be completed by January for the following school year.
• Ask your school. Nearly every college in the U.S. offers some form of merit-based financial aid. You’ll likely need to complete the Free Application for Federal Student Aid (FAFSA), as many colleges have all students apply for scholarships by completing the FAFSA. This includes students who may qualify for only merit-based scholarships.
• Ask local businesses. Many local businesses, civic groups, foundations, and religious or community organizations offer scholarships. So ask around in your community about available financial aid.

The early bird often gets the worm, but the bird that does not go looking for one will never get one!

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

March 2022 Newsletter

Tax season is now underway! Here we share the secret to getting a quick tax refund.

Also read about tax saving tips for parents and grandparents, why you should consider reading the fine print, and several financial tips about how to navigate rising interest rates.

Please enjoy the information, and pass along articles of interest to all your family and friends. And as always, please call if you have questions or need help.

The Secret to a Quick Tax Refund – here’s how to get your overpayment as soon as possible

Delayed tax refunds, penalties for not filing 2020 tax returns on time that were actually filed on time, and timely tax payments being flagged as late are just some of the headaches taxpayers are grappling with due to a massive backlog of several million unprocessed tax returns the IRS is trying to wade out from under.

Here’s how to avoid getting your tax refund delayed and steer clear from late-filing and payment penalties resulting from the IRS backlog:

What you need to know

• E-file your return! The secret to getting a quick tax refund is to e-file your 2021 tax return! The IRS says approximately 90% of the more than 160 million individual tax returns expected for the 2021 tax year will be e-filed. The majority of these taxpayers will avoid any issues filing their return and getting their refund. If you do e-file, don’t forget to sign Form 8879, which authorizes the e-filing of your return.
• Stay calm if you receive a letter from the IRS. You may receive an IRS notice indicating you have an unfiled tax return or that you have an unpaid balance on your account. If the notice was mailed because of the backlog and you indeed filed the tax return in question or paid the amount due listed, the IRS says there is no need to call or respond to the notice as it’s continuing to process prior year tax returns as quickly as possible.
• Certified mail is your friend. If you receive an IRS notice for a situation not related to the backlog, you’ll want to respond in a timely fashion via certified mail. This will provide proof of your timely correspondence. So even if your response gets lost or caught up in the backlog, you’ll have evidence that you responded by the deadline listed on the notice. Remember that delays in responses could generate penalties and additional interest payments.
• Be patient if you need to talk with the IRS. The IRS received a record 282 million phone calls during its 2021 fiscal year, according to National Taxpayer Advocate Erin Collins. Only 32 million of these calls were answered. Collins said the best time to call the IRS are Wednesdays through Fridays, especially early mornings starting at 7 am Eastern time.

Read the Fine Print

According to a recent Deloitte survey, 91 percent of people agree to terms and conditions without reading the legal agreement. While reading through legally complex language may be slow and painful, it’s more important than you think. Here are four reasons why reading entire legal agreements make sense:

You miss a major technicality. Many agreements have an exit penalty that requires you to pay for a period of time after you terminate an agreement. Others automatically renew your agreement for a year with exit penalties unless you tell them in writing you do not wish to renew prior to a key date. In a recent example of missing a legal technicality, eight teachers claimed the Department of Education (DOE) mishandled a debt forgiveness program that promised to reduce student loans after 10 years of public service. In most of the cases, the teacher’s application was denied because, according to the DOE, they were in the wrong type of loan or payment program.

You give something away. With extensive agreement documents (PayPal’s user agreement is over 50 pages long!), it’s easy for a company to add language that grants itself rights to something that’s yours. Here are some examples:

• Your identity. Companies like Facebook grant itself rights to use your likeness and personal information for targeted advertising unless you catch the clause and take action.
• Your work. If you create a presentation using online tools, the agreement might allow the site to use the presentation without your permission.
• Your location. Most navigation software tracks your location even when not using their application. The same is true with most newer vehicles. The only way to catch these tracking rights is to read the clause in the agreement.

You’re not comfortable with the risks. Data breaches are occurring more often and are hard to prevent. To reduce their exposure to litigation, businesses are continuing to add language to agreements to protect themselves. Your job, as the consumer, is to know these risks when signing up for a new service. The more personal information you provide, the more important it is to understand your legal recourse if the supplier of your service is hacked.

You miss something good. Reading an agreement to the end may pay off. A woman in Georgia won $10,000 just by reading her travel insurance agreement. The company, SquareMouth, had a “Pays to Read” program that awarded a cash prize to the first person to read the clause with a cash prize. For most people, it’s more likely you’ll find additional benefits that come with the agreement or laugh at some humor injected by the company.

Tax Saving Tips for Parents AND Grandparents

Leveraging the kiddie tax rules

With careful tax planning, you can use the kiddie tax rules to reduce your tax obligation. Here’s what you need to know.

Background

The term kiddie tax was introduced by the Tax Reform Act of 1986. The rules are intended to keep parents from shifting their investment income to their children to have it taxed at their child’s lower tax rate. In 2022 the law requires a child’s unearned income (generally dividends, interest, and capital gains) above $2,300 be taxed at their parent’s tax rate.

Who the Kiddie Tax Applies To

• Children under the age of 18
• Full-time students under the age of 24 and providing less than half of their own financial support
• Children with unearned incomes above $2,300

Who/What the Kiddie Tax Does NOT Apply To

• Earned income (wages and self-employed income from things like babysitting or paper routes)
• Children that are age 18 or older and have earnings providing more than half of their support
• Gifts received by your child during the year

How the Kiddie Tax Works

• The first $1,150 of unearned income is generally tax-free
• The next $1,150 of unearned income is taxed at the child’s (usually lower) tax rate
• The excess over $2,300 is taxed at the parent’s rate.

Tax Planning With the Kiddie Tax Rules

While your child’s unearned income above $2,300 is a problem, you will still want to leverage the tax advantage up to this amount. Here are some ideas:

• Maximize your lower tax investment options. Look for gains in your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.
• Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by reducing your tax benefits in other programs like the American Opportunity Credit.
• Leverage gift giving. If your children are not maximizing tax-free investment income each year, consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.

Properly managed, the kiddie tax rules can be used to your advantage. But be careful, this part of the tax code can create an unwelcome surprise if not handled properly.

Review Financial Decisions When Interest Rates Change

Interest rates are expected to increase this year in response to inflation that is running at a 40-year high. How will you be affected?

Any interest rate revision can cause a ripple effect throughout the economy. Accordingly, the Federal Reserve’s actions probably will exert at least a moderate influence over financial choices that you may make at home and in your business in 2022 and beyond.

Savings and debt

As a consumer, you stand to gain from rising interest rates because you’ll likely earn a better return on your deposits. Over the last ten years, placing your money in a certificate of deposit or passbook savings account has been hardly more profitable than stuffing it under a mattress. On the other hand, the cost of borrowing money will likely increase. As a result, mortgages, car loans, and credit cards will demand higher interest rates. That’s not a big deal if you’re already locked into low-interest fixed-rate loans. But if you have a variable rate loan or carry balances on your credit cards, you may find your monthly payments starting to increase.

Investments

On the investment front, market volatility may increase because rate increases are not completely predictable. Market sectors will likely exhibit varied responses to changes in interest rates. Those sectors that are less dependent on discretionary income may be less affected – after all, you need to buy gas, clothes, and groceries regardless of changes in interest rates.

As you adjust your financial plan, you might only need to make minor changes. Staying the course with a well-diversified retirement portfolio is still a prudent strategy. However, you may want to review your investment allocations.

Your Business

Rising interest rates can also affect your business. If your company’s balance sheet has variable-rate debt, rising interest rates can affect your bottom line and possibly your plans for growth. As the cost of borrowing increases, taking out loans for new equipment or financing expansion with credit may become less desirable.

Please call if you have questions about deciding on the most beneficial response to potential future changes in interest rates.

Debt: Gone But Not Forgotten by the IRS

With the ups and downs of our economy over the last 2 years, you may have had a loan or credit card balance forgiven or cancelled by a financial institution. You would think that the cancellation of debt by a credit card company or mortgage company would be a good thing for you and your family. And it can be, but it can also be considered taxable income by the IRS. Here is a quick review of various debt cancellation situations.

• Consumer debt. If you have gone through some type of credit workout program on consumer debt, it’s likely that some of your debt has been cancelled. If that is the case, be prepared to receive IRS Form 1099-C representing the amount of debt cancelled. The IRS considers that amount taxable income to you, and they expect to see it reported on your tax return. The exception is if you file for bankruptcy. With bankruptcy, generally the debt cancelled is not taxable.
  Even if you are not legally bankrupt, you might be technically insolvent where your liabilities exceed your assets. If this is the case, you can exclude your debt cancellation income by reporting your financial condition and filing IRS Form 982 with your tax return.
• Primary home. If your home is short sold or foreclosed and the lender receives less than the total amount of the outstanding loan, expect that amount of debt cancellation to be reported to you and the IRS. But special rules allow you to exclude up to $2 million in cancellation income in many circumstances. You will again need to complete IRS Form 982, but the exclusion from taxable income brought about by the debt cancellation on your primary residence is incredibly liberal. So make sure to take advantage of these rules should they apply to you.
• Student loans. If your school closes while enrolled or soon after you withdraw, you may be eligible to discharge your federal student loan and not include the forgiven amount as taxable income. You also may be eligible to exclude from taxable income any student loans discharged due to your school misleading you or engaging in other misconduct in violation of certain state laws.
• Second home, rental property, investment property, business property. The rules for debt cancellation on second homes, rental property, and investment or business property can be extremely complicated. Given your cost of these properties, your financial condition, and the amount of debt cancelled, it’s still possible to have this debt cancellation income taxed at a preferred capital gains rate, or even considered not taxable at all.

Please call if you have questions about how a cancellation of debt situation applies to you.

Hiring Your First Employee? Make It a Success!

Are you ready to hire your first employee? Perhaps you started a new business, and are working solo or with a spouse or business partner. Now the business is growing and there’s just too much to do. You find yourself working long hours and still not keeping up. It may be time to make your first hire. Think of the hiring process in two stages.

Defining your needs

Long before you start interviewing, think carefully about why you need an employee and how you’re going to work with the new hire. Do you need someone to bring new skills that the business is lacking? Or are you looking for someone to share your workload and free up your time?

If you’re looking for specific skills, could you use a consultant, a temp agency, or another outside source?

Remember that hiring an employee will open up a wealth of new issues to take up your time – payroll, employment regulations, tax reporting, benefits, and so on. Make sure there’s no way to get the help you need without these complications.

Will your new employee be part-time or full-time? Will he or she work under your direct supervision, or will you delegate responsibility to your new hire? Are you prepared for the challenge of giving up hands-on control over part of your business? Think hard about these issues until you have a very clear idea of what you want from your new employee.

Know the skills you need and the role you expect the new person to play.

Finding the right person

You and your employee will be working closely together, so good personal chemistry is essential. There’s no magic formula for choosing the right person. Think about possible candidates whose work you know, perhaps employees of your suppliers or other businesses you deal with. Interview thoroughly, check references, and above all, trust your intuition.

Making your first hiring decision is seldom easy. Please call if you have any questions.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does PATTERSON, HARDEE & BALLENTINE CPAs have any control over, or responsibility for, the content of any such Websites. All rights reserved.

February 2022 Newsletter

With tax season now officially underway, you’ll start seeing more and more tax documents show up in your inbox or mailbox. And this year, there are some unusual ones arriving, so outlined here is what to expect. Plus there is a great article discussing common areas of tax surprises plus a great set of ideas to help you protect yourself while online and minimize your digital footprint. All this and some great ideas for you if you have a home-based hobby or business.

Please enjoy the information, and pass along articles of interest to all your family and friends. And as always, please call if you have questions or need help.

Easy-to-Overlook Tax Documents – This year is a little more challenging

With tax season now officially underway, here are several tax documents that may be easy to miss in your mailbox or inbox:

Child tax credit letter. From July through December 2021, the IRS paid out 50% of projected child tax credit payments to qualified households. The IRS is sending out a recap of these advance payments in Letter 6419 that you can use to correctly account for these payments on your tax return. This letter should have arrived in your mailbox by late January.

The IRS is alerting taxpayers, however, that Letter 6419 may have incorrect dollar amounts if you moved or changed bank accounts in December. The IRS is urging taxpayers to use the information in their online taxpayer accounts for the most up-to-date figures on the amount of the advance Child Tax Credit to include on their tax returns, instead of the numbers included in Letter 6419. Click here to find out more about your online account with the IRS.

Stimulus payment letter. The IRS issued millions of economic impact payments in 2021. The IRS is mailing a summary of these payments you received in Letter 6475. As with the child tax credit letter, you can use this letter to accurately report your economic impact payments on your tax return. This letter also should have arrived in your mailbox by late January.

Identification PIN. The IRS may have assigned you an Identity Protection PIN (IP PIN) to help protect your identity. An IP PIN is a six-digit number that prevents someone else from filing a tax return using your Social Security number or Individual Taxpayer Identification Number. This IP PIN is known only to you and the IRS. If you are a confirmed victim of tax-related identity theft and the IRS has resolved your tax account issues, the IRS will mail you a CP01A Notice with your new IP PIN each year.

Corrected tax forms. If an error is discovered on a tax form you’ve already received, a corrected version will be created, then mailed to both you and the IRS. You can also request a corrected tax form if you believe you found an error. Here are some of the forms you might see with corrections:

• Form W-2 from your employer that shows corrected wages, salary and taxes withheld
• Form 1099-INT or Form 1099-DIV from your investment broker that shows a revision in interest and dividend income
• Form 1099-NEC from a client to whom you provide services
• Form 1098 that shows how much mortgage or student loan interest you’ve paid

You may not be aware you were issued a corrected tax form until it shows up in your mailbox (or inbox). If you do receive a corrected form, don’t throw the old version away! Save both the original version and corrected version in case either are needed for future reference.

Often the ease of filing your tax return is dependent on having the correct information, so remember to look for everything, including these often overlooked forms.

I Owe Tax on That? 5 Surprising Taxable Items

Wages and self-employment earnings are taxable, but what about the random cash or financial benefits you receive through other means? If something of value changes hands, you can bet the IRS considers a way to tax it. Here are five taxable items that might surprise you:

1. Scholarships and financial aid. Applying for scholarships and financial aid are top priorities for parents of college-bound children. But be careful — if any part of the award your child receives goes toward anything except tuition, it might be taxable. This could include room, board, books, travel expenses or aid received in exchange for work (e.g., tutoring or research).
   Tip: When receiving an award, review the details to determine if any part of it is taxable. Don’t forget to review state rules as well. While most scholarships and aid are tax-free, no one needs a tax surprise.
2. Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets and sports betting. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records.
   Tip: Know when the gambling establishment is required to report your winnings. It varies by type of betting. For instance, the filing threshold for winnings from fantasy sports betting and horse racing is $600, while slot machines and bingo are typically $1,200. But beware, the gambling facility and state requirements may lower the limit.
3. Unemployment compensation. Congress gave taxpayers a one-year reprieve in 2021 from paying taxes on unemployment income. Unfortunately, this tax break did not get extended for the 2022 tax year. So unless Congress passes a law extending the 2021 tax break, unemployment will once again be taxable starting with your 2022 tax return.
   Tip: If you are collecting unemployment, you can either have taxes withheld and receive the net amount or make estimated payments to cover the tax liability.
4. Social Security benefits. If your income is high enough after you retire, you could owe income taxes on up to 85% of Social Security benefits you receive.
   Tip: Consider if delaying when you start collecting Social Security benefits makes sense for you. Waiting to start benefits means you’ll avoid paying taxes on your Social Security benefits for now, plus you’ll get a bigger payment each month you delay until you reach age 70.
5. Alimony. Prior to 2019, alimony was generally deductible by the person making alimony payments, with the recipient generally required to report alimony payments received as taxable income. Now the situation is flipped: For divorce and separation agreements executed since December 31, 2018, alimony is no longer deductible by the payer and alimony payments received are not reported as income.
   Tip: Alimony payments no longer need to be made in cash. Consider having the low-income earning spouse take more retirement assets such as 401(k)s and IRAs in exchange for reduced alimony payments. This arrangement would allow the higher-earning spouse to make alimony payments by transferring retirement funds without paying income taxes on it.

When in doubt, it’s a good idea to keep accurate records so your tax liability can be correctly calculated and you don’t get stuck paying more than what’s required.

Great Tips for Your Home-Based Business

Home-based businesses can be financially rewarding and provide a certain amount of flexibility with your day-to-day schedule. Here are some tips to keep your business running at full steam.

• Stay on top of accounts receivable. It’s easy to get caught up with fulfilling your business obligations while invoices you’ve sent out go unpaid. Agree to payment terms in advance with new customers and immediately – but politely – communicate with them as soon as they miss a payment deadline. Keep current with regular invoicing and collections.
• Keep your bookkeeping records up-to-date. You may not realize you have an unpaid invoice that’s several months old unless your bookkeeping is up-to-date. Keeping accurate books involves more than balancing your bank accounts once a month. In addition to your monitoring your bank accounts, also consistently look at your accounts receivable, accounts payable, any debts (credit card, car loans or other borrowings), and all money you invest in your business. Ask for help if you don’t have enough time to do the bookkeeping yourself, or if you need help properly setting up your bookkeeping software.
• Check on permit requirements. Depending on what type of home-based business you have, you may be required to obtain various permits, licenses or other registrations. If you have not already done so, check with your town or city for local requirements. The Small Business Administration is also a good source to research information on permits.
• Get insured. Obtain adequate insurance for the type of operation you’ll be running. Besides the insurance required for business activities, you might consider adding a rider to your homeowner’s policy for liability protection should an accident occur on your property.
• Stay on top of technology. While you may not need a top of the line computer, be sure that the technology equipment you use can handle the bandwidth of everything you’ll ask it to do, including video calls, software apps and data storage. Also consider scheduling a time for your internet provider to visit your home to make sure everything is in working order and your security protocols are top notch. Have a back-up plan in place for when a device breaks down, including where you’ll go to have it repaired.
• Cash in on tax breaks. Take advantage of the tax breaks available to home-based businesses, including deductions for supplies, equipment and vehicle expenses. You may even be able to deduct the cost of your home office, including a pro-rated amount of your real estate taxes and utilities, if certain conditions are met.
• Set aside money to pay your taxes. Ask for help to calculate how much of your incoming cash you should be setting aside to pay your federal, state and local taxes. Consider opening a separate bank account to transfer your tax money into.

Please feel free to reach out with any questions or concerns you may have.

Protecting Your Digital Footprint

In today’s digital age, it is impossible to avoid the internet. Even if you don’t have a computer and actively avoid social media, there is information about you in some corner of the web. Here are some ideas to help you manage your digital footprint:

• Actively manage your security settings. Every app, social media site and web browser have multiple layers of privacy and security settings. When you download a new app or register with a new site, don’t simply trust the default settings. Look through the options yourself to ensure you are comfortable with the level of privacy. One thing to watch for with apps on your phone is location settings. Some apps will track your location even when the app isn’t running.
• Protect your online image. Career search firms now have strategies built entirely around recruiting through social media. In addition to recruiting, human resource departments will vet prospective employees by reviewing social media profiles. Pay attention to what others post about you, as well. If you are uncomfortable with what they are sharing, have a conversation with them and ask that it be taken down.
• Set boundaries for yourself. According to the Pew Research Center, 74 percent of Facebook users visit the site on a daily basis. And 51 percent say they visit multiple times per day. Try to find the balance that allows you to enjoy connecting with others online, but doesn’t negatively impact other parts of your life. In addition to time spent, draw a bright line between what you consider shareable versus personal information. If you have these boundaries in mind when on social media, it will help you think critically before continuing to scroll or posting something.
• Know your friends. Be aware of who you are connected to on social media sites. Be cautious of accepting connection requests from people you don’t know, as some of these requests could be a phishing attempt to swipe confidential information.

The best defense of your private information is you. Having a plan and actively managing your online profiles is the best way to minimize the chance of your personal data falling into the wrong hands.

Cryptocurrency: The IRS is Watching You!

Whether you own cryptocurrency or not, everyone should know the tax rules surrounding this type of property as it becomes more popular. If you have one take away regarding cryptocurrency, it should be this: Remember that Uncle Sam is watching you!

Here’s what you need to know about the IRS and cryptocurrency:

Background

The IRS generally considers cryptocurrency—also referred to as virtual currency or digital currency—to be property, just like stocks and bonds for federal income tax purposes.

Therefore, if you sell cryptocurrency at a gain, it is subject to capital gains tax. Similarly, you may claim a capital loss on the sale or other disposition of cryptocurrency. But that’s not all: Anytime you exchange cryptocurrency for actual currency, goods or services, the IRS says it’s a taxable event.

Say that you hold Bitcoin for longer than one year and then sell it at a gain. The gain is taxable up to 20%. High-income taxpayers may also need to pay a 3.8% surtax on the cryptocurrency gain. Accordingly, you can use a loss from a cryptocurrency sale to offset capital gains plus up to $3,000 of ordinary income. Any excess is carried over to the following tax year.

The IRS Is Watching You!

Cryptocurrency transactions often flew under the radar, but the IRS is now paying much closer attention. Here’s how the IRS is stepping up enforcement efforts:

• Answer a Form 1040 question. The IRS is so concerned about cryptocurrency transactions being reported that they have a cryptocurrency question on Page 1 of your tax return, just below your name. Before filling out any part of your tax return, the IRS wants you to answer a question about whether you received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency.
• Brokers must report transactions. After 7 years of gently prodding taxpayers to self-report cryptocurrency transactions, Congress has given the green light for the IRS to obtain cost basis and sales proceeds information for all crypto transactions directly from brokers (such as CoinBase, Electrum or Mycelium) or other individuals who regularly provide digital asset transfer services on behalf of other people. Similar to the reporting of stocks and bonds, taxpayers will receive a Form 1099-B from brokers that list all crypto transactions. These new reporting rules are effective beginning January 1, 2023.
• Expanded $10,000 reporting requirement. Businesses that accept virtual currency as payment may be required to report transactions above $10,000 to the IRS beginning January 1, 2023. In an interesting twist, cryptocurrency and other digital assets would be considered cash for purposes of the $10,000 reporting requirement, while the IRS will continue to treat cryptocurrency as real property (and not cash) for tax compliance purposes.

What you need to do

Here are some suggestions for tracking and reporting your cryptocurrency transactions on your tax return:

• Keep up-to-date records. Consider tracking each transaction as they occur throughout the year. You may also want to keep your own transaction ledger as a way to double-check the accuracy of your broker’s statements.
• Set aside money to pay taxes. Consider saving a certain percentage of each cryptocurrency transaction you sell at a gain for taxes you may need to pay.
• Be aware before you dive into cryptocurrency. As you can see, being involved in cryptocurrency may not be for everyone. Wild swings in valuation are common. Reporting requirements are complicated.

As Warren Buffet is quoted as saying,

If you have been playing poker for half an hour and still cannot tell who the patsy is, you’re the patsy.

Please call if you have questions about your cryptocurrency transactions.

Business Metrics that Have Impact

At the end of the year it is easy to compare revenue, gross margin, and profitability to the prior year and to your business plan. Here are a few ideas of other metrics to consider.

• Customer acquisition cost. Divide the total amount of money you’ve spent on marketing over a set period by the number of new customers you’ve gained. The result is your cost per new customer, also known as your customer acquisition cost. To get an even better read, divide your marketing costs into two buckets: one you spend on current customers and one for money spent to acquire new ones. Now you have two metrics: customer acquisition cost AND customer retention cost. Compare these figures against prior years to see if you are becoming more efficient.
  To go a step further, look at how much each new customer spends on average compared with how much it costs to acquire them. Knowing your rate of return for each customer can help you revise your marketing strategy.
• Lead-to-client conversion rate. For many businesses, generating leads is an integral part of the selling process. If this is true for your business, clearly define each step of the sales funnel from lead to purchase. You can judge how successful your sales efforts are over time by calculating how many qualified leads are converted to sales. Remember to use these measures to refine and improve your selling process. Even a tried-and-true conversion process can get tired, but if you are not measuring it you may not know until it is too late.
• Website traffic. Use tools such as Google Analytics to find out who is visiting your website, from where, and what they spend the most time on while they’re there. You can learn a lot about your potential customers and your market by keeping notes on how your website traffic changes over time and how it reacts to new content. Just don’t get stuck inside this analysis.
• Seasonality. Understand and keep track of the seasonal trends for both sales and number of orders by month in your business. This helps manage human resources and cash flow in both busy and slow periods. Examining these metrics for sales and web traffic can help you prepare inventory and staffing for the busy season. It will also help you time the scheduling of technical upgrades and equipment repairs for expected slow periods. You can also use this information to shift seasonality with marketing offers to make better use of your staff during slow times.
• Cash burn rate. Keeping a close watch on your cash flow statement as well as your income and balance sheet is the key to keeping your business running smoothly. Simply subtract how much cash you have at the start of the month from what you have at the end of the month. You can then divide your reserves by your cash burn rate to see how many months you can sustain that rate. A key to the usefulness of this measurement is maintaining a forward-looking financial forecast for the next 12 months. This will help you take timely actions to avoid a cash crunch, such as cutting costs, improving sales or collecting accounts receivable.

Remember that measurements for measurements sake is just busy work. The key to all of them? They need to provide an actionable result for your business.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

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