#taxes

By:  Arash Navi, CFP®, CPA, Controller & Wealth Manager

Our goal is to help our clients build and grow their wealth and tax planning plays an important role in this process. We recommend that you mark your calendar to review your finances in the first week of October, annually. Take this time to review your income for the year from employment, businesses, investments, or any other sources. This will help you project your tax liability ahead of time and allow your financial advisor or tax accountant to find strategies to reduce your tax burden. Implementing this consistently and reducing your tax burden annually will have a compounding impact over the years and increase your retirement nest egg. Here are a few tax planning strategies to keep in mind:

IRAs and Retirement Plans

Take full advantage of tax-advantaged retirement accounts. By contributing to Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans, you can reduce your taxable income and lower your taxes. For 2023, you can contribute up to $22,500 to a employer-sponsored retirement plan ($30,000 if you’re age 50 or older) and up to $6,500 to a Traditional IRA ($7,500 if you’re age 50 or older).

Roth Conversions

If you are in a lower tax bracket this year and expect your income tax rate to increase in the future, you may want to consider a Roth IRA conversion. You can convert all or part of your pre-tax retirement account into a Roth IRA and pay the taxes now at a lower rate. The funds in your Roth IRA will continue to grow tax free, and you will have more income flexibility in retirement. Watch here as we make a case for Roth conversions and how they could benefit you.

Charitable Donation

If you are charitably inclined, you should plan your donations in advance to ensure you maximize the tax benefits. For those over age 70.5, you may want to consider Qualified Charitable Distribution (QCD), where you can transfer up to $100K from your IRA to a charity. This method not only reduces your Required Minimum Distribution (RMD), but the distribution is also excluded from your taxable income. Beginning in 2024, the QCD limit ($100k) will change as it will be linked to inflation. Also, with the passage of the SECURE Act 2.0, starting in 2023 taxpayers may take advantage of a one-time gift up to $50k (adjusted annually for inflation) to fund a Charitable Remainder Unitrust, Charitable Remainder Annuity Trust, or a Charitable Gift Annuity. This is an expansion of the type of charity, or charities, that can receive a QCD.

Tax Bracket Management

The IRS uses a progressive tax system which means as your income grows, it is subject to a higher tax rate. Therefore, it is important to know which of the seven federal tax brackets you will fall into. In your high-income years, you may want to reduce your tax liability by increasing your retirement contribution or utilize a tax-loss harvesting strategy. On the other hand, in low-income years, you may want to consider Roth IRA conversions, accelerate income recognition, or postpone deductible expenses.

Tax planning should be part of every individual investor’s financial and retirement plan. There are many strategies available for individuals and business owners, but it requires proper planning throughout the year. If you’d like to learn more about tax planning strategies unique to your personal circumstances, feel free to Talk With Us!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Starting in 2023, a personal or general business tax credit of up to $7,500 is available for the purchase of new clean vehicles meeting certain requirements (including electric, plug-in hybrid, and fuel cell vehicles). A credit of $3,750 is available if a critical minerals requirement is met, and a credit of $3,750 is available if a battery components requirement is met (for vehicles placed in service from January 1, 2023, through April 17, 2023, the credit allowed generally varied from $3,750 to $7,500 depending on the battery capacity of the vehicle, rather than on these two requirements). Fuel cell vehicles that have final assembly within North America can qualify for the credit without regard to these two requirements.

Proposed regulations (required by the Inflation Reduction Act) have now been published to generally explain the new clean vehicle tax credit and these two battery-related requirements. The two requirements apply to new clean vehicles placed in service after April 17, 2023. The number of vehicles eligible for the credit has dropped considerably now that the proposed regulations have been published.

Vehicle eligibility

Assuming other requirements are met, the amount of the credit will generally be the full $7,500 for new clean vehicles (other than fuel cell vehicles) as long as both the critical minerals and battery components requirements are met ($3,750 if only one of these requirements is met; no credit if neither requirement is met). Qualified fuel cell vehicles are not subject to these two requirements and should qualify for the full $7,500 credit.

The critical minerals requirement is that the percentage of the value of critical minerals contained in the battery that were extracted or processed in the U.S. or in any country with which the U.S. has a free trade agreement in effect, or recycled in North America, is equal to or greater than the applicable percentage. The applicable percentage is 40% for a vehicle placed in service from April 18, 2023, through December 31, 2023, increasing in later years until it reaches 80% after 2026.

The battery components requirement is that the percentage of the value of the components contained in the battery that were manufactured or assembled in North America is equal to or greater than the applicable percentage. The applicable percentage is 50% for a vehicle placed in service from April 18, 2023, through December 31, 2023, increasing in later years until it reaches 100% after 2028.

The credit is not available for vehicles with a manufacturer’s suggested retail price (MSRP) higher than $80,000 for vans, sports utility vehicles, and pickups, or $55,000 for other vehicles. For this purpose, the MSRP is the base retail price suggested by the manufacturer, plus the retail price suggested by the manufacturer for each accessory or item of optional equipment physically attached to the vehicle at the time of delivery to the dealer. It does not include destination charges or optional items added by the dealer, or taxes and fees.

You can check the eligibility of vehicles for the credit at fueleconomy.gov. Final confirmation of vehicle qualification should be done at time of purchase. The seller must provide you with a report about a vehicle’s eligibility at the time of sale.

Purchaser’s income limitation

The credit is generally not available if the purchaser’s modified adjusted gross income (MAGI) for the taxable year or the preceding taxable year (whichever is less) exceeds $150,000 ($300,000 for joint filers and surviving spouses, $225,000 for heads of household). The proposed regulations state that the income limitation does not apply to corporations subject to the corporate income tax. In the case of a partnership or S corporation, the credit is allocated to the partners or shareholders, respectively, and the income limitation is applied to those individuals.

Personal or general business tax credit?

The new clean vehicle tax credit can be either a personal or a general business tax credit, depending on whether the vehicle is used in a trade or business. The proposed regulations provide that if the vehicle is used 50% or more for business, the credit is treated as a general business tax credit; otherwise, the credit is allocated between personal and business use. The credit is nonrefundable if it exceeds your tax liability. An unused general business tax credit can be carried forward to a later year.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The IRS has identified 21 states that made special payments to taxpayers in 2022. After a review of those special payments, the IRS has determined that taxpayers in many states will not need to report those payments on their 2022 federal income tax returns. Special payments in four of those states should be treated as refunds of state taxes paid, and taxation is determined under the general federal income tax rules for state tax refunds. Special payments in 17 states are treated as made for the promotion of the general welfare or as a disaster relief payment and are excluded from income for federal tax purposes. Illinois and New York are listed in this category but seem to have provided a mixture of payments that fell into multiple categories (see below).

If you have already filed your 2022 federal income tax return and omitted one of these special payments when it was required to be included in income, you may need to file an amended tax return and pay any additional tax due. If you included one of these special payments in income when it did not need to be included, you may need to file an amended tax return in order to get a federal income tax refund with respect to the special state tax payment.

Refund of State Taxes Paid

The IRS has concluded that the special payments from the following states in 2022 are treated as a refund of state taxes paid, and the appropriate analysis under the general state tax refund rules should be made.

• Georgia
• Massachusetts
• South Carolina
• Virginia

Under general rules, if the payment is a refund of state taxes paid, the payment is excluded from federal income tax unless the recipient received a tax benefit in the year the taxes were deducted on the federal income tax return. Thus, the recipient does not need to include the payment in income if the recipient claimed the standard deduction or the taxpayer itemized deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied) in the year the state taxes were deducted.

General Welfare and Disaster Relief Payments

The IRS has determined that the special payments from the following states in 2022 were made for the promotion of the general welfare or as a disaster relief payment and are excluded from income for federal tax purposes.

*Exclusion is only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.

**The IRS stated that “Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.” It seems that additional guidance from the IRS is needed here to identify the tax treatment of specific payments.

Other Payments

The IRS adds that other payments that may have been made by states (e.g., payments from states provided as compensation to workers) are generally includable in income for federal income tax purposes.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The federal income tax filing deadline for individuals is generally Tuesday, April 18, 2023.

The IRS has postponed the deadline to file federal income tax returns and make tax payments for certain New York storm victims until May 15, 2023, and to July 31, 2023, for certain Mississippi storm victims. The deadline has been postponed for disaster-area taxpayers in most of California and parts of Alabama and Georgia until October 16, 2023 (there is no need to file for an extension). The current list of eligible localities and other details for each disaster are always available on the Tax Relief in Disaster Situations page on irs.gov.

Need more time?

If you’re not able to file your federal income tax return by the April (or May or July) due date, you can file for an extension by the April (or May or July) due date using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you until October 16, 2023, to file your federal income tax return. You can also file for an automatic extension electronically (but only if filed by the original April due date) (details on how to do so can be found in the Form 4868 instructions). There may be penalties for failing to file or for filing late.

Note: Special rules apply if you’re living outside the country, or serving in the military outside the country, on the regular due date of your federal income tax return.

Pay what you owe

One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if at all possible. If you absolutely cannot pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the unpaid balance (options available may include the ability to enter into an installment agreement).

It’s important to understand that filing for an automatic extension to file your return does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe; you should pay this amount by the April (or May or July) filing due date.  If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension.

Tax refunds

The IRS encourages taxpayers seeking tax refunds to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if the return is filed electronically, the tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

IRA contributions

Contributions to an individual retirement account (IRA) for 2022 can be made up to the April due date (without regard to extensions) for filing the 2022 federal income tax return.  Certain New York storm victims have until May 15, 2023, to make contributions to an IRA for 2022; certain Mississippi storm victims have until July 31, 2023; and disaster-area taxpayers in most of California and parts of Alabama and Georgia have until October 16, 2023.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

Our team would like to provide an update on a recent blog post discussing tax relief and the tax filing deadline for certain counties in California. The individuals in counties originally discussed in that posting will have until May 15^th, 2023, to file tax returns, but some counties are automatically extending that tax filing deadline to October 16^th, 2023. If you are a resident in one of the following counties, you qualify for additional relief and your tax filing deadline is October 16^th, 2023.

Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Benito, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, San Diego, San Francisco, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, and Yolo

Residents in Alabama and Georgia may also be able to receive tax relief and have the tax filing deadline extended to October 16^th, 2023.

This means that IRA contributions and Health Savings Account (HSA) contributions for Tax Year 2022 may be made as late as October 16^th, 2023. Estimated tax payments normally due on April 18^th, June 15^th, and September 15^th, and the California Passthrough Entity (PTE) payments for all taxpayers in affected areas are due between now and October 16^th.

For those that are claiming disaster-related casualty losses or would like to request copies of tax returns and waive the fee for requesting prior year tax returns, you may do so by completing Form 4684 ‘Casualties and Thefts’ or Form 4506 (or 4506-T) ‘Request for Copy of Tax Return’ (or ‘Request for Transcript of Tax Return’) respectively. Please reference in bold letters at the top of the applicable form “California, severe winter storms, flooding, and mudslides” and reference the FEMA disaster declaration number, FEMA-3591-DR. The IRS also has a disaster hotline (866-562-5227) and FEMA’s website can be used: https://www.disasterassistance.gov/ for any questions on the above deadlines and inquiries on whether or not you qualify for disaster relief.

Please visit the disaster assistance overview page on the IRS website for further guidance if you live in an impacted area.

Please let us know how we can be of help during what may be a difficult time for you and your family.

Sources:

1. https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-severe-winter-storms-flooding-landslides-and-mudslides-in-california.
2. https://www.irs.gov/newsroom/irs-may-15-tax-deadline-extended-to-oct-16-for-disaster-area-taxpayers-in-california-alabama-and-georgia
3. https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-and-emergency-relief-for-individuals-and-businesses

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.