New Corporate Transparency Act – What Does It Mean For You?

TLDR: There is a new law that you are likely required to comply with if you have ownership in an entity, including a single member LLC (exceptions apply for larger businesses, see details below). This new law requires you to provide information about the owner(s) of your entity to the Financial Crimes Enforcement Network (FinCEN) and goes into effect on January 1, 2024. If your entity was set up prior to 1/1/24, you must file the necessary report by 1/1/25. If you set up a new entity in 2024, you will have 90 days to file the necessary reporting paperwork with FinCEN. The penalties for noncompliance can be significant.

Long version (information mainly provided by AICPA in a letter intended for clients of CPAs):

Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company.

 It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The intent of the BOI reporting requirement is to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity. 

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

Below is some preliminary information for you to consider as you approach the implementation period for this new reporting requirement. This information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with competent legal counsel and/or other retained professional adviser.

What entities are required to comply with the CTA’s BOI reporting requirement?

Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA.

Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

Are there any exemptions from the filing requirements?

There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:

a)    Employ more than 20 people in the U.S.;

b)    Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and

c)    Be physically present in the U.S.

Who is a beneficial owner?

Any individual who, directly or indirectly, either:

·         Exercises “substantial control” over a reporting company, or

·         Owns or controls at least 25 percent of the ownership interests of a reporting company

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define the terms “substantial control” and “ownership interest” further.

When must companies file?

There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

·         New entities (created/registered in 2024) — must file within 90 days

·         New entities (created/registered after 12/31/2024) — must file within 30 days

·         Existing entities (created/registered before 1/1/24) — must file by 1/1/25

·         Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days.

What sort of information is required to be reported?

Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes — name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

 Risk of non-compliance

 Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time. For more information about the CTA, visit Beneficial Ownership Information Frequently Asked Questions. If you are ready to file your BOI report, it can be filed electronically through the following link: BOI E-filing

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Recommended Apps & Online Software for New Business Owners

Starting a small business can be totally overwhelming.  You have so many to-do’s on your list…it’s hard to know where to start.  Technology available today should make this easier…but it can feel harder because there are so many options.  Here are some online apps and programs that I recommend when you are getting started.  

Accounting programs

Wave – Wave can be a good “starter” online accounting software for someone who doesn’t have a lot of transactions.  It’s free and offers basic accounting functions, including invoicing.

https://www.waveapps.com/

QuickBooks Online – QuickBooks is typically the “go-to” in the accounting program world.  It offers a variety of options and add-ons.

https://quickbooks.intuit.com/login/

Xero – Xero is another popular accounting app.  Some benefits it may have over the other programs mentioned is more potential integrations with other apps, as well as better project profitability tracking. 

https://www.xero.com/us/

Personal Budgeting programs

I’m often asked about personal budgeting programs.  The two that I recommend are Mint.com and YNAB (You Need A Budget).  I have used Mint personally for many years; it is more than just a budgeting app.  It can track your net worth, investment performance, and more.

https://mint.intuit.com/

YNAB is a popular app that uses a zero-based budgeting system.  This involves allocating every dollar of income to a specific purposes (spending or saving). One of the downsides of YNAB is it does come with a monthly or annual subscription cost.

https://www.youneedabudget.com/

Payroll

I typically recommend Gusto for a business with just an owner-employee or a few employees.  It is cost effective and has an easy to use online interface.

https://gusto.com/

Mileage tracking

If you are self-employed or have a small business, you will want to keep track of the miles you drive for business so you can potentially claim auto related tax deductions.  I usually recommend MileIQ.  Several accounting programs (including QuickBooks) have a mileage tracker app add-on option as well.

https://mileiq.com/ 

Retirement Saving/Brokerage DIY (Do It Yourself) 

If your new business is doing well and you need a place to sock away some of the extra cash, I like Vanguard for DIY brokerage accounts and self-employed retirement accounts.  Fidelity is another popular option.

https://investor.vanguard.com/corporate-portal/

https://www.fidelity.com/

Health Savings Account

A Health Savings Account is a tax-beneficial way to save money for medical expenses.  This type of account is utilized by many small business owners.  Lively is an HSA app that offers accounts with no fees and a user-friendly interface.  

https://livelyme.com/

Password Management   

Cybersecurity should be a top priority for a small business.  Using a password manager to store passwords can help keep your customers’ data secure.  I like LastPass.

https://www.lastpass.com/

Meeting Scheduling 

Using a scheduling app for customer appointments can free up hours of time every week.  Calendly makes online scheduling easy and offers a free plan for those who only need basic scheduling.

https://calendly.com/

Video recording and sharing 

Loom is an app that allows you to record, edit, and share videos using your device’s camera and/or screen recording.  You can then share the video via a link for the viewer to watch at their convenience.  

https://www.loom.com/

Midyear Tax Planning Tips

As the year reaches its halfway point, it’s a good time to take proactive steps to optimize your tax situation. Planning ahead for your taxes can help you save money and reduce stress at tax filing time. Here are some midyear tax tips to consider.

If you are a W-2 employee:

Review your income tax withholding to make sure you are having the Goldilocks amount of tax withheld from your pay…not too small, not too big, just the right amount!  The IRS has an online calculator to help you calculate how much tax you should have withheld and how to fill out your W-4 https://www.irs.gov/individuals/tax-withholding-estimator

Review your other payroll withholdings – including retirement contributions, Health Savings Account (HSA) contributions, medical Flexible Spending Arrangement (FSA) and dependent care benefit FSA withholdings.  With some types of withholdings, such as retirement contribution withholding, you are able to change the amount being withheld at any time during the year. Other types, such as FSA withholdings can only be changed during the year if you have a qualifying life event. For your FSA withholdings, you will want to have a plan for how you are going to use up the amount you are setting aside from your pay as you typically have to use it up within an allotted time frame.

If you have dependent children:

Keep track of your childcare receipts, including summer camps, and before and after school care, which  may qualify you for the federal dependent care tax credit.  This credit is a 20% credit on up to $3,000 of childcare expenses for 1 child (maximum $600 credit), and on up to $6,000 of childcare expenses for 2 or more children (maximum $1,200 credit).   Some states also offer a state-level dependent care tax credit.

If you or a dependent are incurring secondary education expenses, keep track of all of your expense payments so you can be sure to take advantage of any tax incentives you are due when you file your tax return. Depending on your income level, you may qualify for the federal American Opportunity Tax Credit or the federal Lifetime Learning Tax Credit. If you are using amounts from a 529 College Savings plan to pay your expenses, you will want to keep a record of your expenses paid to support that any distributions from the 529 plan were used for qualified expenses and therefore should be tax-free.

If are retired:

Consider whether you need to adjust your tax withholding or make any quarterly estimated tax payments for the year. For some types of retirement income, such as Social Security benefits, there will not be any tax withheld unless you specifically request there to be. Other types of income, such as payouts from a brokerage account, do not have the option for tax to be withheld at all. You may want to do a tax projection to determine whether you should increase any tax being withheld or make quarterly estimated tax payments so you don’t have surprises at tax filing time.

If you are over age 70 1/2, have a traditional IRA, and are charitably inclined, you could consider whether you want to make a qualified charitable distribution (QCD) from your IRA. A QCD allows you to transfer money directly from your IRA to the charities of your choice, with no tax consequences to you. If you have reached required minimum distribution age and don’t need all of your IRA distribution, this can be a great way to shelter some of the distribution from tax.

Consider the effect of your income level on your Medicare premium costs. If your income for the year will be unusually high due to a one time transaction, such as the sale of real estate or other investments, or a large pension payout, be aware that this may increase your Medicare premium amount due to the IRMAA adjustment (Income-Related Monthly Adjustment Amount). Medicare premiums are based on your modified adjusted gross income level. As you reach higher levels of income, the premium cost goes up. Here is a link to a page that lists the MAGI levels and premium costs for 2023. Potentially being hit with the IRMAA adjustment can provide additional incentive to try to find additional tax deductions and ways to reduce your income in years when you have large income events.

If you have medical expenses:

If you purchase your health insurance through a state health insurance marketplace and are receiving advance premium tax credits to offset your health insurance cost, consider whether your income for the year is on track with what you estimated for your income when you originally applied for health insurance for the year.  If your income is trending higher, be aware that you may end up paying some or all of your advance premium tax credit back when you pay your taxes. If this applies to you, you may have more incentive to try to lower your income for the year as it will 1) lower your tax liability and 2) lower the premium tax credit you need to pay back.

A question I often get from clients is whether they should be tracking their medical expenses.  On your federal tax return, you typically only get a benefit for a medical expense deduction if you meet the following criteria:

  1. You itemize your deductions for the year and
  2. Your total out of pocket medical expenses for the year exceed 7.5% of your adjusted gross income.

Example A:  Tom and Raquel file married filing jointly and have enough mortgage interest and state tax expense that it is beneficial for them to itemize their deductions.  Their adjusted gross income for the year is $150,000.  7.5% of their AGI is $11,250 ($150,000 x 7.5%) They paid medical expenses out of pocket of $10,000.  They would not get any deduction for their medical expenses because their medical expenses of $10,000 are less than 7.5% of their AGI, $11,250.

Example B: The facts are the same except their medical expenses total $17,000.  They would get to deduct medical expenses $5,750 of their medical expenses ($17,000 – $11,250).

In my experience, most people are not able to deduct their medical expenses because they do not get over the thresholds listed above. However, if you know the year will be a high expense year for you, start tracking your expenses now as it is much easier to track as you incur expenses then after the fact.

-Health Savings Account contributions – if you’ve switched health insurance during the year, make sure your HSA contributions for the year are still appropriate.  If you or your spouse are no longer covered by a high deductible HSA eligible health plan and you’ve been contributing to an HSA, you may need to recalculate how much you are able to contribute to your HSA.  IRS Publication 969 Health Savings Accounts provides details on how to calculate your maximum allowed HSA contribution for the year.

If you are a business owner:

Make sure you are tracking all business expenses, including mileage, meals, and home office use.  Keep track of expenses now will make your life much easier at tax time.

If you believe your business will be in a loss position for the year, be sure you are keeping the appropriate records to support that you are treating the activity as a business and not a personal hobby.  If the IRS examines your tax return and determines your activity is a hobby, your deductions and losses related to that activity would be limited. Claiming business losses for several years can invite additional scrutiny from the IRS. The IRS provides a list of some criteria to consider when determining whether it is appropriate to report an activity as a business or a hobby https://www.irs.gov/newsroom/people-should-know-if-their-pastime-is-a-hobby-or-a-business

Now is a great time to implement a retirement plan for your business if you haven’t already. Depending on how much you want to save and whether you have employees, options available could be a SEP IRA, Simple IRA, or a solo 401(k). If your business is very profitable, it could also make sense to consider a cash balance plan, which is a type of retirement plan that can allow you to set aside large amounts of money.

-Consider whether hiring a family member could reap tax benefits.  Hiring your child under the age of 18 can be a great tax strategy if your business files taxes as a sole proprietorship/single member LLC reporting on your personal income tax return, as you do not have to pay Social Security, Medicare, or federal unemployment tax on their wages. Depending on how much you pay them, they may also be able to avoid income tax on the wages.  There are also scenarios where hiring your spouse can be beneficial.

Be sure you are setting enough money aside for taxes.  Oftentimes, a business owner’s quarterly estimated tax payments are based on their prior year tax liability.  You can typically pay in 100% of your prior year tax (110% if the taxable income on your personal tax return is over $150,000) and not be subject to any underpayment of estimated tax penalty.  This is great because it is a known amount.  However, if business is currently booming, making quarterly payments based on the prior year tax will keep you from being penalized, but you will still need to have money aside to pay your tax bill when you file your annual income tax return.

Example: Arianna’s sandwich shop was not profitable in 2022. She had a small amount of other income for the year, putting her federal tax liability at $1,000. She expects business to take off in 2023; she is projecting that her taxable income will be $216,000 and her federal tax will be $20,000. She calculates her 2023 quarterly estimated tax payments as $1,000 (prior year tax) x 110% or $1,100 for the year. She makes a payment of $275 ($1,100 divided by 4) each quarter in 2023. When she files her 2023 tax return, her taxes turned out as she expected; she owes $18,900 with her tax filing; this is her tax amount of $20,000 minus the $1,100 she paid in via estimated payments. Even though she has a balance due with the return, she does not have to pay any underpayment of estimated tax penalty because she paid in the IRS safe harbor amount via quarterly estimated tax payments.

If you own rental properties:

Track the hours you spend on your real estate activities.  Keeping a log of your time spent on real estate activities may give you more flexibility at tax time to claim certain real estate related tax benefits. You may be able to claim a deduction called the qualified business income deduction on your net rental income. The IRS has provided a safe harbor test for this deduction that is based on the number of house you spend on real estate. Being able to substantiate your hours is also critically important if you want to claim the real estate professional election for your real estate activities.

-If you are making repairs or improvements to your property during the year, consider what tax benefit you will receive from the repair or improvement.  Depending on what you are doing to your property and the type of property you own, you may be able to deduct the amount paid fully in the year paid, capitalize as an improvement but take accelerated depreciation, or you may need to capitalize and take depreciation expense over the life of the property.  These treatments can have vastly different tax effects.

-If you are renting to family members, be aware of the personal use rules.  You must rent at fair market value and the property must be used as the family member’s main home for it to qualify as an arms length rental in the IRS.  Failure to meet these criteria may result in some or all of the property’s expenses being disallowed for deduction on your tax return (but you still have to report the rental income as taxable income…it’s a raw deal!)  Note that in some circumstances the IRS may accept a slightly discounted rental rate to family in exchange for them doing work on the property, the expectation that they will take better care of the property then an unrelated third party, etc.  

Other midyear tax planning considerations:

If you are selling property -review the taxable gain or loss from the sale and impact on your tax position for the year.  Do not make the mistake of waiting until it is tax time to understand the tax implications of a property sale.

Gifting – if you want to make gifts to family and friends, the 2023 annual gift exemption amount is $17,000.  This means you can gift up to $17,000 during 2023 to an individual without any tax reporting obligations.  If you gift over $17,000 to any one individual, you will need to file a Form 709 Gift Tax Return.  Even if you meet the threshold to file a gift tax return, you will not owe gift tax until you use up what is called your lifetime exemption, which is currently $12,920,000 per person.  This means you would not owe gift tax until you have gifted over $12,920,000 during your lifetime.  If this applies to you, then let’s be friends!!  Remember that making payments directly to an educational institution or medical facility on behalf of another do not count towards your annual gift exemption amount.

-If you file taxes in a state that imposes an income tax, consider whether your state offers special income tax incentives. Each state offers it’s own variety of tax deductions and credits. Common benefits include exclusion from state income tax of some or all retirement income, additional deductions or credits for contributing to specific charitable organizations or state charitable funds, as well as additional credits and deductions for older people, children, and those in lower income tax brackets.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Cassandra Lenfert, CPA, LLC has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. We also do not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

What to Do If You Receive a Tax Notice

Receiving a tax notice from the Internal Revenue Service (IRS) or a state taxing agency can be stressful. Here are a few tips on how to deal with a notice.

If you are a current client – I do not charge to review a tax notice for current clients.  Please upload a copy of every page of the notice to your client portal as soon as possible.  If additional work is needed to deal with the notice, I will communicate with you about any potential fees before proceeding with work to resolve the notice.    Do not pay any amounts requested by a taxing authority until I review the notice.  Payment requests are often wrong.

If you are not a current client and want to deal with a tax notice on your own, here are recommended steps to take.

1. Read and Understand the Notice 

The first step is to carefully read the tax notice you received. Pay close attention to the reason for the notice, any deadlines mentioned, and the specific actions required from you. Understanding the content of the notice will help you determine the appropriate next steps.

2. Don’t Panic 

Receiving a tax notice can cause anxiety, but it’s important to remain calm. Many tax notices are routine and can be resolved with proper communication and documentation. Panicking will only add unnecessary stress to the situation.

3. Verify the Information 

After reading the notice, cross-reference the information provided with your own records. Double-check the dates, figures, and other relevant details. Mistakes can happen, and it’s essential to ensure the accuracy of the IRS or state tax agency’s claims before proceeding.

4. Research the Issue 

Take the time to research the specific tax issue mentioned in the notice. The IRS website (www.irs.gov) as well as state tax agency’s websites provide a wealth of information and resource, including publications, forms, and instructions. Educating yourself about the issue will help you make informed decisions about how to proceed.

5. Contact Your Tax Preparer or Advisor 

If you work with a tax professional or advisor, reach out to them immediately after receiving the notice. They have experience dealing with these types of issues and can provide valuable guidance. Share the details of the notice with them, and they will be able to assist you in understanding your options and developing a strategy.

6. Respond within the Deadline

Most tax notices require a response within a specific timeframe. Failing to respond promptly can lead to additional penalties or legal actions. Make a note of the deadline mentioned in the notice and ensure you provide a timely response.

7. Gather Documentation and Evidence 

Compile all relevant documents, receipts, and evidence that support your position. This might include income statements, bank statements, receipts, and any other records that validate your claims. Having well-organized documentation will help you present a strong case.

8. Draft a Clear and Concise Response

When responding to a tax notice, be clear and concise in your communication. Address the issues raised in the notice and provide the necessary information and documentation to support your claims. If you are unsure about how to draft an appropriate response, seek professional help.

9. Keep Copies of Everything

Make copies of all correspondence, documents, and forms you send to the IRS or state tax agency. It’s crucial to have a record of everything you submit for your own reference. 

10. Submit your Response 

For certain types of notices, you may be able submit your response online via the IRS or state tax agency’s website.  Other types of notices require a paper response.  When mailing information, I always recommend that you mail via the US Postal Service using certified mail with a return receipt.  This provides proof of when you mailed your response as well as when it was received.  This can be useful if there is a dispute in the future about when you provided the requested information.

11. Follow Up and Track Progress

After responding to the IRS, keep track of your correspondence and any communication from the agency. If the IRS requests additional information, provide it promptly. Following up will help you stay informed about the progress of your case.

It may take time and patience but you can usually resolve a tax notice by following the steps listed above.  If you have received a tax notice and need help with how to respond, consider scheduling a free initial consultation call with me.

2022 Year End Tax Planning for Individuals

Here’s a look at some tax planning considerations for individuals as we approach year-end.

2022 Tax Law Changes

There have been few major tax law changes from 2021 to 2022.  One item of note is that several tax credits will return to their pre-pandemic levels, which may result in smaller refunds or balances due with 2022 federal tax return filing.  Changes include amounts for the Child Tax Credit (CTC), Earned Income Tax Credit (EITC) and Child and Dependent Care Credit.

  • Those who got $3,600 or $3,000 per dependent in 2021 for the CTC will, if eligible, get $2,000 for the 2022 tax year.
  • For the EITC, eligible taxpayers with no children who received roughly $1,500 in 2021 will now get $500 in 2022.
  • The Child and Dependent Care Credit returns to a maximum of $2,100 in 2022 instead of $8,000 in 2021.

Retirement planning

There’s still time before the end of 2022 to make tax-saving moves with your retirement plans.

  • If you have earned income, consider maximizing contributions to retirement plans.  Remember that for traditional and Roth IRAs, and most self-employment retirement plans, you actually have until the tax filing deadline (and in some cases the extended deadline) to make contributions for 2022.

  • Consider Roth conversions – Roth conversions are a strategy where you move money from pre-tax retirement accounts over to Roth retirement accounts. You pay tax on the transfer of the money now, but it then grows tax-free and can be withdrawn in retirement tax-free. This can be beneficial when you think your current tax rate is lower than or equal to your future expected retirement tax rate. Weigh the benefits of converting Traditional IRA to a Roth IRA to lock in lower tax rates on some pre-tax retirement accounts. 
    • Remember that Roth Conversions can no longer be recharacterized so there’s no reversing once executed.
    • Keep in mind that Roth conversions will be more beneficial when the tax can be paid by funds outside of the IRA.
    • Remember that all IRA balances are included in the tax calculation of the conversion limiting the ability to only convert after-tax amounts.

  • If you have reached age 72, be sure to take your required minimum distributions from your retirement plans before year end.  Some beneficiaries of inherited IRAs may also need to take a required minimum distribution before year end from their inherited IRAs.  

Investment tax strategies – see this post with specific portfolio tax strategies.

Charitable contribution planning

If you are planning to donate to a charity, it may be better to make your contribution before the end of the year to potentially save on taxes.  However, keep in mind that for most charitable giving strategies, you need to itemize deductions on your federal tax return to obtain a tax benefit.

  • Consider donation of appreciated assets that have been held for more than one year, rather than cash. 
  • Consider opening and funding a Donor Advised Fund (DAF) as it allows for a tax-deductible gift in the current year and also provides the ability to dole out those funds to charities over multiple years.
  • Qualified Charitable Distributions (QCDs) are another option for those over 70.5 and especially for those who don’t typically itemize on their tax returns.

Last year, individuals who did not itemize their deductions could take a deduction of up to $300 ($600 for joint filers). This opportunity is currently not available for tax year 2022 however there is some speculation that Congress may make this available for 2022 via an extenders package that would be passed in December 2022. Also, some states allow for a charitable contribution deduction even if you don’t itemize on your federal return (for example, Colorado allows for a charitable deduction when total annual donations exceed $500). It is still worth tracking your charitable contributions for 2022 even if you don’t itemize deductions on your federal tax return.

Education expense planning

If you are paying college expenses, you may want to consider before year end if you will qualify for the American Opportunity Tax Credit (AOTC).   This is a federal tax credit available for the first four years of higher education.  It is a 100% tax credit for the first $2,000 of qualifying college expenses, and an additional 25% credit on the next $2,000 of expenses, for a maximum credit of $2,500.  The student must be enrolled at least half-time in a degree program.

If you file married filing jointly, your ability to claim the AOTC completely phases out once your modified adjusted gross income reaches $160,000.  For taxpayers who file, single, head of household or qualifying widow/er, it phases out at $90,000.  Taxpayers who file married filing separately are not eligible to claim the AOTC.

College expenses paid with funds from 529 plans do not qualify for the AOTC.   If you are eligible to claim the AOTC, you will want to factor it in when determining how to fund college expenses (via 529 savings, personal funds, student loan, grandparent gifts, etc.).

Estate and Gift tax planning

Here are some estate and gift tax planning items to consider before year end.

  • Make use of annual exclusion gifts.  Generally, you are able to give up to $16,000 per donee and $32,000 per married couple without having a gift tax return filing requirement.
  • Capitalize on the unlimited gift exemption for direct payment of tuition and medical expenses. (Payments made directly to educational institutions and medical providers are not subject to the $16,000 annual gift limitation).
  • Consider gifting to a 529 plan by year-end if saving for a child’s or grandchild’s education. Many states offer tax deductions for residents contributing to their state programs.
  • Consider gifting up to 5 years of the annual exclusion amount to an individual’s 529 plan and filing a gift tax return, electing to treat it as if it were made evenly over a 5-year period.

If you need help determining whether a tax planning strategy is right for your finances, please reach out to me.

Information provided on this web site by Cassandra Lenfert, CPA, LLC is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

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