YEAR END TAX PLANNING

It’s that time of year again!

Once the ball drops on One Time Square on New Year’s Eve and 2023 is rung in there is very little that you can do to reduce your 2022 tax liability.  But there is much that can be done during the last months of the year to make sure that you pay the absolute least amount of federal and state income tax possible.

Sit down with paper and pencil in October or at the beginning of November and add up your taxable income from all sources and allowable deductions for the first 10 months of 2022.  Next estimate the income and deductions you anticipate for the last 2 months.  Using your 2021 return as a guide, you want to prepare a “projected” 2022 tax return.

Traditional year-end planning calls for postponing the receipt of taxable income until 2023 and accelerating allowable deductions to be claimed in 2022.  This strategy will generally apply if you expect to be in the same tax bracket for both 2022 and 2023, or if you expect to be in a lower bracket in 2023.

If you anticipate a substantial jump in income in 2023, which will push you into a higher bracket, you should do the opposite and accelerate the receipt of taxable income this year and postpone deductible expenses until next year.  Income will be taxed at a lower rate in 2022, and deductions claimed in 2023 will provide a greater tax savings.

If you are unsure what your 2023 income will look like follow the traditional advice and “when in doubt, defer”. Postpone income and accelerate expenses.

It does not pay to itemize on Schedule A unless your total deductions exceed the Standard Deduction that applies to your filing status, plus any additions for age or blindness.  If you haven’t had enough deductions to be able to itemize in the past, but after preparing your projected 2022 return discover you will be able to do so this year, incur, and pay for, as many deductible expenses as possible during these last two months of the year.

Under the limitations on itemized deductions enacted by the GOP Tax Act there are fewer options where you can actually accelerate deductions.  The one area left where you can do this is with charitable contributions.  Make charitable contributions scheduled for early 2023 in 2022. 

Whether a deduction is allowed in 2022 or 2023 depends not on the date written on the check but on the check's anticipated “date of delivery”.  Put payments in the mail on December 24th and not December 31st.  Checks dated December 31 that are hand delivered to payees before the New Year is rung in will be deductible in 2022.    

If you do not have the cash available to pay for deductible items that you have scheduled as part of your 2022 year-end tax plan you can use a credit card.  Allowable expenses charged to a “bank” credit card (VISA, MasterCard, Discover, American Express) are deductible in the year charged, and not in the year that you actually pay for the charge.  This is not true for “store” credit cards like those issued by Sears or JC Penny.  

When preparing your projected return, review the performance of your investment portfolio for the year. Add up all realized gains and losses from actual sales for the first 10 months of the year, with separate net totals for short-term (held one year or less) and long-term (held more than one year) activity. Gains and losses from the sale of inherited property are considered long-term, as are capital gain distributions from mutual funds.  Do a similar calculation for any unrealized “paper” gains and losses on the investments you still hold.

If you anticipate you will fall below the 15% bracket income threshold for the special “qualified dividends and capital gains” tax rate you may want to generate additional long-term capital gains to take full advantage of the 0% rate.  If you need a gain to offset excess losses, or to take advantage of the 0% rate, you can sell an investment that has increased in value, claim the capital gain, and buy back the exact same investment the next day.  As an added benefit, this will increase your cost basis in the investments and reduce any future gain when the investments are sold.  The wash sale rules do not apply if the sale results in a profit.

When estimating year-end capital gains remember that capital gain distributions from mutual fund investments are considered long-term capital gains, and included in the income that is taxed at the lower rates.  These distributions are usually not made until at least mid-December.

It is important to keep in mind that any long-term capital gains that are taxed at the special 0% rate on your federal Form 1040 will be fully taxed on your state return under the tax laws for your state.  And when determining year-end capital gain strategies remember that while excess capital losses can be carried forward to future years on the federal return, this may not be true on your state return.  For example, losses in excess of gains are lost forever on the NJ-1040.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 
* The EIDEBAILLEY TAX NEWS AND VIEWS BLOG reported “The IRS Announces New Per Diem Rates Effective October 1, 2022”.
 
*  Jeff Stimpson tells us “Alaska weather victims get federal filing relief” at ACCOUNTING TODAY.
 
* A new BOBSERVATIONS post!  Check it out.
 
* As was expected, the Internal Revenue Service recently announced– “IRS announces tax relief for victims of Hurricane Ian in Florida”.
 
* Speaking of Hurricane Ian, Kay Bell provides a timely warning at DON’T MESS WITH TAXES – “Beware: Land sharks & recovery scams follow every disaster”.
 
* And Kay suggests “4 tax moves to make this October”.
 
The post includes a chart of the six states and two territories with an extended extension deadline.

Big Dog Ranch Rescue
 
PAWSChicago
 
ASCPA
 

TTFN

 

A HISTORY OF THE US INCOME TAX

 

FYI - here is a brief history of income taxes in the United States -
 
1643: The colony of New Plymouth, Massachusetts levies the first recorded income tax in America.
 
1861: Congress passed the first income tax law as an emergency measure to fund the Civil War.
 
1872: Congress repeals the income tax law.
 
1884:  The Enabling Act of 1884, aka The Horse Act of 1884 created what is today known as the Enrolled Agent by allowing individuals appointed by the Treasury Department to assist individuals with claims against the United States.
 
1894: As a response to complaints that excessive reliance on tariffs as a source of revenue resulted in an increase in the cost of imported goods, Congress again passed an income tax law.
 
1895: The US Supreme Court ruled that the income tax law was unconstitutional.
 
1913:  In February the 16th Amendment, which states "Congress shall have the power to lay and collect tax on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration", was ratified by the necessary 3/4 of the states.  On October 3rd Congress passed the Revenue Act of 1913, which created the first permanent US income tax.
 
Under this act, the first $3000 of income for single persons and $4000 for married couples was exempt from taxation.  A "normal" tax of 1% was applied to income above $3000 or $4000, and a "super" tax of from 1-6% was applied to income in excess of $20,000.  Deductions were allowed for business expenses (including depreciation), interest paid on "personal indebtedness", all national, state, county, school and municipal taxes paid, casualty losses, and worthless debt.  In the first year only 1 out of every 271 American citizens were taxed and $28 Million in revenue was raised.
 
1916:  The Federal Eatate Tax was enacted to help generate additional revenue to fund America's anticipated entry into the first World War.
 
1917:  Congress raised tax rates in response to the increasing cost of the war and approved credit for dependents and deductions for charitable contributions.
 
1918:  The maximum combined basic and super income tax rate reached 77%.
 
1922:  For the first time preferential tax treatment was provided for capital gains.
 
1932:  The tax law was amended to provide that US presidents were liable for federal income tax on their salaries.  Franklin Roosevelt was the first president since Abraham Lincoln to pay federal income tax on his presidential salary.
 
1935:  The Social Security tax, 1% on the first $3000 of wages, was enacted.
 
1941:  Tax tables for low-income taxpayers were introduced, simplifying the calculation of tax liability.
 
1942-1945:  New tax laws, in response to the cost of World War 2, created withholding on wages, more tax brackets for lower income taxpayers, the standard deduction, a personal exemption for dependents, a deduction for medical expenses, and increased tax rates.  By the end of the war the maximum tax rate was 94%.
 
1953:  The Bureau of Internal Revenue becomes the Internal Revenue Service. 
 
1954:  Congress completely revised the Tax Code, changing rates, redefining Adjusted Gross Income, and adding credits for retirement income and dividends and new itemized deductions.
 
1961:  Taxpayers were required to provide their Social Security or other taxpayer identification number to banks and other financial institutions so they could report interest and dividend payments to the IRS.
 
1964:  Tax rates were reduced from a range of from 20% to 94% to from 16% to 77%.  The Income Averaging method of tax computation was introduced.
 
1970:  Congress created a Minimum Tax so high-income individuals could not completely avoid paying taxes through the use of preferential tax shelters, loopholes and deductions.

1972: Robert D Flach, who would become the internet't WANDERING TAX PRO, begins work as an apprentice tax preparer.
 
1974:  Congress created the deductible Individual Retirement Arrangement (IRA), known popularly as the Individual Retirement Account, for taxpayers not covered by employer pension plans.
 
1975:  Low-income taxpayers were allowed to claim a refundable Earned Income Credit (EIC).
 
1979:  Unemployment compensation was made partially taxable.
 
1981:  Tax legislation reduced tax rates by 25% over 3 years, indexed tax brackets for inflation, and applied the same tax rates to earned and unearned income.
 
1984:  For the first time recipients of Social Security and Railroad Retirement benefits were subject to tax on up to 50% of the benefits received, depending on the recipient's income.
 
1986:  The largest revision of the Tax Code since 1954, the Tax Reform Act of 1986, was enacted.  The law reduced the number of tax brackets from 14 to 2, decreased the maximum tax rate from 50% to 28%, repealed the dividend exclusion, Income Averaging, the itemized deduction for sales tax paid and the preferential treatment of long-term capital gains, introduced the passive activity rules, the Kiddie Tax, the deduction from gross income for health insurance premiums paid by self-employed individuals, and the 2% of AGI limitation on most miscellaneous itemized deductions, phased out the itemized deduction for personal (credit card, auto loan, etc.) interest, limited the deduction for business meals and entertainment to 80%, and replaced the additional personal exemption s for age 65 and blind with an increased standard deduction.
 
1987:  For the first time taxpayers were required to list the Social Security number of dependent children, age 5 and over.
 
1990:  The Revenue Reconciliation Act of 1990 added a third tax bracket (31%) and instituted the reduction of itemized deductions and phase-out of personal exemptions for high-income taxpayers.
 
1993:  The Omnibus Budget Reconciliation Act added the 36% and 39.6% tax brackets, increased the maximum tax on Social Security benefits from 50% to 85%, and reduced the deduction for business meals and entertaining from 80% to 50%.
 
1998:  In response to abusive treatment of taxpayers by the Internal Revenue Service, the IRS Reform and Restructuring Act of 1998 was enacted.
 
2001:  Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, the largest tax cut in over 20 years, with 85 major provisions.  All provisions of this Act expired in 2011.
 
2003:  Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003 intended to stimulate the economy.
 
2006:  Congress passed the Tax Increase Prevention and Reconciliation Act of 2005, which prevented several tax provisions from expiring and extended reduced tax rates on capital gains and dividends and the alternative minimum tax reduction, and the Tax Relief and Health Care Act of 2006, which extended many expired and expiring provisions retroactively.
 
2008:  Congress passed the Economic Stimulus Act of 2008: Congress, again intended to stimulate the economy.  
 
2010:  Congress passed the Patient Protection and Affordable Care Act, aka the Affordable Care Act and “Obamacare”, which attempted to provide for universal health care part of American culture.  It also passed the Health Care and Education Reconciliation Act, which amended parts of Obamacare and created the 3.8% Net Investment Income Tax surcharge for “wealth” Americans. 
 
2012:  Congress passed the American Taxpayer Relief Act of 2012.  All the expiring tax cuts from the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 were made permanent, the exemption amount for the Alternative Minimum Tax (AMT) was permanently indexed for inflation, the American Opportunity Credit was extended through 2017, and certain “temporary” tax benefits were extended through 2013.
 
2015:  Congress passed the Protecting Americans from Tax Hikes Act of 2015, which made permanent many of previous “temporary” tax benefits and temporarily extended others.   
 
2017: Congress passed Public Law 115-97 - “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”, also known as the GOP Tax Act and “The Tax Cuts and Jobs Act”.  This Act drastically changed the United State Tax Code.  For 2018 through 2025, or until new tax legislation is enacted, the Tax Cut and Jobs Act will affect every income tax return filed – both business and individual.  
 
2019: In December Congress passed The Setting Every Community Up for Retirement Enhancement Act, aka the SECURE Act, which changed the beginning date for taking required minimum distributions (RMD) from retirement accounts from age 70½ to age 72 and permitted all taxpayers with earned income to make contributions to an IRA regardless of their age, both effective with tax year 2020.
 
2020 and 2021: Congress passed several acts providing temporary tax benefits in an attempt to stimulate the economy in response to the COVID-19 pandemic, including issuing several “Economic Impact Payment” checks to many Americans that were reconciled on the Form 1040.
 

The above was taken from my book THE JOY OF AVOIDING TAXES.  Click here for more information.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 

*  Russ Fox tells those of you who have not yet filed your extended 2021 income tax returns “It’s Time to Panic!” at TAXABLE TALK -
 
“If your return is simple and straightforward, stop procrastinating and get it done and filed. If your return has any sort of complexities, you must start working on it now. Your tax professional needs time to get it done correctly. You need to turn in that paperwork post haste. If you’ve procrastinated, stop, sit down, and get it done–NOW.”
 
And that was posted a week ago!
 
* More proof it is not a good idea to use “fast food” commercial tax preparation services from Michael Cohn at ACCOUNTING TODAY – “D.C. Attorney General sues Liberty Tax over 'misleading' cash advance promotion”.

“The lawsuit alleged that Liberty aggressively marketed its services to low-income residents in D.C. by offering them $50 in cash ‘just for filing,’ but then actually increased the tax prep fee for clients who accepted the cash payments.”

* A very important BOBSERVATIONS post this week.  Please read and share.
 
* A reminder from Kay Bell at DON’T MESS WITH TAXES – “File 2019, 2020 tax returns by Sept. 30 to avoid IRS penalty”.
 
* And Kay also discusses “Valuing tax-deductible donated clothing & household goods” in a subsequent post.
 
* FYI, the NJ Division of Taxation has a new FAQ page about the also new ANCHOR property tax relief benefit program.  Click here.
 
* Planning to visit my area?  Check out my free local North East PA handout THE LAKE REGION SOMETHING.  
 
THE LAST WORD –
 
More Republican hypocrisy.
 
An erroneous Republican TV ad in PA says we should vote against Democrat Matt Cartwright because he is “focused on himself”.
 
But they still love Trump.  The ONLY thing Trump is focused on is himself.
 
BTW – if you wonder why I am not a Republican it is because I have a brain and a conscience.
 
TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 

BUZZ is back on Tuesday.
 
* Sarah Brenner explains “3 IRA RULES TO KNOW BEFORE YOU WALK DOWN THE AISLE” at the SLOTT REPORT.
 
* BLOOMBERG TAX has posted an editorial on the lies being spread by Republicans (no surprise there) about the increased IRS funding provided by the “Inflation Reduction Act” titled “Sense and Nonsense About the IRS’ Funding Increase from Congress” (highlight is mine) -
 
“These {statements quoted in the editorial} and many similar statements about the IRS funding are not just misleading and nearly hysterical in tone—they’re also just dead wrong on the facts.”
 
* I have a new BOBSERVATIONS post.  Check it out.  And share with friends, family and colleagues.
 
* NJ.COM reports “The online portal for the N.J. ANCHOR property tax program is open and more areeligible. Here’s how to apply” -
 
“The online portal to apply for the state’s newest property tax savings program is open. . . . . . . Applications started to be emailed on Sept. 13, . . . . . Once you receive the application, you can apply online or by phone at (877) 658-2972.”
 
Click here to apply online.
 
* Kay Bell tells us “18 states sending residents tax refunds/rebates” at DON’T MESS WITH TAXES -
 
“ . . . payments going out in Massachusetts, as well as refunds headed to residents of California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Minnesota, New Jersey, New Mexico, New York, Pennsylvania, South Carolina, and Virginia.”
 
I assume the NJ refund/rebate refers to the new ANCHOR program, which replaces the Homestead Benefit.  But I am not quite sure about PA.
 
* Have you checked out my TAX PLANNING RESOURCE CENTER yet?
 
* FYI – according to NJ INSIDER “New Jersey’s Minimum Wage to Increase to $14.13/Hour for Most Employees on Jan. 1” -
 
“New Jersey’s statewide minimum wage will increase by $1.13 to $14.13 per hour for most employees, effective January 1, 2023.
 
Annual increases in the minimum wage are due to legislation signed by Governor Murphy in February 2019 that raises the wage floor to $15 per hour by 2024 for most employees. Under the law, the minimum wage increases by $1 per hour – or more if warranted because of significant increases in the Consumer Price Index (CPI), as happened this year.”
 
And –
 
“Tipped workers’ cash wage will increase to $5.26/hour, with employers able to claim an $8.87 tip credit, an increase in the maximum allowable tip credit of $1. If the minimum cash wage plus an employee’s tips do not equal at least the state minimum wage, then the employer must pay the employee the difference.”
 
TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

* KIPLINGER.COM answers the question “What Are I-Bonds?”.

Some truly good news (highlights are mine) -

“Thanks to high inflation, those issued from May through October 2022 offer a sky-high composite rate of 9.62%.”  

How are I bonds taxed? (again, highlights are mine) - 

“I bond interest is free of state and local income tax, and you can defer federal tax until you file a tax return for the year you cash in the bond or it stops earning interest because it has reached final maturity (after 30 years), whichever comes first. You can also report the interest every year, which may be a smart choice if you’d rather avoid one large tax bill years down the road. If you use I bond proceeds to pay for certain higher-education expenses for yourself, your spouse or your dependents, you may avoid federal tax.”

As I had been telling clients and readers for decades, claiming the accrued interest each year is a good idea for your young dependent children who do not have enough other income to have to pay federal income tax, as it will reduce the overall federal tax cost of the interest earned and substantially reduce the federal tax in the year the bonds are cashed.

* Be sure to check out the latest post at BOBSERVATIONS.  And share with family, friends and colleagues.  Thanks!

* Kay Bell warns us that “Offers to accelerate or increase student loan relief are scams” at DON’T MESS WITH TAXES -

“Beware of perps on the prowl with promises that they can get rid of your student loan obligation more quickly. Or get you even more loan relief if the federal plan doesn't cover all your college borrowing. Or help you avoid state taxes that apply to your canceled student debt.

All of these offers of help, most often by phone or email, will only help the scammers steal your money.”

According to K. Michelle Grajales, an attorney with the Federal Trade Commission's Division of Financial Practices, quoted in the post (highlight is mine) -

"You don't need to do anything or pay anybody to sign up for the new program — or the pause. Nobody can get you in early, help you jump the line, or guarantee eligibility.”

* And Kay also reminds us “Have a side hustle? Estimated tax payment on that money due by Sept. 15”.

* Over at ACCOUNTING TODAY Jeff Stimpson reports “Victims of Mississippi water crisis get filing relief”.

* Have you checked out my TAX PLANNING RESOURCE CENTER yet?

TTFN

NEVER FORGET

 

POLICE OFFICER MAURICE BARRY

PATH EMERGENCY SERVICE UNIT

POLICE OFFICER SHIELD #1038

A Port Authority officer for 16 years, Maurice "Moe" Barry, 48, was assigned to the PATH commuter train system. The resident of Rutherford, NJ, upon hearing the reports of the terrorist attacks, was one of the first on scene when he rushed from Jersey City to Lower Manhattan and then into the North Tower to help in the rescue efforts. As thousands fled the searing flames and smoke of the Towers, Officer Barry was attempting to reach trapped and frightened workers on the upper floors. The last time he was seen, he was on his way to the higher floors to get people out.
.
Moe had a history of heroism - he was involved in rescue efforts during an airplane crash at La Guardia airport; he once climbed a bridge to retrieve the body of a person electrocuted there; he was involved in the rescue effort during the 1993 bombing of the World Trade Center; and he rescued a woman from her home, by boat, during Hurricane Floyd. Moe was also a volunteer for the Rutherford Ambulance Corps.

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 As I often say – some BUZZ is better than no BUZZ.

* A recent JS CORPORATION WEEKLY TAX TIP provided some good information and advice on “Understanding Tax Terms:Contemporaneous Records”.
 
* The National Taxpayer Advocate’s NTA BLOG provides a clear and easily understandable explanation of the recent penalty relief in “Good News: The IRS IsAutomatically Providing Late Filing Penalty Relief for Both 2019 and 2020 Tax Returns. Taxpayers Do Not Need to Do Anything to Receive this Administrative Relief”.
 
* Have you checked out the TAX PLANNING RESOURCE CENTER yet?  Why not?
 
* According to an August 29 update from the on the status of the processing backlog -
 
“As of August 19, 2022, we had 8.7 million unprocessed individual returns received in calendar year 2022. These include tax year 2021 returns and late filed tax year 2020 and prior returns. Of these, 1.7 million returns require error correction or other special handling, and 7 million are paper returns waiting to be reviewed and processed.”
 
And -
 
“As of August 20, 2022, we had 1.9 million unprocessed Forms 1040-X. We are processing these returns in the order received and are working hard to get through the inventory. The current timeframe can be more than 20 weeks instead of up to 16.”

What should you do if you are waiting for a refund?  Nothing.  Just have patience.
 
FYI – I and others I have heard from received our 2021 refund just within 6 months of mailing the return to the IRS (all manual returns).
 
* BOBSERVATIONS is now a “normal” blog posted weekly.  Check out the latest post – I remember attending the wedding of Sly of Sly and the Family Stone in 1974.
 
THE LAST WORD
 
Nothing Trump said or did from January 2017 through January 2021 was the least bit “presidential” or indicated that he had any clue about the responsibilities and limitations of the office of President or actually knew his arse from a hole in the ground about anything.
 
Forget that Trump is a traitor and a crook, doesn’t care one ounce about anyone or anything but himself, and that his one and only agenda as President was to line his pockets and feed his ego.  Trump is an incompetent moron!
 
TTFN

ANCHORS AWAY!

 

New Jersey has replaced the Homestead Benefit property tax relief program with ANCHOR – Affordable New Jersey Communities for Homeowners and Renters.

The 2022 program is for NJ residents who were a homeowner or resident on October 1, 2019.  The amount of the benefit payment is based on the NJ Gross Income from the taxpayer’s 2019 NJ-1040 Line 29.

Homeowners with 2019 NJ Gross Income of $150,000 or less will get $1,500 and those with 2019 NJ Gross Income of $150,001 - $250,000 will get $1,000.  Tenants with 2019 NJ Gross income of $150,000 or less will get $450.

The total amount of all property tax relief program benefits for a taxpayer – ANCHOR, Property Tax Reimbursement and any tax reduction for seniors, veterans and the disabled – cannot be more than the total property taxes paid on his or her primary residence for the year.

Homeowners whose residence was exempt from local property taxes and those who made “Payments in Lieu of Tax” and tenants who lived in tax-exempt, subsidized and campus apartments do not qualify for the benefit payment.

Payment of the benefit will be via either direct deposit or paper check.  Benefit payments applied for this year are expected to be paid in May 2023.

As with the Homestead Benefit, residents will be sent an application package and can apply either online or by phone.  Some residents may be required to file a paper application.  The deadline for filing an ANCHOR application is December 30, 2022.

Applications will be sent out next month.  Here is a chart of the mailing schedule for the application packages-

COUNTY	MAILING TO BEGIN
Burlington, Hunterdon, and Mercer	September 12, 2022
Atlantic and Essex	September 14, 2022
Bergen and Warren	September 16, 2022
Ocean, Salem, and Sussex	September 19, 2022
Cumberland, Gloucester, and Hudson	September 21, 2022
Monmouth and Somerset	September 23, 2022
Passaic and Union	September 26, 2022
Cape May and Middlesex	September 28, 2022
Camden and Morris	September 30, 2022

The ANCHOR application is NOT an income tax form and has nothing to do with state income tax.  While your tax preparer may be willing to assist you with the application process do not expect him or her to file it for you.

TTFN