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Member of Russell Bedford International, a global network of independent professional service firms.
In late December 2022, while most practitioners and their clients were busy with other things, Congress passed a giant omnibus budget bill. Buried within it was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (“SECURE 2.0”), which contains many retirement changes and some other changes that practitioners and their clients need to be aware of. It provides new incentives for employers to offer their employees retirement plans and participate in and improve their retirement security. SECURE 2.0 helps employees and their beneficiaries, owner-employees, small businesses, and retirees and eases costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the following key provisions that benefit individuals was signed into law by President Biden on December 29, 2022.
Tax-free rollovers from 529 accounts to Roth IRAs. After 2023, SECURE 2.0 permits beneficiaries of 529 college savings accounts to make up to $35,000 of direct trustee-to-trustee rollovers from a 529 account to their Roth IRA without tax or penalty. The 529 account must have been open for more than 15 years, and the rollover is limited to the amount contributed to the 529 account (and its earnings) more than five years earlier. Rollovers are subject to the Roth IRA annual contribution limits but are not limited based on the taxpayer’s AGI.
Age increased for required distributions. Under SECURE 2.0, the age used to determine required distribution beginning dates for IRA owners, retired employer plan members, and active-employee 5%-owners increases in two stages from the current age of 72 to age 73 for those who turn age 72 after 2022, and to age 75 for those who will turn 74 in 2032.
Bigger catch-up contributions permitted. Starting in 2025, SECURE 2.0 increases the current elective deferral catch-up contribution limit for older employees from $7,500 for 2023 ($3,500 for SIMPLE plans) to the greater of $10,000 ($5,000 for SIMPLE plans), or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans) for individuals who attain ages 60-63. The dollar amounts are inflation-indexed after 2025.
More penalty-free withdrawals permitted. SECURE 2.0 adds an exception after 2023 to the 10% pre age-59 1/2 penalty tax for one distribution per year of up to $1,000 used for emergency expenses to meet unforeseeable or immediate financial needs relating to personal or family emergencies. The taxpayer has the option to repay the distribution within three years. No other emergency distributions are permissible during the three-year period unless repayment occurs.
Similarly, plans may permit participants that self-certify as having experienced domestic abuse to withdraw the lesser of $10,000 indexed for inflation, or 50% of their account free from the 10% tax on early distributions. The participant has the opportunity to repay the withdrawn money from the retirement plan over three years and get a refund of income taxes on money that is repaid. Also, the additional 10% early distribution tax no longer applies to distributions to terminally ill individuals.
Beginning December 29, 2025, retirement plans may make penalty-free distributions of up to $2,500 per year for payment of premiums for high quality coverage under certain long term care insurance contracts.
Also, retroactive for disasters after January 25, 2021, penalty free distributions of up to $22,000 may be made from employer retirement plans or IRAs for affected individuals. Regular tax on the distributions is considered gross income over three years. Distributions can be repaid to a tax preferred retirement account. Additionally, amounts distributed prior to the disaster to purchase a home can be recontributed and an employer may provide for a larger amount to be borrowed from a plan by affected individuals and for additional time for repayment of plan loans owed by affected individuals.
SECURE 2.0 also contains an emergency savings provision that allows employers to offer non-highly compensated employees emergency savings accounts linked to individual account plans that automatically opt employees into these accounts at no more than 3% of their salary, capped at a maximum of $2,500. Employees can withdraw up to $1,000 once per year for personal or family emergencies without certain tax consequences.
Reduced penalty tax on failure to take RMDs. For tax years beginning after December 29, 2022, SECURE 2.0 reduces the penalty for failure to take required minimum distributions from qualified retirement plans, including IRAs or deferred compensation plans under Code Sec. 457(b) from the current 50% to 25% of the amount by which the distribution falls short of the required amount. It reduces the penalty to 10% if the failure to take the RMD is corrected in a timely manner.
Favorable surviving spouse election. For plan years after 2023, the surviving sole spousal designated beneficiary of an employee who dies before RMDs have begun under an employer qualified retirement plan may elect to be treated as if the surviving spouse were the employee for purposes of the required minimum distribution rules. If the election is made distributions need not begin until the employee would have had to start them.
This provision allows a designated spousal beneficiary to receive a similar distribution period for lifetime distributions under an employer plan as is permitted if the surviving spouse rolled the amount into an IRA.
The IRS will prescribe the time and manner of the election, which once made may not be revoked without the IRS’ consent.
Employer match for student loan payments. To assist employees who may not be able to save for retirement because they are overwhelmed with student debt and are missing out on available matching contributions for retirement plans, SECURE allows them to receive matching contributions by reason of their student loan repayments. For plan years after 2023, it allows employers to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA for “qualified student loan payments.”
Return of excess contributions. SECURE 2.0 specifies that earnings attributable to excess IRA contributions that are returned by the taxpayer’s tax return due date (including extensions) are exempt from the 10% early withdrawal tax. The taxpayer must not claim a deduction for the distributed excess contribution. This applies to any determination of or affecting liability for taxes, interest, or penalties made on or after December 29, 2022.
We know that this amount of information is overwhelming, but there is much here that may affect you or your business and induce or require you to change your retirement plan or how you handle your account and distributions. It’s a lot to consider. Be assured that we can help you with all of this. Please don’t hesitate to call Cray Kaiser at (630) 953-4900 if you would like to discuss how SECURE 2.0 may impact you or your business.
On December 16, 2022, section 197.3181, Florida Statutes (F.S.) was signed into law providing a prorated refund of ad valorem taxes for residential improvements rendered uninhabitable by Hurricanes Ian or Nicole.
The following information from the Florida Department of Revenue will help homeowners understand the new statute.
If a residential improvement was rendered uninhabitable for at least 30 days due to Hurricanes Ian or Nicole, a homeowner may be eligible for a partial refund of 2022 property taxes for the time the property was uninhabitable. Under section 197.3181 F.S., “’uninhabitable” means the loss of use and occupancy of a residential improvement for the purpose for which it was constructed resulting from damage to or destruction of, or from a condition that compromises the structural integrity of, the residential improvement which was caused by Hurricane Ian or Hurricane Nicole during the 2022 calendar year.”
Homeowners should contact the county property appraiser for the county in which the property is located to start the application process. The property appraiser will provide the Application for Hurricane Ian or Hurricane Nicole Tax Refund form. Homeowners must provide supporting documentation to determine uninhabitability. The maximum number of days that can be claimed in 2022 is 95 days for Hurricane Ian, and 52 days for Hurricane Nicole.
The application and supporting documentation must be submitted to the property appraiser by April 3, 2023. A homeowner who fails to file the application by this date waives their claim for a tax refund under the new law.
The refund amount is calculated by applying the percent change in value to the number of days the residential improvement was uninhabitable. The percent change in value is found by subtracting the January 1, 2022 just value of the residential improvement from the January 1, 2022 just value of the entire parcel to establish the post-disaster value and then calculating the percent change in value. The example below depicts these calculations.
Step One:
Find the percent change in value by subtracting the parcel’s post-disaster just value from the pre-disaster just value using the following calculations:
Change in value: $300,000 less $225,000 = $75,000
Percent change in value: $225,000 divided by $300,000 = .75 or 75%
Step Two:
Find the percent of days the residence was uninhabitable by dividing the number of days in 2022 the residential improvement was uninhabitable by the number of days in the year using the following calculations:
Percent of uninhabitable days: 95 days divided by 365 days = .26 or 26%
Step Three:
Find the damage differential by applying the percent change in value to the percent of uninhabitable days using the following calculation:
Damage differential calculation: .75 multiplied by .26 = .195
Step Four:
The refund amount is calculated by applying the damage differential to the total of 2022 property taxes paid using the following calculation:
Refund calculation: $2,250 multiplied by .195 = $438.75 refund due
The property appraiser will approve or deny a homeowner’s eligibility for a refund based on the Application for Hurricane Ian or Hurricane Nicole Tax Refund form (Form DR-5001). Homeowners will be notified no later than June 1, 2023 of eligibility status. If the homeowner is eligible, the property appraiser is also responsible for notifying the tax collector.
If the homeowner is found ineligible, a petition may be filed with the value adjustment board requesting that the refund be granted. A final petition must be filed on or before the 30th day following the issuance of the notice by the property appraiser.
Understanding the ins and outs of a new statute can be complex unless
What makes Roth IRAs so appealing? Primarily, it’s the ability to withdraw money from them tax-free. But to enjoy this benefit, there are a few rules you must follow, including the widely misunderstood five-year rule.
To understand the five-year rule, you first need to understand the three types of funds that may be withdrawn from a Roth IRA:
Contributed principal. This is your after-tax contributions to the account.
Converted principal. This consists of funds that had been in a traditional IRA but that you converted to a Roth IRA (paying tax on the conversion).
Earnings. This includes the (untaxed) returns generated from the contributed or converted principal.
Generally, you can withdraw contributed principal at any time without taxes or early withdrawal penalties, regardless of your age or how long the funds have been held in the Roth IRA. But to avoid taxes and penalties on withdrawals of earnings, you must meet two requirements:
Withdrawals of converted principal aren’t taxable because you were taxed at the time of the conversion. But they’re subject to early withdrawal penalties if you fail to satisfy the five-year rule.
As the name suggests, the five-year rule requires you to satisfy a five-year holding period before you can withdraw Roth IRA earnings tax-free or converted principal penalty-free. But the rule works differently depending on the type of funds you’re withdrawing.
If you’re withdrawing earnings, the five-year period begins on January 1 of the tax year in which you made your first contribution to any Roth IRA. For example, if you opened your first Roth IRA on April 1, 2018, and treated your initial contribution as one for the 2017 tax year, then the five-year period started on January 1, 2017. That means you were able to withdraw earnings from any Roth IRA tax and penalty-free beginning on January 1, 2022 (assuming you were at least 59½ or otherwise exempt from early withdrawal penalties).
If you’re withdrawing converted principal, the five-year holding period begins on January 1 of the tax year in which you do the conversion. For instance, if you converted a traditional IRA into a Roth IRA at any time during 2017, the five-year period began on January 1, 2017, and ended on December 31, 2021.
Unlike earnings, however, each Roth IRA conversion is subject to a separate five-year holding period. If you do several conversions over the years, you’ll need to track each five-year period carefully to avoid triggering unexpected penalties.
Keep in mind that the five-year rule only comes into play if you’re otherwise subject to early withdrawal penalties. If you’ve reached age 59½, or a penalty exception applies, then you can withdraw converted principal penalty-free even if the five-year period hasn’t expired, but you would still pay taxes on your earnings.
You may be wondering why the five-year rule applies to withdrawals of funds that have already been taxed. The reason is that the tax benefits of Roth and traditional IRAs are intended to promote long-term saving for retirement. Without the five-year rule, a traditional IRA owner could circumvent the penalty for early withdrawals simply by converting it to a Roth IRA, paying the tax, and immediately withdrawing it penalty-free.
Generally, one who inherits a Roth IRA may withdraw the funds immediately without fear of taxes or penalties, with one exception: The five-year rule may still apply to withdrawals of earnings if the original owner of the Roth IRA hadn’t satisfied the five-year rule at the time of his or her death.
For instance, suppose you inherited a Roth IRA from your grandfather on July 1, 2021. If he made his first Roth IRA contribution on December 1, 2018, you’ll have to wait until January 1, 2023, before you can withdraw earnings tax-free.
The consequences of violating the five-year rule can be costly, but fortunately, there are ordering rules that help you avoid inadvertent mistakes. Under these rules, withdrawals from a Roth IRA are presumed to come from after-tax contributions first, converted principal second and earnings third.
So, if contributions are large enough to cover the amount you wish to withdraw, you will avoid taxes and penalties even if the five-year rule hasn’t been satisfied for converted principal or earnings.
Many people are accustomed to withdrawing retirement savings freely once they reach age 59½. But care must be taken when withdrawing funds from a Roth IRA to avoid running afoul of the five-year rule and inadvertently triggering unexpected taxes or penalties. The rules are complex — so when in doubt call us at Cray Kaiser at (630) 953-4900 before making a withdrawal.
Many companies are eligible for tax write-offs for certain equipment purchases and building improvements. These write-offs can do wonders for a business’s cash flow, but whether to claim them isn’t always an easy decision. In some cases, there are advantages to following the regular depreciation rules. So, looking at the big picture and developing a strategy that aligns with your company’s overall tax-planning objectives is critical.
Taxpayers can elect to claim 100% bonus depreciation or Section 179 expensing to deduct the full cost of eligible property up front in the year it’s placed in service. Alternatively, depending on how the tax code classifies the property, they may spread depreciation deductions over several years or decades.
Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation is available for property placed in service through 2022. Without further legislation, bonus depreciation will be phased down to 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026; then, after 2026, bonus depreciation will no longer be available. (For certain properties with longer production periods, these reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.)
In March 2020, a technical correction made by the CARES Act expanded the availability of bonus depreciation. Under the correction, qualified improvement property (QIP), which includes many interior improvements to commercial buildings, is eligible for 100% bonus depreciation following the phaseout schedule through 2026 and retroactively to 2018. If bonus depreciation isn’t claimed, QIP is generally depreciable on a straight-line basis over 15 years.
Sec. 179 also allows taxpayers to fully deduct the cost of eligible property. Still, the maximum deduction in a given year is $1 million (adjusted for inflation to $1.08 million for 2022), and the deduction is gradually phased out once a taxpayer’s qualifying expenditures exceed $2.5 million (adjusted for inflation to $2.7 million for 2022).
While 100% first-year bonus depreciation or Sec. 179 expensing can significantly lower your company’s taxable income, it’s not always a smart move. Here are three examples of situations where it may be preferable to forgo bonus depreciation or Sec. 179 expensing:
The above rules apply to federal income tax. However, many states have decoupled with either or both bonus depreciation and Section 179 provisions. For example, Illinois no longer allows the bonus depreciation deduction but does follow federal law with respect to Section 179 deductions. So, if you are projecting an overall federal loss, you will want to also project state taxable income to account for the federal to state tax differences.
Keep in mind that forgoing bonus depreciation or Sec. 179 deductions only affect the timing of those deductions. You’ll still have an opportunity to write off the full cost of eligible assets; it will just be over a longer time period. Cray Kaiser can analyze how these write-offs interact with other tax benefits and help you determine the optimal strategy for your situation. You can contact us today at 630-953-4900.
Even though the overall IRS audit rate is currently low, it’s expected to increase as a result of provisions in the Inflation Reduction Act signed into law in August. So, it’s more important than ever for taxpayers to follow the rules to minimize their chances of being subjected to an audit. How can you reduce your audit chances? Watch for these 10 red flags that can trigger IRS scrutiny:
Of course, this isn’t the end of the list. There are many other potential audit triggers, depending on a taxpayer’s particular situation. Also, keep in mind that some audits are done on a random basis. So even if you have no common triggers on your return, you still could be subject to an audit (though the chances are lower).
With proper tax reporting and professional help, you can reduce the likelihood of triggering an audit. And if you still end up being subject to one, proper documentation can help you withstand it with little or no negative consequences. Cray Kaiser is here to help guide you with best practices in documenting your tax records. If you receive an audit notice, don’t panic; call us at (630) 953-4900 as we have significant experience dealing with tax audits.
Companies that wish to reduce their tax bills or increase their refunds shouldn’t overlook the fuel tax credit. It’s available for federal tax paid on fuel used for nontaxable purposes.
The federal fuel tax, which is used to fund highway and road maintenance programs, is collected from buyers of gasoline, undyed diesel fuel and undyed kerosene. (Dyed fuels, limited to off-road use, are exempt from the tax.)
But purchasers of taxable fuel may use it for nontaxable purposes. For example, construction businesses often use gasoline, undyed diesel fuel or undyed kerosene to run off-road vehicles and construction equipment, such as front loaders, bulldozers, cranes, power saws, air compressors, generators, and heaters.
As of this writing, a federal fuel tax holiday has been proposed. But even if it’s signed into law (check with your Cray Kaiser tax advisor for the latest information), businesses can benefit from the fuel tax credit for months the holiday isn’t in effect.
Currently, the federal tax on gasoline is $0.184 per gallon and the federal tax on diesel fuel and kerosene is $0.244 per gallon. Therefore, calculating the fuel tax credit is simply a matter of multiplying the number of gallons used for nontaxable purposes during the year by the applicable rate.
For instance, a company that uses 7,500 gallons of gasoline and 15,000 gallons of undyed diesel fuel to operate off-road vehicles and equipment is entitled to a $5,040 credit (7,500 x $0.184) + (15,000 x $0.244).
This may not seem like a large number, but it can add up over the years. And remember, a tax credit reduces your tax liability dollar for dollar. That’s much more valuable than a deduction, which reduces only your taxable income.
Keep in mind, though, that fuel tax credits are includable in your company’s taxable income. That’s because the full amount of the fuel purchases was previously deducted as business expenses, and you can’t claim a deduction and a credit on the same expense.
You can claim the credit by filing Form 4136, “Credit for Federal Tax Paid on Fuels,” with your tax return. If you don’t want to wait until the end of the year to recoup fuel taxes, you can file Form 8849, “Claim for Refund of Excise Taxes,” to obtain periodic refunds.
Alternatively, if your business files Form 720, “Quarterly Federal Excise Tax Return,” you can claim fuel tax credits against your excise tax liability.
No one likes to pay taxes they don’t owe, but if you forgo fuel tax credits that’s exactly what you’re doing. Given the minimal burden involved in claiming these credits — it’s just a matter of tracking your nontaxable fuel uses and filing a form — there’s really no reason not to do so.
If you have questions about how you might benefit from the fuel tax credit, please call the experts at Cray Kaiser today at 630-953-4900.
Although you can’t avoid taxes, you can take steps to minimize them. This requires proactive tax planning – estimating your tax liability, looking for ways to reduce it and taking timely action. To help you identify strategies that might work for you, we’re pleased to present the 2022 – 2023 Tax Planning Guide.
Staying abreast of state nexus requirements is a tricky task. Gone are the days when physical presence in a state was required for nexus. In today’s economy, as interstate sales are a large portion of many companies’ revenues, states are increasingly determining nexus on connections other than physical presence. Even taxpayers who put forth all efforts to maintain state compliance sometimes realize they should have been filing income tax or collecting sales tax in a state where they haven’t been physically present.
When this happens, there is no need to panic. Equally so, ignoring the issue will not make the problem go away. Many states offer Voluntary Disclosure Agreement (VDA) programs that enable taxpayers to report previously undisclosed liabilities for taxes, such as income tax and sales tax. The benefits of working through a VDA include:
Taxpayers with undisclosed liabilities in multiple states may consider applying for multistate voluntary disclosure through the Multistate Tax Commission (MTC). The MTC facilitates the disclosure of tax liabilities for multiple states by working directly with each state’s VDA program.
Not every taxpayer qualifies for a VDA, and there are a few important limitations, such as the inability to amend returns or request refunds for tax periods within voluntary disclosure. Therefore, it is important to check with your tax professional before applying to a state program. Each VDA is unique and Cray Kaiser can help. Call us today if you have questions about how state nexus applies to your company or if you believe your company could benefit from a VDA.
*Exceptions include Iowa, with a typical look-back of five years, Nevada, with an eight-year look-back, and a Hawaii look-back period of 10 years.
The tax code has included energy credits for making your house more efficient for many years. Starting in 2006, taxpayers could claim credits for making energy-efficient home improvements. However, there was a lifetime cap of $500 and a small credit rate of 10% in any given year. As such, the energy savings improvements were not a primary focus for most taxpayers.
With the new Inflation Reduction Act that was passed this year, the credit has been enhanced. The lifetime cap limit of $500 and 10% eligibility has been removed. Going forward the annual cap is now $1,200 and the credit rate increased to 30%.
The legislation made the changes retroactive to include energy-saving home improvements for 2022 and extends the credit through 2032.
As with the prior law, certain credit limits apply to the various types of energy-saving improvements. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements under the new law:
In addition to the items listed above, there’s a $150 credit for having a home energy audit performed. The audit must be conducted and prepared by a home energy auditor that meets the certification or other requirements specified by the IRS.
One thing to keep in mind is that after December 31, 2024, manufacturers are required to provide you with Identification Numbers. The Identification Numbers will be recorded in an IRS database and will notate if the improvement qualifies for the Home Energy Improvement credit.
With substantial increases in energy bills and the higher credits now available homeowners who make energy-efficient improvements may recoup those costs sooner. Please note that the credits do not carry forward, so if your tax circumstances do not allow full credit, it would be lost in future years.
If you have questions related to how you might benefit from the enhanced and extended tax credit for making energy-saving improvements to your home, please call the experts at Cray Kaiser today at 630-953-4900.
Interest in purchasing electric vehicles (EV) has increased over the years, as have the tax incentives that come with ownership. As more manufacturers push EVs to be a larger part of their sales, consumers have been able to benefit from tax incentives for purchasing these vehicles. Historically, EV credits were based on the number of vehicles manufacturers produced, indirectly spurring manufacturers to switch to the new technology. However, with the most recent legislation changes from the Inflation Reduction Act (IRA), the EV tax credit requirements have been modified, impacting if they can be claimed on your income tax return.
With the IRA, Congress wanted to ensure that the final assembly of vehicles qualifying for tax credits occurs in North America, thereby increasing domestic production over time. This is a big change from the prior legislation which has reduced the list of vehicles that qualify for the credit – for now. Over time, we anticipate the list will increase. In addition, and for the first time, used cars are also eligible, but for a lower credit amount. Use this link from the Department of Energy to view a list of vehicles that will qualify under the new act.
The other part of the IRA legislation includes price caps on vehicles, which means only vehicles with a purchase price below the limits will qualify for credit. The amount of the credit will be based on adjusted gross income. The purchase price limits are:
However, there are some wrinkles in the implementation of this new legislation based on timing. If you purchased the vehicle before the act was passed on August 16, 2022, but delivery happens after this date, then you will still fall under the old legislation. If you purchase and take possession between August 16, 2022 and December 31, 2022, then the credit is transitory, as it takes into effect both the old legislation (caps on number of vehicles sold by manufacturers) and new legislation (final assembly in North America). After January 1, 2023, the new legislation applies, which includes final assembly in North America, upper limits on vehicle cost, and the removal of manufacturer caps on vehicle production.
Let’s explore the new rules using the Tesla 3, one of the most popular electric vehicles on the market, as an example. Under current legislation, along with the transitory period up to December 31, 2022, the Tesla 3 would not qualify for any tax credits because Tesla produced and sold more than 200,000 vehicles. However, after January 1, 2023, the Tesla 3 would again qualify because the final assembly is in North America and the vehicle is typically under $55,000 (depending on the package you choose).
Qualifying for the EV tax credit can be complicated and nuanced, but CK can help make sense of these new changes. Make sure you contact us before purchasing an electric vehicle so we can confirm your eligibility for the tax credit. Call us today at 630-953-4900.
