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Member of Russell Bedford International, a global network of independent professional service firms.
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.
You may have heard that the Illinois House and Senate recently passed the Illinois Family Relief plan. Under the plan, one-time individual income and property tax rebates will be issued to taxpayers who meet certain requirements.
Rebates are expected to begin being issued the week of September 12. If you have not/are not receiving a refund or received a paper check refund, it may take longer for the rebate to be issued.
Keep reading to see if you are eligible to receive one or both of these rebates.
If you were an Illinois resident in 2021 and your adjusted gross income on your 2021 Form IL-1040 is under $400,000 (if filing jointly) or under $200,000 (if filing as a single person) you are eligible for a rebate.
If you filed as a single person your rebate is $50, married couples filing jointly will receive $100 ($50 per person). If you have dependents, you will receive a rebate of up to $300 — $100 per dependent, with a maximum of three.
If you have filed your 2021 IL-1040, you will automatically receive your rebate. If not, you have until October 17, 2022 to file your 2021 IL-1040. If you have dependents, you also must complete Schedule E/EIC.
You are eligible for a property tax rebate if you are an Illinois resident who paid Illinois property taxes in 2021 on your primary residence in 2020, and your adjusted gross income on your 2021 Form IL-1040 is $500,000 or less (if filing jointly) or $250,000 or less (if filing as a single person).
Your rebate amount is equal to the property tax credit you were qualified to claim on your 2021 IL-1040, up to a maximum of $300.
If you have filed your 2021 IL-1040 and Schedule ICR, you will automatically receive your rebate. If not, you have until October 17, 2022 to file a Property Tax Rebate form (IL-1040-PTR) to receive your rebate.
Submit Form IL-1040-PTR electronically through MyTax Illinois or submit a paper Form IL-1040-PTR.
Contact the tax experts at Cray Kaiser by calling 630.953.4900 or by filling out this form if you have any questions or need assistance with these rebates
Tax law requires individuals who have reached age 72 to begin taking minimum distributions from their traditional IRA accounts. These are referred to as a required minimum distribution or RMD. The RMD amount is calculated by dividing the value of the IRA account on December 31 of the prior year by the distribution period from the Uniform Lifetime Table, corresponding to the taxpayer’s age. For example, if an individual turns 75 in 2022, the distribution period from the table is 24.6. If the balance in their IRA was $500,000 on December 31, 2021, then the individual’s RMD for the current year would be $20,325 ($500,000/24.6). RMDs are counted as taxable income. The IRS develops the Uniform Lifetime Table using mortality rate data; it has been updated effective with 2022 distributions.
The tax law also permits individuals aged 70½ or over to transfer funds from their IRA accounts to charities in what is referred to as Qualified Charitable Distributions (QCDs). These QCDs are not taxable. In instances where a taxpayer must make required minimum distributions (RMDs), the QCDs count toward the RMD requirement. Thus, in our prior example, if the individual had transferred the $20,325 to a qualified charity in a QCD, the $20,325 would not have been taxable.
However, QCDs are not limited to RMDs. For those with large IRA balances, QCDs can total up to $100,000 annually. Additionally, QCDs are not limited to a single transfer in a tax year as long as the total amount distributed does not exceed the $100,000 annual limit.
Example: Anne wants to contribute to her church’s building fund, the American Cancer Society, and the American Red Cross in the same year. She can do that by having her IRA make separate direct transfers to each charity.
It is important to remember that all individual Traditional IRAs are treated as one for purposes of determining an RMD and that all QCDs must be direct transfers by the IRA trustee to the charity.
Qualified Charitable Distributions can provide significant tax benefits. Here is how this provision, if utilized, plays out on a tax return:
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps for other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses if itemizing deductions, passive losses, taxable Social Security income, and so on. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps for other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses if itemizing deductions, passive losses, taxable Social Security income, and so on. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
In the past, the tax code did not permit contributions to IRAs by individuals once they reached age 70½, which coordinated with the previous age requirement to begin RMDs and the ability to make QCDs. The age restriction to contribute to IRAs has been eliminated, so now individuals may make IRA contributions at any age provided they have earned income.
Whether intentional or an oversight by Congress, the tax changes did not modify the age at which a taxpayer can begin making QCDs and left it at age 70½ – no longer in synchronization with the revised RMD age of 72.
Unfortunately, that has created a situation that can be detrimental for individuals who have earned income and wish to utilize the QCD provisions and continue to contribute to an IRA after age 70½. The problem is that a Qualified Charitable Distribution must be reduced by the sum of IRA deductions made after age 70½ even if they are not in the same year, causing unexpected tax results for taxpayers that are not aware of this complication. This is best demonstrated by a couple of examples.
Example #1 –
Jack makes a deductible IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72. He claims an IRA deduction of $7,000 on his tax return for each year. Then later when he is 74, he makes a QCD of $10,000 to his church’s building fund. Since Jack had made the IRA contributions after age 70½, his QCD must be reduced by the post-70½ contributions that were deducted, and as a result, the $10,000 is a taxable IRA distribution ($10,000 – 14,000 = <$4,000>). However, he can claim the $10,000 to the church building fund as a charitable contribution on Schedule A if he itemizes his deductions.
In the next year, Jack makes a $5,000 QCD to the university where he got his degree. The excludable amount of the QCD is $1,000 ($5,000 – $4,000 = $1,000). The $4,000 is the amount that remained from post-age 70½ IRA contributions that didn’t previously offset QCDs. Jack includes $4,000 as taxable IRA income and can deduct $4,000 as a charitable contribution if he itemizes. No amount of post-age 70½ IRA contributions remains to reduce the excludable amount of QCDs for subsequent taxable years.
Example #2 –
Bob makes a traditional IRA contribution of $7,000 at age 71 and another $7,000 contribution at the age of 72 and deducts the IRA contributions on his returns. Then later when he is 74, he makes a QCD in the amount of $20,000 to his church’s building fund. Since Bob had made the deductible IRA contributions after age 70½, his QCD must be reduced by $14,000. As a result, of the $20,000 QCD, $14,000 is a taxable distribution, $6,000 is nontaxable, and Bob can claim a $14,000 charitable contribution.
All of this can become quite complicated. If you are considering making a Qualified Charitable Distribution and made IRA contributions after age 70½ consider consulting with the tax experts at Cray Kaiser before you make the distribution to ensure you understand the potential tax ramifications.
The Work Opportunity Tax Credit (WOTC) is a general business credit that is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025.
The WOTC may be claimed by any employer that hires and pays wages to or incurs on behalf of certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups.
In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:
However, an employer cannot claim the WOTC for employees who are rehired.
The maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be considered in determining the WOTC for certain qualified veterans.
Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in certain U.S. territories. Taxable employers claim the WOTC against income taxes, and in general, may carry the current year’s unused WOTC back one year and then forward 20 years. The procedure is different for eligible tax-exempt employers; they can claim the WOTC only against payroll taxes and only for wages paid to members of the Qualified Veteran targeted group.
An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups:
and continues to reside at the locations after employment.
An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.
Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who began work for the organization after 2020 and before 2026. Tax-exempt employers claim the credit against the employer Social Security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.
Form 5884-C is filed after the organization files the related employment tax return for the period for which it is claiming the credit. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
Contact Cray Kaiser at 630-953-4900 for additional information and assistance in determining if the WOTC is appropriate for your business.
If you sold your home this year or are thinking about putting it on the market, there are many tax-related issues that could apply to the sale of your home. To help you prepare for reporting a sale or make you aware of what issues you may face if you opt to sell your home, this article covers the tax basics and some special situations related to home sales and the home-sale gain exclusion.
For decades, Congress has encouraged home ownership by providing various tax breaks for taxpayers selling their homes. Under the current version of the tax code, you are allowed an exclusion of up to $250,000 ($500,000 for married couples) of gain from the sale of your home if you owned and lived in it as your principal residence for at least two of the five years counting back from the sale date. One important note, you cannot have taken a home-sale exclusion within the two years immediately preceding the sale. There is no limit on the number of times you can use the exclusion if you meet these time requirements. The home-sale gain exclusion only applies to your primary residence, not to a second home or a rental property.
As noted above, you must have used and owned the home as your principal residence for two out of the five years immediately preceding the sale. The years don’t have to be consecutive or the closest to the sale date. Vacations, short absences, and short rental periods do not reduce the use period. If you are married, to qualify for the $500,000 exclusion, both you and your spouse must have used the home for two out of the five years prior to the sale, but only one of you needs to meet the ownership requirement. When only one spouse in a married couple qualifies, the maximum exclusion is limited to $250,000 instead of $500,000.
Although this situation is quite rare, if you acquired the home as part of a tax-deferred exchange (sometimes referred to as a 1031 exchange), then you must have owned the home for a minimum of five years before the home-gain exclusion can apply.
If you don’t meet the ownership and use requirements, there are some situations in which a prorated exclusion amount may be possible. An example of this situation would be if you were required to sell the home because of extenuating circumstances, such as a job-related move, a health crisis, or other unforeseen events. Another rule extends the five-year period to account for the deployment of members of the military and certain other government employees. Give us a call if you have not met the two out of five years rule; we can help determine if you qualify for a reduced exclusion.
If you used your home for business and claimed a tax deduction—for instance, for a home office, storing inventory in the home, or using it as a daycare center—that deduction most likely included the home’s depreciation. In that case, up to the extent of the gain, the claimed depreciation cannot be excluded.
The first step is to determine how much the home cost, the combination of the purchase price and the cost of improvements. From this total cost, subtract any claimed casualty loss deductions and any depreciation taken on the home. The resulting number is your tax basis. Next, subtract the sale expenses and this tax basis from the sale price. The result is your net gain or loss on the sale of the home. Your mortgage does not affect the taxable gain or loss computation.
If the result is negative, the sale is a loss; losses on a personal-use property such as a home cannot be claimed for tax purposes.
If the result is a gain, subtract any home-gain exclusion (discussed previously) up to the extent of the gain. This is your taxable gain, which is, unfortunately, subject to income tax. If you owned the home for at least a year and a day, the gain will be a long-term capital gain; as such, it will be taxed at the special capital-gains rate, which ranges from zero for low-income taxpayers to 20% for high-income taxpayers. Depending on the amount of all your income, the gain may also be subject to the 3.8% net investment income surtax that was added as part of the Affordable Care Act.
If you have owned your home for 25 years or more, you may face another issue that can affect your home’s tax basis. If you purchased your home before May 7, 1997, after selling another home, the tax rules on home sale gains were different. Instead of a home-gain exclusion of the profit from the home you sold, any gain from the sale would have been deferred to the replacement home. This deferred gain would reduce your current home’s tax basis and add to any gain for the current sale. While this situation is rare now, if it applies to you, be sure to look back in your tax records from the year you purchased your home for information about the reinvested gain deferral.
If you previously used your home as a rental property, the law includes a provision that prevents you from excluding any gain attributable to the home’s appreciation while it was a rental. The law’s effective date was the beginning of 2009, meaning that you only need to account for rental appreciation starting that year. This law was passed to prevent landlords from moving into their rentals for two years to exclude the gains from those properties. Before the law changed, some landlords had done this repeatedly.
There are a few other rare home-sale rules we did not include here. As you can see, home-sale computations and tax reporting can be very complicated. If you have recently sold your home or are planning on selling, reach out to the tax experts at Cray Kaiser at (630) 953-4900 if you need assistance planning a sale or post-sale reporting.
