IRS audit rates are historically low, according to a recent Government Accountability Office (GAO) report , but that’s little consolation if your return is among those selected to be examined. Plus, the IRS recently received additional funding in the Inflation Reduction Act to improve customer service, upgrade technology and increase audits of high-income taxpayers. But with proper preparation and planning, you should fare well. From tax years 2010 to 2019, audit rates of individual tax returns decreased for all income levels, according to the GAO. On average, the audit rate for all returns decreased from 0.9% to 0.25%. IRS officials attribute this to reduced staffing as a result of decreased funding. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, all types of audits are being conducted less frequently than they were a decade ago. There’s no 100% guarantee that you won’t be picked for an audit,...[ Read More ]
When professional auditors review a not-for-profit’s books, they usually spend significant time on revenue. Inadequate revenue — or revenue trending in the wrong direction — can provide an early warning of future trouble. But you don’t have to wait for your next audit to assess revenue. You can employ the same techniques an auditor uses to monitor your organization’s financial health. Contributions and grants Start by comparing the donation dollars raised in past periods to pinpoint trends. For example, have individual contributions been increasing over the past five years? What campaigns have you implemented during that period? You might go beyond the totals and determine if the number of major donors has grown. Also estimate what portion of contributions is restricted. If a large percentage of donations are tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials. Pay attention to grant trends,...[ Read More ]
Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy self-employment income and want to contribute substantial amounts to a retirement nest egg. This strategy is geared toward self-employed individuals including sole proprietors, owners of single-member limited liability companies and other one-person businesses. Go it alone With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account. For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for...[ Read More ]
If you have a child or grandchild who’s going to attend college in the future, you’ve probably heard about qualified tuition programs, also known as 529 plans. These plans, named for the Internal Revenue Code section that provides for them, allow prepayment of higher education costs on a tax-favored basis. There are two types of programs: Prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won’t be starting college for some time; and Savings plans, which depend on the investment performance of the fund(s) you place your contributions in. You don’t get a federal income tax deduction for a contribution, but the earnings on the account aren’t taxed while the funds are in the program. (Contributors are eligible for state tax deductions in some states.) You can change the beneficiary or roll over the funds in the program to...[ Read More ]
Now that fall is officially here, it’s a good time to start taking steps that may lower your tax bill for this year and next. One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2022. Many taxpayers won’t itemize because of the high 2022 standard deduction amounts ($25,900 for joint filers, $12,950 for singles and married couples filing separately and $19,400 for heads of household). Also, many itemized deductions have been reduced or abolished under current law. If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction. Bunching, pushing, pulling Some taxpayers may be able to work around these deduction restrictions by...[ Read More ]
High-income taxpayers face two special taxes — a 3.8% net investment income tax (NIIT) and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the taxes and what they may mean for you. 3.8% NIIT This tax applies, in addition to income tax, on your net investment income. The NIIT only affects taxpayers with adjusted gross income (AGI) exceeding $250,000 for joint filers, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. If your AGI is above the threshold that applies ($250,000, $200,000 or $125,000), the NIIT applies to the lesser of 1) your net investment income for the tax year or 2) the excess of your AGI for the tax year over your threshold amount. The “net investment income” that’s subject to the NIIT consists of interest, dividends, annuities, royalties, rents and net gains from property sales. Wage...[ Read More ]
If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions. But not everyone who works from home gets the tax break. Employees who work remotely can’t deduct home office expenses under current federal tax law. To qualify for a deduction, you must use at least part of your home regularly and exclusively as either: Your principal place of business, or A place to meet with customers, clients or patients in the normal course of business. In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes. Notably, “regular and exclusive” use means you must consistently use a specific identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you. Rules...[ Read More ]
If you don’t have enough federal tax withheld from your paychecks and other payments, you may have to make estimated tax payments. This is the case if you receive interest, dividends, self-employment income, capital gains or other income. Here are the applicable rules for paying estimated tax without triggering the penalty for underpayment. When are the payments due? Individuals must pay 25% of a “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day. So the third installment for 2022 is due on Wednesday, September 15. Payments are made using Form 1040-ES. How much should you pay? The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return...[ Read More ]
During the busy holiday season, not-for-profit executives may rely on staffers to purchase gifts and holiday party supplies for the organization. But before you hand over a credit card, you need to make sure that the employee is trustworthy and understands your nonprofit’s credit card use policy. Don’t have a policy? Here’s how to establish one. Limit access Your policy should start with who is authorized to have or use a card. Nonprofits commonly issue cards to their executive directors, program directors and office managers (or other employees responsible for buying supplies). Before issuing a card to an employee — or temporarily handing one to other staffers — consider whether that person really needs it. Most can pay out of pocket and submit reimbursement requests. However, if employees travel or entertain donors regularly on your nonprofit’s behalf, it may make sense to give them cards. Communicate the rules It’s also...[ Read More ]
When you filed your federal tax return this year, were you surprised to find you owed money? You might want to change your withholding so that this doesn’t happen again next year. You might even want to adjust your withholding if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan. Adjust if necessary Taxpayers should periodically review their tax situations and adjust withholding, if appropriate. The IRS has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas such as available itemized deductions, the child credit, the dependent credit and the repeal of dependent exemptions. You can access the IRS calculator here: https://bit.ly/33iBcZV Life changes There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you: Adjusted your...[ Read More ]