Day Traders

Navigating the Tax Landscape for Day Traders

by with No Comment Tax

Day trading, the practice of buying and selling financial instruments within the same trading day, has gained significant popularity in recent years. With the rise of online trading platforms and increased market volatility, more individuals are drawn to the potential profits of day trading. However, along with the potential for financial gain comes a complex web of tax implications. Understanding these tax issues is crucial for anyone considering or currently engaged in day trading. This article explores who qualifies as a day trader, the pros and cons of day trading from a tax perspective, and other noteworthy tax considerations.

Who Qualifies as a Day Trader?

Merely calling oneself a day trader isn’t sufficient for tax purposes. To be recognized as a day trader for tax purposes, individuals must meet specific criteria set by the Internal Revenue Service (IRS). The IRS does not have a formal designation for day traders, but it does provide guidelines to determine if a taxpayer qualifies for trader tax status (TTS). Meeting these criteria can offer significant tax advantages, but it requires adherence to strict guidelines:

Substantial Activity – The individual must engage in substantial trading activity. This typically means executing trades on most trading days, with a high volume of trades. The IRS looks for consistency and frequency in trading activities.

Intent to Profit – The primary purpose of the trading activity must be to profit from short-term market fluctuations, rather than long-term investment gains. According to the IRS, a trader must keep detailed records to distinguish the securities they hold for investment from the securities in the trading business. To do this, the trader must identify the securities being held for investment in their records on the day the trader acquires them (for example, by holding them in a separate brokerage account).

Regularity and Continuity – Trading should be regular and continuous. Sporadic or occasional trading does not qualify.

Time Devoted – A significant amount of time must be devoted to trading activities. This often means spending several hours each day monitoring the markets and executing trades.

Business Setup – While not a strict requirement, having a dedicated office space and maintaining detailed records can support a claim for trader tax status.

Pros of Day Trading from a Tax Perspective

Mark-to-Market Accounting: One of the primary benefits of qualifying for trader tax status is the ability to elect mark-to-market (MTM) accounting. This method allows traders to treat all gains and losses as ordinary income, which, with respect to losses, can be advantageous for offsetting other income. Additionally, MTM accounting eliminates the need to track individual trade dates for tax purposes, simplifying record-keeping.

Deductible Expenses: Day traders with TTS are considered by the IRS to be operating a business, and therefore, can deduct a wide range of business expenses, including home office costs, educational materials, software, and internet fees. These deductions can significantly reduce taxable income. Generally, these expenses are reported on Schedule C (sole proprietor). Gains and losses from selling securities are not self-employment income for purposes of the SE Tax.

Avoiding the Wash Sale Rule: The wash sale rule, which disallows a loss deduction if a substantially identical security is purchased within 30 days before or after the sale, does not apply to traders using MTM accounting. This can be a significant advantage for active traders who frequently buy and sell the same securities.

Retirement Account Contributions: Traders with TTS can contribute to retirement accounts like SEP IRAs or Solo 401(k)s, potentially reducing taxable income while saving for retirement.

Self-Employment Tax: Day traders with TTS are not subject to self-employment tax (Social Security and Medicare taxes) on their gains and losses from selling securities, while this saves tax on the current tax return, it means that the day trader isn’t accumulating an earnings record needed by the Social Security Administration to calculate Social Security benefits at retirement. Thus to some it might belong in the Con category.

Cons of Day Trading from a Tax Perspective

Complexity and Scrutiny: Qualifying for trader tax status requires meeting stringent criteria and maintaining meticulous records. The IRS may scrutinize claims for TTS, leading to potential audits and disputes.

Ordinary Income Tax Rates: While MTM accounting allows for the deduction of losses, it also means that gains are taxed at ordinary income rates, which can be higher than long-term capital gains rates.

Loss Limitations: Without TTS, traders are subject to capital loss limitations, which restrict the amount of losses that can be deducted against other income. This can be a disadvantage in years with significant trading losses.

Other Noteworthy Tax Considerations

State Taxes: In addition to federal taxes, day traders must consider state tax implications. Some states have unique tax rules for traders, and state tax rates can vary significantly.

Record-Keeping: Accurate and detailed record-keeping is essential for day traders. This includes maintaining records of all trades, expenses, and other relevant financial activities. Good record-keeping practices can help support claims for deductions and trader tax status.

Tax Software and Professional Assistance: Given the complexity of tax issues related to day trading, many traders benefit from using specialized tax software or consulting with tax professionals who have experience with trader tax issues.

International Considerations: For traders operating in multiple countries or trading international securities, additional tax considerations may apply. This includes understanding tax treaties, foreign tax credits, and reporting requirements for foreign accounts.

Tax Planning Strategies: Effective tax planning can help day traders minimize their tax liabilities. This includes timing trades to optimize tax outcomes, utilizing tax-advantaged accounts, and exploring entity structures like trading partnerships or S-corporations.

Day Trader Election

The day trader election refers to the process by which a taxpayer elects to use the mark-to-market (MTM) accounting method for tax purposes. This election is significant for those who qualify as day traders, as it affects how their trading activities are taxed.

Making the Election: To make the MTM election, a taxpayer must file a required statement with their federal income tax return. This statement must be filed no later than the due date (without regard to extensions) of the original federal income tax return for the tax year immediately preceding the “election year.” For example, to apply the election to the 2025 tax year, the election must have been made by April 15, 2025.

Tax Issues After Making the Election: Once the MTM election is made, the taxpayer must recognize gain or loss on any security held in connection with their trade or business at the close of any tax year as if the security were sold for its fair market value on the last business day of the tax year. The gain or loss is then taken into account as ordinary income or loss, and the wash sale rules do not apply. Gains and losses are reported on Form 4797 instead of Schedule D/Form 8949.

Day trading offers the potential for significant financial rewards, but it also comes with a complex set of tax implications. Understanding who qualifies as a day trader, the pros and cons of day trading from a tax perspective, and other key considerations is essential for anyone involved in this high-stakes activity.

By seeking professional guidance, day traders can navigate the tax landscape effectively, maximizing their profits while minimizing their tax liabilities. As with any financial endeavor, careful planning and diligent record-keeping are crucial to success in the world of day trading. Contact our office for assistance.

Forms and application for health insurance

A Secret to Lower Taxes: Special Deduction for Self-Employed Health Insurance

by with No Comment Tax

In the labyrinth of tax regulations, the self-employed health insurance deduction stands out as a beacon of relief for self-employed individuals, partners in partnerships, and shareholders in S corporations. This deduction allows eligible taxpayers to deduct 100% of their health insurance premiums from their gross income, providing a significant tax benefit. This article looks at who qualifies for this deduction, the nature of qualifying insurance, and the process of claiming it.

Who Qualifies for the Self-Employed Health Insurance Deduction?

  • Self-Employed Individuals – Self-employed individuals who report a net profit on Schedule C (Form 1040) or Schedule F (Form 1040) are eligible for the self-employed health insurance deduction. This includes freelancers, independent contractors, and small business owners who are not considered employees of another company. The deduction is limited to the net earnings from self-employment, after accounting for the 50% of self-employment tax deduction and contributions to certain retirement plans (but not traditional IRAs).
  • Partners in Partnerships – Partners with net earnings from self-employment, as reported on Schedule K-1 (Form 1065), box 14, code A, can also take advantage of this deduction. The health insurance policy can be in the name of the partnership or the partner.  
  • If the partnership pays the premiums, the premium amounts must be reported on Schedule K-1, Form 1065, as guaranteed payments included in the partner’s gross income.
  • If a taxpayer/partner pays the premiums, and the policy is in the taxpayer/partner’s name, the partnership must reimburse the taxpayer and the premium amounts will be included in gross income as guaranteed payments on Schedule K-1. Otherwise, the insurance plan won’t be considered established under the business. 
  • S Corporation Shareholders – Shareholders who own more than 2% of an S corporation are eligible if the corporation pays their health insurance premiums, which are then reported as wages on Form W-2. The policy can be in the name of the S corporation or the shareholder. If the shareholder pays the premiums and the policy is in their name, the S corporation must reimburse the shareholder, and the premium amounts must be reported on Form W-2 as wages
    • If the S corporation pays the premiums, the premium amounts are included on Form W-2 as wages.
    • If the shareholder pays the premiums, and the policy is in the shareholder’s name, the S corporation must reimburse the shareholder and report the premium amounts on the W-2 as wages. Otherwise, the insurance plan won’t be considered established under the business.

Where is the Deduction Claimed? – The self-employed health insurance deduction is an above-the-line deduction, meaning it reduces the taxpayer’s gross income directly. This advantageous positioning allows taxpayers to benefit from the deduction regardless of whether they itemize deductions or take the standard deduction. The deduction is figured on IRS Form 7206, Self-Employed Health Insurance Deduction, that is attached to the individual’s Form 1040 return. Form 7206 made its debut as part of 2023 returns. Previously, a worksheet in the IRS instructions to the 1040 was used to compute the deduction.

The Tax Benefit – Besides allowing it to be deducted above the line and avoiding the 7½% of AGI medical limitation as an itemized deduction, the SE health insurance deduction also reduces the taxpayer’s AGI. The AGI is frequently used to reduce other tax benefits for higher income taxpayers. This can result in substantial tax savings, making health insurance more affordable for those who are self-employed or small business owners.

What Insurance Qualifies? – To qualify for the deduction, the insurance plan must be established under the name of business, but for self-employed individuals, this means the policy can be in either the individual’s name or the name of the business. For partners and S corporation shareholders, certain conditions regarding the payment and reporting of premiums must be met, as outlined above.

The deduction covers medical, dental, and long-term care insurance premiums for the taxpayer, their spouse, dependents, and children under 27 years of age, even if they are not dependents. Medicare premiums voluntarily paid to obtain insurance in the individual’s name that is like qualifying private health insurance can be used to figure the deduction. I.   

Limitations and Restrictions – While the self-employed health insurance deduction offers significant tax relief, there are limitations.  

  • The deduction cannot exceed the earned income from the business under which the insurance plan is established.
  • The long-term care (LTC) insurance premium part of the deduction is limited based on the age of the person covered by the LTC plan.
  • No deduction is allowed for any month in which the taxpayer was eligible to participate in a health plan “subsidized” by their or their spouse’s employer. The term “subsidized” means at least 50% of the cost of the coverage is paid by the employer.

If you have questions related to this often-overlooked tax benefit, please contact our office.

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Tax Benefits Available to Disabled Taxpayers

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Disabled individuals, as well as parents of disabled children, may qualify for several tax credits and other tax benefits. If you or someone listed on your federal tax return is disabled, you may be eligible for one or more of the following tax benefits:

Increased Standard Deduction – Since a change in the law more than 35 years ago, taxpayers (or spouses when filing a joint return) who are legally blind have been eligible for a standard deduction add-on. Thus, for 2024, if you are filing jointly with your blind spouse, you can add an additional $1,550 to your standard deduction of $29,200; if both you and your spouse are blind, the add-on doubles to $3,100. For other filing statuses, the additional amount is $1,950. While being age 65 or older isn’t a disability, it should be noted that there is also an “elderly” add-on to the standard deduction of $1,550 or $1,950, depending on filing status. These add-ons apply only to the taxpayer and spouse, not to dependents.

Exclusions from Gross Income – Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income (i.e., they are not taxable). Amounts received for Social Security disability are treated the same as regular Social Security benefits, which means that up to 85% of the benefits could be taxable, depending on the amount of the recipient’s (and spouse’s, if filing jointly) other income.

Impairment-Related Work Expenses – Individuals with a physical or mental disability may deduct impairment-related expenses paid to allow them to work.

  • Employees – Although the 2017 tax reform eliminated most miscellaneous itemized deductions through 2025, it retained a deduction for employees who have a physical or mental disability that limits their employment. As a result, they can still deduct the expenses necessary for them to work even when not itemizing deductions.
  • Self–employed – For those who are self-employed, impairment-related expenses are deductible on Schedule C or F.

Impairment-related work expenses are ordinary, necessary business expenses for attendant care services at the individual’s place of work as well as other expenses in the workplace that are necessary for the individual to be able to work. An example is when a blind taxpayer pays someone to read to them work-related documents.

Financially Disabled – Under normal circumstances, one must file a claim for a tax refund within 3 years of the unextended due date of the tax return. For example, for a 2021 tax return, the due date was April 18, 2022, which is when the 3-year clock started running. Thus, the IRS will not issue refunds for an amended 2021 or a late-filed original 2021 return submitted to the IRS after April 15, 2025. However, if a taxpayer is “financially disabled,” the period for claiming a refund is suspended for the period during which the individual is financially disabled.  

What does financially disabled mean? An individual is financially disabled if they are unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.

For a joint income tax return, only one spouse must be financially disabled for the time period to be suspended. However, financial disability does not apply during any period when the individual’s spouse or any other person is authorized to act on the individual’s behalf in financial matters.

Earned Income Tax Credit (EITC) – The EITC is available to taxpayers who are disabled and to the parents of a child with a disability, even when the child’s age would normally prevent the child from being a qualifying child. To be eligible for the credit, the taxpayer must receive earned income, which generally means wages or self-employment income. However, if an individual has retired on disability, taxable benefits received under their employer’s disability retirement plan are considered earned income until the individual reaches a minimum retirement age. If the disability benefits received are nontaxable, as would be the case if the disabled individual paid the premiums for the disability insurance policy from which the benefits come, then the benefits are not considered earned income. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children may qualify for the EITC.

If a taxpayer’s child is disabled, the qualifying child’s age limitation for the EITC is waived.

The EITC has no effect on certain public benefits. Any refund received because of the EITC will not be considered income when determining whether a taxpayer is eligible for benefit programs such as Supplemental Security Income and Medicaid.

Child or Dependent Care Credit – Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse may be entitled to claim this credit. For children, this credit is usually limited to the care expenses paid only until age 13, but there is no age limit or children unable to care for themselves.

Special Medical Deductions When Claiming Itemized Deductions – In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents. They include:

·        Equipment and Home Improvement Expenses – Amounts paid for special equipment or improvements installed in the home may be included as medical expenses deductible as part of itemized deductions, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. Examples of the many eligible home improvement expenses include constructing entrance or exit ramps, widening doorways and hallways, and installing railings and support bars in a bathroom. The cost of permanent improvements that increase the value of the property may only be partly included as a medical expense.
  • Learning Disability – Tuition paid to a special school for a child with severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses eligible for the medical deduction when itemizing deductions. A doctor must recommend that the child attend the school. Fees for the child’s tutoring recommended by a doctor and given by a teacher who is specially trained and qualified to work with children who have severe learning disabilities might also be included.
  • Drug Addiction – Amounts paid by a taxpayer to maintain a dependent, themself or their spouse in a therapeutic center for drug addicts, including the cost of meals and lodging, are included as medical expenses for itemized deduction purposes.
  • Other Medical Expenses – Here are some other medical expenses that apply to individuals with disabilities:  
    • Cost of Braille books and magazines that exceeds the price of regular printed editions.
    • Cost of a wheelchair used mainly for the relief of sickness or disability, not just to provide transportation to and from work, including the cost of operating and maintaining the wheelchair.
    • Cost and care of a guide dog or other animal aiding a person with a physical disability.
    • Cost of artificial limbs and hearing aids.

Exclusion of Qualified Medicaid Waiver Payments – Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income if they meet certain requirements to be considered foster care payments. Even so, the nontaxable income may qualify as earned income for purposes of the care provider claiming the earned income tax credit. Qualified foster care payments are amounts paid under a state’s foster care program (or political subdivision of a state or a qualified foster care placement agency). For more information, please call.

ABLE Accounts – Achieving a Better Life Experience (ABLE) accounts provide a way for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life.

Federal law authorizes states to establish and operate ABLE programs. Under these programs, an ABLE account may be set up for any eligible state resident – someone who became severely disabled before turning 26 – who would generally be the only person who could take distributions from the account. Beginning for years after 2025, the eligibility age increases to 46. ABLE accounts are very similar in function to Sec. 529 plans that are designed for saving for education expenses. The main purpose of ABLE accounts is to shelter assets from the means testing required by government benefit programs.

Individuals can contribute to ABLE accounts, subject to per-account gift tax limitations (maximum $$18,000 for 2024, up from $17,000 in 2023). For years 2018 through 2025, working individuals who are beneficiaries of ABLE accounts are allowed to contribute limited additional amounts to their ABLE accounts, and these contributions can also be eligible for the nonrefundable saver’s credit.

Distributions to the disabled individual are tax-free if the funds are used for qualified expenses of the disabled individual.

For more information on these tax benefits available to disabled taxpayers or dependents, please give this your RBG advisor a call.

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Top 10 Ways to Spot a Tax Scam

by with No Comment Tax

Tax season can be stressful enough without having to worry about falling victim to tax scams. With cybercrime and identity theft becoming increasingly prevalent as more people file their taxes online, it’s wise to be vigilant and aware of potential scams targeting your personal information (and your financial well-being!) 

Here are the top 10 ways to spot a tax scam and protect yourself from becoming a victim:

File Early: Beat scammers to the punch by filing your taxes as early as possible. This reduces the window of opportunity for fraudsters to file a false return in your name. Plus, you’ll probably get your tax refund faster!

Sign Up for an IP PIN: The IRS offers an Identity Protection Personal Identification Number (IP PIN) program, providing an extra layer of security by requiring a unique code for tax filing. Consider enrolling to safeguard your tax return every year.

Beware of Unsolicited Contact: The IRS never initiates contact via email, text, or social media to request personal information. Be wary of any communication claiming to be from the IRS and asking for sensitive data. The agency only sends initial correspondence via the United States Postal Service (USPS).

Verify Caller Identity: If you receive a phone call purportedly from the IRS, verify the caller’s identity. The IRS does not ask for credit or debit card numbers over the phone and will never demand payment via gift cards or cryptocurrency. Furthermore, legitimate IRS agents will identify themselves with their employee ID number as a matter of course.

Watch for Spoofed Numbers: Scammers may use spoofing technology to make it appear as though they’re calling from an official IRS number. Don’t be fooled by the caller ID; always exercise caution when sharing personal information over the phone. 

Know the Payment Process: The IRS only accepts payments in U.S. dollars and will never insist on unconventional payment methods like gift cards or cryptocurrency. If a payment request seems suspicious, verify it directly with the IRS.

Stay Informed: Educate yourself about common tax scams and stay updated on the latest tactics used by fraudsters. Awareness is key to avoiding falling victim to fraudulent schemes. Popular scams can change from one tax season to the next, so do your research annually.

Trust Your Instincts: If something feels off or too good to be true, it probably is. Trust your instincts and err on the side of caution when dealing with unfamiliar or suspicious requests for personal information.

Seek Professional Advice: If you’re unsure about the legitimacy of a communication or suspect you may be targeted by a tax scam, seek advice from reputable sources such as the Identity Theft Resource Center or the Federal Trade Commission. 

Report Suspected Scams: If you believe you’ve been targeted by a tax scam or have fallen victim to identity theft, report it immediately to the appropriate authorities. Prompt reporting can help mitigate the impact of fraud and aid in recovery efforts.

Protecting Yourself Further

Speaking to NBC News, Colleen Tressler, a senior project manager at the FTC’s Division of Consumer and Business Education, shared the importance of taking swift action if you suspect you’ve been targeted by a tax scam. Tressler said, “It’s much easier to stop tax ID theft before it happens than to recover from it.” 

Utilize resources like identitytheft.gov to report incidents of identity theft and access guidance on protecting yourself from various types of fraud. Remember, staying informed and proactive is key to safeguarding your financial well-being during tax season and beyond.

Tax season doesn’t have to be synonymous with anxiety and uncertainty. By staying informed, vigilant, and proactive, you can spot potential tax scams and protect yourself from falling victim to identity theft and financial fraud. Remember, just like with your physical health, prevention is always better than cure when it comes to safeguarding your personal information and financial welfare.

Stay safe and secure this tax season – and every tax season!

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The IRS Is Tackling Tax Evasion With AI

by with No Comment UncategorizedTax

As the current tax season continues, the Internal Revenue Service (IRS) has ushered in a new era of tax enforcement thanks to the power of artificial intelligence (AI). AI tools have taken nearly every industry by storm recently, and even federal tax authorities have realized that these resources can be invaluable in catching tax evaders.

Bolstered by funding from the Inflation Reduction Act of 2022, the IRS is improving its audit processes, particularly in areas where audit coverage has dwindled. Large partnerships, large corporations, and employment tax returns are all under the microscope as the IRS seeks to crack down on tax avoidance, particularly among wealthy companies and high-net-worth individuals.

AI Audit Concerns

While AI presents opportunities for more efficient tax audits, some industry experts have expressed concerns about privacy, bias, and transparency. In a Thomson Reuters report, James Creech, a senior manager for Baker Tilly’s tax advocacy and controversy team, voiced apprehensions about the potential ramifications of AI-driven audits. He cautioned against the possibility of taxpayers being flagged for returns that deviate slightly from the norm, noting that safeguards will be important in this new era of tax enforcement.

On the flip side, Creech did acknowledge the strides made in AI technology, particularly in targeted audits of partnerships. The AI tools employed by the IRS have already led to better issue selection, expediting the audit process and prompting inquiries regarding specific issues.

Future Outlook and Challenges

The IRS’s Strategic Operating Plan for FY 2023 through 2031 showcases a commitment to bolstering enforcement efforts, especially for large partnerships and corporations. However, the human element remains a critical factor in AI implementation. In the aforementioned Thomson Reuters deep dive, Creech pointed out that IRS “audits have been driven by algorithms for a long time,” noting that a “DIF” (discriminant function) score has been used to drive audit selection. Although Creech believes that new AI technology will make audit selection “better and better” in the long run, he still has concerns about  “what does the human being do with [algorithmic information.”

This is, of course, something that federal tax authorities will have to consider moving forward as AI becomes an increasingly important part of the auditing process.

AI and the ERC

As the IRS becomes increasingly reliant on AI, tax practitioners may find themselves navigating new terrain, including an increased number of Employee Retention Tax Credit (ERC) audits. In September 2023, the agency unexpectedly suspended all ERC applications. Then, in December, IRS officials announced a program that allowed taxpayers to voluntarily admit to “mistakenly claimed” pandemic-era tax credits.

The ERC, in particular, presents AI difficulties due to limited data availability. Creech made the point that AI’s effectiveness hinges on the availability of large data sets, making limited programs like the ERC less amenable to AI-driven scrutiny.

Addressing IRS Audit Red Flags

Wealthy taxpayers should be mindful of IRS audit triggers. According to Kiplinger, these red flags include claiming residence in Puerto Rico without substantiation, engaging in offshore asset movements, and significant cryptocurrency transactions. IRS AI algorithms are poised to detect patterns indicative of tax evasion, highlighting the importance of compliance.

While the IRS’s usage of AI technology promises improved tax enforcement and customer service, major change is never without challenges. Questions surrounding algorithmic bias, human interpretation, and data limitations persist – and likely will until far-reaching results of AI technology and taxes are available for assessment.

As the IRS meets the intersection of emerging technology and tax compliance, the onus remains on taxpayers and tax professionals to operate with diligence and integrity. Compliance with tax laws and regulations is important, as always, particularly with the rise of artificial intelligence.

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Seasonal Summer Employees Can Provide Tax Benefit

by with No Comment Firm NewsTax

Summer is upon us, which signals the need for seasonal employees to fill in for workers who are on vacation during the busy months ahead and even for some gearing up for the upcoming hectic holiday season. However, given the current labor shortage, many businesses are facing a tight jobs market. So, it may be time to become creative.

One solution might be hiring family members. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

You might even consider hiring your children to work in your business. Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. Click here for information related to hiring your children in your business and the associated tax breaks.

Another solution might be hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment. Doing so may allow you to benefit from the Work Opportunity Tax Credit (WOTC).

The Work Opportunity Tax Credit (WOTC) is a general business tax 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 or incurs wages to 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:

  • Is in their first year of employment with the business;
  • Is certified as being a member of a targeted group; and
  • Performs at least 400 hours of services for that employer.

However, an employer cannot claim the WOTC for employees who are rehired.

Maximum Credit – Thus, 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.

Who Can Claim the Credit – 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. “Carrying back” the credit means that the tax return filed for the prior year will need to be amended to claim the credit on that return. The procedure is different for eligible tax-exempt employers; please contact this office for details.

Qualified Employees – An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups:

  • Qualified IV-A Recipient (relates to Temporary Assistance for Needy Families (TANF))
  • Qualified Veteran
  • Qualified Ex-Felon
  • Qualified Designated Community Resident (DCR)
  • Qualified Vocational Rehabilitation Referral
  • Qualified Summer Youth Employee
  • Qualified Supplemental Nutrition Assistance Program (SNAP) Recipient
  • Qualified Supplemental Security Income (SSI) Recipient
  • Qualified Long-Term Family Assistance Recipient
  • Qualified Long-Term Unemployment Recipient 

Pre-screening and Certification – 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. The instructions to Form 8850 provide details about the targeted groups.

Please contact this office for additional information and assistance to determine if hiring family members or hiring individuals who qualify for the WOTC is appropriate for your business.

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6 Tax Tips for 2023

by with No Comment Tax

It’s that time of year again: tax time. And while many of your money-saving options might be limited after Dec. 31, there’s still a lot you can do to help lower your taxes, save money and avoid penalties. Here’s a quick snapshot.

Contribute to Your Retirement Accounts

Yes, doing this will help lower your tax bill. So, if you haven’t already maxed out your contribution for 2022, you can still do so up until April 18 for a traditional IRA (deductible or not), and a Roth IRA. If you have a Keogh or Simplified Employment Pension Plan (SEP), you can apply for a tax filing extension until Oct. 16; however, it’s best not to wait that long to contribute to those plans so you begin tax-free compounding. Plus, when you make a deductible contribution, your money will compound tax deferred. For instance, if you put away $5,000 a year for 20 years with an annual return of 8 percent, your $100,000 in contributions will grow to more than $250,000. Do you see these numbers? Gotta love this.

File a Form 2210

So last year, if you had an income windfall that arrived after Aug. 31, 2022, and you think you might owe taxes on it, you can file what is called an Underpayment of Estimated Tax. It will help annualize your estimated tax liability and possibly reduce any extra charges. That said, don’t try to pay too much. It’s better to owe the government than to expect a refund. As we all know, the IRS doesn’t give you any interest when they borrow money from you.

Itemize Your Deductions

While it’s so much easier to take the standard deduction, you could save a boatload when you do this, especially if you’re self-employed, own a home or live in a high-tax area. Here are couple ways to figure out if this option is right for you.

  • When your qualified expenses add up to more than the 2022 standard deduction of $12,950 if you’re single and $25,900 if you’re married.
  • If the portion of your medical expenses exceeds 7.5 percent of your 2022 adjusted gross income.

Take that Home Office Deduction

Good news: eligibility rules for claiming your home office deduction have been loosened, so for small business owners this is huge. And the rules apply even when you don’t have clients visit you in your office space. Here’s what you can write off:

  • Rent or mortgage interest
  • Utilities
  • Insurance
  • Repairs or maintenance
  • Depreciation
  • Housekeeping

Note: The percentage of these costs that are deductible are based on the square footage of your office within the context of the total area in your home.

Provide Dependent Taxpayer IDs

Don’t forget to enter Taxpayer Identification Numbers (usually Social Security numbers) for your children or other dependents. If you fail to do this, the IRS will deny you these important credits that might rightfully be yours, such as the Child Tax Credit. However, you’ll want to be careful if you’re divorced. Only oneof you can claim your kids as dependents. If you and your ex both claim your child, your return process will be detoured and they’ll be contacting you for more information. If you’re a new parent, be sure to get your child’s Social Security card as soon as you can so you’ll have it ready at tax time.

Consult a Professional

If you feel you need help or if your numbers aren’t where you’d like them to be, get in touch with your trusted tax specialist. You might be missing some critical info in your return that could help lower your tax obligation.

Taxes are a necessary part of life in the United States, so make sure you have all the right tools when diving in. When you’re well-equipped, chances are this process won’t be as much of a chore.

Sources

https://www.irs.gov/newsroom/how-small-business-owners-can-deduct-their-home-office-from-their-taxes#:~:text=The%20home%20office%20deduction%2C%20calculated,%2C%20maintenance%2C%20depreciation%20and%20rent

https://turbotax.intuit.com/tax-tips/tax-planning-and-checklists/tax-tips-after-january-1st/L8fY6OyFl

person checking personal finances

5 Financial Resolutions You Can Live With

by with No Comment Tax

For the most part, New Year’s resolutions are hard to keep because many times you either list too many things or ones that aren’t manageable for the long haul – especially those that involve money. Here are a few simple tricks to help you make changes that are bite-sized, easy to implement, and more likely to stick.

Do a five-minute daily money check-in. Life is so busy that sometimes it’s easy to just spend money, then move on to the next task at hand. You might think, “I’ll check my bank balance later,” and then you never do. But if you’re serious about getting a handle on your finances, you might want to try this one thing: give yourself a “money minute.” Select a time of day, maybe after dinner, to log into your bank account. Take stock of what you spent money on. Did you really need that bottled water? That designer coffee? This way, you can nip those small (perhaps unnecessary) expenditures in the bud and make smarter choices in the coming days.

Get a money-saving app. One of the best ones to help you achieve financial goals is Ibotta. Let’s say you want to buy a new pair of running shoes; a good brand that’ll last. With this app, you’ll save on everyday purchases and when you’ve earned enough cash back, you can cash it in for a gift card from your selected store and get what you want.

Consider micro savings goals. This technique is actually about rewarding yourself financially for changing your behavior. For instance, every time you go to yoga or Pilates, stash away $5. Or if you wake up early or finish a difficult task, stash away $10. When you’ve saved enough money to buy whatever it is you’ve decided on beforehand, you’ve not only avoided the trap of putting your goodie on credit (and paying interest) but also most likely started a new, healthy habit.

Set up an automatic savings plan. After you’ve paid taxes, insurance premiums, and perhaps even your retirement account, you might consider tucking away money for yourself that you’ll never miss. Every. Single. Paycheck. That’s right. When you automatically have a set amount deducted every time you get paid, over time you’ll accumulate a bucket of money to use in whatever way you deem important – it could be saving for a vacation or a new car. It could also be a fund for emergencies. The point is, it’s an easy, failsafe way to save and achieve your goals.

Do one frugal thing a day. This is all about a little bit of forethought and then just taking action. And when you adopt this mindset, you’ll be working daily toward your financial goals like paying off debt, saving money to quit a job you hate, or even have enough extra cash to invest in real estate or whatever strikes your fancy. Here are a few things to consider: drink more water than soda. Eat at home. Use public transportation instead of driving when you can. But this just scratches the surface. For more smart ways to start living frugally, check out this super helpful article. You’ll be surprised at all the ways you can cut back and save.

All of these tricks are easy and, in some cases, no-brainers. When you take a few minutes, set your mind on what you want, anything’s possible. Here’s to fulfilling your dreams in the New Year! 

Sources: https://lifeandabudget.com/11-financial-resolutions-that-will-stick/