Mesa Money Minute: Recent Episodes
Gina Tallman & Donna Morrall
We're local financial professionals who produce this daily feature at the studios of KAFM Community Radio in Grand Junction, Colorado. We offer up short, 1- to 2- minute segments on tax, finance, economy, markets and other financials topics.Image credit: President Washington by Laakso for FreeVector.com
If you're a freelancer, you might be curious about potential tax deductions. Generally, any expense that’s ordinary and necessary for your business operations can be deducted, though there are many exceptions in the tax code. One commonly overlooked deduction for sole proprietors is the home office deduction. If you use a space in your home regularly and exclusively for business, you can deduct a portion of your mortgage interest or rent, utilities, insurance, maintenance, and HOA dues. Another useful deduction for small business owners is the business use of your cell phone. If you have multiple lines, break out the portion of the bill for your line and estimate a reasonable business use percentage, like 25% or 30%. Additionally, don’t forget about the mileage deduction for your personal vehicle. Keep a digital or paper log of your business drives, as commuting between your home and place of work is not deductible. Consult your CPA to ensure you’re not missing any valuable business deductions.
Whether you're a sole proprietor, a partnership, or a small corporation, you're probably wondering what you can "write off" or deduct from your taxes. Any expenditure that is ordinary and necessary to the operations of your business can generally be deducted, with many exceptions noted in the code. A commonly overlooked deduction available for your sole proprietorship is the use of a home office. If you use a space in your home regularly and exclusively for your business, you can deduct a portion of your mortgage interest or rent, utilities, insurance, maintenance, and HOA dues. Another useful deduction almost all small business owners can take advantage of is the portion of your cell phone that you use for business. If you have multiple lines on your account, you should break out the portion of the bill that is only for your line, and estimate a reasonable business use portion such as 25 or 30% of that line. Another simple but valuable deduction is mileage on your personal vehicle. You will need to substantiate this deduction should you be audited, so be sure to keep a digital or paper log of your business drives, and remember that commuting between your home and place of work is not deductible. Speak with your CPA about other business deductions you might be overlooking.
The gig economy or sharing economy is a term for the activities in which people earn income by providing services or goods on an on-demand basis, usually connected through digital platforms. Income from the gig economy is taxable even if it is part time, temporary, not reported on any tax form like a W-2 or 1099, or paid in any form including cash, crypto, or with a trade. If you're employed in the gig economy, be prepared to track and report your income and expenses just like any other business. You are required to file a tax return if you have net earnings from gig work or other types of self-employment of $400 or more. As a gig worker who is an independent contractor, you will be required to pay both income and self-employment taxes on your income, and you may need to pay quarterly estimated taxes if you do not have a job where you can have additional withheld from your check to cover your gig work income. The upside is that you can deduct expenses related to your work, such as mileage on your vehicle, the portion of your cell phone you use for work, and possibly even a home office. Consult your CPA for more information on the taxation of your gig!
For the second year in a row, many Colorado residents are eligible for a refundable state sales tax refund credit, which is a mechanism to refund tax revenue in excess of limits established by the Taxpayers' Bill of Rights amendment, or TABOR, added to the Colorado Constitution in 1992. The credit is allowed only to those individuals who lived in Colorado for the entire year. In order to claim the credit, taxpayers must file a Colorado income tax return or a Colorado Property Tax/Rent/Heat Rebate Application. If the taxpayer has either a Colorado tax liability or Colorado withholding, they are still eligible to claim the credit on an extended return until the due date of the return. Unfortunately for many seniors and low income individuals, if an individual had neither Colorado withholding nor Colorado tax liability, they must have filed their tax return or property tax rebate form by the original due date of April 18th, even if they extended their federal income tax return. Some industry groups such as the Colorado Society of CPA's has brought the unfairness of this rule to the attention of the Colorado Department of Revenue and to lawmakers and there is some hope for a resolution by year-end.
August means back to school! There are lots of tax benefits for higher education. The American Opportunity Credit is a credit of up to $2,500 per year for the first four years of college. The Lifetime Learning Credit is a credit of up to $2,000 per year for years after the first four years of higher education. Child not college age yet? You can still get a tax benefit by setting aside savings to a Qualified Tuition Program, also known as a 529 plan. Contributions to eligible plans are deductible for state purposes, and withdrawals from such an account are not taxable if used for education expenses. Withdrawals from 529 plans can now also be used for qualified K-12 expenses, up to $10,000 per year. There are other tax benefits for education, including penalty-free IRA withdrawals, student loan interest deductions, and gift-tax exceptions. Speak with your CPA about the methods that are best for your situation.
The taxation of gifts is complex, but the vast majority of us will never actually pay gift taxes, at least under current tax code. Gifts are generally not taxable to the recipient, however, if a gift of an asset such as a rental property is made, and then that property begins generating income, that income will be taxable to the new owner of the property (the recipient). Any potential gift taxation is the responsibility of the giver, not the recipient. There is currently a gift tax exclusion of $17,000 per year per recipient, meaning that you can gift that amount to an unlimited number of people with no tax or reporting consequences. You can also split gifts with your spouse, meaning a married couple can gift up to $34,000 per year per recipient with no reporting requirement. This is known as the annual exemption. Gifts for medical or education expenses paid directly to an institution are not counted against the annual gift exclusion. Once you get above those limits, you must report those gifts on a Form 709 Gift Tax Return, which is due on April 15 of the year following the year of the gift. Generally any gifts you give above the limit use up what is known as the Uniform Lifetime Credit. This credit essentially allows each individual to transfer, either by gift while living or by bequeathment after death, up to $12.92 million over their lifetime. Gifts above the annual exclusion amount eat into this limit, which is adjusted for inflation every year. Unless Congress acts, this exclusion drops to $7 million in 2026.
What is the best account to use for your retirement savings, a 401(k) or an Individual Retirement Account (IRA)? Each has pro's and cons. With a 401(k) you can set aside more each year (up to $22,500 in 2023, or $30,000 if you're over age 50); it is easy for an individual to set up (usually your employer takes care of deducting your contributions from your paycheck each month and depositing them to the account); there are no income limits; and often employers offer matching contributions to boost your savings. IRA's are a bit more flexible than 401(k)'s (you can make contributions until the filing deadline [usually April 15]) whereas generally 401(k) contributions must be made by December 31; you can contribute any type of earned income to an IRA so you don't have to rely on your employer to offer the plan. However, you are responsible for setting aside and making your contributions; the max contribution to the plan is lower ($6,500 in 2023 or $7,500 if you're 50 or older); and there are income limits that apply if you or your spouse are also covered by an employer plan. There are also many other types of retirement plans to consider, such as SEP's and Simples. It's best to confer with your advisers to determine which plans are best for your circumstances.
Biden signed the Fiscal Responsibility Act on June third, ending the debt limit crisis. The act increases the federal debt limit and suspends the federal debt limit until January 2025. It also ends the current student loan repayment pause, meaning that student loan repayments will resume towards the end of the summer. It also cuts about $20 billion of the $80 billion funding provided to the IRS by the Inflation Reduction Act. This could mean that the anticipated improvements in IRS taxpayer services will be delayed or canceled. What this means for you is that you can likely continue to expect long delays in processing, especially of paper filed returns and requests, and that if you have an IRS issue, expect it to take many months to resolve. The IRS, however, has said that it will continue with its plans to ramp up enforcement, and is focusing on high net worth individuals for audit selection. Ideally what this means is that it can shift some focus away from audits of low- to medium-income taxpayers.
June is an estimate month! Generally individuals and businesses must submit their income tax payments to the IRS and state agencies four times per year. There is an exception if your tax bill, after withholding and other payments, is less than $1,000. However, if you don't meet this or other exceptions then there can be penalties for not paying estimated tax payments. The penalty rate is similar to interest and is applied on a daily basis. Currently the penalty rate is 7%, so it is similar to paying 7% annually on a credit card. These penalties are usually calculated and paid with your tax bill at the end of the year. To calculate your estimated tax payments, calculate the tax due on your estimated taxable income for the year, subtract any withholding or other payments, and divide the result by four. This is the amount you should pay each quarter. There is also a safe harbor available, known as protective estimates, in case you cannot or don't want to estimate your current year's tax liability. The safe harbor is 100% of last year's tax liability, or 110% of last year's tax liability if your income was more than $150,000. Protective estimates will prevent penalties on not paying estimated tax payments, even if you owe much more than you paid. Consult with your CPA for assistance calculating and paying estimated tax payments.
It's graduation season! What if you didn't end up needing all your college savings for college? Maybe you got scholarships, went to a free school overseas, or decided not to pursue higher education after all and now you're wondering what do with the funds leftover in your 529 plan. Starting in 2024, the SECURE Act 2.0 passed last year allows you to convert some of the funds in your 529 tuition plan to a Roth Individual Retirement Account, so you can jump start your retirement savings. There are some limitations however; the funds must have been in the account for at least five years, the transfer must be directly from the 529 plan to the Roth, the annual limit for Roth contributions applies (which is $6,500 for 2023), and the lifetime maximum is $35,000. Contact your CPA if you have questions about this strategy.
On May 3, the Federal Reserve once again raised interest rates by 0.25%, the latest in a series of rate hikes. However, they also hinted that they may be done raising interest rates for the time being. The latest rate hike was the 10th in a row, starting in March of 2022, in an attempt to curb the rampant inflation in the economy after the the pandemic. Inflation has slowed, from a high of 9.1% in June of 2022 to 4.98% in March. While this is still greater than the fed's 2% target, the fed has to balance managing inflation with the possibility of tipping the economy into a recession. What does all this mean for you? It means that rates for savings and CD's may be at a zenith. It may be a good time to consider a CD if you have some extra cash you won't need for some time. Speak with your banker and investment advisor before making any investment decisions.
Deadlines are approaching for employers to register for their Colorado SecureSavings accounts or to certify their exemptions. Colorado SecureSavings is a new state-sponsored retirement plan that is required for employers without an existing retirement plan who have at least 5 employees. For employers with 5-49 employees, the deadline to register is May 15. For employers with 50 or more employees, the deadline to register has already passed. If you haven't received an email from the state with instructions to register, contact the program office at 1-844-692-1073 or clientservices@ColoradoSecureSavings.com. This program requires employers to withhold 5% of employees' pay and contribute it to the plan, which creates a Roth IRA in the employee's name, unless the employee opts out. Employers must begin the withholding 30 days after registering. Whether you're an employer or an employee, more information can be found at www.coloradosecuresavings.com.
April 30 to May 6 the Small Business Administration sponsors the National Small Business Week. Did you know that there are 33 million small business in the US and that small businesses create two-thirds of net new jobs, employ nearly half the workforce and produce 40% of our economic output? The SBA uses this week to honor and celebrate small businesses with awards and recognition. Visit SBA.gov for more information on the winners and to learn more about the programs and support the SBA offers small businesses.
A common misconception regarding taxes is that a 40% tax rate means that you will pay 40% of your taxable income in taxes. In fact, the United States has a graduated income tax system, which means that your top, or marginal, tax rate only applies to the income in that bracket. For example, many people believe that a 24% tax rate on $100,000 of taxable income would equal $24,000 in taxes. In fact, the 24% would only apply to the last $5,000 of income. The first $11,000 of income would be taxed at 0%; the next $33,000 of income would be taxed at 12%; and the next $50,000 would be taxed at 22%. This would equal approximately $17,000 in taxes. The effective rate, which is the average rate you pay, is 17% even though the marginal rate is 24%. Please note the figures in this episode are based on single filing for the tax year 2022 and are for illustrative purposes only.
Do you know the difference between taking the standard deduction and itemized deductions? It can be helpful in understanding your tax return and planning for taxes to know when you would itemize deductions instead of taking the standard deduction. The standard deduction is a dollar amount, adjusted for inflation each year, by which every American taxpayer gets to reduce their income to calculate their tax liability. The idea of the standard deduction was introduced in the 40's to simplify tax preparation - instead of having to tabulate piles of receipts, taxpayers could just take the $500 standard deduction. In 2022 the standard deduction has increased to $25,900 for a couple under 65. They can take that deduction without tracking or documenting a single penny of deductions. On the other hand, some people have much higher deductions than that, and find it is worth the extra hassle to track and document those receipts. This is called "itemizing" deductions. Expenses that can be included are significant medical expenses, state and local taxes subject to a $10,000 cap, mortgage and investment interest, charitable contributions, and other less common expenses. Understanding whether and how much your itemized deductions would be compared to your standard deduction will save you time and money.
The IRS has not yet announced when it will begin accepting e-filed returns for the 2023 tax season, but it will likely be towards the end of January or beginning of February. That doesn't mean you can't start getting ready now! Most tax forms are due to be postmarked to the recipients by January 31, so keep a keen eye on the mail in the next few weeks. Also take note if any of your forms are selected for electronic delivery - watch your email inbox and junk folder for notifications that those are ready to view. If you use a tax preparer, also watch your mail or email for their tax organizer which will help you collect all the info your preparer needs to do your return in the most efficient manner. Note any deadlines your preparer has for providing them documents. If you make quarterly estimate payments, the fourth one for 2022 is due January 17, so make sure you get that payment in. Happy Tax Season!
The IRS announced last week that it finished processing corrections on 14 million 2020 tax returns for taxpayers who overpaid their taxes on unemployment compensation they received that year. The American Rescue Plan Act which became law in March of 2021 excluded up to $10,200 in 2020 unemployment compensation from taxable income for individuals and married couples whose gross income was less than $150,000. Many people had already filed their tax returns when the law became effective, so IRS automatically corrected those returns and is issuing approximately 12 million refunds. If you receive an unexpected check from the IRS, as always, check the IRS explanation, which will probably come separately from your check, against your records, and contact a qualified accountant if you don't understand the changes.
Courts have issued decisions which have halted the Biden administration's plan to cancel up to $20,000 in federal student debt for more than 40 million Americans. The Biden administration has appealed the decisions and is attempting to reinstate the program; however, in the meantime, the stay on student loan repayments has been extended until June 30, 2023, though you can continue to make payments on your loans if you wish. More than half of eligible borrowers had applied for the program before it was paused, and the Department of Education had approved some 16 million applications. For now, the application has been closed. If you've already applied, the Department will hold your application and process it if the court decisions are overturned. Subscribe to updates at studentaid.gov.
Beginning on January 1, 2023, Colorado employers will be required to start withholding .45% of their employees' wages to contribute to the new Family and Medical Leave Insurance (FAMLI) program. Employers with more than 10 employees will also contribute .45% of wages to the program. The funds will be used, beginning in 2024, to pay employees for leave taken for the birth or adoption of a child or for caring for a family member with an illness, or other approved uses. The employer portal is open for enrollment now and it's recommended to get the account set up as soon as possible so you're ready for the payroll deductions beginning next month. Self-employed individuals are not required to participate in the program but may do so if they wish. Visit famli.colorado.gov to set up the portal or for more information.
Beginning in early 2023, most employers without a retirement plan offering will be required to enroll in the Colorado SecureSavings program and automatically sign up their employees for a 5% payroll deduction to contribute to their savings accounts. The funds will be contributed to a Roth IRA for the employee. Employees will be able to opt out or change their savings rate if they wish. Employers will receive an official registration notice in early 2023 which they will use to set up their online account, where they will enroll their employees. There is no employer contribution or cost except for the cost of setting up and maintaining the account. Go to www.coloradosecuresavings.com for more information.
This week is the 7th annual National Tax Security Awareness Week which is a joint effort by the IRS, state tax agencies, and the tax industry to urge increased security measures as fraudsters exploit COVID-19 concerns. The IRS is warning people to be on the lookout for scammers using fake charities during the holiday season when folks are expressing their generosity as well as year round. Some tips to avoid fake charity scams include, don't give in to pressure. Scammers often use the technique of urgent need to pressure people into making a contribution. Be wary about how a donation is requested. Don't work with charities that ask for donations by giving numbers from a gift card or wiring money. Don't give more than needed. Personal information can be just as valuable to scammers as money. Never give out your social security number, credit card numbers, or PIN numbers. Visit irs.gov/securitysummit for more tips on protecting yourself from identity theft.
If you own a small business, or even if you don't, you may be getting a lot of solicitations advising you that you may qualify for the Employee Retention Tax Credit (ERTC). Be wary of these "ERC Shops" that may advise you to claim the credit when you may not qualify. These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the credit. Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERTC could result in taxpayers being required to repay the credit along with penalties and interest, and chances are that by the time that auditor comes around, those ERC Shops will be nowhere to be found. If you think you may qualify for a tax credit, discuss it with a qualified professional like your CPA.
Now that tax season 2021 is finally in the books, it's time to start thinking about next year! The last couple of months of the year are an excellent time to revisit your tax plan and make any last-minute adjustments. It's a good time to estimate your 2022 tax liability based on how you've done in the year so far, to be prepared for any extra payments that may be needed. There are online tools to do this such as the one on efile.com, or get with your CPA. Review your charitable goals and make any additional gifts by December 31. If you haven't completed a W-4 at your job since 2019 when the form was updated, request a new one and complete it using the calculator at irs.gov. Also do so if you have any life changes, such as getting married or having a child. Designate a safe place, such as a bin or a folder to put your tax documents as they start coming in. Determine if you can or should make any additional contributions to your 401k. Contact your CPA if you have planning issues beyond what you can handle on your own!
The Inflation Reduction Act, signed into law by the President on August 16, provides significant expansion of individual tax credits for green energy. Consumers may receive tax credits on new and used clean vehicle purchases. The federal credit for up to $7,500 for new vehicles and $4,000 for used vehicles. The solar credit increases the credit amount from 26% to 30% for solar panel installation costs. There is also a 30% credit for installing efficient exterior windows, skylights, doors, water heaters, and other items. There is also a $4,000 credit for an electric load service center upgrade, a $2,500 credit for electric wiring, and a $1,600 credit for insulation, air sealing, and ventilation. Consumers may also be eligible for up to $14,000 in rebates on purchases of certain efficient electric appliances such as a heat pump water heater, a heat pump for space heating or cooling, an electric stove, or an electric heat pump clothes dryer. There are income limits on most of the credits so do your research before making any purchases.
The 2017 federal Tax Cuts and Jobs Act (the TCJA) went into effect on January 1, 2018. Among other things the TCJA capped the amount of state and local taxes (or SALT) that an individual could deduct to $10,000. This cap extends to individual owners of pass-through entities because business income generated from pass-through entities like LLC's, partnerships, and S-Corps, is assessed at the individual owner level rather than at the business level. This limitation does not apply to C-Corporations. On June 23, 2021, Governor Polis signed into law the "SALT Parity Act" which allows owners of Colorado pass-through entities to obtain substantial federal income tax savings. The SALT Parity Act allows pass-through entities to elect to be taxed at the entity level, thereby bypassing the $10,000 SALT cap and allowing business owners to obtain substantial federal income tax savings. On May 16, 2022, Governor Polis signed another bill that makes the election available going back to 2018. Speak with your CPA about whether making this election is appropriate for your business, and what needs to be done differently to make sure your taxes are paid on time.
Two and half years into the pandemic, the IRS has finally announced they will provide some automatic late filing penalty relief. The tax community has been lobbying for automatic relief for penalties due to the burdens placed upon taxpayers and tax professionals during the pandemic. Staff shortages, service outages, constantly shifting tax regulations, and illness caused many taxpayers and tax professionals to be unable to timely file tax returns over the last 30 months. IRS announced last week that it is providing automatic relief for late filing penalties for 2019 and 2020 tax returns. This covers most federal (but not state) income tax returns for businesses and individuals. Taxpayers do not need to do anything to receive the relief and should receive letters in the coming months communicating the penalty relief. The relief does not apply to late payment penalties or any penalties on state returns or payroll returns, among other things. Importantly, if you have not filed a 2019 or 2020 tax return, file it by September 30 to be eligible for the penalty relief.
On August 16, President Biden signed into law the Inflation Reduction Act. This sweeping bill includes some changes to invididual income taxes, including extending the Premium Tax Credits for marketplace health plans through 2024 (they were originally scheduled to end this year). It modifies, extends, and creates a variety of tax credits for green energy. For busineses, it imposes a 15% minimum tax on corporate books income for corporations with profits over $1 billion. And increases the research & development tax credit for small businesses to $250,000. It expands IRS funding by $80 billion over 10 years and includes some provisions expected to bring down the cost of prescription drugs.
To alleviate the nationwide issue of low retirement savings for individuals in Colorado, the state is implementing a public retirement savings plan. Employers who have more than 4 employees and don't offer a retirement account, will be required to enroll in the program and auto-enroll each employee. The default savings rate will be 5% of wages, but employees can change that rate or opt out completely. There is no employer match or cost, other than the cost of setting up and maintaining the program. If you have a retirement plan in place, you may be required to apply for exemption from the program by providing documentation that you have a plan. Employers may receive notices from the Colorado State Treasurer's office in 2023 requesting that you enroll in the program or provide the documentation that you have a retirement plan. Respond promptly to all requests.
All the buzz is about the federal student loan forgiveness program! In a nutshell, if you have federal student loans and make less than $125,000 if you are single or $250,000 if you are married or head of household, then you will qualify for $10,000 student loan forgiveness. If you received a Pell grant when you were in school, you will qualify for $20,000 forgiveness. If you are on an income-based repayment plan, the Department of Education may already have your income information on file and may automatically grant the forgiveness. If not, you will need to apply. The application is expected to be released in early October, and you can sign up on ed.gov/subscriptions to be notified when it is. Visit studentaid.gov for more information.
Last week we gave you the first four tips for audit proofing your small business. Here are four more valuable tips. (5) Use technology. The options are endless and your CPA can help you decide what's best for you. (6) Understand what is deductible. Of course you will need your CPA's help from time to time, but having a general understanding of how tax deductions work will help you stay organizer. (7) Remember, only your business can make business deductions. If your employees spend their own money on business expenses, they cannot deduct them. Try a reimbursement policy instead. (8) Track donations meticulously. Donation expenses are one area the IRS looks at thoroughly. Be sure to keep the thank you letters the organization sends you.
Audits are an unfortunate fact of life for small business owners. While the chance of an audit in any given year is low, there's a decent chance that over the life of your business you'll be subject to at least one type of audit of your business records. Here are eight tips to ensure you're prepared in case of an audit: (1) choose a strategy and stick with it! Are you going to use technology, a professional, old fashion paper ledgers? Figure out what works for you and keep it up. (2) Know what to track: income, expenses, assets and liabilities. Make sure your strategy covers all items. (3) Store your information in one place. You need to keep information for at least seven years, so get organized with your documentation system, whether that's a filing cabinet or the cloud. (4) Keep your business and personal accounts separate. If you do one thing for your small business recordkeeping, do this. Tune in next time for the rest of the tips.
Last week, Sen. Manchin agreed to a pared-down version of Biden's Build Back Better legislation. The bill is called the Inflation Reduction Act and leaves out most of the tax provisions of Biden's proposal. There are no increases in individual tax rates, however the child tax credit, which was expanded for 2021, will also not be expanded going forward. The most significant tax change is the 15% minimum tax on financial profits to large corporations. This refers to the financial income reported to shareholders rather than the taxable income reported to the IRS, which under current law is frequently vastly different. The bill also attempts to end the much maligned "carried interest" tax benefit. There is also $370 billion of energy and climate-change provisions, and roughly $80 billion of IRS funding, in the hopes of raising revenue through increased enforcement action. This bill is not yet law and it remains to be seen whether it will garner enough support to make it through Congress so stay tuned.
A lot of real estate investors are converting their long-term rentals to short-term rentals, and renting them on websites such as AirBNB and VRBO. Before making the switch, it's important to understand the tax implications. First off, localities (including the City of Grand Junction) often charge lodging tax in addition to sales tax. They may also require a special permit be obtained. Check with the city your property is located in to learn about tax and licensing requirements. Additionally, if you provide significant personal services, such as daily cleaning, recreational, or information services to your tenants or guests, the income from the property might be considered self-employment income subject to the 15% self employment tax. Consult with your CPA before deciding to convert to a short-term rental to make sure you understand the costs and benefits of doing so.
With the boom in real estate values in the last couple of years, many casual and professional real estate investors are looking for ways to save in taxes on their real estate investments. One strategy is to complete a cost segregation study. Cost segregation studies, or "cost segs" for short, are prepared to allocate or reallocate building costs to tangible personal property. A cost seg identifies and reclassifies personal property from real property assets to shorten the depreciation time for tax purposes. This, in turn, reduces current income tax obligations. Personal property, or section 1245 property, includes assets that are non-structural elements. Other property such as land improvements can also be depreciated with shorter lives. The deduction created from the cost seg will directly reduce taxable income. Cost segs must be completed by a qualified cost segregation provider. Reach out to your CPA to ask if a cost seg is right for your situation.
Effective July 1, Colorado imposes a retail delivery fee on all deliveries by motor vehicle to a location within Colorado with at least one item of tangible personal property subject to state sales or use tax. The retailer that collects the sales tax on the sale sold and delivered, including delivery by a third party, is liable to collect and remit the retail delivery fee. Deliveries include when any taxable goods are mailed, shipped, or otherwise delivered by motor vehicle to a purchaser in Colorado. The retail delivery fee is due at the same time as your sales tax return. Returns are generally filed on a monthly basis and must be filed on or before the 20th day of the month following each reporting period. Retailers permitted to file state sales tax return on a quarterly, annual or other basis will file the retail delivery fee return on the same schedule. The retail deliver fee is calculated as $.27 per sale. If every item in a retail sale is exempt from sales tax, the delivery is also exempt from the retail delivery fee.
On May 23, 2022, Governor Polis signed a new law to give Coloradans a tax rebate of $750 for single filers and $1,500 for joint filers this summer. If you filed your individual 2021 tax return by June 30, you will receive your check by September 30. If you extended your tax return and file it by October 17, you will receive your check by January 31, 2023. To prevent fraud, all rebates will be issued by check, not direct deposit. You must file either a Colorado tax return or a property tax/rent/heat credit rebate in order to receive the rebate. You must have been a full-year Colorado resident in 2021; you do not qualify if you moved into or out of Colorado in 2021, or if you moved into Colorado in 2022. Go to colorado.gov or ask your CPA for more information.
Federal and state departments of labor and other taxing authorities are cracking down on the misclassification of workers. Workers in your business can be classified as either independent contractors or employees. Properly classifying workers is important because misclassifying a worker as an independent contractor can open you up to back payroll taxes, penalties, and interest; whereas misclassifying a worker as an employee can cost you in payroll taxes and benefits. Determining whether a worker is an employee or a contractor is a facts and circumstances test, meaning there is not a hard line definition. Instead, the authorities look at a number of factors to try to understand the big picture. There are three general categories of factors: behavioral control, financial contraol, and relationship control. They will be looking at things like who sets the schedule, whether the worker performs the same type of work for other businesses or the public, and who buys supplies and equipment, among other things. The more control the business has over the work, the more likely the person will be classified as an employee. The state department of labor and employment puts particular weight on whether the worker publicly markets their services to other businesses.
Colorado voters approved Proposition 118 in November of 2020, creating a state-run Paid Family and Medical Leave Insurance (FAMLI) program. FAMLI will start providing benefits to employees beginning January 1, 2024. Eligible employees will receive up to 12 weeks of paid leave in order to take care of themselves or their family during life changes such as the birth or adoption of a child or taking care of a family member with a serious health condition. Both employers and employees will pay a premium for the program, equalling about a half a percent of wages each. Beginning January 1, 2023, employers will need to begin withholding these premiums from employees' checks and remitting the premiums to the state. Small businesses with fewer than 10 employees will not have to pay the employer's portion of the premiums, but will still need to withhold the employee portion and remit it to the state.
A conservatorship is a court-ordered guardianship over an individual's financial life. These are set up when an individual lacks the capacity to manage one or more areas of their own finances. An interested party such as the adult child of an elderly person will bring the case to the court, and a judge will determine whether a conservatorship is necessary, and will appoint a conservator. Conservatorships can be limited, which applies to only specific matters, or full, which grants a conservator the rights and responsibilities regarding all financial aspects of an individual's life. The conservator has an obligation to act in the best interest of the protected person also known as a conservatee. Any adult can be a conservator, and they are usually a family member, although professional conservators who perform the duties for a fee also exist. The conservatorship is monitored by the court, with periodic reporting required. Before obtaining a conservatorship, consider whether a less restrictive solution, such as a power of attorney, can accomplish the same goals.
Correspondence from tax agencies are on the rise. What should you do if you receive a letter or a notice from the IRS or a state tax agency? First of all, don't panic, but don't ignore it. Many of these issues are relatively easily resolved. Don't assume the notice, including any balance due, is correct. If you prepared your own return, carefully review the notice against your records to ensure that you understand what the agency is changing or what they are requesting of you. If you do not understand, it is best to contact a CPA to help you solve the issue. It can save you thousands of dollars. If you used a tax preparer, provide them a copy of the notice as soon as possible (we do not automatically receive copies of these and have no way of knowing that there's an issue unless you give them to us). Ask your preparer if they included the cost of responding to letters in your tax prep fee. If not, ask them to estimate the cost of their assistance with the notice. Lastly, be patient. The IRS and other agencies are taking 6 to 9 months recently to respond to correspondence. You may even receive additional correspondence in the meantime. Follow up if you haven't heard anything in about 9 months.
The cryptocurrency market, just like the stock market, has been on a rout recently. You may be wondering if you sell or dispose of your crypto at a loss, how does that affect your taxes. The IRS has deemed cryptocurrency as property, so gains and losses on it are generally considered capital, similar to holding a stock or a bond. Capital gains and losses are taxed differently than other types of income. Long term capital gains are generally taxed at 15% for most taxpayers. Capital losses can be used to offset any capital gains, plus $3,000 of other income, with any remaining loss being carried forward indefinitely. What this means is that if you sell crypto for less than you paid for it, you can take up to $3,000 of that loss against your other types of income. This can be a useful tax planning strategy if you have lost some money on crypto recently. Remember that purchasing goods or services with cryptocurrency as well as converting one type of crypto to another are all considered taxable sales of currency which must be reported.
The Fed raised interest rates this month again, from 3% to 3.5%. How might this impact you? You will likely see higher interest rates on borrowing, such as home mortgages and car loans. Rates are expected to continue to increase, though, so if you're considering taking out a loan do so sooner rather than later. HIgher interest rates will also likely put some additional downward pressue on certain types of investments. However, you will likely be able to eek out a bit more interest on your savings account. Higher interest rates are also expected to cool demand for labor somewhat, possibly alleviating some of the worker shortage. The main purpose of increased interest rates, however, is to lower inflation, so we are likely to see the historical inflation rates tame down in the coming months.
Watching the market tank can be anxiety-inducing. However, there can be a tax silver lining to the market downturn. Tax loss harvesting is selling positions within your portfolio at a loss in order to capture or harvest that loss for use against a capital gain. You shouldn't sell losing positions solely for the tax benefits, however you can use this strategy to reduce your capital gains from sales of other positions or real estate, or even reduce your ordinary income by up to $3,000. Consider this strategy if you need to do some routine rebalancing in your portfolio, have an overweighted position in your portfolio, or a position that no longer aligns with your goals. Beware of loss sale rules which disallow losses if you repurchase the same security within 30 days. Speak with your financial advisor and CPA before attempting this complicated stragey.
The Supreme Court decision in Wayfair vs. South Dakota brought to the forefront a concept known as Economic Nexus. What this concept is referring to is essentially, where are you for tax purposes. With the explosion of remote work as well as the continued growth of ecommerce, this concept is more challenging than it once was. For example, if your company is based in Colorado but you have an employee working remotely from their home in Michigan, where is that employee considered to be? Conversely, if your company is based in Florida, but you sell products online to buyers across the country, where are those sales considered to take place? The decision in Wayfair opened up the ability for states to claim a business has nexus in their state without a physical presence in that state. Every state has different rules and exceptions for when you must report to them, and the rules also differ by the type of tax - for example, employment tax rules may be different from sales tax rules. It's important to understand the concept of nexus and how it applies to your business so that you stay in compliance with laws and regulations.
Vacation rentals are common in ski areas in Colorado. A vacation rental is defined as a property that is rented at least 15 days and used for personal purposes. Certain expenses that are directly related to renting the property, such as advertising or agent's fees, can be fully deducted. Other expenses on such a vacation rental must be prorated according to the rental days compared to the personal days used. Any day you spend working on the rental property, such as cleaning or making repairs, is not considered a personal day, even if family members are using the property for recreation on the same day. However, any day rented to someone at a discount (as might be the case with friends or family) is considered a personal day. Also, if you use the property for personal purposes for more 14 days or 10% of the rented days, whichever is greater, you cannot take a loss on the rental activity.
Continuing our discussion from last month on rental real estate investments. What expenses are deductible against your rental real estate income? The IRS allows expenses to be deducted from your rental income that are necessary to the management of the property. This will include the usual things like advertising, property taxes, landlord's insurance, and mortgage interest. However, did you know you can also take a portion of the cost of the building each year as an expense? This is called depreciation. Also, if you use your cell phone or home internet connection to manage the property, you can take a portion of those expenses as well. If you travel overnight to manage an out of town rental, you can deduct travel expenses, including meals. It's important to keep excellent records to ensure that you can justify all the deductions you take on your rental properties.
Here in Colorado it's common for people to both rent out a property and use it for personal purposes. This could be the case with a vacation rental or in a situation where you're renting a portion of your home but using the other portion for personal purposes. IRS rules state that if the rental use is less than 15 days, this is not income and expenses are not allowed. If the rental use is more than 14 days, then you must report the rent income and you can report the proportional expenses against this income. If it was a vacation rental, use the days rented and the total days used to determine the rental portion of expenses. If it was your home that you were renting a portion of, you can use the square footage of the portion rented compared to the total square footage of the home, or the number of rooms rented compared to the total number of rooms in the home. Note that shared areas are considered personal use. If personal use of the property is more than 14 days or 10% of rental days, whichever is greater, then you cannot take a loss on the rental activity (expenses cannot exceed income).
With the real estate market boom recently, a lot of folks are investing in rental properties. Now's a good time to discuss the taxability of rental income. A common misconception is that if your rental expenses are greater than your rental income, you don't have to report it. Not only are you still required to report rental losses, but you may be missing out on valuable tax benefits from a loss on your rental investment. Rental income is generally considered "investment income", with some exceptions for real estate professionals who work in real estate full-time. Investment income is treated differently for tax purposes than earned income. Losses are limited, and for certain high-income taxpayers there is an additional 3.8% tax. Rental real estate losses are allowed an exception to the loss limitation. If you make less than $150k as a married couple filing jointly, or $75k as a single person, you can take up to $25k per year of your rental property losses against your other income, as long as you actively participate in the management of your rental property.
Starting a new business? One of the first things you will need to do is decide on what type of entity you'll set up - sole proprietorship, corporation, partnership, limited liability company or another type. Sole proprietorships have the benefit of simplicity - there are no legal forms to file in Colorado and they do not require a separate income tax return. However, they can be more expensive in self-employment taxes and don't offer as much liability protection for the owner. Corporations and partnerships are a little more difficult to set up, as the state requires documents be filed and it is generally best practice to have an attorney draft an operating agreement. However, they offer the benefit of having more than one owner split the profits and additional liability protection for the owners. LLC's can offer the best of both worlds in some situations. It's best to chat with your attorney and CPA to determine which entity type will serve you best now and in the future.
It's the great resignation and a lot of people are opting to start their own businesses. If you are one of them, there are a few steps to take to get going. First, make an appointment with an attorney specializing in business law. They can advise you on the best way to structure your start up and can help you draft the documents you need. Then, meet with an accountant. They will also give their two cents about your entity structure and help you get your accounting systems in place to make sure you can monitor your business's success and stay in line with tax laws. Lastly, visit your bank. It's smart to set up a separate bank account for your business to keep it separate from your personal finances, and they can help you if you need financing to get started. The state of Colorado has some good resources for new business owners as well, just visit mybiz.colorado.gov.
There's still time to claim your Employee Retention Tax Credits (ERTC's)! Although the program is only available for wages paid through September 30, 2021, you still have time to file and claim the credit for wages paid before that date. The ERTC offers a credit of 50% of eligible wages paid, up to $10,000 per employee per year, for 2020. For 2021, the credit is 70% of eligible wages paid, up to $10,000 per employee per quarter. What this means is there is a potential credit available of up to $26,000 per employee. To be eligible, you must have either a significant decline in gross receipts for the quarter, or have been shut down by government order. Most owner's wages are not eligible. Talk to your CPA about determining if you're eligible for the credit!
Reminder of some important upcoming tax deadlines. Fourth quarter 2021 individual and calendar year business estimated tax payments are due on January 18, 2022. Pay on time to avoid possible penalties and surprise tax bills. Fourth quarter 2021 payroll tax reports are due January 31. W-2's are due to the SSA and the recipients on January 31. 1099's are due to the IRS and the recipients by January 31.
The IRS will be sending out two letters to certain individuals with information needed to file their 2021 tax returns. People who received the Advanced Child Tax Credit will receive Letter 6419 sometime between late December and mid January, which will include the total amount of the credit and the number of qualifying children. People who received the third Economic Impact Payment (stimulus payment) will receive letter 6475, which will help people determine if they are entitled to and should claim the Recovery Rebate Credit. This letter should be received in late January. Save both these letters if you receive them with your other important tax documents; you will need them to file your return.
The IRS has announced that it will provide tax deadline relief to taxpayers affected by the Colorado wildfires which began on December 30. People who lived or had a business in the affected area will have until May 16, 2022, to file and pay taxes that are due between January 1 and April 18. This includes the fourth quarter estimate payment due on January 18, business tax returns due on March 18, individual tax returns and payment dues on April 18, and IRA contribution due on April 18. Quarterly payroll and excise tax returns due on January 31 and May 2 are now due on May 16. Go to IRS.gov and search for disaster relief for more information and to view eligible areas.
President Biden signed HR 3684 the Infrastructure Investment and Jobs Act into law on November 15. While this legislation doesn't contain as many tax provisions as the other bill currently on the hill, the Build Back Better Act, there are some important changes to be aware of. The Employee Retention Tax Credit or ERTC was ended early. Wages paid after September 30 do not qualify, however there is still time to apply for the credit for 2020 and the first three quarters of 2021. There is a new reporting requirement for cryptocurrency transactions. This should not impact taxpayers who have already been reporting their crypto transactions correctly, but may help IRS catch fraudsters who aren't reporting income from their crypto holdings. Stay tuned for an update on tax law changes that may come if the Build Back Better Act is passed.
December is a time for giving! Many individuals make most of their charitable contributions in December. Ordinarily, people who choose to take the standard deduction cannot claim a deduction for their charitable contributions. But a temporary law change now permits them to claim a limited deduction on their 2021 federal income tax return for cash contributions made to qualifying charitable organizations. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify. Under this provision, individual tax filers, can claim a deduction of up to $300 for cash contributions made to qualifying charities in 2021. The maximum deduction is $600 for married individuals filing joint returns. Remember, these need to be cash contributions, not donations of items. You must complete the donation by December 31st to qualify!
Link to IRS News Release
This week is the 6th annual National Tax Security Awareness Week. The IRS, state tax agencies and the nation's tax industry – working together as the Security Summit - are warning taxpayers to be aware of a dangerous combination of events that can increase their exposure to tax scams and identity theft. The combination of the holiday shopping season, the upcoming tax season and the pandemic create additional opportunities for criminals to steal sensitive personal or financial information. Take extra care while shopping online or viewing emails and texts. Follow @IRSnews and #TaxSecurity on social media for tips and more information on National Tax Security Awareness Week.
Link to IRS News Release