IRS Raises Standard Mileage Rate for 2022

Effective Jan. 1, 2022, the optional standard mileage rate used in deducting the costs of operating an automobile for business purposes will be 58.5 cents per mile, the IRS announced in Notice 2022-03.

Employers often use the standard mileage rate also called the safe harbor rate to pay tax-free reimbursements to employees who use their own vehicles for business.

If your employer doesn’t reimburse you, you’re out of luck. Unreimbursed employee travel expenses are not deductible. That’s because the 2017 Tax Cuts and Jobs Act eliminated the miscellaneous itemized deduction for unreimbursed employee travel expenses for tax years 2018 through 2025.

If you’re self-employed, you’ll list your mileage as a business expense on Schedule C. You can’t use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle.

Section 179 Expensing

In 2022, the Section 179 expense deduction increases to a maximum deduction of $1,080,000 of the first $2,700,000 of qualifying equipment placed in service during the current tax year. This amount is indexed to inflation for tax years after 2018. The deduction was enhanced under the TCJA to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems. Also, of note is that costs associated with the purchase of any sport utility vehicle, treated as a Section 179 expense, cannot exceed $27,000.

Bonus Depreciation

Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and years beyond. Note that passenger automobiles are subject to depreciation limitations. Heavy SUV’s used more than 50% for business are not subject to limitations.

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The Three Ways To Make Tax-Free Gifts

The tax code provides three ways to make tax-free gifts. Increase your family’s after-tax wealth by using these methods to the extent they fit your estate and family situation.

The first tax-free giving method is the annual gift tax exclusion. In 2021, the exclusion limit is $15,000 per recipient, and it rises to $16,000 in 2022. The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there is no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable.

Note: This discussion is not relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.

If you are married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).

Education and medical gifts are the second method of tax-free giving. There’s no limit on the amount of tax-free gifts that can be made for qualified education or medical purposes.

To be tax-free, education gifts must pay for direct tuition costs and not for items such as books, supplies, board, lodging, or other fees. The gifts must be made directly to an education institution, not as reimbursements to the student or parents.

The gifts can be made on behalf of any individual, regardless of his or her relationship to you, and for any level of education.

Medical gifts also must be made directly to the medical care provider to qualify for the unlimited gift tax exclusion. Payments for any items that would qualify as deductible itemized medical expenses on an individual income tax return qualify for tax-free medical gifts.

The third method of tax-free giving is by utilizing the lifetime exemption amount. Any gifts you make during life that exceed the annual exclusion and don’t qualify as tax-free medical and education gifts count against your lifetime exemption. In 2021 is $11.7 million and will be $12.06 million in 2022. In a married couple, each spouse has a separate exemption. To the extent your lifetime exemption isn’t used by lifetime gifts, the remainder is used to reduce estate taxes.

As you’re aware, there are proposals in Congress to reduce the lifetime exemption. Even if none of these proposals is enacted, the current exemption amount is scheduled to be cut in half after 2025 when the 2017 tax law expires.

Don't hesitate to call if you have any questions about this topic and others. Also, make sure to follow us on social media for more tax and accounting tips!

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IRS Adjusts Tax Levels for Inflation in 2022

The standard deduction for married couples filing jointly for tax year 2022 is increasing to $25,900, up $800 from the previous year. For single taxpayers and married individuals filing separately, the standard deduction is rising to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.

For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly). The other rates are:

• 35%, for incomes over $215,950  ($431,900 for married couples filing jointly);

• 32% for incomes over $170,050  ($340,100 for MFJ);

• 24% for incomes over $89,075  ($178,150 for MFJ);

• 22% for incomes over $41,775 ($83,550 for MFJ); and

• 12% for incomes over $10,275  ($20,550 for MFJ).

The lowest rate is 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).

Other highlights for changed amounts for 2022:

Earned Income Tax Credit amount is $6,935 for qualifying taxpayers who have three or more qualifying children, up from $6,728 for tax year 2021. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

Unearned income of minor children ("kiddie tax"): the amount used to reduce the child's net unearned income is $1,150.

Maximum capital gains 0% rate: $83,350 taxable income for married couples filing jointly, $41,675 for single taxpayers and married individuals filing separately, $55,800 for heads of household, and $2,800 for an estate or trust.

Maximum capital gains 15% rate: $517,200 for joint returns or surviving spouses, $258,600 for married individuals filing a separate return, $488,500 for heads of household, $459,750 for all other individuals, and $13,700 for an estate or trust.

Alternative minimum tax exemption amounts: $118,100 for joint returns or surviving spouses, $75,900 for single individuals, $59,050 for married individuals, and $26,500 for estates and trusts.

Certain expenses of elementary and secondary schoolteachers: The maximum deduction is $300.

Cafeteria plans: The dollar limitation for voluntary employee salary reductions for contributions to health flexible spending arrangements is $2,850.

Deduction for qualified business income: The threshold amount is $340,100 for married couples filing jointly, $170,050 for married individuals filing separately, and $170,050 for all others. The phase-in range amount is $440,100 for married couples filing jointly, $220,050 for married individuals filing separately, and $220,050 for all others

Interest on education loans: Phases out with modified adjusted gross income (MAGI) exceeding $70,000 ($145,000 for joint returns) and is completely phased out at MAGI of $85,000 ($175,000 for joint returns).

Limitation on use of cash method of accounting: The gross receipts test of Sec. 448(c) (also applicable to several other business provisions) is met if average annual gross receipts for the three-tax-year period ending with the 2022 tax year do not exceed $27,000,000.

Foreign earned income exclusion: The exclusion amount is $112,000 up from $108,700 for 2021.

Unified credit against estate tax: The basic exclusion amount for decedents dying in 2022 is $12,060,000.

Annual exclusion for gifts: The first $16,000 of gifts to any person are not included in total taxable gifts under Sec. 2503 made during 2022.

It is important to understand how all these changes could potentially impact your tax preparation for 2022. Don't hesitate to call if you have any questions about this topic and others. Also, make sure to follow us on social media for more tax and accounting tips!

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Marginal vs. Effective Tax Rates

What is your marginal tax rate? What is your effective rate?

A point of confusion for many taxpayers is the difference between the two. Both measures tell a lot about a taxpayer’s financial profile and both are used for tax preparation purposes to weigh the after-tax consequences of investments and transactions. Let's take a closer look:

Marginal Tax Rate

The United States has a progressive tax system. The more money you earn, the higher your tax rate is and the more taxes you pay to the IRS. In 2021, there are seven tax brackets ranging from 10% to 37%. If you earn $35,000 a year as a single filer, you are in the 12% tax bracket. If you make $520,000 a year as a single filer, you are in the 37% tax bracket. These brackets represent the percentage of taxes you pay based on your taxable income and are referred to as marginal tax rates. When someone says they are in the 35% tax bracket, this is typically what they are referring to and this is where the confusion begins.

Due to the way the tax code is set up and because marginal tax rates apply to each additional level of income above your tax bracket's income limit, it is not as straightforward as it seems. If you earn $100,000 and are in the 24% tax bracket, it doesn't mean that you pay a 24% tax on your earned income (0.24 x $100,000 = $24,000).

To illustrate how this works, let's look at the following example for a single taxpayer earning $100,000 of annual income in 2021 (i.e., filing a tax return in April 2022). The amount of tax owed breaks down as follows:

• 10% Bracket: ($9,950 - $0) x 10% = $995.50

• 12% Bracket: ($40,525 - $9,950) x 12% = $3,669.00

• 22% Bracket: ($86,375 - $40,525) x 22% = $10,087.00

• 24% Bracket: ($100,000 - $86,375) x 24% = $3,270.00

Total tax = $18,021.50

In the example above, the marginal tax rate (tax bracket) on $100,000 of income is 24%, but the effective tax rate is closer to 18% ($18,021.50/$100,000) - without taking any deduction that reduce taxable income.

Effective Tax Rate

The effective tax rate is the actual amount of federal income taxes paid on a taxpayer's taxable income and more accurately represents the amount of tax most people pay. The effective tax rate does not include state taxes and local taxes, FICA taxes, or self-employment tax.

Many taxpayers take advantage of tax credits and deductions that reduce taxable income, such as the standard deduction, tax-deductible contributions to a retirement or pension plan, health savings account, tax credits for dependent children, and charitable contributions.

Calculating your effective tax rate is relatively simple: Divide your total tax liability by your gross (before tax) annual income. For example, if you made $100,000 (single filer), took the standard deduction of $12,500 in 2021, reducing your income to $87,450, and paid $15,009.50 in tax, the effective tax rate is 15 percent even though you are in the "24%" tax bracket.

Note: For many taxpayers, their income is the same as their earnings from wages; however, taxpayers should note that income from capital gains may be taxed differently. Short-term capital gains are generally taxed as ordinary income subject to the seven tax brackets mentioned above. Long-term capital gains, however, are taxed at 0%, 15%, and 20%.

Conclusion

There are three major causes of differences between marginal and effective tax rates. The objective of tax planning is to minimize the taxes you pay not just this year but over many years and, ideally, over the course of your life.

The first is the progressive nature of the U.S. tax system. As mentioned above there are seven tax brackets ranging from 10% to 37% in 2021. The second is the nature of the income in question. Not all income is taxed the same. Long-term capital gains, for example, are taxed at a rate of between 0% and 20%, depending on your income level. A taxpayer with $1 million in income, half of which is capital gains, will pay significantly less taxes than another with $1 million in ordinary income. Tax strategies that can “convert” ordinary income to capital gains can potentially result in big tax savings. To determine if they make sense, you have to compare the capital gains rate with the marginal tax rate. The third source of difference between marginal and effective tax rates is the enormous number of legitimate deductions and credits available to taxpayers particularly those who own businesses. For individuals, the items include tax-deductible contributions to a pension plan or health savings account, tax credits for dependent children and charitable contributions. For businesses, the number of items is exponentially larger.

The art behind the tax-planning effort is to consider each individual’s or business’ particular circumstances over an extended period and to incorporate expectations about potential tax policy changes in the future.

Don't hesitate to call if you have any questions about this topic and others. Also, make sure to follow us on social media for more tax and accounting tips!

Reporting Gambling Income and Losses

The following rules apply to casual gamblers who aren't in the trade or business of gambling. Gambling winnings are fully taxable and you must report the income on your tax return. Gambling income includes but isn't limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.

Gambling Winnings

If you receive certain gambling winnings or have any gambling winnings subject to federal income tax withholding, you will be issued a Form W-2G, Certain Gambling Winnings. Gambling winnings are reported as "Other Income" on Schedule 1 of Form 1040 or Form 1040-SR. Winnings that aren't reported on a Form W-2G should also be included. Depending on the amount of gambling winnings, you may be required to pay an estimated tax on that additional income.

If you win a non-cash prize, such as a car or a trip, you will be responsible for paying taxes on the fair market value of each prize. Depending upon the amount of your winnings and the type of gambling, the establishment or payer may be required to withhold income taxes. In general, 24% of the amount is required to be withheld. 

Gambling Losses

You may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040) and have kept a record of your winnings and losses. You can claim your gambling losses up to the amount of winnings as "Other Itemized Deductions." Even if you claim the standard deduction, you are still obligated to report and pay tax on all winnings you earn during the year. The amount of gambling losses you can deduct can never exceed the winnings you report as income. For example, if you have $4,000 in winnings but $8,000 in losses, your deduction is limited to $4,000. You could not write off the remaining $4,000, or carry it forward to future years.

You can include in your gambling losses the actual cost of wagers plus other expenses connected to your gambling activity, including travel to and from a casino.  Keep in mind that the IRS does not permit you to simply subtract your losses from your winnings and report the difference on your tax return.

Nonresident Aliens

As a nonresident alien of the United States for income tax purposes and you must file a tax return for U.S. source gambling winnings, using Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Generally, nonresident aliens of the United States who aren't residents of Canada can't deduct gambling losses.

Professional Gambling

The rules described on this blog are for the majority of people with gambling income—those who are not professional gamblers. If gambling is your actual profession, then your gambling income is generally considered regular earned income and is taxed at your normal effective income tax rate. As a self-employed individual, you will need to report your income and expenses on Schedule C and the net income would be subject to self-employment tax. You can deduct gambling losses as job expenses using Schedule C, not Schedule A.

Recordkeeping

To deduct your losses, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.

Don't hesitate to call our tax advisors if you have any questions about this topic and others. Also, make sure to follow us on social media for more tax and accounting tips!

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