What taxpayers need to know about making 2022 estimated tax payments

By law, everyone must pay tax as they earn income. Generally taxpayers must pay at least 90 percent of their taxes throughout the year through withholding, estimated or additional tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty when they file. Some taxpayers earn income not subject to withholding. For small business owners and self-employed people, that usually means making quarterly estimated tax payments.

Here are some key things to help taxpayers determine if they need to make estimated tax payments:

• Generally, taxpayers need to make estimated tax payments if they expect to owe $1,000 or more when they file their 2022 tax return, after adjusting for any withholding.
• The IRS urges anyone in this situation to check their withholding using the Tax Withholding Estimator on IRS.gov. If the estimator suggests a change, the taxpayer can submit a new Form W-4  to their employer.
• Aside from business owners and self-employed individuals, people who need to make estimated payments also include sole proprietors, partners and S corporation shareholders. It also often includes people involved in the sharing economy.
• Corporations generally must make these payments if they expect to owe $500 or more on their 2022 tax return.
• Aside from income tax, taxpayers can pay other taxes through estimated tax payments. This includes self-employment tax and the alternative minimum tax.
• The remaining deadlines for paying 2022 quarterly estimated tax are: June 15, Sept. 15, and Jan. 17, 2023.
• Taxpayers can check out these forms for details on how to figure their payments:
• Form 1040-ES, Estimated Tax for Individuals 
• Form 1120-W, Estimated Tax for Corporations
• Taxpayers can visit IRS.gov to find options for paying estimated taxes. These include:
• Direct Pay from a bank account.
• Paying by credit or debit card or the Electronic Federal Tax Payment System.
• Mailing a check or money order to the IRS.
• Paying cash at a retail partner.
• Anyone who pays too little tax through withholding, estimated tax payments, or a combination of the two may owe a penalty. In some cases, the penalty may apply if their estimated tax payments are late. The penalty may apply even if the taxpayer is due a refund.

TAX TIPS FOR RECENTLY MARRIED TAXPAYERS

 

This is the time of year for many couples to tie the knot. When you marry, here are some post-marriage tips to help you avoid stress at tax time.

1. Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices. Your income tax refund may be delayed if it is discovered your name and SSN don’t match at the time your return is filed. 
   
   
2. Notify Those Paying You as a Contractor – If you are a self-employed sole proprietor filing your business income and expenses on a Schedule C, and you have a different name now that you are married, notify anyone who has been issuing you a Form 1099-NEC under your Social Security number about the name change. This will prevent a mismatch with the IRS. 
   
   
3. Notify the IRS - If you have a new address, you should notify the IRS by sending in a completed Form 8822, Change of Address. If your state has an income tax, also notify the appropriate tax agency. 
   
   
4. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state tax agency correspondence can be forwarded. 
   
   
5. Review Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket, and you may have an unpleasant surprise when we prepare your joint return for the first time. On the other hand, if only one of you works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. In either case, it may be appropriate to review your withholding (W-4 status) and estimated tax payments, if any, for the year to make sure that you are not going to be under-withheld and that you don’t set yourself up to receive bad news for the next filing season. Even if no adjustment is needed with your tax withholding, you will still need to advise your employer of your new marital status and name change, if applicable. 
   
   
6. Notify the Marketplace – If you or your spouse have health insurance through a government Marketplace (Exchange), you must notify the Marketplace of your change in marital status. If you were included on a parent’s health insurance policy through a Marketplace, then the parent must notify the Marketplace. Failure to notify the Marketplace can create tax filing problems. 

If you have any questions about the impact of your new marital status on your taxes, please give this office a call.

Settling Tax Debt With an IRS Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. That's the good news. The bad news is that not everyone can use this option to settle tax debt; the IRS rejected nearly 60 percent of taxpayer-requested offers in compromise. If you owe money to the IRS and wonder if an IRS offer in compromise is the answer, here's what you need to know.

Who is Eligible?

If you can't pay your full tax liability or doing so creates a financial hardship, an offer in compromise may be a legitimate option. However, it is not for everyone, and taxpayers should explore all other payment options before submitting an offer in compromise to the IRS. Taxpayers who can fully pay the liabilities through an installment agreement or other means generally won't qualify for an OIC.

To qualify for an OIC, the taxpayer must have:

• Filed all tax returns.
• Made all required estimated tax payments for the current year.
• Made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

IRS Acceptance Criteria

Whether your offer in compromise is accepted depends on several factors; however, an offer in compromise is typically accepted when the amount offered represents the most the IRS can expect to collect within a reasonable time frame - referred to as the reasonable collection potential (RCP). In most cases, the IRS won't accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP), which is how the IRS measures the taxpayer's ability to pay.

The RCP is the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to the property, the RCP includes anticipated future income minus certain amounts allowed for basic living expenses.

The IRS may accept an OIC based on one of the following criteria:

Doubt as to liability. An OIC meets this criterion only when there's a genuine dispute about the existence or amount of the correct tax debt under the law.

Doubt as to collectability. This refers to whether there is doubt that the amount owed is fully collectible such as when the taxpayer's assets and income are less than the full amount of the tax liability.

Effective tax administration. This applies to cases where there is no doubt that the tax is legally owed and that the full amount owed can be collected - but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Application and Fees

When requesting an OIC from the IRS, use Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. If you are applying as a business, use Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must also file additional forms.

A nonrefundable application fee, as well as initial payment (also nonrefundable), is due when submitting an OIC. However, if the OIC is based on doubt as to liability, no application fee is required.

If the taxpayer is an individual (not a corporation, partnership, or other entity) who meets Low-Income Certification guidelines, they do not have to submit an application fee or initial payment. They will not need to make monthly installments while the IRS evaluates an offer in compromise.

The initial payment is based on which payment option you choose for your offer in compromise:

Lump Sum Cash. Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.

Periodic Payment. Submit your initial payment with your application. Continue to pay the remaining balance as monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

The IRS will notify you by mail if it rejects your OIC. The letter will explain why the IRS rejected the offer and provide detailed instructions on appealing the decision. If you decide to appeal, you must do so within 30 days from the date of the letter.

Help is Just a Phone Call Away

If you have any questions about the IRS Offer in Compromise program, don't hesitate to contact the office for more information.

TIPS FOR STUDENTS PLANNING TO WORK DURING THE SUMMER

 

As the summer break from school approaches, many students are looking for part-time summer employment. Both parents and students should be aware of the tax issues that need to be considered when working a summer job. Here is a rundown of some of the more common issues:

• Completing Form W-4 – The W-4 form is used by employers to determine the amount of tax that will be withheld from an employee’s paycheck. Students with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student with income only from summer and part-time employment, and who is claimed as a dependent of someone else, can earn as much as $12,950 (the standard deduction amount for 2022) without being liable for income tax. However, if the student has investment income, the tax determination becomes more complicated because, as he or she is a dependent of another, special rules apply.
   
• Watch Out for Payroll Surprises – Some employers may attempt to avoid their payroll tax liabilities by paying the student in cash and incorrectly treating them as an independent contractor, thus leaving the student with the responsibility of paying both the employee’s and employer’s payroll tax liability (see self-employment tax below). If a potential employer intends to do that, they will generally ask the student to complete a Form W-9 rather than a W-4 or simply ask for their Social Security Number (SSN) without requesting a W-4. 
  
  
• Tips – A student who works as a waiter or a camp counselor may receive tips as part of their summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. This reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and Medicare taxes) and income taxes on these reported tips, then includes the tips and wages on the employee’s W-2. 
  
  
• Odd Jobs – Many students do odd jobs over the summer and are paid in cash. Just because the payment is in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see next). These earnings include income from odd jobs like dog walking, babysitting, and lawn mowing. 
  
  
• Self-Employment Tax – When a student works as an employee, the employer withholds Social Security tax and Medicare tax from the employee’s pay, matches the amount dollar for dollar, and remits the combined amount to the government. On the other hand, a student who is self-employed is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings are $400 or more. This tax pays for future benefits under the Social Security system and Medicare Part A. Even if the student is not liable for income tax, this 15.3% tax may apply to a student’s odd jobs. 
  
  
• Working for Parents – A child under the age of 18 working in a business solely owned by his or her parents is not subject to payroll taxes. This saves the child from having to pay the 7.65% payroll taxes and also provides the parent with relief from payroll taxes. The payroll tax exception won’t apply if the parent’s business is set up as a corporation. 
  
  
• ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable. 
  
  
• Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:
  
  o They are in the business of delivering newspapers;
  o All of their pay for these services directly relates to sales rather than to the number of hours worked; and
  o They perform the delivery services under a written contract that states that they will not be treated as an employee for federal tax purposes.
   
• Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax. 
  
  
• Retirement Plan Contributions – Putting away money for retirement is probably the last thing a student will want to spend their summer earnings on. However, having earned income opens up the opportunity to make traditional and Roth IRA contributions. 

If you are a student or the parent of a student with questions about these or other issues associated with student employment, please contact this office for assistance.

FORGOT SOMETHING ON YOUR TAX RETURN? IT’S NOT TOO LATE TO AMEND THE RETURN

Corrections on Tax Return

If you discover that you forgot something on your tax return, you can amend that return after it has been filed. The need to amend can include a number of issues: 

• Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation. 
  
  
• Overlooking an item of income or receiving a late or corrected 1099. 
  
  
• Forgetting about a deductible expense. 
  
  
• Forgetting about an expense that would qualify for a tax credit. 

These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2021 return or prior year returns.

Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return.

1. If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. For example, the statute of limitations for the 2021 return will generally expire on the April filing due date for 2025. Some states have a longer statute. 
   
   
2. Generally, you do not need to file an amended return to correct math errors. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms. 
   
   
3. If you are filing to claim an additional refund, we should wait until you have received your original refund before filing Form 1040X. 
   
   
4. If you owe additional tax, file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
    
5. When amending multiple paper-filed returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed. 
   
   
6. If the changes involve a new schedule or form that wasn’t part of the original return, it must be completed and included with the amended return. And if there are changed forms, they must be included as well. In addition, it may be appropriate to include documentation related to the changes to avoid subsequent correspondence from the IRS or state agency. 
   
   
7. A detailed explanation of the changes must also be included. This is required to explain to the government’s processing staff the reason for the amendment. An insufficient explanation can lead to additional correspondence and delays. 
   
   
8. Depending on why an amended federal return is required, it may be necessary to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, we will need to amend the state return as well as the federal. 

An amended return can be more complicated than the original, so please contact this office for assistance in preparing your amended returns.

Wedding planning checklist: cake, rings, flowers … tax forms?

The summer wedding season is fast approaching. Wedding planning is often overwhelming but figuring out how marriage will affect a couple’s tax situation doesn’t have to be. Here are a few things couples should think about as they prepare for the big day.

Name and address changes

People who change their name after marriage should report it to the Social Security Administration as soon as possible. The name on a person's tax return must match what is on file at the SSA. If it doesn't, it could delay any tax refund. To update information, taxpayers should file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213, or at a local SSA office.

If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, people should send the IRS Form 8822, Change of Address. Taxpayers should also notify the postal service to forward their mail by going online at USPS.com or their local post office.

Double-check withholding

After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4, Employee's Withholding Allowance within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the additional Medicare tax. They can use the Tax Withholding Estimator on IRS.gov to help complete a new Form W-4. Taxpayers should review Publication 505, Tax Withholding, and Estimated Tax for more information.

Filing status

Married people can choose to file their federal income taxes jointly or separately each year. For most couples, filing jointly makes the most sense, but each couple should review their own situation. If a couple is married as of December 31, the law says they're married for the whole year for tax purposes.

WHAT EVERY EMPLOYEE NEEDS TO KNOW ABOUT 401(K) SAVINGS

Are you familiar with 401(k) retirement funds? 

More and more employers are offering 401(k) plans as an employee benefit, and if you have the option and are not currently taking advantage of it, it may be time to rethink your savings strategy. Not only do these popular plans offer the advantage of using pre-tax dollars (and thus lowering your taxable income each year), but they are also a simple way to ensure that you’re putting away money regularly, without having to give it a thought once you’ve set up the plan.

Employers can sign you up automatically in the 401(k) plan that they offer, but even if you have to opt into a plan, once you’ve done so the amount that you’ve elected will automatically be deducted from your paycheck and deposited into your retirement savings account. All you have to do is decide how much you want to set aside each week. The answer to that question is entirely up to you and should be based on what your goals are, as well as variables like your living expenses and your age.

The closer you are to retirement age, the less time you have to save so you may want to bump up the amount that you deposit. Because the money that you invest will compound, the sooner you start investing the better. To give you an idea of how money can grow, consider the difference between investing $3,000 a year at an 8% annual return for 30 years – which would add up to $340,856 – versus only saving for 20 years, which would leave you with just $137,752. You also need to keep in mind that there is an annual maximum amount that you are permitted to contribute. Fortunately, that number increases each year. For 2022, the limit is $20,500.

You’ll also want to consider whether your employer offers a match, and if so how much that match is. One of the advantages of the 401(k) type of account is that employers can match all or a portion of your contribution, but you need to make sure that you understand exactly how your individual program works. Some employers will only offer a match up to a certain point, and others will only match if you opt for a minimum percentage of your income. Most experts encourage employees to make sure that they are fully taking advantage of whatever match their employer is willing to contribute.

To give you a sense of how much the average American has in their 401(k) account, consider the results of a recent survey conducted by Vanguard. It showed that those between the ages of 45 and 54 have an average 401(k) balance of $161,079 (median $56,722), while those who are between the ages of 55 and 64 have saved an average of $232,379 (median $84,714). The group that is closest to retirement – those who are 65 and older – do not have that much more than the group closest to them in age: they have an average 401(k) balance of $255,151 with a median of $82,297.

When thinking about your retirement and how you’ll fund your lifestyle, one of the most important questions you need to answer is exactly how you’re hoping to spend your golden years. If you plan to spend your time at home with family, you will need less than someone who plans world travel.

If you don’t have access to a 401(k) account, a Roth IRA is another good option. Though the contributions that you make come from after-tax dollars, you are able to withdraw them and their earnings tax-free at any point after you turn 59 ½. The annual limit that you can contribute to a Roth IRA is currently only $6,000, which is much lower than the $20,500 allowed each year for the 401(k) accounts.

It’s never too early to start saving for retirement, and there are plenty of good options available. If you need guidance on how best to save, contact us today to set up a time to discuss your situation.