Article Highlights:

Custodial Parent
Dependency Release
Joint Custody
Tiebreaker Rules
Child’s Exemption
Head of Household Filing Status
Tuition Credit
Child Care Credit
Child Tax Credit
Earned Income Tax Credit

If you are a divorced or separated parent, a commonly encountered but often misunderstood issue is who claims the child or children for tax purposes. This is sometimes a hotly disputed issue between parents; however, tax law includes some very specific but complicated rules about who profits from the child-related tax benefits. At issue are a number of benefits, including the children’s dependency, child tax credit, child care credit, higher-education tuition credit, earned income tax credit, and, in some cases, even filing status.
This is actually one of the most complicated areas of tax law, and inexperienced tax preparers or taxpayers preparing their own returns can make serious mistakes, especially if the parents are not communicating well. If parents will cooperate with each other, they often can work out the best tax result overall, even though it may not be the best for them individually and compensate for it in other ways.
Physical Custody (Custodial Parent) – If a family court awards physical custody of a child to one parent, tax law is very specific in awarding that child’s dependency to the parent with physical custody, regardless of the amount of child support provided by the other parent. However, the custodial parent may release that dependency to the non-custodial parent for tax purposes by completing the appropriate IRS form. The release can be granted on a yearly basis or for multiple years at one time. But once made, it is binding for the specified period.
CAUTION – The decision to relinquish dependency should not be taken lightly, as it impacts a number of tax benefits.
Joint Custody – On the other hand, if the family court awards joint physical custody, only one of the parents may claim the child as a dependent for tax purposes. If the parents cannot agree between themselves as to who will claim the child and the child is actually claimed by both, the IRS tiebreaker rules will apply. Per the tiebreaker rules,the child is treated as a dependent of the parent with whom the child resided for the greater number of nights during the tax year; or if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income will claim the child as a dependent.
Parents in the process of divorcing should be aware that for tax purposes, the IRS’s rules as to who can claim a child’s dependency takes precedence over what a divorce decree says or what a judge may have ruled. So, for example, if the family court awards full custody of a child to Parent A but says that Parent B can claim the child as a tax dependent, the IRS’s position is that the child is a tax dependent of Parent A unless Parent A releases the dependency to Parent B, as explained above.
Child’s Exemption Allowance – While there is no longer (through 2025) a monetary tax deduction (also referred to as an exemption allowance) for a dependent child, it still matters who claims the child as a dependent because certain tax credits are only available to the taxpayer claiming the child as a dependent.
Head of Household Filing Status – An unmarried parentcan claim the more favorable head of household, rather than single, filing status if he or she is the custodial parent and pays more than half of the costs of maintaining, as his or her home, a household that is the child’s principal place of abode for more than half the year. This is true even when the child’s dependency is released to the non-custodial parent.
Tuition Credit – If the child qualifies for either the American Opportunity or the Lifetime Learning higher-education tax credit, the credit goes to whomever claims the child as a dependent. Credits are significant tax benefits because they reduce the tax amount dollar-for-dollar, while deductions reduce income to arrive at taxable income, which is then taxed according to the individual’s tax bracket. For instance, the American Opportunity Tax Credit (AOTC) provides a tax credit of up to $2,500, of which 40% is refundable. However, both education credits phase out for taxpayers with adjusted gross income (AGI) between $80,000 and $90,000 for unmarried taxpayers and $160,000 and $180,000 for married taxpayers.
Child Care Credit – A nonrefundable tax credit is available to the custodial parent for child care while the parent is gainfully employed or seeking employment. To qualify for this credit, the child must be under the age of 13 and be a dependent of the parent. However, a special rule for divorced or separated parents provides that if the custodial parent releases the child’s exemption to the non-custodial parent, the custodial parent can still qualify to claim the child care credit, and it cannot be claimed by the noncustodial parent.
Child Tax Credit – A $2,000 credit is allowed for a child under the age of 17. That credit goes to the parent claiming the child as a dependent. However, this credit phases out for higher-income parents, beginning at $200,000 for unmarried parents and $400,000 for married parents filing jointly.
Earned Income Tax Credit (EITC) – Lower-income parents with earned income (wages or self-employment income) may qualify for the EITC. This credit is based on the number of children (under age 19 or a full-time student under age 24) the custodial parent has, up to a maximum of three children. Releasing the dependency of a child or of children to the noncustodial parent will not disqualify the custodial parent from using the children to qualify for the EITC. In fact, the noncustodial parent is prohibited from claiming the EITC based on the child or children whose dependency has been released by the custodial parent.
As you can see, some complex rules apply to the tax benefits provided by the children of divorced parents. It is highly recommended that you consult this office to prepare your return. If you are the custodial parent, you should also consult with this office before deciding whether to release a child as a tax dependent.

If you’ve been keeping up with the news, you’re no doubt aware of a recent policy change that will impact the way that research and development (R&D for short) is handled when it comes to income taxes in the United States. Rather than being allowed to deduct those costs immediately, companies are now being told that they must spread those costs out over a period of five years.
Unsurprisingly, those companies are none too thrilled with that change. It has the potential to hurt manufacturers in a number of different ways, all of which are worth exploring.

The R&D Tax Policy Change: An Overview
In a letter that was sent on November 4, 2022, no less than 178 CFOs – primarily those from some of the biggest names in United States manufacturing like Ford Motor Company, Lockheed Martin, Boeing, and others – outlined why they believe that these aforementioned new rules would lead to what they call a “competitive disadvantage” for American companies. This in turn would almost certainly lead to job losses, which would in turn harm their ability to innovate over the next decade.
Their point of view was simple: they were asking the current Congress to switch back to a system that allowed them to immediately deduct their costs when it came to research and development as soon as the end of the year.
It’s important to note that in a general sense, research and development investment does not spread evenly across the economy. It tends to be heavily localized in a few key spaces, with manufacturing being chief among them. In fact, the manufacturing sector alone accounts for 58% of all research and development costs according to one recent study.
To contextualize that in a different way, it means that the manufacturing sector would face a significant tax increase as per the research cited above – to the tune of $31.7 billion in 2023 alone which is directly attributed to this new approach to R&D amortization.
It’s equally important to note that, until January 1, 2022, businesses could deduct 100% of all expenses that were directly attributed to research and development in the same year that they were incurred. With January 1, 2023, on the other hand, this new law goes into effect. This essentially makes it not only more expensive to invest in advancements that will help innovate various sectors like manufacturing, but in the growth of these companies as well.
Many agree that this means that the sector won’t just get hit, it will get hit significantly. This is essentially a major new expense – the fact that the tax liabilities of these companies are about to increase exponentially – that was not anticipated up to this moment.
One company that is particularly worried about the implications of this change is Miltec UV. Right now, company leadership believes that an exciting new opportunity is within reach. They have spent years developing a new technology for lithium-ion batteries – otherwise known as the rechargeable batteries that are found in countless devices like your smartphone or tablet. This new technology could potentially be used for next-generation electric vehicles.
Miltec UV has poured no less than 11 years of development into manufacturing the electrodes that will be used in these batteries. They’ve spent countless amounts of money on prototyping. There has been various proof of concepts developed to indicate that these microbes can do what the company thinks they can. There has been testing. On top of it all, there is the cost to manufacture the batteries. Officials agree that they are very close to the point where they can commercialize the batteries and begin to sell them, but with these new rule changes that also means that they will have to pay more taxes than they previously thought they would.

In the event that these tax changes are not reversed, industry leaders fear that they will hurt profits in the short-term. This could then negatively impact essential benefits that employees at manufacturing companies have come to count on.
For the record, Miltec UV is also an organization that funds all of its research and development efforts through the profits of its various commercial businesses. It has eschewed taking on outside investment in the past and hopes to continue to do so moving forward.
Regardless of whether Congress reverses these changes, one thing is for certain – this is a development that the entirety of the manufacturing industry will be paying close attention to moving forward.

Article Highlights

Reasons to File Separate
Filing Threshold
Community Property State Income
Joint & Several Liability
Social Security Benefits Taxation Threshold
Capital Loss Limitation
Sec 179 Limitation
Rental Loss Limitation
Traditional IRA
Roth IRA
Savings Bond Interest Exclusion
Higher Education Interest
Standard Deduction
Standard Deduction vs Itemized Deductions
Medicare Premiums
Home Mortgage Interest
SALT Limitation
Alternative Minimum Tax (AMT)
Tax Rates
Child & Dependent Care Credit
Earned Income Tax Credit (EITC)
Adoption Tax Credit
Elderly & Disabled Tax Credit
Retirement (Saver’s) Credit
Tax Withholding
Estimated Tax Allocation
Estimated Tax High Income Safe Harbor
Premium Tax Credit
Automatic 2-month Extension When Out of the Country

Married taxpayers generally have the option to file a joint tax return or separate returns, a filing status commonly referred to as married filing separate (MFS). If you are married and you and your spouse are filing separate returns, or are considering doing so, you should read this article before making that decision.Depending on whether the taxpayers are residents of a separate or community property state, their separate returns may include just the income and eligible expenses of each filer or a percentage of their combined income and expenses.
Couples choose the MFS option for a variety of reasons:

They want to avoid the joint and several liability for the tax from a joint tax return.Joint and several liability is a legal term for a responsibility that is shared by two or more parties to a lawsuit. A wronged party may sue any or all of them, and collect the total damages awarded by a court from any or all of them.
They have children from a prior marriage and want to keep finances separate.
They only want to keep their taxes separate.
The marriage is tenuous.
The taxpayers are separated and don’t want to cooperate in filing a joint return.
One spouse might get a larger refund by filing separately (the other will pay more).
They think they can save money by filing separate returns, and a variety of other reasons.

The fact of the matter is that tax laws are carefully written to keep married taxpayers from filing separately to manipulate the tax laws to their benefit. The following is a list of the more commonly encountered tax disadvantages – some might call them tax penalties -when filing as MFS. Unless otherwise noted the amounts shown are for 2023:
Filing Threshold – For all filing statuses except MFS the income threshold where a return must be filed is equal to the standard deduction for that filing status. For an MFS return the filing threshold is $5.
Community Property State Income – Unlike most states where each spouse claims their own earned income on an MFS return, in community property states the earned income is evenly split between the spouses. However, FICA payroll withholding, self-employment tax, and IRA contributions apply separately to the spouse who earned the income.
Joint & Several Liability – On a joint return both spouses can be held responsible for payment of the tax, while the spouses filing as MFS are only responsible for payment of the tax on their individual MFS returns.
Social Security Benefits Taxation Threshold – Social Security (SS) income is not taxable until taxpayers filing married joint have modified AGI (MAGI) that exceeds a threshold of $32,000. MAGI is regular AGI (without Social Security income) plus 50% of their Social Security income plus tax-exempt interest income, and plus certain other infrequently encountered additions. However, the threshold is zero for taxpayers filing as MFS. Thus taxpayers filing as MFS are taxed on 85% of every dollar of SS income.
Capital Loss Limitation -Where married couples filing jointly can annually deduct up to $3,000 of capital losses, those filing as MFS can only deduct up to $1,500.
Sec 179 Limitation – Taxpayers can elect to expense the cost of qualifying property used in the active conduct of a trade or business. The portion of the cost not expensed under Sec 179 is depreciable. The maximum amount that can be expensed is inflation adjusted annually and is $1,160,000 for 2023 (up from 1,080,000 in 2022). For MFS taxpayers the annual maximum amount must be allocated between the spouses.
Rental Loss Limitation – Generally, most taxpayers cannot deduct rental losses. However, there is aspecial rule that allows a deduction of aggregate losses from rental real estate activities up to $25,000 per year for taxpayers who are an active participant in the activity. It means that the taxpayer must participate in management decisions, and at least arrange for others to provide the necessary services such as repairs.
However, this special allowance only applies to lower income taxpayers with an AGI, without regard to passive losses, of $150,000 or less. In addition the $25,000 loss allowance begins to phase out 50 cents for each $1 of income over $100,000. Thus the allowance is fully phased out for joint filers when the AGI exceeds $150,000.
Phase out applies to gross income without considering passives, taxable Social Security benefits, or deductions for IRA.
Taxpayers filing as MFS must live apart the entire year or they get no relief under this rule. If they lived apart all year, the allowance is $12,500, and phase out begins at income of $50,000
Traditional IRA – For taxpayers filing joint returns, a Traditional IRA is tax deductible except that the deductibility is phased out for higher income taxpayers who are active participants in an employer retirement plan. Where both spouses are active participants in an employer retirement plan the deductibility of IRA contribution in 2023 phases out for AGIs between $116,000 and $136,000. Where only one spouse is an active participant the phase out is between $218,000 and $228,000. However, for those filing MFS the phaseout is between $0 and $9,999.
Roth IRA – The ability to contribute to a Roth IRA phases out for those couples filing jointly between $218,000 – $228,000. However, for those living together and filing MFS the phase-out is range is $0 and $9,999.
Savings Bond Interest Exclusion – An individual who pays qualified higher education expenses with redemption proceeds from Series EE or I bonds issued after ’89 can potentially exclude from income the bond interest. No exclusion is available to a taxpayer filing married separate.
Higher Education Interest – An “above-the-line” deduction is allowed for interest payments due and paid on any “qualified student loan,” regardless of when a taxpayer first incurred the loan. The maximum deduction per year is $2,500. However, for those filing MFS, no deduction is allowed.
Standard Deduction – The deduction for those filing as MFS is ½ of the standard deduction for married filing joint taxpayers plus the age 65 and blind add-on amounts.
Standard Deduction vs Itemized Deductions – Generally taxpayers can choose between taking the standard deduction or itemizing deductions. However, where both spouses are filing as MFS if one itemizes, then both must itemize, a tax trap often overlooked by MFS filers.
Medicare Premiums – For taxpayers who qualify forMedicare, the premiums are based upon their modified adjusted gross income (MAGI) and filing status from the tax return two years prior. The rates for individuals filing MFS are substantially higher than for other Medicare participants.
Home Mortgage Interest – MFS spouses are treated as if they are one taxpayer and must split between them the amount of mortgage interest deduction they would be entitled to jointly. If two homes are involved, each spouse can only claim interest on one home unless they agree one can claim both.
State and Local Taxes Deduction – When itemizing deductions, the tax code limits (referred to as the SALT limitation) the deduction for state and local taxes, such as state income or sales tax and property tax, to $10,000 for all filing statuses except MFS, which is limited to $5,000.
Alternative Minimum Tax (AMT) – For MFS taxpayers the AMT exemption amount is only half of the amount for those filing jointly and the income threshold for the 28% tax rate is half of what it is joint filers.
Tax Rates – The marginal rates for MFS are twice that of married taxpayers filing jointly.
Child & Dependent Care Credit – MFS taxpayers cannot claim this credit unless legally separated. Where it can be claimed, the AGI credit phaseout threshold is $75,000 (half of that allowed for joint filers).
Earned Income Tax Credit (EITC) – The EITC is a tax credit for low-income taxpayers. Where one spouse can file as head of household (HH) instead of MFS and lives in a community property state, earned income for the credit does not include amounts earned by the other spouse. For a spouse to claim HH instead of MFS, he or she must have lived apart from their spouse at least the last six months of the year and paid more than one-half of the cost of maintaining a household which is the principal place of abode for more than one-half the year of a child, stepchild, or eligible foster child for whom the taxpayer may claim a dependency exemption.
Adoption Tax Credit – Allowed for an MFS taxpayer only if the spouses lived apart for the last 6 months of the year and the child lived with taxpayer more than half the year and the taxpayer provided over half the cost of maintaining the home.
Elderly & Disabled Tax Credit – Not allowed for those filing as MFS.
Retirement (Saver’s) Credit – The maximum AGI to be eligible for any Saver’s Credit for those filing jointly in 2023 is $54,750 while for those filing MFS it is $36,500.
Tax Withholding – MFS taxpayers only claim their own income tax withheld unless they are residents of a community property state where they each claim half.
Estimated Tax Allocation – When taxpayers make joint estimated tax payments, they can allocate the payments between themselves in any amounts they can agree upon. If they cannot agree, they must divide the payments in proportion to each spouse’s individual tax as shown on their separate returns for the year.
Estimated Tax High Income Safe Harbor – Taxpayers are subject to an underpayment penalty when their tax liability less the sum of their withholding and estimated tax payments is more than $1,000. However, there is a high income exception to the penalty when the AGI for the previous year is over $150,000, in which case the required estimated payments are the smaller of 90% of the current year’s tax, or 110% of the previous year’s tax. If filing MFS the AGI for the previous year need only be over $75,000.
Premium Tax Credit – The premium tax credit is a refundable credit available to lower income taxpayers to help them offset the cost of purchasing their health insurance from a government marketplace. Taxpayers filing MFS cannot claim this substantial credit unless they are a victim of spousal abuse or abandonment.
Automatic 2-month Extension When Out of the Country – Taxpayers who are out of the U.S. on the tax filing due date are granted an automatic 2-month extension to file their tax return. This provision applies to both spouses when filing a joint return even if only one spouse is out of the country. When filing MFS, the extension will only apply to the spouse that is out of the country.
Many of the consequences listed interact with others and generally require professional tax software to account for all of interactions and to accurately compare the results for a couple filing jointly or each filing separately.
If you have questions or would like to schedule an appointment to see how the consequences of filing separate returns might apply to your situation, please give the office a call.

February 3 – Tax AppointmentIf you don’t already have an appointment scheduled with this office, you should call to make an appointment that is convenient for you.
February 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
February 15 – Last Date to Claim Exemption from Withholding
If you are an employee who claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

February 10 – Non-Payroll Taxes
File Form 945 to report income tax withheld for 2022 on all nonpayroll items. This due date applies only if you deposited the tax for the year in full and on time.February 10 – Social Security, Medicare and Withheld Income Tax File Form 941 for the fourth quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.February 10 – Certain Small Employers File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2022. This due date applies only if you deposited the tax for the year in full and on time.February 10 – Farm employers File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2022. This due date applies only if you deposited the tax for the year timely, properly, and in full.February 10 – Federal Unemployment Tax File Form 940 for 2022. This due date applies only if you deposited the tax for the year in full and on time.
February 15 – All Businesses
The following information statements are due to recipients to whom certain payments were made during 2022: Form 1099-B (Proceeds from Broker and Barter Exchange Transactions), Form 1099-S (Proceeds from Real Estate Transactions) and Form 1099-MISC (Miscellaneous Income) if substitute payments are reported in Box 8 or gross proceeds paid to an attorney are reported in Box 10. With consent of the recipient, the 1099 can be issued electronically.
February 15 – Social Security, Medicare and Withheld Income TaxIf the monthly deposit rule applies, deposit the tax for payments in January.February 15 – Payroll WithholdingEmployers begin withholding for employees who claimed exemption from withholding in 2022 but have not provided a W-4 (or W-4(SP)) to continue the exemption for 2023.
February 15 – Last Date to Claim Exemption from Withholding If you are an employee who claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.
February 28 – Payers of Gambling Winnings
File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2022. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was January 31.
February 28 – Informational Returns Filing DueFile government copies of information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2022, other than the 1099-NECs that were due January 31. There are different 1099 forms for different types of payments.
February 28 – Large Food and Beverage Establishment Employers
File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31.
February 28 – Applicable Large Employers (ALE) – Form 1095-C
If you’re an Applicable Large Employer, file paper Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C with the IRS. For all other providers of minimum essential coverage, file paper Forms 1094-B, Transmittal of Health Coverage Information Returns, and 1095-B with the IRS. If you’re filing any of these forms with the IRS electronically, your due date for filing them will be extended to March 31. See the Instructions for Forms 1094-B and 1095-B and the Instructions for Forms 1094-C and 1095-C for more information about the information reporting requirements.

February 3 – Tax AppointmentIf you don’t already have an appointment scheduled with this office, you should call to make an appointment that is convenient for you.
February 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
February 15 – Last Date to Claim Exemption from Withholding
If you are an employee who claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

Article Highlights:

1099-K Reporting Threshold
IRS Is After Unreported Income
Venmo, e-Bay, Etsy, and Others
Deductible Expenses
Self-employment tax
Self-employment Retirement
Self-Employed Health Insurance Deduction
Hobby vs. Business

The IRS Tax law, since 2011, has required third-party settlement organizations such as Venmo, PayPal, CashApp, and Ebay to report transactions over $20,000 in payments per year from over 200 transactions.
The American Rescue Plan of 2021 abruptly changed the reporting threshold to $600 per year regardless of the number of transactions. This change was supposed to have taken place beginning for 2022 transactions.
However, some pressure from the tax preparation community and businesses have caused the IRS to delay for one year the implementation of the $600 threshold, so it will be applicable to transactions that occur beginning in 2023 instead of those in 2022.
This delay will give folks more time to prepare for the change in 2023. Even with the reporting relief provided by the IRS, some 1099-Ks may be issued by the payment processers when transactions reach the $600 threshold if their computer programs have already been set to use the lower threshold.
So, you might ask, what does that have to do with me? This change can impact taxpayers in several ways, some unexpected, so you may find yourself in for a surprise that can be unpleasant in some situations.
This article explores the several ways taxpayers can be adversely affected. But first we need to review the purpose of the 1099-K and what can transpire for you if you receive one.
The 1099-K was created by the IRS as a means to detect unreported income by businesses. The IRS does that by requiring third-party settlement organizations such as credit card companies, eBay, Venmo and others to report on IRS Form 1099-K the transactions they’ve handled for an individual or business if the gross amount of those transactions exceeds a specified threshold.
Example: Susan, who owns and operates a gift shop, accepts credit cards for purchases made by her customers. Since the credit card transactions are processed through a third-party settlement organization, that third party must issue a 1099-K for the total dollar amount of credit card transactions that Susan had for the year. The 1099-K goes to the IRS and a copy goes to Susan. The IRS can then compare the 1099-K amount to the amount Susan reports as the gross income from her business. The IRS is also aware of, through studies they have conducted, the amount of cash sales certain types of businesses might have. With this information, the IRS can efficiently identify taxpayers who are not reporting all their income and ID them for audit.
Although primarily intended for businesses, there are situations where you may find yourself a recipient of a 1099-K.
One such situation is if you sold personal property on eBay or a similar web platform. If the total amount received is $600 or more (now starting with 2023 transactions), you will receive a 1099-K. Although these sales are generally not taxable since used personal items are usually sold for less than their cost, the IRS does not know the circumstances of the sale and if the amount is significant, it needs to be reconciled on your individual tax return. A sale of personal property that results in a loss is not deductible for tax purposes. In years when the threshold for requiring a 1099-K is $20,000, a 1099-K is never issued to most non-business taxpayers, so there is no concern about reconciliation.
Many taxpayers are also involved in the gig economy selling their products through Etsy, eBay, etc., or hiring out their services on TaskRabbit.
Others may be driving for Uber or Lyft or making deliveries through Door Dash, Uber Eats, etc.
Some individuals have been meeting their tax responsibilities from these activities while others have not, thus prompting Congress to reduce the threshold. In either case, it is important that these individuals keep records of their expenses associated with their income-producing activities to reduce any tax liability. Here are some expense examples:

Cost of goods sold
Advertising
Vehicle travel
Business cell phone service
Internet service for on-line sales
Office supplies
Postage & shipping
Some may qualify for a home office deduction

Since these activities are generally treated as self-employment income, here are other issues to be aware of:
Self-employment tax – Which is like Social Security and Medicare taxes paid by employees and matched by the employer through payroll taxes. Except a self-employed individual pays both the employee’s and the employer’s share, which combined can total 15.3% of net profit.
Self-employment Retirement – Self-employment Income qualifies for IRA contributions and the very popular Simplified Employee Pension Plan (SEP) where a self-employed individual can contribute a tax-deductible amount of 20% of their net earnings to the retirement plan.
Self-Employed Health Insurance Deduction – Most self-employed individuals can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of themself, spouse, dependents, and children under age 27 even if the child is not a dependent. However, this deduction is limited to the net income from the business.
Hobby vs. Business – Whether the activity is truly a business or just a hobby impacts how the income is reported on the tax return, deductibility of expenses (including medical insurance premiums), whether self-employment tax applies, and if contributions to retirement plans can be based on the activity’s income.
As you can see, all of this can become quite complicated and the penalties for not reporting self-employment income can be severe. Please contact this office about what expenses are deductible for your specific type of endeavor and your business filing obligations.
What ever you do, don’t ignore a 1099-K; it must be reconciled on your tax return.
Please contact this office if you have any questions.

Article Highlights:

Required Minimum Distribution (RMD)
Penalty for Not Taking an RMD
Excess Contribution or Distribution Penalty Statute of Limitations
Nanny Retirement Contributions
Credit for Small Employer Pension Plan Start-up Costs
Military Spouse Retirement Plan Eligibility Credit for Small Employers
Firefighter Retirement Distributions
Penalty-Free Withdrawals for Domestic Abuse Victims
Qualified Charitable Distributions (QCDs) to Split Interest Entity
Qualifying Longevity Annuity Contracts (QLACs)
Tax Free Sec 529 Plan to Roth Rollovers
Additional Nonelective Contributions to Simple Plans
Indexing IRA Catch-Up Contributions
Employers Can Make Matching Contributions Based on Student Loan Payments
Withdrawals for Certain Emergency Expenses
Emergency Savings Accounts
Increased Catch-Up Contributions for Those Aged 60 Through 63
Automatic Enrollment in Retirement Plans Requirement
Long-Term Part-Time Employee 401(k) Participation
Enhancement and Modification of the Saver’s Credit

The President, on December 29, 2022, signed the Consolidated Appropriations Act, 2023, which is the “omnibus spending bill” Congress needed to pass to avoid a government shutdown. That legislation also included theSetting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, a.k.a. theSECURE 2.0 Act, that can significantly impact and augment your retirement planning strategies. The SECURE 2.0 Act incorporates provisions from proposed legislation that was passed by the House and another bill that was passed by the Senate that had not previously been reconciled.
So What’s in the Legislation That May Affect You?
Included are over 300 pages of provisions affecting tax-favored retirement benefits that modify many provisions of the original SECURE Act enacted back in 2019. Some apply to individuals while others benefit businesses. The provisions of the SECURE 2.0 Act become effective over several years stretching out until 2026. This article includes the most significant provisions.
THOSE EFFECTIVE IN 2023
Here are the takeaways for those effective in 2023:

Required Minimum Distribution (RMD) – To prevent an individual from investing in tax-deferred retirement plans, including Traditional IRAs, but never withdrawing from the plans, the account owner is required to begin taking RMDs in the year the IRA owner reaches the mandatory age set by Congress.The policy behind the RMD rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.Originally RMDs had to begin at age 70½, until the original SECURE Act increased it to 72 beginning in 2020. Now the SECURE 2.0 Act is increasing it to age 73 in 2023 and age 75 in 2033, giving folks longer to accumulate their retirement savings.
Penalty for Not Taking an RMD – For years, thepenalty (technically an excise tax on “excess accumulation”) for an individual failing to take the required minimum amount from their traditional IRA or retirement plan has been a draconian 50% of the amount that should have been withdrawn but wasn’t for the year. The SECURE 2.0 Actdecreases the penalty to 25% and further reduces it to 10% if corrected in a timely manner.
Excess Contribution or Distribution Penalty Statute of Limitations – Individuals often are not aware of the penalty for excess contributions or not taking a required minimum distribution leading to an indefinite accumulation of interest and penalties. To provide finality for taxpayers in the administration of these excise taxes, the SECURE 2.0 Act provides that a 3-year period of limitations begins when the taxpayer files an individual tax return (Form 1040) for the year of the violation, except in the case of excess contributions, in which case the period of limitations runs 6 years from the date Form 1040 is filed.
Nanny Retirement Contributions – The act permits employers of domestic employees (e.g., nannies) toprovide retirement benefits for such employees under a Simplified Employee Pension (SEP)plan. The reason these plans are referred to as simplified is the contributions are maintained in an IRA account of an employee and subject to normal IRA rules.SEP-IRAs require little administration on the part of the employer and contributions immediately vest for the employee.The employer can decide what amount to contribute each year, anywhere from $0 to the maximum SEP-IRA contribution which is, 25% of compensation or $66,000 for tax year 2023, whichever is less.
Credit for Small Employer Pension Plan Start-up Costs – SECURE 2.0 Act modifies the credit by creating a second category of employer – those with 50 or fewer employees – while leaving the original credit in place for employers with more than 50 employees but not more than 100.Thus, for employers with 50 or fewer employees the maximumcredit is increased from $500 to $1,000. In addition, the credit percentage is increased from 50% to 100% for the first-year expenses for starting a pension plan and for the next three years will be as shown here:  2nd Year…………………………………………………   75%3rd Year………………………………………………….   50%4th Year………………………………………………….   25%
Military Spouse Retirement Plan Eligibility Credit for Small Employers – Members of the military are transferred frequently and their spouses who move with them often do not remain employed long enough to become eligible for their employer’s retirement plan or to vest in employer contributions. The SECURE 2.0 Act provides small employers (no more than 100 employees earning more than $5,000 per year) a tax credit with respect to their defined contribution plans if they:(1) Make military spouses immediately eligible for plan participation within twomonths of hire,(2) Upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at 2 years of service, and(3) Make the military spouse 100% immediately vested in all employer contributions.The tax credit equals the sum of:(1) $200 per military spouse, and(2) 100% of all employer contributions (up to $300) made on behalf of the military spouse.This results in a maximum tax credit of $500. This credit applies for 3 years with respect to each military spouse.
Firefighter Retirement Distributions – Under current law, an employee who withdraws funds from their retirement plan before age 59½ will pay a penalty (additional tax) of 10% of the taxable amount of the distribution. An exception to the penalty is if an employee terminates employment after age 55 and takes a distribution from a retirement plan. Further, there is a special rule that allows firefighters to substitute age 50 for age 55 for purposes of this exception from the 10% tax. The SECURE 2.0 Act extends the age 50 rule to private sector firefighters.
Penalty-Free Withdrawals for Domestic Abuse Victims – The Act allows retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw a small amount of money and avoid the 10% early withdrawal penalty when they withdraw the lesser of:o   $10,000, oro   50% of the present value of the nonforfeitable accrued benefit of the employee under the plan.The distribution may be redeposited to the retirement plan at any time during the 3-year period beginning on the day after the date on which the distribution was received and avoid the tax on the distribution.
Qualified Charitable Distributions (QCDs) to Split Interest Entity – Normally an individual at least age 70½ can annually transfer tax free up to $100,000 from their IRA to a qualified charity. That provision is expanded by the SECURE 2.0 Act to allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Caution: Where a taxpayer made IRA contributions after reaching age 70½ there may be taxable ramifications; call this office before making a transfer.
Qualifying Longevity Annuity Contracts (QLACs) – QLACs are generally deferred annuities that begin payment toward the end of an individual’s life expectancy. Because payments start so late, QLACs are an inexpensive way for retirees to hedge the risk of outliving their savings in defined contribution plans and IRAs.Tax regulations published in 2014 imposed certain limits that have prevented QLACs from achieving their intended purpose in providing longevity protection.The Act addresses these limitations by:o   Repealing the 25% of the account balance limit that applies to the amount of premiums paid for the contract,o   Allowing up to $200,000 (indexed) to be used from an account balance to purchase a QLAC, ando   Facilitating the sales of QLACs with spousal survival rights – and clarifies that free-look periods are permitted up to 90 days with respect to contracts purchased or received in an exchange on or after July 2, 2014.

THOSE EFFECTIVE IN 2024

Tax Free Sec 529 Plan to Roth Rollovers – Frequently individuals express concerns about funds being left over and stuck in 529 accounts when the beneficiary’s higher-education expenses paid from the plan have turned out to be less than the account’s value, leaving them no choice for getting access to the funds except taking a non-qualified withdrawal and assume a penalty.The Act amends the tax code to allow for tax- and penalty-free rollovers from 529 accounts to Roth IRAs, under certain conditions.o   Beneficiaries of 529 college savings accounts would be permitted to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA.o   The 529 account must have been open for more than 15 years.o   These rollovers are also subject to the Roth IRA annual contribution limits (for example, an inflation-adjusted $6,500 in 2023), which means the $35,000 maximum rollover can’t be done all in one year.
Additional Nonelective Contributions to SIMPLE Plans – Currently employers with SIMPLE plans are required to make employer contributions to employees of either 2% of compensation or 3% of employee elective deferral contributions.Beginning in 2024 an employer can make additional contributions to each employee of the plan in a uniform manner, provided that the contribution may not exceed the lesser of:o   Up to 10% of compensation oro   $5,000 (indexed)
Indexing IRA Catch-Up Contributions – Currently the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50. Beginning in 2024 catch-up contributions will be inflation adjusted in $100 increments.
Employers Can Make Matching Contributions Based on Student Loan Payments – This new retirement plan twist is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student loan debt, and thus are missing out on available employer matching contributions for retirement plans.The Act allows employees to receive matching contributions by reason of repaying their student loans and by permitting an employer to make matching contributions under a 401(k) plan, 403(b) plan, SIMPLE IRA or 457(b) government plan with respect to qualified student loan payments.A qualified student loan payment is largely defined as a payment made on any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.
Withdrawals for Certain Emergency Expenses – Unless an exception applies, withdrawals from a 401(k) plan or a traditional IRA before attaining the age of 59½ are generally subject a 10% early withdrawal penalty.Effective beginning in 2024, the Act provides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses.Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution to the plan within 3 years.No further emergency distributions are permissible during the 3-year repayment period unless repayment occurs.
Emergency Savings Accounts – According to a report by the Federal Reserve, almost half of Americans would struggle to cover an unexpected $400 expense resulting in many tapping into their retirement savings.  Congress reasoned that separating emergency savings from one’s retirement savings account will provide participants a better understanding that one account is for short-term emergency needs and the other is for long-term retirement savings, thus empowering employees to handle unexpected financial shocks without jeopardizing their long-term financial security in retirement through emergency hardship withdrawals from their retirement plans.Thus the Act provides employers the option to offer to their non-highly compensated employees pension-linked emergency savings accounts.Employers may automatically opt employees into these accounts at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer).The first four withdrawals from an emergency savings account each plan year may not be subject to any fees or charges. At separation from service, an employee may take their emergency savings account as a cash distribution or roll it into their Roth defined contribution plan (if they have one) or an IRA.

EFFECTIVE IN 2025

Increased Catch-Up Contributions for Those Aged 60 Through 63 – Employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan more than the otherwise applicable limits. The limit on catch-up contributions for 2023 is $7,500, except in the case of SIMPLE plans for which the limit is $3,500.Effective beginning in 2025, these limits are increased to the greater of $10,000 or 50% more than the regular catch-up amount beginning in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025.Automatic Enrollment -ManyAmericans reach retirement age with little, or no savings simply because they are not offered an opportunity to save for retirement through their employers. Even for those employees who are offered a retirement plan at work, many do not participate.The Act requires new 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (employees may opt out of coverage).o   The initial auto enrollment amount is a contribution by the employee of at least 3% but not more than 10% of their compensation.o   Each year thereafter that amount is increased by one percentage point until it reaches at least 10%, but not more than 15%.o   All current 401(k) and 403(b) plans are grandfathered (i.e., not required to have automatic enrollment).The following employers are exempt from the mandatory enrollment requirement, including:o   Small businesses with 10 or fewer employees.o   Employers that have been in business for less than three years.o   Church Plans.  o   Government Plans.
Long-Term Part-Time Employee 401(k) Participation – The Act significantly lowers the bar for part-time employees to participate in 401(k) retirement plans. Employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete:o   1 year of service (with the 1,000-hour rule) oro   2 consecutive years of service where the employee completes at least 500 hours of service per year (down from 3 consecutive years).

EFFECTIVE IN 2027

Enhancement and Modification of the Saver’s CreditCurrent law provides for a nonrefundable credit for lower income individuals who make contributions to individual retirement accounts (“IRAs”), employer retirement plans (such as 401(k) plans), and ABLE accounts. The Act repeals and replaces the credit with respect to IRA and retirement plan contributions, changing it from a credit paid in cash as part of a tax refund to a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan.The match is 50% of IRA or retirement plan contributions up to $2,000 perindividual. Thus, the government’s contribution will be a maximum of $1,000. Since the matching contribution is for lower- and middle-income individuals, the matching contribution is phased as indicated in the table.

SAVER’S MATCH MAGI PHASEOUT

Filing Status
Phaseout Threshold
Fully Phased Out

Single, MFS
20,500
35,500

HH
30,750
53,250

MFJ, SS
41,000
71,000

MAGI = AGI plus add back of foreign and possession (Internal Revenue Code Sections 911,931 and 933) exclusions.

The preceding covers only some of the provisions in the new law. As the IRS develops further guidance and tax regulations more details will emerge of which we will keep you informed.
If you have questions or would like to schedule a retirement planning appointment, please give this office a call.