Below is important information on the newest tax laws, retention of records, and helpful web links to answer any of your questions.
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NEW LEGISLATION
The new standard deduction will not encourage charitable giving as it has increased to $29,200 (married filing jointly), $21,900 (head of household), and $14,600 (all other taxpayers).
Personal Income Tax
• Employees will pay only 6.2% OASDI (Social Security) tax on compensation received during 2024 up to $168,600 (the wage base for 2024).
• Self-employed persons will pay only 12.4% Social Security self-employment taxes on self-employment income up to $168,600.
• Note: Sole proprietors and partners are subject to the medicare tax on their self employment income even if the income is not distributed. Shareholders in an S corporation are not subject to the self-employment tax on their share of the corporation's net income whether distributed or not.
Definition of Medicine for Health Plan Reimbursements
• Beginning 2020, the cost of over-the-counter medicines can be reimbursed with excludible income through a health flexible spending arrangement (FSA), health reimbursement account (HRA), health savings account (HSA), or Archer MSA (medical savings account), unless the medicine is prescribed by a doctor or is insulin.
• For distributions after 2010, the additional tax on distributions from an HSA that are not used for qualified medical expenses increases from 10% to 20% of the disbursed amount, and the additional tax on distributions from an Archer MSA that are not used for qualified medical expenses increases from 15% to 20% of the disbursed amount
• Beginning in 2023, there will be a federal limit on annual contributions to flexible spending accounts of $3,200.
Retirement Plan Changes
• Small employers may establish simple cafeteria plan.
• For years beginning after Dec. 31, 2010, small employers (those having an average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a simple cafeteria plan.
Medicare Tax
Starting in 2013, some high wage earners will pay an extra 0.9% Medicare tax on a portion of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay.
The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. The 0.9% tax applies only to employees, not to employers.
Once an employee's wages reach $200,000 for the year, the employer must begin witholding the additional 0.9% tax from the wages. However, this witholding may prove insufficient if the employee has additional wage income from another job or if the employee's spouse also has wage income. To avoid that result, an employee may request extra income tax witholding by filing a new Form W-4 with the employer.
Tax Cuts & Jobs Act of 2017
• New income tax rates & brackets
• Standard deduction increased
• Personal exemptions suspended
• Repeal of Affordable Care Act's individual mandate
• State & local tax deduction limited
• Mortgage & home equity interest deduction limited
• Moving expenses deduction suspended
• Miscellaneous itemized deductions suspended
• New deduction for pass-thru income
New Basis and Character Reporting Rules
• Generally effective on Jan. 1, 2011, every broker required to file an information return reporting the gross proceeds of a covered security such as corporate stock must include in the return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short-term or long-term
• The reporting is generally done on Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions.
• A covered security includes all stock acquired beginning in 2011
Net Investment Income Tax
This new tax will only affect taxpayers whose adjusted gross income (AGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately.
If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply.
What is net investment income? The "net investment income" that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn't included in net investment income, nor is wage income.
If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won't be subject to the 3.8% Medicare contribution tax.
Consolidated Appropriations Act, 2021
• Taxpayers can take deductions for charitable contributions equal to 60% of contribution base beginning 2023.
• 50% limit on business meal deduction is effective beginning 2023.
• Educational payments excluded from employees' wages include student loan repayments. There is a $5,250 per employee limit for all educational payments beginning 2021.
Secure 2.0, signed December 29, 2022
• Age increased for required distributions.
• Tax-free rollovers from 529 accounts to ROTH IRA.
• Bigger catch-up contributions permitted.
• More penalty-free withdrawals permitted.
YOUR RECORDS
Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later if you file a claim for credit or refund after you file your return. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction. Records for acquisition of stock, real estate, and improvements to your property should be retained until the asset is sold.
General
• Except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed.
• Example: if your 2019 individual income tax return is filed by its original due date of April 15, 2020, IRS will have until April 17, 2023 to assess a tax deficiency against you. If you filed the return late on November 1, 2020, IRS will have until November 1, 2023 to assess a tax deficiency against you.
• The assessment period is extended to six years if more than 25% of gross income is omitted from a return
• Where no return was filed for a tax year, IRS can assess tax at any time (even beyond three or six years)
• Be sure to retain tax returns indefinitely.
• Keep important tax records (receipts, W-2’s, 1099’s) for six years after the return is filed
• Keep other documents (real estate closing statements, records of investments in stocks and mutual funds, other investments) indefinitely as children and grandchildren may need these records.
Separation & divorce
Be sure you have access to any tax records affecting you that are kept by your spouse. Or better still, make copies of the tax records, since in such situations, relations may become strained and access to the records difficult. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse. Your records should include a copy of the divorce decree or agreement of separate maintenance, which may be needed to substantiate alimony payments and distinguish them from child support or a property settlement. Your records should also include agreements or decrees over custody of children and any agreements as to who is entitled to claim an exemption for them. Retain records of the cost of all jointly-owned property. Also, get records as to the cost or other basis of all property your spouse or former spouse transferred to you during your marriage or as a result of the divorce, because your basis in that property is the same as your spouse's or former spouse's basis in it was.
Relating to property
Keep in mind that the tax consequences of a transaction that occurs in one year may depend on things that happened in earlier years—and that the period for which you should retain records must be measured from the year in which the tax consequences actually occur. This may be significant, for example, where you sell property that you bought years earlier.
For example, suppose you bought your home in 1996 for $100,000 and made $20,000 of capital improvements in 2013. To determine the tax consequences of the sale, it's necessary to know your basis (i.e., original cost plus later capital improvements). Thus, if you sell your home in 2021, and your return for that year is audited, you may have to produce records relating to the purchase in 1996 and the capital improvement in 2013 to be able to show what your basis is. Therefore, those records should be kept for at least six years after your 2021 return is filed instead of just six years after the transactions they relate to occurred.
When new property takes the basis of old property, records relating to the old property should be kept until six years after the sale of the new property is reported. For example, suppose you bought a car for business use in 2016 and you traded it in on a new car for business use in 2018. If you sell that car in 2021, your basis in the car will determine whether you have a tax gain or a tax loss on the sale, and your basis in the car is determined, at least in part, by your basis in the car you traded in for it in 2018. Accordingly, records relating to your old car should be kept until 2028.
Similar considerations apply to other property which is likely to be bought and sold—for example, stock in a business corporation or in a mutual fund, bonds (or other debt securities), etc. In particular, remember that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate purchase of stock. The records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.
Loss/destruction of records
To safeguard your records against loss from theft, fire or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home. In addition, consider keeping copies of the most important records in a single, easily accessible location so that you can grab them if you have to leave your home in an emergency.
If, in spite of your precautions, records are lost or destroyed, it may be possible to reconstruct some of them. For example, a paid tax return preparer is required by law to retain, for a period of three years, copies of tax returns or a list of taxpayers for whom returns were prepared. Most preparers comply with this rule by retaining copies (sometimes for a longer period than the legally required three years) and can furnish a copy if yours is not available. (In the case of my own clients, I retain copies of returns for a period of seven years.)
HELPFUL LINKS