Quick Reminder:
It’s a good time to make year-end donations of clothing & household items to charitable organizations.
Don’t forget to make a list, including each item’s condition, since only items “good or better” qualify for deductions. Photos are helpful too.
As a general “rule of thumb”, 3 years is all you need to keep copies of tax returns and related tax documents. The IRS has a 3-year statute of limitations – meaning they generally will not go back more than 3 years to audit your tax returns, assuming the tax returns were timely filed, including extensions.
However:
Although 3 years is generally a “safe bet” for retention of past years tax returns and tax documents, for taxpayers looking to be a bit more cautious, a 6-7 year holding period may be a more conservative time frame.
If storage space available for maintaining paper copies of your tax documents and other records in your residence is an issue, the IRS accepts digitally stored records and tax documents. As long as your records are accurate and readable, documents stored digitally are permissible by the IRS if ever needed.
For more tips on retaining documents for tax purposes, please look at the MA Society of CPAs Record Retention Guide.
With the recent surge in home prices over the past couple of years, many taxpayers are selling their residences for significant capital gains. Under the current tax rules, when selling a primary residence:
The capital gain is the difference between your net sale proceeds (gross sales price less selling expenses such as broker commission, legal fees, stamps and other items noted on the Closing Disclosure) less your cost basis (original cost of the house plus renovation and improvement costs). As long the taxpayers have owned and lived in the house for 2 out of the past 5 years, they will qualify to exclude $500K/$250K of capital gain income from the sale of their primary residence.
A few other tax considerations when selling of your primary residence:
Your mortgage balance doesn’t impact the capital gain.
The home sale capital gain exclusion only applies to the sale of a qualifying primary residence and not to a second home.
Maintain documentation for renovations and capital improvements on your home as best you can.
At closing, the attorney handling the paperwork will generally provide the seller with a Form 1099-S, Proceeds from Real Estate Transactions, reporting the sale proceeds of the house.
One final item to be aware of, if your residence was ever used as business property, such as a home office or rental property (including Airbnb), the allowed depreciation claimed while used for business purposes needs to be “recaptured” as income in the year of sale.
Below is a brief summary of reporting foreign accounts, gifts and inheritances. Please note that the penalties for non-compliance can be onerous.
If you inherit or receive a gift from a foreign person of more than $100k:
If you have a foreign account open at any time during the calendar year, no matter how low the balance:
If you have foreign accounts open that exceed $10k in any calendar year:
If you are married filing jointly and have foreign accounts with a combined value of more than $150k during the year or more than $100k at 12/31, or any other taxpayer with a combined value of more than $75k during the year or more than $50k at 12/31:
Most years, the government bumps up the maximum Social Security taxes that you can pay. For 2023, the maximum wage base jumps to $160,200, an increase of $13,200, or 9.0%, over the max of $147,000 that was in place for 2022.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $9,932. This is $818 higher than the 2022 max of $9,114. Employers then match any Social Security taxes withheld from their staff’s salaries.
Higher Medicare Taxes Due To The Affordable Care Act Passed In 2012:
Starting back in 2013, the employee portion of the Medicare tax jumps from the current rate of 1.45% to 2.35% on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer will continue to match their employees’ Medicare taxes at a rate of 1.45%, which means the total marginal Medicare tax will be 3.8% for high-income taxpayers. This tax is reported on the Form 8959.
For example, if you’re single, and earn wages of $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k – $200k) * .9%) for 2013 and beyond.
To increase taxes for high-income individuals even more, the Medicare tax continues to apply to unearned income. Anyone with income over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income (except for when you rent office space you own to your practice) in addition to any federal and state income taxes due on this income. This tax is reported on the Form 8960.
Calculating the Self-employment Tax:
If you’re self-employed and earn more than $400 in net profit from your business, you’re subject to Social Security and Medicare taxes as well. Known as the “self-employment tax”, you’ll need to complete a Schedule SE to calculate this tax, and then report the amount due on your Form 1040 in additional to your federal income taxes due.
The self-employment tax is based on a Social Security tax rate of 12.4% and a Medicare tax rate of 2.9%. These rates are double those paid by employees, since a self-employed person must pay both the employee’s portion and the employer’s portion of both taxes. Remember, when you work as an employee, your employer matches the Social Security and Medicare taxes withheld from your pay.
Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes.
If your practice received a Provider Relief Fund Grant of more than $10k from HRSA, you are required to self-report that you utilized those funds properly. On 10/22/22, the Health Resources and Services Administration (HRSA) issued guidance available at: https://www.hrsa.gov/sites/default/files/hrsa/provider-relief/post-payment-notice-reporting-requirements-october-2022.pdf.
For those practices that received PRFs of more than $10k in aggregate between 7/1/21 and 12/31/21, your self-reporting period starts 1/1/23 and ends 3/31/23. HRSA has already emailed PRF recipients who might be required to self-report during the upcoming Reporting Period of 1/1/23 – 3/31/23. Early in January we will be reaching out to our practice clients who received more than $10k in Provider Relief Funds during the second half of 2021 to help them fulfill this filing requirement.
And don’t forget that the self-reporting period for practices receiving PRFs in excess of $10k between 1/1/22 and 6/30/22 commences on 7/1/23 and ends on 9/30/23.
You can access the Provider Relief Fund Reporting Portal at: https://prfreporting.hrsa.gov/s/. The first step is to register to set up your account if you haven’t already done so. Please register using your email address as the username, but then use practicehelp@schwartzaccountants.com as the contact email if you will be having us help you out with this self-reporting application. Our fee is $750 to assist with the self-reporting application.