Category Archives: Tax Related

Tax Benefits for Adopting

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Are you aware of the tax benefits for adopting a child? There are two tax breaks available to offset expenses. In 2022, adoptive parents may be able to claim a credit against their federal tax for up to $14,890 of “qualified adoption expenses” for each child. This will increase to $15,950 in 2023. That’s a dollar-for-dollar reduction of tax.

Also, adoptive parents may be able to exclude from gross income up to $14,890 in 2022 ($15,950 in 2023) of qualified expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits.

Parents can claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expenses.

Qualified Expenses Defined

To qualify for the credit or the exclusion, the expenses must be “qualified adoption expenses.” These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including meals and lodging), and other expenses directly related to the legal adoption of an “eligible child.”

Qualified expenses don’t include those connected with the adoption of a child of a spouse, a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a government program. Expenses reimbursed by an employer don’t qualify for the credit, but benefits provided by an employer under an adoption assistance program may qualify for the exclusion.

Further, expenses related to an unsuccessful attempt to adopt a child may qualify. Expenses connected with a foreign adoption (the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.

Taxpayers who adopt a child with special needs are deemed to have qualified adoption expenses in the tax year in which the adoption becomes final, in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,890 for 2022 ($15,950 for 2023). They can take the adoption credit or exclude employer adoption assistance up to that amount, whether or not they had those amounts of actual expenses.

What is an Eligible Child?

An eligible child is under age 18 at the time a qualified expense is paid. A child who turns 18 during the year is eligible for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for him- or herself is eligible, regardless of age.

A special needs child refers to one who the state has determined can’t or shouldn’t be returned to his or her parents and who can’t be reasonably placed with adoptive parents without assistance because of a specific factor or condition. Only a child who is a citizen or resident of the U.S. is included in this category.

Phase-out Amounts

The credit allowed for 2022 is phased out for taxpayers with adjusted gross income (AGI) over $223,410 ($239,230 for 2023) and is eliminated when AGI reaches $263,410 ($279,230 for 2023).

Note: The adoption credit isn’t “refundable.” So, if the sum of your refundable credits (including any adoption credit) for the year exceeds your tax liability, the excess amount isn’t refunded to you. In other words, the credit can be claimed only up to your tax liability.

Get the Full Benefit for Adopting

The tax benefits for adopting a child can help offset adoption expenses. Be sure to get the full benefit of tax savings available to adoptive parents. If you need help understanding the rules, the tax professionals at Ramsay & Associates can help. Contact us with any questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Updating Income Tax Withholdings

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When you filed your federal tax return this year, were you surprised to find you owed money? You might want to change your withholding so that this doesn’t happen again next year. You might even want to adjust your withholding if you got a big refund. Receiving a tax refund essentially means you’re giving the government an interest-free loan. Here are some things to know about updating income tax withholdings.

Adjust if Necessary

Taxpayers should periodically review their tax situations and adjust withholding, if appropriate.

The IRS has a withholding calculator to assist you in conducting a paycheck checkup. The calculator reflects tax law changes in areas, such as available itemized deductions, the child credit, the dependent credit, and the repeal of dependent exemptions.

Consider Life Changes

There are some situations when you should check your withholding. In addition to tax law changes, the IRS recommends that you perform a checkup if you:

  • Adjusted your withholding last year, especially in the middle or later part of the year,
  • Owed additional tax when you filed your 2021 return,
  • Received a refund that was smaller or larger than expected,
  • Got married or divorced,
  • Had a child or adopted one,
  • Purchased a home, or
  • Had changes in income.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly estimated payments are due. The next payments for 2022 are due on January 16, 2023.)

Plan Ahead Now

Updating income tax withholdings can help remedy any shortfalls to minimize taxes due for 2022, as well as any penalties and interest. Contact us if you have any questions or need assistance. The personal tax professionals at Ramsay & Associates can help you determine if you need to adjust your withholding.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Transferring Assets Through the Kiddie Tax

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Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children. When transferring assets through the kiddie tax, be sure you’re aware of the rules.

Kiddie Tax Rules and Rates

While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if:

  1. The child hasn’t reached age 18 before the close of the tax year, or
  2. The child’s earned income doesn’t exceed half of their support and the child is age 18 or is a full-time student aged 19 to 23.

The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial.

If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax,” and special allocation rules apply if the parents have more than one child subject to the kiddie tax.

Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates instead of the parents’ tax rates.

Be aware that to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.

Possible Saving Vehicles

The portion of investment income that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:

  • Securities and mutual funds oriented toward capital growth;
  • Vacant land expected to appreciate in value;
  • Stock in a closely held family business, expected to become more valuable as the business expands but pays little or no cash dividends;
  • Tax-exempt municipal bonds and bond funds;
  • U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in, or an election to recognize income annually is made.

Investments that produce no taxable income — and therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as:

A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.

If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return.

We Can Help You with Reporting Options

Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child.

The tax professionals at Ramsay & Associates can help with transferring assets through the kiddie tax. If you have questions about the rules for income shifting, contact us. We can help.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Own an EV? Take Advantage of Tax Credits

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According to several sources, sales and registrations of electric vehicles (EVs) increased dramatically in the U.S. in 2022. However, while they’re still a small percentage of the cars on the road today, they’re increasing in popularity all the time. Do you own an EV? You may be able to take advantage of tax credits if you qualify.

Tax Credit Fine Print

If you buy an EV, you may be eligible for a federal tax break. The tax code provides a credit to purchasers of qualifying plug-in electric drive motor vehicles, including passenger vehicles and light trucks.

The credit is equal to $2,500 plus an additional amount, based on battery capacity, that can’t exceed $5,000. Therefore, the maximum credit allowed for a qualifying EV is $7,500.

Be aware that not all EVs are eligible for the tax break, as we’ll describe below.

What Defines an Electric Vehicle

For purposes of the tax credit, a qualifying vehicle is defined as one with four wheels that’s propelled to a significant extent by an electric motor, which draws electricity from a battery. The battery must have a capacity of not less than four kilowatt hours and be capable of being recharged from an external source of electricity.

The credit may not be available because of a per-manufacturer cumulative sales limitation. Specifically, it phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the United States (determined on a cumulative basis for sales after December 31, 2009).

For example, Tesla and General Motors vehicles are no longer eligible for the tax credit. And Toyota is the latest auto manufacturer to sell enough plug-in EVs to trigger a gradual phase out of federal tax incentives for certain models sold in the U.S.

Several automakers are telling Congress to eliminate the limit. In a letter, GM, Ford, Chrysler, and Toyota asked Congressional leaders to give all electric car and light truck buyers a tax credit of up to $7,500. The group says that lifting the limit would give buyers more choices, encourage greater EV adoption, and provide stability to auto workers.

Here’s What Else to Know

The IRS provides a list of qualifying vehicles on its website, and it recently added some eligible models.

Here are some additional points about the plug-in electric vehicle tax credit:

  • It’s allowed in the year you place the vehicle in service.
  • The vehicle must be new.
  • An eligible vehicle must be used predominantly in the U.S. and have a gross weight of less than 14,000 pounds.

Want to Know More? Ask Us

These are only the basic rules for those who own an EV and want to take advantage of tax credits. There may be additional incentives provided by your state. If you want more information about the federal plug-in electric vehicle tax break, the tax professionals at Ramsay & Associates can help. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

IRS Upped Business Travel Rates

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Business owners know that gas prices are historically high, which has made their vehicle costs soar. Fortunately, there is some relief. The IRS upped business travel rates for the last six months of 2022. The tax agency announced an increase in the optional standard mileage rate in the hopes that the increase helps offset vehicle costs for business owners. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business. Keep reading to learn more.

Prices and Rates

The average nationwide price of a gallon of unleaded regular gas on June 17 was $5, compared with $3.08 a year earlier, according to the AAA Gas Prices website. A gallon of diesel averaged $5.78 a gallon, compared with $3.21 a year earlier.

With higher prices come increased rates. For the second half of 2022 (July 1–December 31), the standard mileage rate for business travel will be 62.5 cents per mile. This is up from 58.5 cents per mile for the first half of the year (January 1–June 30). There are different standard mileage rates for charitable and medical driving.

Unusual Circumstances

Raising the standard mileage rate in the middle of the year is unusual. Normally, the IRS updates the mileage rates once a year at the end of the year for the next calendar year. However, the tax agency explained that “in recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022.” But while the move is uncommon, it’s not without precedent. The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices rose significantly.

While fuel costs are a significant factor in the mileage figure, there were other contributing elements. The IRS notes that “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.”

Two Mileage Options

The optional standard mileage rate is one of two methods a business can use to compute the deductible costs of operating an automobile for business purposes. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate. This may include expenses such as gas, oil, tires, insurance, repairs, licenses, vehicle registration fees and a depreciation allowance for the vehicle.

From a tax standpoint, you may get a larger deduction by tracking the actual expense method than you would with the standard mileage rate. But many taxpayers don’t want to spend time tracking actual costs. Be aware that there are rules that may prevent you from using one method or the other. For example, if a business wants to use the standard mileage rate for a car it leases, the business must use this rate for the entire lease period.

We’re Here to Help

Your business may get a helping hand now that the IRS upped business travel rates for the last half of the year. If you have additional questions about your business’s vehicle expenses, the knowledgeable team at Ramsay & Associates is here to help. Consult with us about your unique circumstances to determine the best course of action.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.