Its’ April. No Fooling.
Welcome to tax month! Your tax advisors have been hard at work this tax season and our first major milestone is coming up. In this month’s newsletter we include the most common questions taxpayers ask during the month: what to do if you are unhappy with your tax bill, how to best deal with interest rate increases, and what tax record to keep. Read about ideas to manage your emergency fund while in our new inflationary environment. Also, get the latest resources that we have put together for you.
We realize this can be a time of great stress, even panic. Just know that Moskowitz LLP is here for all our clients with our unique combination of experience and empathy.
Please feel free to forward this newsletter to someone who may be interested in one of the topics discussed here. And, of course, we would love to hear from you with any questions you may have.
Please call if you would like to discuss how this information could impact your situation. If you know someone who could benefit from this newsletter, feel free to send it to them.
- April 18
– Individual income tax returns & tax payments for 2021 are due
– First quarter 2022 estimated tax payments are due
In This Issue
- Common April Tax Questions Answered!
- Unhappy With Your Tax Bill?
- 2022 IRS Interest Rate Hikes?
- Estimated Tax Payments; Not Just for the Self-Employed?
- Toss This. Not That
- Protect Your Emergency Fund From Inflation
Common April Tax Questions Answered!
The individual tax deadline of April 18th (yes, this year it’s April 18th!) is fast approaching. Here are answers to five common questions that taxpayers typically ask in April.
- What happens if I don’t file on time?
What happens if I don’t file on time?
There’s no penalty for filing a tax return after the deadline if you are set to receive a refund. However, penalties and interest are due if taxes are not paid on time or a tax extension is not requested AND you owe tax. To avoid this problem, file your taxes as soon as you can because the penalties can pile up pretty quickly. The failure-to-file penalty is 5 percent of the unpaid tax added for each month (or part of a month) that a tax return is late.
- Can I file for an extension?
If you are not on track to complete your tax return by April 18th, you can file an extension to give you until Oct. 17, 2022 to file your tax return. Be aware that this is only an extension of time to file — not an extension of time to pay taxes you owe. You still need to pay all taxes by April 18th to avoid penalties and interest. So even if you plan to file an extension, a preliminary review of your tax documents is necessary to determine whether or not you need to make a payment when the extension is filed.
- What are my tax payment options?
You have many options to pay your income tax. You can mail a check, pay directly from a bank account with IRS Direct Pay, pay with a debit or credit card (for a fee), or apply online for an IRS payment plan.No matter how you pay your tax bill, finalize your tax payment arrangements by the end of the day on April 18th.
- When will I get my refund?
According to the IRS, 90 percent of refunds for returns that are e-filed are processed in less than 21 days. You could end up waiting several months, however, if you paper file your return. The IRS is still processing a backlog of several million paper-filed tax returns from last year. You can use the Where’s My Refund? feature on the IRS website to see the status of your refund. The refund information is usually available 24 hours after receiving confirmation that your e-filed tax return was accepted by the IRS.
- I hear the IRS is still backlogged with last year’s tax returns. Is this true?
Yes. Late changing tax legislation created tons of extra work for the IRS, all while the pandemic played havoc on staffing. During a testimony made to Congress, the Director of the IRS claims the backlog will be cleared up by the end of the year…assuming no major demands for are made on their resources./li>
Unhappy With Your Tax Bill?
Did you know that our Tax Planning department helps individuals and businesses lower their overall tax burden by performing comprehensive tax and business strategies that result in maximized profits and minimized tax burdens?
Find out how we do it and some options we can offer for you with our video webinar on Profit Optimization.
2022 IRS Interest Rate Hikes?
Effective April 1st, 2022, corporations and self-employed filers who submit quarterly estimated taxes will see a hike in the interest rates that the agency charges for both overpayments and underpayments.
The new rates will be:
- 4% for underpayments;
- 6% for large corporate underpayments
- 4% for overpayments (3% in the case of a corporation)
- 1.5% for the portion of a corporate overpayment exceeding $10,000
Though these changes will not affect you if you calculate your liability correctly and pay on time each quarter, those taxpayers who have an outstanding balance or who are otherwise out of compliance with their tax obligation need to remember that the longer they take to address the situation, the more their obligation will grow as their liabilities accrue interest at a rate of 3%.
If you have questions on how the new rates will affect you, feel free to contact us today.
Estimated Tax Payments, Not Just for the Self-Employed?
Estimated tax payments are not just for the self-employed. They are for anyone whose withholding and tax credits are significantly less than their projected tax liability, and if used properly, can protect a taxpayer from underpayment penalties.
Employees who will have income, Social Security, and Medicare taxes withheld from their wages generally do not need to make estimated tax payments. On the other hand, self-employed individuals must prepay their taxes by making quarterly estimated tax payments. These are referred to as estimated tax payments because the self-employed individual must estimate his or her net earnings for the year and pay taxes on a quarterly basis according to that estimate. Failure to do so will result in interest penalties.
The self-employed are not the only ones who are subject to estimated tax requirements – anyone who has income on which there’s no income tax withheld, and even those whose taxes are not sufficiently withheld, may need to make estimated payments. Thus, if you have income from stock sales, property sales, investments, alimony, partnerships, S-corporations, inherited pension plans, or other sources where no tax was withheld, you may also be required to pay either estimated taxes or run the risk of an underpayment penalty. Others subject to making estimated payments are individuals who must pay special taxes such as the 3.8% tax on net investment income or the employment tax on household employees.
Although these payments are called “quarterly” estimates, the periods they cover do not usually coincide with a calendar quarter. For 2022 the dates are:
Period Covered: January through March
Due Date: April 18, 2022
Period Covered: April and May
Due Date: June 15, 2022
Period Covered: June through August
Due Date: September 15, 2022
Period Covered: September through December
Due Date: January 17, 2023
Toss This. Not That.
Your guide to post tax-filing record retention.
Before you close this year’s tax file there is still some work to do. If the IRS or state revenue department selects your return for review, you will need to be prepared. Here is what you need to do now:
- Keep a copy of your Form 1040 indefinitely.
Do not toss or destroy any of your 1040s. You may need them to correct historic Social Security earnings statements or to prove that you filed a tax return. We recently won an audit because our client had kept his tax returns from 1990’s and we needed it to prove our theory of why he was entitled a position he took on his return.
- Supporting documents need to be retained for three years.
Records to support your tax return (i.e., W-2s, 1099s, K-1s, receipts, canceled checks, bank statements and mileage logs) should be kept for a minimum of six years from the later of the tax filing due date, the date you filed your taxes, or the date you paid your tax in full. This approach ensures that your records are available for a potential IRS audit.
- Property and investment records need to be held longer.
To prove your cost/basis and taxable gain or loss, all records relating to property that you own (your home, rental properties, stocks bonds and other investments) need to be kept for at least three years after it’s sold or disposed.
- Be mindful of other record retention requirements.
The three-year period is the federal guidance for standard returns. There are other factors that should be considered, including:
– State record retention requirements (often six months to one year longer)
– Requirements for insurance, banking or estate management – especially foreign bank account requirements.
– Additional federal requirements for tax returns including unreported income (six years), worthless securities (seven years) or bad debt (seven years)
– No audit time limit for fraudulent returns
- A specific filing system is not required, but organization is key.
The ability to easily find your documents in the event of an audit will make the process much simpler. Here are some tips:
– File records by year rather than income or deduction type.
– Within the file, order your records to match the flow of the Form 1040
– Consider scanning your files to create a digital file as a backup.
– Create 2022 files now to save documents for current year.
– Shred old documents; don’t just throw them away.
If you are unsure whether to retain or shred something, keep it unless you know the document can be replaced.
Protect Your Emergency Fund From Inflation
Most financial experts suggest keeping three to six months worth of household expenses in savings to help in case of emergency. But with record inflation, that task just got a lot harder to accomplish as virtually every safe place to put your emergency funds will not provide interest rates that keep pace with inflation. But that does not mean you cannot increase the rate of return on these funds.
Here are some ideas to reduce the impact of inflation on your emergency funds.
Actively monitor your savings account rate.
Earlier this year the Federal Reserve increased interest rates for the first time since 2018. In addition, the head of the Federal Reserve is suggesting there may be several of these rate increases in the next twelve months. This should increase the interest you can earn on the cash in your emergency account.
What you need to know:
Not all savings accounts are created equal. When the Fed increases the interest rate, your saving account rate should also go higher…immediately. But this is not always the case. If your bank is slow to raise your savings rate, be willing to monitor and shift funds to a bank that does. Just make sure the funds are still FDIC insured and are kept at a reputable bank.
Take a look at Series I Savings Bonds.
Series I Savings bonds are issued and backed by the U.S. government and feature two interest rate components: a fixed rate and an inflation rate. The fixed rate is set when the bond is issued and never changes during the life of the bond. The inflation rate resets semi-annually based on the Consumer Price Index.
What you need to know:
Use of a Roth IRA is often a creative way to fund your emergency account while achieving higher returns with conservative investment choices, but it is not for the faint of heart. If you get this one wrong, it could cost you in taxes, penalties and lost fund value in a bear market. Prior to removing funds from any IRA, it makes sense to conduct a tax planning session.
Please call if you have questions about how to reduce the impact of inflation on your emergency fund.