Planning Tips 2024

November 25, 2024

The Big Upcoming (Potential) Tax Change

The 2017 tax reform made major changes in tax rates, estate taxation, the 20% qualified business deduction, state tax deductions, etc. However, congress could not get a big enough majority to make those changes permanent. As a result, if there is no agreement going forward then at the end of 2025 all those changes go away, and we go back to the old law. With one party control of federal government, this is likely to come up in 2025. If congress does restore the state tax deduction it may eliminate the need to pay PTE (pass through entity) tax payments at the entity level.

IRS Priorities

More new IRS employees: At a recent conference it was announced the IRS has redesigned their recruiting procedures and hired 100,000 new employees in the past 12 months. We will all need patience as we work with these new hires while they try to learn very complex tax laws.
Supposedly Improved Customer Service: The IRS is answering more calls. They spoke with 9 million callers, which they say is an 88% success. The problem is there were actually 40 million calls and only 12.4 million were answered to start with and then 88% of those were routed to someone. It appears you only have about a one in four chance of getting through to the department you are trying to call when calling the IRS.
Online Accounts: You can now set up your own online IRS account to try and get correspondence handled more quickly. That is a great improvement but watch out for scammers who offer to setup these online accounts so they can get your personal information. Make sure you are at the HYPERLINK “http://www.irs.gov”www.irs.gov website when setting up your online account.
IRS and Artificial Intelligence: AI is all the rage so IRS actually tested some of the AI chatbots. The national taxpayer advocate says answers generated by AI chatbots found on the websites of popular tax preparation firms don’t give accurate answers to complex queries much of the time.The Washington Post found the chatbots of the two leading tax prep companies gave inaccurate or irrelevant responses to complex questions up to half the time.
Free Filing: The FTC filed an administrative complaint against one of the big names in tax preparation software alleging that it pressures consumers into overpaying for its digital products and deceptively markets them as free when many aren’t eligible for the free version.
Actually Free Filing: The IRS wrote their own tax program and is making permanent its free direct file option for e-filing simple returns. They offered this to 141,000 taxpayers last year. Filers got a step-by-step guide and online support from IRS personnel.
IRS Hot Topic Targets: Here are some areas the IRS is targeting
- Sole proprietors: Those who underreport their income and overreport their expenses cost the government an estimated $182 billion in lost revenue in 2021.
- Deducting loss on a business that is actually a hobby: If IRS determines the business is really a hobby, the losses are only deductible up to the amount of income. IRS looks at 9 factors to determine if a business is actually a hobby. (Expertise, asset appreciation, time & effort, history of loss, amount of occasional profit, success in other ventures, substantial other income, etc)
- The gig economy: Uber, Lyft, Doordash, AirBNB, etc. all treat the provider of the service as a self employed business person. The IRS now has a special page on their website for gig economy workers explaining how to report their income and deductions.
- Partnerships and LLCs: Taxation of distributions above basis, sale of partnership interests, payment of self-employment tax, etc are just a few of the big targets.
- Gambling: Surprise, surprise taxpayers failed to report over $13 billion of gambling income reported on W-2g forms. All gambling winnings are actually taxable. Next up, IRS is considering a special code on the W-2g form for sports betting.
And you thought the IRS didn’t know about that income: There is a stronger and stronger push to get income reported to the government on the various 1099 forms so it can be matched to your tax return to lower the tax gap.
- New lower limit for 1099k reporting this year: Those who sell through online websites (ebay, etsy, AirBNB, DoorDash, etc) will get a surprise this year. If you did over $5,000 in business through a website or app, they will send the IRS a 1099k form showing how much you sold. Make sure the business sales you report is at least as high as the amount listed on the 1099 form. Those who ignore reporting this income may well get a nice “valentine” in the mail from the IRS in a couple years saying they owe tax on the unreported income.

Don’t forget the new filing requirement for the corporate transparency act (BOI beneficial ownership information) where every business legally formed with the secretary of state must go to fincen.gov/boi and file information disclosing the business name, address, federal ID and similar information for the owners.

Every business must file by Dec 31, 2024
The filing only needs updated if you have a change of ownership or if you need to post a new copy of documents you uploaded that have expired such as your drivers license.
Every owner will need to post a copy of their drivers license or passport as part of the filing.
This filing must be done online and cannot be done on paper.
After January 1, 2025 any new business must file within 30 days of formation.

Qualified charitable distribution (QCD) increased:

The amount you can contribute direct to charity from your IRA once you reach age 70 ½ increased to $105,000 per year. You can use this money to satisfy the required minimum distribution you must take from your IRA and you will pay no income tax on the distribution. The money must go directly from the IRA to the charity. For those who do not itemize deductions this is a great way to not pay tax on the funds you contribute to church and other charities.

Bonus depreciation is shrinking:

The amount of bonus depreciation you can take in the year of purchase dropped from 80% in 2023 to 60% in 2024 and will drop to 40% in 2025.

Reminder on auto depreciation:

For vehicles with a gross vehicle weight under 6,000lb there are special rules that limit the depreciation in any year. For vehicles over 6,000lb but less than 14,000lb there is a limit of $30,500 for sec 179 first year depreciation. For pickups with a 6ft bed or vans with only 2 seats there are no depreciation limits and the business portion of the vehicle can be fully depreciated the first year. Keep in mind everyone thinks every vehicle is 100% business and the IRS thinks just the opposite. Make sure you can justify the business use of any vehicle used by the owner. One way to prove the business use is to keep a log for a period of time that documents the percent of business use.

30% Energy tax credits for solar and ground source heating:

These credits have been around for several years. Items that can affect the amount of the credit.

If you get a subsidy from your utility it is not taxable but it reduces the cost of the item for the credit
If you get a rebate from the manufacturer it is not taxable but it reduces the cost of the item for the credit.
If you get a state energy grant it is not taxable but does not reduce the cost of the item for the credit.

Retirement savings perks:

The employer match to a simple or a SEP can go to a ROTH account if requested by employee but the employer has to report the contribution on form 1099r with code g so the employee pays tax on the employer contribution to the ROTH. The reporting of this income will be taxed to the employee in the year the employer actually makes the matching contribution to the account.
There is a tax credit available to employers with under 50 employees. The credit is 100% of the employer match cost up to $1,000 per employee for first 2 yr, 75% 3^rd yr, 50% 4^th yr, 25% 5^th yr
After 2023 employers may increase the SIMPLE IRA match from the existing 2% or 3% to as high as 10%. However, the match for any one employee may not exceed $5,000 per year.
The 2024 employee contribution to a SIMPLE IRA increased to $17,600 and an additional $3,850 catch up for over 50. Employers with over 25 employees must increase the employer match by 1% to 4% if they allow the higher deferral limits to a SIMPLE IRA.
There are larger catchup contributions starting in 2025 for all retirement accounts for those age 60 through 63.
All new 401k plans are required to automatically enroll all employees in the plan withholding 3% of the employee wages as a contribution to the plan. The contribution increases 1% per yr until it hits 10%. The employee can opt out of this withholding.

If you ever made a nondeductible contribution to an IRA consider this:

If you roll your IRA into a employer 401k account it can be split into the ROTH and pretax portions in the 401k. Then when you later roll the money out to an IRA, the Roth will be separate and can grow tax free forever.

What changed in Washington taxes for the 2024 tax filing season:

The initiative to eliminate the state’s new capital gain tax failed. Capital gain taxes will continue to be assessed on gains over $250k per year, with some exceptions (notably for sales of small businesses and land).
In 2025 the salary needed to be considered an employee exempt from overtime laws is $69,306 (for employers with under 50 employees).