J HEATH & CO

The Inflation Reduction Act created several tax credits to promote clean energy. You may want to take advantage of them before it’s too late. President-Elect Donald Trump has pledged to “terminate” the law so it may be repealed in 2025. For example, there’s an Energy Efficient Home Improvement Credit. It covers 30% of the cost of eligible improvements, such as installing energy-efficient windows, doors, and insulation, up to $1,200 a year. There’s also a credit of up to $2,000 for qualified heat pumps, water heaters and biomass stoves or boilers. And there’s a credit for 30% of the cost of installing solar panels.

Do you own a growing, unincorporated small business, and are you concerned about high self-employment (SE) tax? The SE tax is how Social Security and Medicare taxes are collected from self-employed individuals. The maximum 15.3% SE tax rate hits the first $168,600 of 2024 net SE income. The 15.3% rate is made up of 12.4% for Social Security tax plus 2.9% for Medicare tax. In 2025, the maximum 15.3% SE tax rate will hit the first $176,100 of net SE income. Above that, the 12.4% Social Security tax goes away, but the 2.9% Medicare tax continues for all income. There are ways to reduce SE tax it by operating as an S corporation.

Taxpayers born before 1951 need to take required minimum distributions (RMDs) by Dec. 31, to avoid penalties. RMDs are the mandatory withdrawals from many retirement plans and IRAs, including SIMPLE IRAs and SEPs. Roth IRAs aren’t subject to RMDs during the owners’ lifetimes. RMDs are taxable income and can incur penalties if not withdrawn on time. Previous tax law required RMDs to begin at age 72 and imposed a penalty of 50% on missed withdrawals. The Secure 2.0 Act raised the age to 73 and lowered the penalty to 25% (or 10% if corrected within two years). Here’s more from the IRS: https://bit.ly/48oNYXC

As we get closer to the end of the year, employees only have a few paychecks left for 2024. If you’re an employee who received a surprise tax bill – possibly with penalties – for the 2023 tax year, consider checking your withholding to ensure it’s sufficient. The IRS provides an online withholding estimator tool to help determine the correct amount. If you find you need to adjust your withholding, give your payroll administrator a new Form W-4 to have more withheld this year. What if you got a big refund last year? Instead of letting Uncle Sam keep your money for a year, you can lower your withholding and give yourself a raise in take-home pay. Here’s the tool: https://bit.ly/3O5KAbV

If the IRS contacts you about a specific tax matter, you can authorize a third party to handle it on your behalf. It could be a relative, friend or a tax pro at our firm, as long as you grant formal permission. Current rules require the IRS to provide a 45-day notice when it intends to contact a third party, with certain exceptions. National Taxpayer Advocate Erin Collins is criticizing an IRS proposal that would shorten the statutory 45-day notice to 10 days when there’s a year or less remaining on the statute of limitations for collection. Collins said that “[t]he IRS’s proposed regulations … erode an important taxpayer protection and could punish taxpayers for IRS delays.”

Certain U.S. small business owners must report beneficial ownership information (BOI) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) by Jan. 1, 2025. In a recent letter to FinCEN, 44 House Republicans urged the agency to delay the reporting deadline. The letter states that “without a delay in the effective date, millions of America’s smallest business owners will be deemed out of compliance and subject to penalties and fines up to $250,000 and even jail time.” Instituted by the Corporate Transparency Act, the BOI requirement is intended to help prevent criminals from using businesses for illicit activities, such as money laundering and fraud.

Employee stock options are a potentially valuable asset for employees who receive them. If you’re one of them, you’ll eventually sell shares acquired by exercising nonqualified stock options (NQSOs), hopefully for a nice profit. Your objectives should be to 1) have most or all of the profit taxed at lower long-term capital gain rates and 2) postpone paying taxes for as long as possible. When exercising NQSOs, the “bargain element” (difference between market value and exercise price) is treated as ordinary compensation income. Therefore, it’s subject to federal income tax and payroll tax withholding.

Employers that withhold taxes from employee wages but don’t pay them over to the IRS may face a penalty of 100% of the unpaid tax. The Trust Fund Recovery Penalty (TFRP) can be assessed personally against “responsible” parties. In one case, the owner of three masonry companies was assessed a TFRP of $650,000 for failing to pay employment taxes withheld from his employees. He attempted to evade taxes in multiple ways, including filing false tax returns and giving the IRS false information regarding an Offer in Compromise. He also placed companies and bank accounts in the names of others. He pleaded guilty in U.S. District Court and now faces up to five years in prison and a $250,000 fine.

Back in 2012, Puerto Rico enacted a law (Act 22) to attract wealthy mainland individuals to invest in its communities. In exchange, Puerto Rico and a U.S. tax code provision provide certain tax benefits to Americans who buy homes there. However, the law has driven up local housing prices and reduced tax income. In response, some U.S. House Democrats have introduced the United with Puerto Ricans Opposed to Act 22 Risks Act. The lawmakers claim the tax breaks have spurred purchases of not only luxury properties but also “affordable” housing. Foreign buyers often pay higher-than-appraised prices in cash. Some U.S. buyers have also allegedly evaded U.S. tax by claiming Puerto Rican income.