Why you need a cpa

Tax News and Year End Tax Planning

Form 1099-NEC

Everyone who is engaged in a trade or business that makes certain types of reportable payments must report the payment to the IRS. Form 1099-NEC is used for reporting payments for non-employee compensation of $600 or more to a payee. File Form 1099-NEC, Nonemployee Compensation, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, with the IRS if you made payments in course of your trade or business totaling more than $600 to a payee for services performed by someone who is not your employee, cash payments for fish or fees to attorneys. Forms 1099-NEC must be furnished to recipients by January 31. For more information regarding Forms 1099-NEC refer to Reporting Payments to Independent Contractors. For changes in the E-Filing requirements see E-Filing Requirements Will Change Beginning in 2024.

Form 1099-K

There is no change to the taxability of income; the only change is to the reporting rules for Form 1099-K. As before, income, including from part-time work, side jobs or the sale of goods, is still taxable. Taxpayers must report all income on their tax return unless it is excluded by law, whether they receive a Form 1099-NEC, Nonemployee Compensation; Form 1099-K; or any other information return. The IRS emphasizes that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable.

The American Rescue Plan Act of 2021 (ARPA) lowered the reporting threshold for third-party networks that process payments for those doing business. Given the complexity of the new provision, the large number of individual taxpayers affected and the need for enough reporting time, the IRS is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP).

Taxpayers may need to explain on the tax return the 1099-Ks that have been received that have not been reflected on the tax return.

Rental Activities

Landlords should be aware that keeping accurate accounting records is just as important as collecting the rent on time each month. If a taxpayer owns rental real estate, there are federal tax responsibilities. All rental income must be reported on their tax return, and in general the associated expenses can be deducted from their rental income.

If a landlord is a cash basis taxpayer, they will report rental income on their return for the year they receive it, regardless of when it was earned. As a cash basis taxpayer, a landlord generally deducts their rental expenses in the year they pay them. If a landlord uses an accrual method, they generally report income when they earn it, rather than when they receive it and they deduct their expenses when they incur them, rather than when they pay them. Most individuals use the cash method of accounting.

Rental Income

Landlords must include in their gross income all amounts they receive as rent. Rental income is any payment received for the use or occupation of property. Landlords must report rental income for all their properties. In addition to amounts they receive as normal rent payments, there are other amounts that may be rental income that include:

· Amounts paid to cancel a lease

· Advance rent

· Expenses paid by a tenant

· Security deposits

Rental Expenses

If a landlord receives rental income from the rental of a dwelling unit, there are certain rental expenses they may deduct on their tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

Landlords can deduct the ordinary and necessary expenses for managing, conserving, and maintaining their rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.

Recordkeeping

Good records will help landlords monitor the progress of their rental property, prepare your financial statements, identify the source of receipts, keep track of deductible expenses, prepare their tax returns and support items reported on tax returns. Landlords must be able to substantiate certain elements of expenses to deduct them. Generally, the landlord must have documentary evidence, such as receipts, canceled checks or bills, to support their expenses. Keep track of any travel expenses that are incurred for rental property repairs.

Basis of Property Acquired Under Code Secs 1031 or 1033

In certain types of transactions there are opportunities for taxpayers to defer gain on the exchange of property, including like-kind exchanges and involuntary conversions. Like-kind exchanges offer tax planning opportunities to defer gain on the exchange real property held for business use or for investment in exchange for similar replacement property. An involuntary conversion is the receipt of replacement property as a result of a casualty, theft, destruction, or condemnation.

In both transaction types, the gain is deferred until a taxable sale or exchange occurs. Taxpayers will need to calculate the basis of the replacement property for the future reporting and treatment as a gain or loss. To figure your gain or loss on a sale, exchange, or disposition of property, taxpayers must make certain adjustments to the basis of property.

Basis in like-kind exchanges

The basis of the property you receive is generally the same as the basis of the property you gave up. If you receive money in addition to property, the basis of the property received is the same as the basis of the property you gave up and include adjustments for: cash paid, cash received, exchange expenses, and any gain recognized.

Basis in involuntary conversions

The basis of replacement property similar or related in service or use to the converted property received is the old property’s basis on the date of conversion and includes adjustments. Adjustments are made for the following: money received and not spent on similar replacement property, gain or loss on conversion, and expenses for acquiring the replacement property. If multiple replacement properties are acquired an allocation is required for the basis.

Reporting

Reporting is required in the year of the like-kind exchange to calculate the amount of gain deferred as well as the basis of the like-kind property received in the year of the transaction. Additionally, report the dates of sale and identification of the relinquished and replacement properties and if any cash received, report the amount of gain recognized for the cash or property received. For involuntary conversions, report the gain or loss on your return in the year you realize the gain or loss. Limitations may apply on losses from both transaction types.

 Additional tax and planning considerations

· Make the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans. 

· Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible. 

· Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($18,000 per donee, $36,000 for married couples) to help save on potential future estate taxes. This amount is increased to $19,000 ($38,000 for couples) in 2025. These gifts may be made directly to trusts, custodial accounts or 529 college savings plans. 

· Consider a VT529 plan to help save for education; you can benefit with a 10% Vermont state income tax credit on annual contributions deposited for college or training after high school. College savings plans allow for frontloading up to five years’ worth of annual gifting exclusions.

· Take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future.

· Review withholding and estimated tax payments and assess any liquidity needs. 

If you have any questions related to your year-end tax planning, please contact me.