Rick Arellano, CPA

03/23/2023

Tax Credits vs. Tax Deductions:
It's possible you could benefit from tax deductions and credits when you prepare your tax return. The IRS calculates these types of tax breaks differently, and the impact on your return can vary.

How Are Tax Credits and Tax Deductions Different?
A tax credit reduces your tax liability dollar for dollar. A tax deduction reduces your taxable income.
A deduction is worth only as much as the tax bracket you’re in, while a credit saves taxes dollar for dollar. For example, if a taxpayer is in the 22% bracket, a $1,000 deduction saves $220 in taxes while a $1,000 credit saves $1,000 in taxes. Deductions are more valuable the higher the tax bracket a person is in.
Deductions may also affect your income: You can subtract some of them before you calculate your adjusted gross income. These are known as above the line deductions.

Some common above the line deductions:
• IRA contribution deduction.
• Student loan interest deduction.
• Alimony paid deduction for divorce or separation instruments executed on or before Dec. 31, 2018.
• Health savings account deduction.
• Educator expense deduction.

Different Types of Tax Credits:
Tax credits reduce your tax liability dollar for dollar.
For example, homeowners can claim credits for making certain energy efficient improvements to their homes and consumers can claim credits for buying electric vehicles if they qualify. There are credits to help pay for health insurance (the premium tax credit) child care (dependent care credit) and more.
The value of the credit doesn’t vary based on your tax bracket but some tax credits are worth different amounts based on your income.
For example: the retirement savings contribution tax credit (also known as the saver’s credit) is worth 0%, 10%, 20% or 50% of up to $2,000 in retirement savings plan contributions per person for the year, depending on your income. The lower your income, the larger the percentage.

Nonrefundable vs. Refundable Credits:
There are two kinds of tax credits: nonrefundable and refundable. All tax credits reduce your tax liability, but the difference lies in whether you can get back more than your total taxes for the year.
Most tax credits are nonrefundable, which means they can’t reduce your tax liability below $0 for the year. But some tax credits are refundable, which means you can get a refund even if the credit takes you below $0 tax liability.
A nonrefundable tax credit is capped at the taxpayer’s tax liability. A refundable tax credit that exceeds the taxpayer’s liability is refunded to the taxpayer.
For example, the child and dependent care tax credit is nonrefundable and you can't carry it over if there's any remaining credit after the tax liability is $0.
If you have two children and you’re eligible for a $2,100 dependent care credit based on your child care expenses but your tax liability is only $1,000, you’ll be able to get only up to $1,000 of the credit. (That credit was temporarily refundable for 2021 but not for 2022.)
But with refundable credits you’ll get the full amount and if it’s more than your tax liability, you’ll receive a refund. The earned income tax credit, additional child tax credit and 40% of the American opportunity tax credit (up to $1,000) are the most common refundable credits..

Even if you aren’t required to file a tax return because your income is below the standard deduction, you still need to file one to claim the refundable tax credits.

The IRS doesn’t send refunds automatically; taxpayers need to file returns to claim them.

02/17/2023

Charitable Contribution Deduction: Rules and Changes for 2022 and 2023

More tightening to make sure you pay more this tax season.

Charitable contribution deduction rules have changed for 2022 and 2023. Or, to be even clearer, they have reverted. The two special tax rules that allowed taxpayers to deduct a certain level of cash contributions even if they didn't itemize 2021 income taxes—and claim deductions of sums up to 100% of their AGI—have expired and were not renewed by Congress.

Charitable contributions are one of the best tax-saving opportunities available. Not only does the charity benefit, but taxpayers enjoy tax savings by deducting part or all of their contributions on their tax returns. For the 2022 and 2023 tax years, rules return to the usual requirements that taxpayers can only deduct charitable contributions if they itemize their tax deductions on Schedule A. In addition, taxpayers can only claim charitable contribution deductions for cash contributions to public charities and operating foundations up to 60% of their adjusted gross income (AGI).

02/13/2023

Tax benefits of Commercial Real Estate: Not Much...

Commercial buildings and improvements are generally depreciated over 39 years. Depreciation means that you can deduct a portion of the building and improvement cost every year over the building’s depreciation period (1/39 every year). That may seem like a long time but there are special tax breaks that allow depreciation deductions to be taken more quickly for certain real estate investments. Some of these were enhanced by the Tax Cuts Jobs Act (TCJA) and may provide a bigger benefit when you file your 2018 tax return. Due to a drafting error in the TCJA, there are two breaks you may not be able to take advantage of unless a technical correction is made to the TCJA. (NOTE: I will let you know when Congress passes a technical correction in the near future for this law oversight).

Section 179 – First Year Expensing
Section 179 expensing allows you to be able to deduct qualified improvement property right away rather than depreciating over a number of years. The TCJA also allows Sec. 179 expensing for certain depreciable tangible personal property used predominantly to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection, alarm and security systems. Starting in 2018, the Sec. 179 limit increases to $1 million (from $510,000 for 2017) on qualifying property. This is subject to a phase-out if your qualified asset purchases for the year exceed $2.5 million (compared to $2.03 million for 2017).

Shorter Recovery Period (39 year life to 15 year life) – Yes, No… Maybe?
This break historically allowed a shortened recovery period of 15 years for property that qualified. Before the TCJA, the break was available for qualified leasehold-improvement, restaurant and retail-improvement property. Again, the TCJA expanded the definition to “qualified improvement property.” But, due to a drafting error, no recovery period was given to such property, so it defaults to 39-year property. A technical correction must be issued (we believe a law change is almost a certainty) before you can claim accelerated depreciation for qualified improvement property.

Bonus depreciation
Qualified improvement property is not eligible for bonus depreciation due to the TCJA drafting error mentioned above. A technical correction will need to be issued in order to be eligible to use bonus depreciation on qualified improvement property. When available, bonus depreciation is increased to 100% (up from 50%) for qualified property placed in service after Sept. 27, 2017, but before Jan. 1, 2023. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced.

Warning: Under the TCJA, real estate businesses that elect to deduct 100% of their business interest expense will be ineligible for bonus depreciation starting in 2018.

Can you benefit?
Although the enhanced depreciation-related breaks may offer substantial savings on your 2018 tax bill, it’s possible they won’t prove beneficial over the long term. Taking these deductions now means forgoing tax deductions that could otherwise be taken later in later years. In some situations — if your income will be in a higher tax bracket, for instance, or there is an increase in tax rates — the normal depreciation deductions could actually be more valuable over a long-term basis. I can help you evaluate when to maximize depreciation based on your specific facts and circumstances.

02/02/2023

For 2022 you have until 4/18/23 to make IRA contributions that you can deduct on your 2022 return.
Qualified single filers

01/30/2023

2023 Tax Changes: Expect to pay more in 2023 (No Covid-19 Credits/Deductions)
These are the important tax changes for 2022:

#1) Child Tax Credit Decrease
The America Rescue Plan increased the CTC in 2021 and made it fully refundable. It went from $2,000 per child up to:
$3,600 for children up to the age of 6.
$3,000 for children between the ages of 7 and 17.
In 2022, the CTC is expected to return to its previous nonrefundable status and will be reduced to $2,000 per qualifying child,
It will also once again be limited to dependents under the age of 16.

#2) Earned Income Tax Credit Decrease
The EITC has also been decreased for filers with no qualifying children. Eligible taxpayers without children who received a $1,502 EITC in tax year 2021 will receive just $560 in 2022. The EITCs for filers with children aren't decreasing – they've increased slightly to account for inflation.

#3) Child and Dependent Care Credit Decrease
If you pay for the care of a qualifying person in order to work, you can still receive a credit for some or all of your expenses. The IRS, however, has significantly reduced the child and dependent care credit cap this year. It dropped from a maximum of $8,000 in tax year 2021 to a maximum of $2,100 in 2022.

#4) Charitable Deductions Have Changed
Another tax provision that went into effect during COVID-19 was the ability to take an above-the-line charitable donation tax deduction. In other words, you could take the standard deduction and claim an additional deduction for an amount you donated to charity. Single filers could deduct up to $300 and married couples filing jointly could deduct up to $600.

#5) Clean Vehicle Credit Eligibility Rules Change
If you bought a new electric vehicle after August 16 in 2022, it must have undergone final assembly in North America to qualify for the $7,500 credit. The IRS added this requirement midyear as part of the Inflation Reduction Act of 2021.

#6) Form 1099-K Changes Postponed
One of the most talked about changes for tax year 2022 is the new reporting requirement for third-party settlement organizations like PayPal, Venmo and Cash App. Previously, TPSOs were required to file Form 1099-K only if customers processed at least 200 transactions and received $20,000 or more in payments.

#7) Other Tax Changes for 2022
In addition to these new tax updates, the IRS has ramped up its staff. “With the IRS increasing its workforce by 87,000 new agents, audits will be more likely to happen.

01/20/2023

Instead of fixing inflation, the Fed may be changing the rules on CPI. When you see news outlets saying inflation is down go buy hedge-dollar stuff like gold, crypto, commodities.

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01/19/2023

I'm expanding my tax practice and looking for new clients. If someone is currently preparing your taxes and you want to save a big chunk of money, have it completed faster, and reviewed with you in plain English please visit me at rickarellanocpa.com or you can reach me at 916-284-1640 I work 5pm-7:00 weekdays and available all-day weekends.