Tax & Business Alert

They say the early bird gets the worm. Early federal income tax filers may get a couple worms, which is a good thing in this metaphor.

Although it may seem like a quaint tradition to wait until the deadline — usually April 15, but actually April 18 in 2022 — there’s more than one valid reason for getting your return completed and submitted well before this date.

PREVENT IDENTITY THEFT

In one tax identity theft scheme, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund. The real taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. While the taxpayer should ultimately be able to prove that his or her return is the legitimate one, tax identity theft can be a hassle to straighten out and significantly delay a refund. Filing early may be your best defense: If you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

GET A POTENTIALLY EARLIER REFUND

Another reason to file early is you may put yourself closer to the front of the line to receive your tax refund (assuming you qualify for one). The IRS website still indicates that it expects to issue most refunds for the 2021 tax year within the usual 21 days, despite the massive pandemic-related delays that affected millions of 2020 tax returns. The time is typically shorter if you file electronically

and receive a refund by direct deposit into a bank account. Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.

LOOK FOR YOUR DOCUMENTS

To file your tax return, you need your Form W-2s (if you’re an employee) and Form 1099s (if you’ve worked as an independent contractor or “gig worker”). January 31 is the deadline for employers to issue 2021 Form W-2s to employees and, generally, for businesses to issue Form 1099s to recipients of any 2021 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors). If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for assistance.

NEED HELP?

If you have questions or would like an appointment to prepare your return, please contact us. We can help you ensure you file an accurate return that takes advantage of all the breaks available to you.■ mickleinc.com

The onset of the COVID-19 pandemic in March 2020 disrupted the personal finances of many families who were negatively affected by job losses, reduced income, sickness and other challenges. This included families across the economic spectrum and workers in a wide range of both blue- and white-collar industries.

The virus’s rapid and continued spread — and the economic changes that followed — are vivid reminders of how vulnerable and unpredictable your family’s personal finances may be. Now, almost two years later, the pandemic’s impact persists. Here are three basic lessons to keep in mind:

1. Don’t live above your means. In some ways, this is even more important for high earners than it is for those with more modest incomes. Those with higher incomes sometimes overcommit themselves financially by living a lavish lifestyle. For example, they may buy large homes in high-end neighborhoods or buy expensive luxury automobiles that stretch their finances. Then, if they experience a financial emergency like a job loss or reduced work hours, they’re suddenly unable to afford the lifestyle they’ve grown accustomed to.

2. Build up an adequate emergency savings fund. By living below your means, you may have extra money each month to build up an emergency savings fund. While every situation is different, many financial experts recommend saving between three- to six-months’ worth of living expenses in an emergency fund.

Emergency savings should generally be kept in a liquid savings or money market account. Such an account probably won’t generate a high return, but the money will be relatively safe and easily accessible if you need it for an emergency. Search online to find an account that offers the highest yield along with maximum liquidity.

3. Continuously map out a flexible career path. The time to make career contingency plans is before something like a worldwide pandemic disrupts the global economy and eliminates millions of jobs. As the COVID-19 pandemic has shown, what may appear to be a secure job and career can vanish in the blink of an eye.

Some entrepreneurial individuals have turned career setbacks into opportunities by going back to school or starting new businesses. Others have left their jobs to start freelancing and consulting businesses, using their marketable skills and industry contacts to carve out profitable niches for themselves as self-employed professionals. This has driven a phenomenon known as “the Great Resignation.”

Maybe you’ve seriously reconsidered your employment situation in recent months. Even if you’ve stayed put, it’s to everyone’s benefit to look carefully at his or her career path and head in a direction that both inspires and offers financial security.

The pandemic has been called a once-in-a-century event. Unfortunately, it feels to many of us as if it’s already lasted a century. Keep these three financial lessons in mind as you continue to adopt to forthcoming challenges and opportunities. ■ mickleinc.com

Given the steep cost of nursing homes, planning for long-term care is critical. This holds true not only for you, but also possibly for aging parents if they’re still in your life.

One important question to consider is whether you could be held financially responsible for your parents’ nursing home bills if they can’t afford to pay them. The answer is: It’s possible, but unlikely.

FILIAL RESPONSIBILITY LAWS

More than half of the states have “filial responsibility” laws, under which adult children are responsible for their parents’ medical bills if their parents are unable to pay. These laws are rarely enforced, for several reasons. For one thing, nursing home expenses usually are covered by Medicare or Medicaid. Also, most filial responsibility laws require a court to consider the children’s ability to pay before imposing liability.

In rare cases, however, an adult child may be held responsible for his or her parents’ nursing home bills. This might be the case, for example, if a parent doesn’t yet qualify for Medicare and has just enough financial resources to be disqualified from Medicaid.

It’s also possible for Medicaid eligibility to be delayed by several months — or even years — if the applicant made certain gifts or other asset transfers within a five-year “look-back” period. Nursing homes may be able to seek payment from the adult children of a patient who has made such disqualifying asset transfers to them during the look-back period.

Even if you’re not directly responsible for your parents’ nursing home bills, you may end up contributing to their care indirectly through Medicaid’s estate recovery process. This allows Medicaid to recoup funds it spent on your parents’ care from their estates after they die, which could thus reduce the amount of your inheritance.

FINANCIAL COMPLEXITIES

Caring for aging parents is a difficult task that can lead into many financial complexities. If your parents are receiving, or may soon receive, nursing home care and have limited funds, consult an attorney. A qualified legal advisor can help you determine whether you’re potentially responsible for their bills. An attorney can also investigate whether your parents’ assets are exposed to the Medicaid estate recovery process and whether strategies are available to limit your liability. If you need an attorney recommendation let me know, I have a strong network of qualified licensed attorneys that can help. ■ mickleinc.com

Business owners, 2022 is well underway. So, don’t forget that a provision tucked inside the Consolidated Appropriations Act suspended the 50% deduction limit for certain business meals for calendar years 2021 and 2022. That means your business can deduct 100% of the cost of business-related meals provided by a restaurant.

As you may recall, previously you could generally deduct only 50% of the “ordinary and necessary” food and beverage costs you incurred while operating your business. Now you can deduct your full eligible costs. What’s more, the legislation refers to food and beverages provided “by” a restaurant rather than “in” a restaurant. So, takeout and delivery restaurant meals also are fully deductible.

However, some familiar IRS requirements still apply. The food and beverages can’t be lavish or extravagant under the circumstances. The meal must involve a current or prospective customer, client, supplier, employee, agent, partner or professional advisor with whom you could reasonably expect to engage in the due course of business. And you or one of your employees must be present when the food or beverages are served.

Entertainment expenses still aren’t deductible, but meals served during entertainment events can be deductible if charged separately. If food or beverages are provided at an entertainment activity, further rules apply. In addition, in November of last year, the IRS issued guidance on per diems related to the temporary 100% deduction for restaurant food and beverages. Contact us for further details.■ mickleinc.com

Many of my clients have expressed surprise at the amount of additional tax they have had to pay as a result of distributions from mutual funds in which they have invested. The problem for many of them has been that most mutual funds are managed by analysts who are focused primarily on the investment potential of individual stocks. They give little, if any, consideration to the tax ramifications of their decisions to buy or sell particular stocks. According to Morningstar, the average investor has about 2% of their gain eaten by taxes. This means that an 8% gain is really only 6% after you've paid taxes on it.

"TAX-MANAGED" FUNDS

However, there is a kind of fund called “tax-managed” mutual funds, whose managers employ strategies designed to keep the investors' tax consequences to a minimum. Most of the large, well-known mutual fund organizations like PIMCO, Fidelity, BlackRock, & Vanguard have established tax-managed funds. The tricks of the trade employed by these funds are also used by well educated investors in managing their own personal portfolios. These techniques include doing things like:

• Avoiding short-term capital gains that would be taxed at the investor's regular tax rate

• Deferring taxable investment income by investing in lower-yielding equity securities (i.e., ones that pay small or no dividends) but they are expected to show capital appreciation.

• When selling a portion of a holding, minimizing the gain by selling shares with the highest cost basis first.

• Selling securities that have gone down in value to generate capital losses that will be used to offset against realized capital gains.

In addition to tax-managed funds, you might want to also consider index funds. These are funds that invest in the stocks making up a particular market index, for example, the Standard & Poor's index of 500 large companies. Because these funds stay invested only in the stocks making up the particular index, there are relatively few sales of stock from the portfolio and hence only a small amount of capital gain. Sales are generally made only when there are changes in the component stocks in the index or to generate cash to satisfy redemption requests from fund shareholders.

If you have any questions about the tax aspects of your investments, please feel free to drop me an email.■ mickleinc.com

Selling your home and moving is seldom an easy decision, but did you know that there is an exclusion available that eliminates most if not all of your federal tax liability on the gain from the sale or exchange of your home?

CAPITAL GAIN EXCLUSION

Under current IRS rules, the gain from the sale of a person's principal residence can be excluded from income up to $250,000 (single) or $500,000 (married filing joint).

Like most tax breaks, however, the exclusion has a detailed set of rules to qualify. The most commonly known test is the seller must have owned and used the home as his or her principal residence for at least two years out of the five years before the sale or exchange. In most cases, sellers can take advantage of this provision once every two years.

The second common issue is what is called "unqualified use". This has reference toward periods in which the home was not your primary residence OR you rented the property. I won't go into the details but in limited situations you can still preserve some of the exclusion if the period of unqualified use was temporary (less than 12 months). This is mainly reference to temporary rentals. In any such case I will make sure you take advantage of the option which is best for you.

The third common issue is "unforeseen circumstances". If you sale your primary residence due to unforeseen circumstances and you have already used your home sale capital gain exclusion then a reduced exclusion may be available to you. A sale or exchange is by reason of unforeseen circumstances if the primary reason for the sale or exchange is the occurrence of an event that the taxpayer does not anticipate before purchasing and occupying the residence. Things like:

• involuntary conversions

• certain disasters

• acts of war

• terrorist attacks

• death

• cessation of employment through no fault of your own

• change of employment that resulted in your inability to pay certain costs

• divorce or legal separation

• multiple births from the same pregnancy (twins, triplets, or quadruplets)

The fraction is based on the portion of the two-year period in which the seller satisfies the ownership and use requirements.

COMPLICATED

This is just a brief review and the rules can get quite complicated. For example, if you marry someone who has recently used the exclusion provision, if the residence was part of a divorce, you inherited the residence from your spouse, if you are selling a remainder interest in your home, if there are periods after 2008 in which the residence isn't used as your (or your spouse's) primary residence, or if you have taken depreciation on the residence (home office or rental real-estate).

Please let me know if you have any questions about the exclusion or would like additional information. I would be happy to go over the specifics of your situation with you to determine how the exclusion might apply to a future sale or exchange of your property.■ mickleinc.com