Education Benefits Help Attract and Retain Employees While Saving Taxes

Your business can attract and retain employees by providing education benefits that enable team members to improve their skills and gain additional knowledge, all on a tax-advantaged basis. Here’s a closer look at some education benefits options.

Educational Assistance Program

One popular fringe benefit that an employer can offer is an educational assistance program that allows employees to continue learning, and perhaps earn a degree, with financial help from the employer. An employee can receive, on a tax-free basis, up to $5,250 each year under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, as well as courses normally taken by individuals pursuing programs leading to a business, medical, law, or other advanced academic or professional degree.

The educational assistance must be provided under a separate written plan that’s publicized to your employees and meets specific conditions. A plan can’t discriminate in favor of highly compensated employees.

In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be claimed by an employee for any amount excluded from the employee’s income as an education assistance benefit.

If you pay more than $5,250 for educational benefits for an employee during the year, that excess amount must be included in the employee’s wages and the employee must generally pay tax on it.

Job-Related Education

In addition to, or instead of applying, the $5,250 exclusion, an employer can fund an employee’s educational expenses on a nontaxable basis if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

  • Maintain or improve skills required for the employee’s then-current job, or
  • Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for his or her employment or other trade or business.

Educational assistance benefits meeting the above “job-related” rules are excludable from employees’ income as working condition fringe benefits.

Assistance with Student Loans

Some employers also offer student loan repayment assistance as a recruitment and retention tool. Starting in 2024, employers can help more.

Under the SECURE 2.0 Act, an employer will be able to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.’ The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers.

Tax-Smart Employee Attraction and Retention

In today’s competitive job market, providing education-related assistance can make a difference in attracting and retaining the best employees. Structured properly, these plans can also save taxes for both your business and your employees.

Use the Tax Code to Make Business Losses Less Painful

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a Deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

Eligibility for the NOL deduction depends on having deductions for the tax year that exceed your income. The loss generally must be caused by deductions related to your:

  • Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
  • Casualty and theft losses from a federally declared disaster, or
  • Rental property (Schedule E).

The following generally aren’t part of the NOL determination:

  • Capital losses that exceed capital gains,
  • The exclusion for gains from the sale or exchange of qualified small business stock,
  • Nonbusiness deductions that exceed nonbusiness income,
  • The NOL deduction itself, and
  • The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can calculate individual NOLs using their separate shares of business income and deductions.

Limitations

Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back NOLs for two years and carry them forward 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits NOL deductions to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

If your NOL carryforward is more than your taxable income for the year you carry it to, you may have an NOL carryover. That’s the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

A Limit on Excess Business Losses

The TCJA also established an “excess business loss” limitation, effective beginning in 2021. For partnerships or S corporations, this limitation applies at the partner or shareholder level, after applying the outside basis, at-risk and passive activity loss limitations.Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000, or $578,000 if married filing jointly. For 2024, the thresholds are $305,000 and $610,000, respectively. Remaining losses are treated as an NOL carryforward to the next tax year. That is, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning Ahead

The tax rules regarding business losses are complex, especially the interaction between NOLs and other potential tax breaks.

Contact the office for help charting the best course forward: (408) 252-1800

Tax Credits for Energy-Efficient Home Improvements

Taxpayers making certain energy-efficient updates to their homes are reminded that they could qualify for home energy tax credits. The credit amounts and types of qualifying expenses were expanded by the Inflation Reduction Act of 2022. Taxpayers who make energy improvements to a residence may be eligible for expanded home energy tax credits.

What Taxpayers Need To Know

Taxpayers can claim two tax credits for the year the qualifying expenditures are made: the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. Before purchasing energy-efficient equipment, taxpayers are encouraged to review all requirements and qualifications at IRS.gov/homeenergy. Additional information is also available on energy.gov, which compares the credit amounts for tax year 2022 and tax year 2023.

Homeowners making improvements to their primary residence will benefit the most from these tax credits; however, renters may also be able to claim credits, as well as owners of second homes used as residences. Landlords cannot claim this credit. Let’s take a closer look at how these credits work:

Energy Efficient Home Improvement Credit

Under the Inflation Reduction Act, taxpayers that make qualified energy-efficient improvements to their home after January 1, 2023, may qualify for a tax credit of up to $3,200 for the tax year the improvements are made. Beginning January 1, 2023, the credit equals 30% of certain qualified expenses:

1. Qualified energy efficiency improvements installed during the year, which can include things such as:

  • iExterior doors, windows and skylights.
  • Insulation and air sealing materials or systems.

2. Residential energy property expenses such as:

  • Central air conditioners.
  • Natural gas, propane, or oil water heaters.
  • Natural gas, propane or oil furnaces, and hot water boilers.

3. Heat pumps, water heaters, biomass stoves, and boilers.

4. Home energy audits of a main home.

The maximum credit that can be claimed each year is:

  • $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600), and home energy audits ($150).
  • $2,000 annually for qualified heat pumps, biomass stoves, or biomass boilers.

The credit is available only for qualifying expenditures to an existing home or for an addition or renovation of an existing home and not for a newly constructed home. The credit is nonrefundable, which means taxpayers cannot get back more from the credit than what is owed in taxes, and any excess credit cannot be carried to future tax years.

Residential Clean Energy Credit

Taxpayers who invest in energy improvements for their main home, including solar, wind, geothermal, fuel cells, or battery storage, may qualify for an annual residential clean energy tax credit. Taxpayers may be able to claim a credit for certain improvements other than fuel cell property expenditures made to a second home that they live in part-time and don’t rent to others.

The Residential Clean Energy Credit equals 30% of the costs of new, qualified clean energy property for a home in the United States installed anytime from 2022 through 2033.

Qualified expenses include the costs of new, clean energy equipment such as:

  • Solar electric panels.
  • Solar water heaters.
  • Wind turbines.
  • Geothermal heat pumps.
  • Fuel cells.
  • Battery storage technology (beginning in 2023).

Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit:

  • Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the applicable state.
  • Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase.
  • Battery storage technology must have a capacity of at least 3-kilowatt hours.

The credit is available for qualifying expenditures incurred for installing new clean energy property in an existing or newly constructed home. This credit has no annual or lifetime dollar limit except fuel cell property. Taxpayers can claim this credit each tax year they install eligible property until the credit begins to phase out in 2033.

This is a nonrefundable credit, which means the credit amount received cannot exceed the amount owed in tax. Taxpayers can carry forward any excess unused credit and apply it to any tax owed in future years.

Taxpayers should use Form 5695, Residential Energy Credits, to claim the credit. This credit must be claimed for the tax year when the property is installed, not just purchased.

Keeping Good Records is Essential

Taxpayers are reminded that it is important to keep all receipts and records of purchases and expenses when the improvements are made to assist them in claiming the applicable credit during tax filing season. If you have any questions about home energy tax credits, please call.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

Five Overlooked Tax Breaks for Individuals

Are you confused about which credits and deductions you can claim on your 2022 tax return? You’re not alone. With tax law becoming more complicated every year, it’s hard to remember which tax breaks are available in any given year. With that in mind, here are five tax breaks you might not want to overlook.

1. State Sales and Income Taxes

The IRS allows for a deduction of either state income tax paid or state sales tax paid, whichever is greater. As an individual, your deduction of state and local income, sales, and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately). If you bought a big ticket item like a car or boat in 2022, deducting the sales tax might be more advantageous, but don’t forget to figure out any state income taxes withheld from your paycheck, just in case. If you’re self-employed, you can include the state income paid from your estimated payments. In addition, if you paid state tax when filing your 2021 tax return in 2022, you can include that amount in the state tax deduction on your 2022 federal tax return this year.

2. Child and Dependent Care Tax Credit

Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. The child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent such as an elderly parent who is physically or mentally unable to care for him or herself. The credit is worth a maximum of $1,050 or 35% of $3,000 of eligible expenses per dependent. For two or more qualifying children, the credit can be up to $6,000.

3. Student Loan Interest Paid by Parents

Typically, a taxpayer can only deduct interest on mortgages and student loans if they are liable for the debt; however, if a parent pays back their child’s student loans, the IRS treats the money as if the child paid it. As long as the child is not claimed as a dependent, they can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.

4. Medical Expenses

Most people know medical expenses are deductible if they are more than 7.5% of AGI for tax year 2022. They often don’t realize which medical expenses can be deducted, such as medical miles driven to and from appointments and travel (airline fares or hotel rooms) for out-of-town medical treatment. For 2022, these amounts are 22 cents per mile from July 1-December 31, 2022, and 18 cents per mile from January 1-June 30, 2022. For tax year 2023, the rate is 22 cents per medical mile driven.

Other deductible medical expenses that taxpayers might not be aware of include: health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.

Self-employed individuals. If you’re self-employed, you can deduct the amount of your entire health insurance premium, and if you pay health insurance premiums for an adult child under age 27, you may be able to deduct them as well. Self-employed individuals aged 65 or older can also deduct the amounts paid for medicare premiums as long as they do not have a regular job covered under their (or their spouse’s) employer’s health care plan.

5. Bad Debt

If you’ve loaned money to a friend but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 annually. To qualify, however, the debt must be totally worthless in that there is no reasonable expectation of payment. Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.

If you think you qualify for these tax breaks but aren’t sure, help is just a phone call away.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

State Payments Excluded From 2022 Federal Returns

Taxpayers in 21 states received special payments related to general welfare and disaster relief in 2022. However, according to recently issued guidance from the IRS, they will not need to report these payments on their 2022 federal tax returns. The special tax refunds or payments made by certain states were related to the pandemic and its associated consequences. Generally, payments made by states are includable in income for federal tax purposes. Due to this unique and complex situation, the rules surrounding their treatment for federal income tax purposes are more complex.

As such, people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island. Alaska is included in this group as well. Still, taxpayers should be aware that the annual payment of Alaska’s Permanent Fund Dividend does not apply to this exception as it is considered taxable income on federal tax returns.

Additionally, taxpayers in Georgia, Massachusetts, South Carolina, and Virginia will not include state payments in income for federal tax purposes if they meet certain requirements. For these individuals, state payments will not be included for federal tax purposes if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.

To assist taxpayers who have received these payments in filing their returns in a timely fashion, additional information is provided below:

Refund of State Taxes Paid

If the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied), the payment is not included in income for federal tax purposes.

Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.

  • Georgia
  • Massachusetts
  • South Carolina
  • Virginia

General Welfare and Disaster Relief Payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example, related to the outgoing pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Determining whether payments qualify for these exceptions is a complex fact-intensive inquiry that depends on several considerations.

The IRS has reviewed the types of payments made by various states in 2022 that may fall into these categories. Given the complicated fact-specific nature of determining the treatment of these payments for federal tax purposes balanced against the need to provide certainty and clarity for individuals who are now attempting to file their federal income tax returns, the IRS has determined that in the best interest of sound tax administration and given the fact that the pandemic emergency declaration is ending in May 2023 making this an issue only for the 2022 tax year, if a taxpayer does not include the amount of one of these payments in its 2022 income for federal income tax purposes, the IRS will not challenge the treatment of the 2022 payment as excludable for income on an original or amended return.

Payments from the following states fall in this category, and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022.

  • Alaska (Only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend.)
  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Idaho
  • Illinois (Illinois issued multiple payments, and in each case, one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.)
  • Indiana
  • Maine
  • New Jersey
  • New Mexico
  • New York (New York issued multiple payments, and in each case, one of the payments was a refund of taxes, which should be treated as noted above, and one of the payments is in the category of disaster relief payment.)
  • Oregon
  • Pennsylvania
  • Rhode Island

For a list of the specific payments to which this applies, please call the office for assistance.

Other Payments

Other payments that states may have made are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska’s Permanent Fund Dividend and any payments from states provided as compensation to workers.

Questions or concerns? As always, help is just a phone call away.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

There’s Still Time To Make an IRA Contribution for 2022

If you haven’t contributed funds to an Individual Retirement Account (IRA) for tax year 2022 or put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 18, 2023, due date, not including extensions.

Be sure to tell the IRA trustee that the contribution is for 2022. Otherwise, the trustee may report the contribution as being for 2023 when they get your funds.

Generally, you can contribute up to $6,000 of your earnings for tax year 2022 (up to $7,000 if you are age 50 or older). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot exceed these amounts.

Traditional IRA. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.

Roth IRA. You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

The IRS announces the cost of living adjustments and limitations for retirement savings plans each year. Saving for retirement should be part of everyone’s financial plan, and it’s important to review your retirement goals every year to maximize savings. If you need help with your retirement plans, please call.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500