It’s almost the 2022 tax season already and we’ve put together a few things that are very important for our clients to know when setting up for a less stressful tax season.
- Major Payment Processor Changes
- Who Needs to Pay Back The Child Tax Credit Advances?
- Boost in Charitable Deductions
- URGENT: Required Minimum Distribution for Retirement Accounts Returned in 2021
- Customer Education Reminder
The first is not unexpected considering recent legal changes to the IRS in the past year or two. More and more, we expect the IRS to monitor US citizens in different ways. While the potential changes in the Build Back Better plan that was recently stopped are not currently on the table (namely the provision that requires the IRS to collect bank account data for any accounts that have over $600 in transactions in a single calendar year, later changed to $10,000) this doesn’t mean that other similar changes have not slipped through.
Starting in 2022, all payment processors that many hobbyists and small business owners use like Paypal, Venmo, CashApp, and so forth will be required to report all transactions over $600 to the IRS when those transactions are listed as ‘goods and services’.
The current law requires payment processors to report only payments over $20,000 AND more than 200 transactions in a calendar year. As of January 1st, 2022 that will change to any transaction over $600. Taxpayers need to be prepared in advance.
As you’re likely already aware, many taxpayers use these apps to be paid by their customers when they own micro businesses and normal businesses. Even restaurants take payments by CashApp these days. The problem is a lack of understanding how these processors are reporting their information the IRS. There is a significant chance that your clients will not report all of their income to you if they use these apps since until now they have functioned almost the same as cash.
We advise our clients to talk to your customers about these recent changes and to be sure that they keep good logs of payments made to them in future if they don’t already do so.
A major concern last year with our auditing staff was taxpayers who claimed more exemptions than their income or their claimed income did not meet the national standard rates for their area. These are two red flags for the IRS, although mostly if they are claiming a refund. The IRS doesn’t tend to investigate as much if they owe money but they might.
We also advise our clients to make sure that your clients are reporting ALL income, including welfare, child support (official or unofficial), and that any special circumstances are well-explained and documented. This is part of your due diligence requirements and ours. We understand this is frustrating, but it protects everyone involved. The last thing anyone wants to deal with is an audit, right?
The American Rescue Plan made mid-season tax changes this year that made most of us crazy but no one more so than the IRS who had to implement those changes.
The ARP upped the child tax credit to be $3000 for families with children under 17 and added an extra $600 for children under 6. No one knows if it will be renewed, but it gave advanced credits to taxpayers and if their income went up they may need to pay it back.
In order to qualify for the full CTC, single filers had to have a modified AGI of less than $75,000 and MFJ had to earn under $150,000 together. The IRS sent the CTC advance payments based on 2020 income so if a family made more money in 2021 they may have problems but there are exceptions.
If your customer’s modified adjusted gross income is not more than:
$40,000 for single
$50,000 for HOH
$60,000 for MFJ
and they lived in the US for more than half of 2021 then no overpayment is required.
If your customer’s modified adjusted gross income is at least:
$80,000 for single
$100,000 for HOH
$120,000 for MFJ
then they must pay back all overpayments made. Everyone in between those two are calculated using the Repayment Protection Amount from the IRS. Don’t worry, the software should do this for you and if not let us know so we can help.
We expect you to deal with some very upset people this year if they have been counting on a big refund but they also received the CTC advance payments. They may try to blame this on you but try to educate them in advance that their refund will likely be lower than normal because they received those advance payments in 2021.
There is some good news this year for taxpayers, believe it or not. Congress included an incentive for charitable giving in the CARES Act of 2020 and the write off was extended through 2021.
This is particularly good for taxpayers who don’t itemize their deductions so a super win on this one for anyone with a giving spirit. Any cash donations and gifts can be claimed on their federal return for up to $300 for singles and $600 for MFJs. All gifts must be given to a qualified charity but can be made using credit or debit cards or by check before 12/31/2021 to qualify and can be claimed by those who choose to file using the standard deduction.
Required minimum distributions were suspended for the 2020 tax year but they snuck back quietly in 2021 and if your customer wasn’t paying attention, they can have some major financial woes in 2022.
If they don’t take their required minimum distributions before 12/31/2021 they can owe penalties of up to 50% of the amount they were supposed to withdraw! The penalties go by age and plan requirements but there is a list of the rules here. Don’t delay in reaching out to your customers who may be affected by these changes!
One thing many of us fall short on is educating taxpayers about how tax law changes affect their daily life and their expectations of receiving a return or paying taxes come Tax Day (note: that is April 18th, 2022 this year!).
Set up a newsletter for your customers to keep them in the loop about changes. A monthly newsletter is a great start and not too taxing on you, the tax preparer. Make sure to include important milestones in the year and make the newsletters easy to share so your clients can give you more word-of-mouth business. Include coupons they can claim for referring more customers to you! Newsletters are a great way to improve your business and makes for happy customers.
Another thing to consider is that without this education from you, there is a possibility that your customers will blame you for the actions of the IRS and assorted Congress critters.
Take for example the IRS processing delays. We’ve already heard from some of you that this has impacted your business. Some of you received screeching calls from your customers because the IRS hadn’t processed their returns yet and it had been six months. None of us can help what the IRS does and this has been a truly unprecedented time to do business in the world. But customer education goes a long way to fix things before a problem starts.
What can you do?
- Contact your clients by email, phone, or text blast and let them know that the IRS expects processing delays again in 2022 but if they have concerns to contact you to see what can be done
- Make sure to inform clients to put together their information now and send it to you as it comes in so you can process their taxes as soon as possible and get ahead of the game.
- If they have complicated taxes talk to them about strategies to make things simpler and easier for the IRS to process.
- Make sure to include in your client information packet that they should prepare letters and documentation now to explain anything untoward – such as having income that doesn’t meet the national standard – that may cause delays in the auditing process with both Taxx Savage and the IRS.
- Offer a small discount to come back to you in 2022 and a bigger discount if they bring friends. You can give them a $20 off rebate as a returning customer bonus and offer a $100 off rebate for every 5 people they refer who do taxes with you. Notice I said rebate, not coupon. Give them actual cash, up front, as a thank you once they have completed their taxes with you or you have finished with their referrals. That coupon is something that they can’t see. Sure, they know that they’re saving $20 but seeing that $20 in their hand is something special.
We hope this helps set you up for a successful and profitable 2022 tax season.