Finances

Getting Ahead of 2023 IRS Cryptocurrency Reporting Requirements

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Know those 1099-B forms that show up at tax time from your broker? Well, if you’re dabbling in cryptocurrency, you’ll soon be seeing more of them.

Starting in 2023, U.S. legislation now extends the same transaction reporting rules to cryptocurrency exchanges, custodians or platforms (e.g., Coinbase, Gemini or Binance), as well as digital assets, such as cryptocurrency (e.g., Bitcoin, Ether or Dogecoin). The same legislation also puts into effect cash reporting rules for payments of $10,000 or more to cryptocurrency. That means businesses accepting payments of $10,000+ in cryptocurrency will have to report those earnings to the IRS (using Form 8300).

How is this different than in the past?
The legislation, enacted in 2021, expanded the definition of “brokers” who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets (also known as virtual currencies) on behalf of another person (for example, cryptocurrency exchanges). Thus, any platform on which you can buy and sell cryptocurrency will have to report digital asset transactions to you and the IRS at the end of each year.

The cryptocurrency exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B. But it’s not yet known whether an exchange/platform will have to file Form 1099-B itself (modified to include digital assets) or some other new IRS form.

Digital assets defined
For these reporting requirements, a “digital asset” is any digital representation of value recorded on a cryptographically-secured distributed ledger or any similar technology. The definition could also potentially include some non-fungible tokens (NFTs) that use blockchain technology for one-of-a-kind assets like digital artwork.

Separate from the broker reporting rules, a business that receives $10,000 or more in cash must report the transaction to the IRS on Form 8300. For this cash reporting requirement, businesses will treat digital assets like cash.

What to expect moving forward
If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will begin tracking the holding period, and the buy and sell prices of the digital assets in your accounts. Be aware that transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency, such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies. 

It’s also good to keep in mind that the cryptocurrency exchanges or platforms may not have all the information they need to meet their reporting requirements under the new rules. So be patient, because it may be a challenging first year to get the information you need.

 

 

Ready to Cash Out on Your Home? Beware of Capital Gains

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Home values around the country are soaring. The median price tag on a single-family home in the U.S. jumped 23% since last year. While it seems like a huge advantage for sellers, there’s one factor that may put a damper on your profit: capital gains taxes.

Your home is a capital asset, so the capital gains tax is what you pay on its appreciation from the time of purchase to the time of sale. The exact amount will depend on your income, your tax filing status and how long you’ve owned the home. And it could mean handing over more than you’d like to Uncle Sam.

The good news? There are some fairly simple strategies to help minimize the capital gains you’ll have to pay on a home sale.

Determine if you’re eligible for an exclusion. If you’ve owned your home for at least two years, then up to $250,000 of profit is tax-free — or $500,000 for married people filing jointly. But to qualify, there are other requirements that must be met:

  • You must live in the home for the majority of the year.
  • You must provide proof of residency (voter registration, utility bills, a tax return, etc.).
  • It must a reasonable distance from your job.
  • For married filers, you and your spouse must claim the same residence.

Factor in adjustments to the cost basis. Did you put on an addition? Renovate the kitchen? Install new central air conditioning? All of these home improvements increase the cost basis of your home. Your cost basis includes the price and acquisition costs of your home, plus a laundry list of property-related expenses. So if you purchased your home for $400,000 and sell it for $500,000 five years later, it may sound like you have a $100,000 capital gain. But if you spent $50,000 on renovations, your cost basis will be $450,000, lowering your taxable gain to $50,000.

Sell when your income is at its lowest. If you were recently laid off, took a pay cut or newly retired, it might work to your advantage. Because your capital gains tax is determined by your tax bracket, a dip in income could have a positive impact on how much you’re expected to pay.

No one wants to pay high taxes on a home sale...

Your home is likely your life’s biggest purchase. When the time comes to sell it, make sure you’re getting back every penny you’re entitled to receive. Reach out to the experts at Magone & Co at (973) 301-2300, and we’ll schedule a no-obligation confidential consultation to explain your options.

5 Actions That Can Unexpectedly Raise Your Taxes

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Knowing what factors can raise your taxes is one of the best ways to keep more money in your pocket. That’s why proper tax planning is a year-round practice. Here are five actions that can unexpectedly increase your tax bill:

  1. Cashing in your retirement plan. There are many reasons not to cash in your plan early, and the tax penalty is one of the biggest. If you take the proceeds from your 401(k) plan in cash, instead of rolling it over into an IRA, you’ll have to pay taxes on the money you withdraw. Even worse, you’ll be subject to a 10% penalty. By the time you’re done, you could lose up to half your hard-earned retirement plan to taxes and penalties.
  2. Working as a freelancer. Working for yourself is great, but it can trigger tax headaches. Freelancers and other self-employed workers are subject to self-employment tax, which represents the combined employer and employee share of the Medicare and Social Security tax. The tax hit can be substantial, especially if you don’t plan for it.
  3. Failing to take your RMD. You can’t keep retirement funds in your account indefinitely. You’re required to start pulling money from your IRA and workplace retirement plans when you turn 70. If you fail to make that required minimum distribution (RMD), the penalty fees can easily offset your savings.
  4. Skipping your IRA contribution. If you’re accustomed to making an annual IRA contribution, skipping that contribution can cost you. Before you omit it completely, run the numbers and see how the decision will affect your tax bill.
  5. Paying off the mortgage. Eliminating mortgage debt can be very freeing, but it can also raise your taxes. Mortgage interest is deductible if you itemize your deductions. Losing that deduction may leave you owing more to the IRS. That’s not necessarily a reason to keep a mortgage, but it can be an important consideration.

With smart strategies for tax planning, the CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

Just Married? Financial and Legal To-dos for Newlyweds

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Wedding season is upon us. September and October are typically the most popular months to tie the knot. And despite the pandemic still raging in many parts of the country, the wedding industry is forecasting a temporary boost in revenue, with the number of fall weddings scheduled already close to pre-pandemic levels for now.

Many engaged couples and their families are remaining hopeful and cautiously planning for their big day. Whether you’re preparing for a wedding celebration now or later, it’s important to remember the administrative tasks to address when you say, “I do.”

 Housekeeping chores for name changes

The majority of pre-marital tasks relate to taking your spouse’s name or vice versa. If your name is changing, here’s the protocol after you’re legally wed:

  • Visit your local SSA office. Notify the Social Security Administration (SSA) after you’re married to protect Social Security benefits and credit ratings. To get a new Social Security card, you need to complete an application and provide proof of identification with your old and new names, such as a driver’s license and a marriage certificate. If you were born outside the United States, you’ll also need proof that you’re a citizen or legally in the country. Keep in mind, the SSA doesn’t accept photocopies, notarized copies or your old Social Security card as evidence of identity.
  • Update IRS records. The SSA informs the IRS about name changes, and the tax agency’s records are generally updated 10 days later. If you don’t notify the SSA and file a tax return with your new married name, IRS computers won’t be able to match the new name with the Social Security number.
  • Spread the word. Once your name is officially changed with the SSA, share the good news with everyone else. To avoid confusion, also be sure to update your driver’s license, passport, tax records, voter registration, vehicle registration, utility records, retirement plans and more.

When you get back to work, consult your company’s HR department to evaluate how your change in marital status affects your benefits options. For example, you might save money by eliminating duplicate healthcare or life insurance coverage.

Joining your finances

Are you combining your savings, checking and credit card accounts into one? Even if you decide to maintain separate accounts, it may be helpful to have at least one joint account to pay for shared expenses, such as rent, mortgage costs, household expenses or childcare.

A joint account can also help avoid trouble in certain situations. When a spouse or common law partner dies and there are separate accounts, the survivor will be excluded from the separate account if the estate goes into probate. That could take months. CPAs often help newlyweds establish joint financial goals, including annual budgets and contingency plans in case a spouse passes away, becomes disabled or gets laid off.

Managing legal matters

From a legal perspective, you’ll need to update deeds, wills and power of attorney documents. Your attorney can also discuss the full array of estate planning tools, such as various trusts, that might be relevant now that you’re married.

People who have been previously married bring additional financial issues to the table, especially if there are children, alimony payments and child support involved.

  • Do you have business debts or obligations with your former spouse?
  • Are you required to keep a former spouse on your insurance?
  • Does a former spouse have a claim on your employer-sponsored retirement account?
  • If you’re entitled to assets from a former spouse (for example, an inheritance or other financial interest) will your remarriage end that entitlement?

Marriage is a celebration — but it also involves a lot of paperwork. Don’t let administrative chores prevent you from living happily ever after. Contact the CPAs at Magone & Company at (973) 301-2300 to help tackle the critical tasks head on.

Overhead Expenses Starting to Accumulate? Manage Them Now Before They Get Out of Hand

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It’s not uncommon for overhead expenses to increase over time. In fact, it’s part of doing business.

But when overhead begins to mushroom out of control, it’s critical to confront the situation in a timely manner to avoid bigger problems down the road. Here are a few tips to help you manage runaway overhead costs:

Oversight is essential. Always be aware of your overhead expenses. Set time aside regularly to review them. Being conscious of what you are spending alerts you to changes that must be made.

Conduct an overhead review. The goal of your overhead review should not be only to reduce costs, but also to make certain those reductions allow you to deliver anticipated service levels to customers and clients. To that end, you must be aware of what your clientele expects from you. Involve employees in making a list of what your customers most value about your services and what they think might be improved. Awareness of customer satisfaction levels gives you a head start in determining what overhead cuts might be detrimental to your business.

Calculating overhead expenses. Use this simple equation to decide if you need to conduct an overhead review:

(Overhead ÷ monthly sales) x 100 = Overhead percentage

Recommended overhead ratios vary by industry. However, an overhead percentage that is no higher than 35 percent of total sales is considered positive.

Classify overhead activity. Overhead activity can be categorized into three areas: core, support and diversionary. Core activities such as sales add direct value to the company. Support activities such as record keeping do not add direct value, but they support the core activity. Diversionary activity such as time spent on correcting errors adds no value to the business. Since diversionary activities can account for as much as 20-40% of total overhead activity, special attention must be given to this category in determining overhead reductions.

Ideas for reducing overhead. These are some of the key areas you should look at in deciding overhead reductions:

  • Renegotiate your lease. The US Chamber of Commerce recommends that you make sure you know how much of a reduction to ask for based on market conditions and your business’s financial projections.
  • Evaluate your utility usage. Determine the levels of service your business actually requires. Odds are that you’ll find you’re spending much more than you need to, especially with the advent of competing utility services.
  • Rethink Insurance. Keeping certain that you remain adequately covered, review your policies to see what might safely be cut. Failing that, don’t auto-renew when your policy comes due annually. Ask your broker to shop around, as rates can vary widely.
  • Rent equipment instead of buying. This eliminates many upfront and maintenance costs. Leasing is not only less expensive, it also helps you keep your technology current.
  • Review your contracts. Cancel contracts you may no longer need, and renegotiate the necessary ones.

Benefits of an overhead review

According to the Managers-Net Archive, a properly executed overhead review can result in at least a 20% reduction in overhead costs, usually within a 10- to 14-week period.  But it also can benefit your company in other ways. The changes you make can result in improved services critical to your customers. It can make you aware of costly diversionary activity and present the opportunity to minimize it. And it can help provide your management team with a better understanding of the current state of the business, resulting in commitment to your proposals for improvement.

Self-employed? Showing Proof of Income is Easier Than You Think

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You’ve found the home of your dreams. Your credit is excellent, and you’ve saved enough for a generous down payment. But when the loan application asks for proof of income, you start to panic. Fortunately, qualifying for a mortgage doesn’t require a nine to five or a weekly paycheck.

For the 57 million freelance workers in the United States, proving an income can be challenging. But with some extra effort and preparation, you’ll be able to demonstrate a stable financial history — and get that mortgage, apartment lease or car loan approval even without a W-2 form or biweekly pay statements. These strategies can help:

  • Use an online payment service. To document income, an online payment service like com records and tracks who pays you, how much money is disbursed and where the money is coming from, so the information is easily accessible when you need it.
  • Ask your bank for an ACH report. An Automated Clearing House (ACH) report can serve the same purpose as a ledger from an online payment service. The ACH report will show when payments were made, along with the amount of each payment for easy tracking.
  • Hold on to your past tax returns. Once your taxes have been filed, keep copies of your returns for at least three years (preferably 7-10). This will help ensure that your income is reported accurately year in and year out.
  • Save your 1099 forms. You may have dozens of clients over the course of a year. To make your life easier, set up a filing system for all those 1099 forms. Take it a step further and scan each form as it’s received, keeping electronic versions on file as well.
  • Average your monthly income. It’s not uncommon for freelancers to have peaks and valleys in income. Over time, you may detect an earning pattern despite the variations. If you hope to qualify for a loan, track your monthly income carefully, averaging out the numbers to reflect your true annual earnings.

Freelance work offers a unique freedom and flexibility, while still affording you the opportunity to make a comfortable living. And if you check all the boxes of meeting a loan’s requirements, proving your self-employment income doesn’t have to be a daunting process. The expert CPAs at Magone & Company assist self-employed workers with our extensive tax and business knowledge. Contact us today (973) 301-2300 for more information.