Have Your Clients Evaluated Their 2022 Roth Conversion Strategy?

The IRS also has reminders for taxpayers with side jobs and businesses seeking to claim employee retention credits.

The end of 2022 is approaching at a rapid pace. Clients who are considering various planning strategies should be advised to act now to ensure that there will be enough time to execute the strategy before year-end. That includes Roth conversions.

The IRS has also issued warnings about schemes promising artificially high employee tax credit refunds and is reminding service providers to look for new Form 1099-Ks if their sales exceed $600 in 2022. 

Taxpayers Considering Roth Conversions Should Act Now

As a reminder, the deadline for converting traditional IRA funds into a Roth is Dec. 31, 2022 (not, as many people believe, the tax filing deadline in April 2023). Taxpayers who execute conversions in 2022 will pay taxes on the conversion at their 2022 rates, which are relatively low and could rise in the future.

However, taxpayers should also consider the impact of a conversion on their Medicare premiums, Social Security benefits and other deductions and credits that phase out based on income.

Taxpayers should also be reminded that, under the 2017 tax reforms, the right to recharacterize (or reverse) the conversion no longer exists — so once the client executes the Roth conversion, they’re stuck with that conversion even if it looks like a mistake in hindsight.

For more information on the considerations that are important in evaluating whether a Roth conversion is a smart move, visit Tax Facts Online. (Read More)

Schemes Promising Inflated ERC Returns

The IRS is warning business owners about scams perpetrated by third parties claiming that employers are eligible for large employment tax refunds generated by improperly claiming or overstating the employee retention credit (ERC).

According to the IRS, these third parties typically charge a large fee or may require a percentage of the tax refund generated by the amended return. While it’s possible that some business owners do legitimately qualify for a refund, many do not.

Similarly, the business owner must remember that if the business files an amended return, they must also reduce the wage deductions they took on their tax return based on the amount of the ERC that is claimed on the amended return. In most cases, the third party offers to prepare an amended return that either improperly determines that the business is eligible for the ERC or overstates the amount of the credit available.

Business owners should closely examine the qualification requirements and their individual circumstances before filing an amended return to claim the ERC. Employers must either satisfy the governmental order test or the gross receipts test to claim the credit. For more information on the ERC, visit Tax Facts Online. (Read More) 

Reminder for Service Providers: Watch for 1099-Ks

The IRS has released a reminder for service providers and others with over $600 in sales during the 2022 tax year. Those taxpayers may receive a Form 1099-K early in 2023 for the first time if their 2022 sales exceed the $600 mark. 

The IRS also reminds taxpayers that there is actually no change to the tax treatment of this income. The only change is to the reporting rules for Form 1099-K. As always, all income remains taxable, including from part-time work, side jobs or the sale of goods. Taxpayers must report all income on their tax return unless it is excluded by law even if they don’t receive a Form 1099-K or any other tax documents.

The new reporting is designed to help taxpayers keep track of their income. The IRS suggests that taxpayers with side jobs may wish to consider making estimated tax payments throughout the year to cover their tax liability.

For more information on the types of income that are taxable, visit Tax Facts Online. 

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