In this Edition
June 28, 2022
Nonworking Spouses May Still Contribute to an IRA
PODCAST: Financial Statements
Help Prevent Financial Scams Aimed At Older People
Is Your Corporation Eligible For The Dividends-Received Deduction?
Businesses Will Soon Be Able to Deduct More Under the Standard Mileage Rate
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Nonworking Spouses May Still Contribute to an IRA |
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Married couples may not be able to save as much as they need for retirement when one spouse doesn’t work outside the home — perhaps so that spouse can take care of children or elderly parents. In general, an IRA contribution is allowed only if a taxpayer earns compensation. However, there’s an exception involving a “spousal” IRA. It allows contributions to be made for nonworking spouses.
For 2022, the amount that an eligible married couple can contribute to an IRA for a nonworking spouse is $6,000, which is the same limit that applies for the working spouse.
IRA Advantages
As you may know, traditional IRAs offer two types of advantages for taxpayers who make contributions to them:
- Contributions of up to $6,000 a year to an IRA may be tax deductible, and
- The earnings on funds within the IRA aren’t taxed until withdrawn. (Alternatively, you may make contributions to a Roth IRA. There’s no deduction for Roth IRA contributions, but if certain requirements are met, distributions are tax-free.)
As long as the couple together has at least $12,000 of earned income, $6,000 can be contributed to an IRA for each, for a total of $12,000. (The contributions for both spouses can be made to either a regular IRA or a Roth IRA, or split between them, if the combined contributions don’t exceed the $12,000 limit.)
Boost Contributions if 50 or Older
In addition, individuals who are age 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000. Therefore, for 2022, for a taxpayer and his or her spouse, both of whom will have reached age 50 by the end of the year, the combined limit of the deductible contributions to an IRA for each spouse is $7,000, for a combined deductible limit of $14,000.
There’s one catch, however. Suppose in 2022, the working spouse is an active participant in one of several types of retirement plans. In that case, a deductible contribution of up to $6,000 (or $7,000 for a spouse who will be 50 by the end of the year) can be made to the IRA of the nonparticipant spouse, only if the couple’s AGI doesn’t exceed $129,000.
Contact us if you’d like more information about IRAs or you’d like to discuss retirement planning.
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Jared Ystad
D 715.384.1974
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Financial Statements
This podcast covers Financial Statements and information you need to keep an eye on. Accounting software packages can generate reports so that a business owner can stay on top of how the business is truly doing. Many business owners only look at the checkbook balance and how far they are booked out with jobs to get an idea of how the business is doing, but there is much more information the reports can give you.
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Help Prevent Financial Scams Aimed At Older People |
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In any season, scam artists are on the lookout for ways to steal financial data and money from vulnerable people. Such fraudulent activities often target older adults. Whether you’re in this age bracket or worry about senior parents and other relatives, here are seven ways to help prevent elder financial abuse and fraud:
- Keep both paper and online financial documents in a secure place. Monitor accounts and retain statements.
- Exercise caution when making financial decisions. If someone exerts pressure or promises unreasonably high or guaranteed returns, walk away.
- Write checks only to legitimate financial institutions, rather than to a person.
- Be alert for phony phone calls. The IRS doesn’t collect money this way. Another scam involves someone pretending to be a grandchild who’s in trouble and needs money. Don’t provide confidential information or send money until you can verify the caller’s identity.
- Beware of emails requesting personal data — even if they appear to be from a real financial institution. Remember, your banker or financial professional already has these things. Ignore contact information provided in the email. Instead, contact the financial institution through a known telephone number.
- As much as possible, maintain a social network. Criminals target isolated people because often they’re less aware of scams and lack trusted confidants.
- Work only with qualified professionals, including accountants, bankers and attorneys.
Most important, never let your guard down. Thieves are on the lookout for vulnerable people, so you need to be on the lookout for thieves.
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Dianna Streed, CPA, CGMA
D 507.453.5967
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Tax Tip Tuesday - Video Short |
Lifetime Learning Credit
In 30 seconds, we cover the basic facts about the Lifetime Learning Credit available for taxpayers enrolled in higher education.
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Is Your Corporation Eligible for the Dividends-Received Deduction? |
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There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” is designed to reduce or eliminate an extra level of tax on dividends received by a corporation. As a result, a corporation will typically be taxed at a lower rate on dividends than on capital gains.
Ordinarily, the deduction is 50% of the dividend, with the result that only 50% of the dividend received is effectively subject to tax. For example, if your corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500.
The deductible percentage of a dividend will increase to 65% of the dividend if your corporation owns 20% or more (by vote and value) of the payor’s stock. If the payor is a member of an affiliated group (based on an 80% ownership test), dividends from another group member are 100% deductible. (If one or more members of the group is subject to foreign taxes, a special rule requiring consistency of the treatment of foreign taxes applies.) In applying the 20% and 80% ownership percentages, preferred stock isn’t counted if it’s limited and preferred as to dividends, doesn’t participate in corporate growth to a significant extent, isn’t convertible and has limited redemption and liquidation rights.
If a dividend on stock that hasn’t been held for more than two years is an “extraordinary dividend,” the basis of the stock on which the dividend is paid is reduced by the amount that effectively goes untaxed because of the dividends-received deduction. If the reduction exceeds the basis of the stock, gain is recognized. (A dividend paid on common stock will be an extraordinary dividend if it exceeds 10% of the stock’s basis, treating dividends with ex-dividend dates within the same 85-day period as one.)
Holding Period Requirement
The dividends-received deduction is only available if the recipient satisfies a minimum holding period requirement. In general, this requires the recipient to own the stock for at least 46 days during the 91-day period beginning 45 days before the ex-dividend date. For dividends on preferred stock attributable to a period of more than 366 days, the required holding period is extended to 91 days during the 181-day period beginning 90 days before the ex-dividend date. Under certain circumstances, periods during which the taxpayer has hedged its risk of loss on the stock are not counted.
Taxable Income Limitation
The dividends-received deduction is limited to a certain percentage of income. If your corporation owns less than 20% of the paying corporation, the deduction is limited to 50% of your corporation’s taxable income (modified to exclude certain items). However, if allowing the full (50%) dividends-received deduction without the taxable income limitation would result in (or increase) a net operating loss deduction for the year, the limitation doesn’t apply.
Illustrative Example
Let’s say your corporation receives $50,000 in dividends from a less-than-20% owned corporation and has a $10,000 loss from its regular operations. If there were no loss, the dividends-received deduction would be $25,000 (50% of $50,000). However, since taxable income used in computing the dividends-received deduction is $40,000, the deduction is limited to $20,000 (50% of $40,000).
Other rules apply if the dividend payor is a foreign corporation. Contact us if you’d like to discuss how to take advantage of this deduction.
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Curt Bach, CPA
D 715.301.7631
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Businesses Will Soon Be Able to Deduct More Under the Standard Mileage Rate |
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Business owners are aware that the price of gas is historically high, which has made their vehicle costs soar. The average nationwide price of a gallon of unleaded regular gas on June 17 was $5, compared with $3.08 a year earlier, according to the AAA Gas Prices website. A gallon of diesel averaged $5.78 a gallon, compared with $3.21 a year earlier.
Fortunately, the IRS is providing some relief. The tax agency announced an increase in the optional standard mileage rate for the last six months of 2022. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business.
For the second half of 2022 (July 1–December 31), the standard mileage rate for business travel will be 62.5 cents per mile, up from 58.5 cents per mile for the first half of the year (January 1–June 30). There are different standard mileage rates for charitable and medical driving.
Special Situation
Raising the standard mileage rate in the middle of the year is unusual. Normally, the IRS updates the mileage rates once a year at the end of the year for the next calendar year. However, the tax agency explained that “in recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022.” But while the move is uncommon, it’s not without precedent. The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices rose significantly.
While fuel costs are a significant factor in the mileage figure, the IRS notes that “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.”
Two Options
The optional standard mileage rate is one of two methods a business can use to compute the deductible costs of operating an automobile for business puroses. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate. This may include expenses such as gas, oil, tires, insurance, repairs, licenses, vehicle registration fees and a depreciation allowance for the vehicle.
From a tax standpoint, you may get a larger deduction by tracking the actual expense method than you would with the standard mileage rate. But many taxpayers don’t want to spend time tracking actual costs. Be aware that there are rules that may prevent you from using one method or the other. For example, if a business wants to use the standard mileage rate for a car it leases, the business must use this rate for the entire lease period. Consult with us about your particular circumstances to determine the best course of action.
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Judy Haven, CPA
D 262.243.9610
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More Resources from CPA-HQ |
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Help When Needed: Apply the Research Credit Against Payroll Taxes
Small businesses and start-ups engaging in research activities: Here’s a way to save on payroll taxes.
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Calculating Quarterly Estimated Tax Payments
An important deadline is coming up for quarterly federal estimated tax payments. Here are four methods for corporations to compute them.
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How Start-up Costs of a New Business Affect Your Tax Return
Small businesses and start-ups engaging in research activities: Here’s a way to save on payroll taxes.
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