11 life changes to review with accounting clients

At this time of year, accounting professionals need to make sure they have the right tools and resources to help their accounting clients prepare for the year-end filing. This white paper provides accounting professionals with valuable information on how to streamline communication and provide seamless services for accounting clients, review life changes from the previous year, and stay up to date on tax changes that may affect their accounting practice.

1. Inflation Reduction Act

The Inflation Reduction Act was signed into law in August 2022 and one of the provisions of the legislation was the $79.6 billion in funding to the Internal Revenue Service (IRS). The funding is intended to supplement and not replace the normal fiscal year appropriations of the IRS.

Along with the implementation of the $79.6 billion to the IRS, the stock market has fallen year to date and if your clients have a traditional IRA, it has lost value. It’s time to talk to them about converting that IRA into a Roth. The benefit of the Roth is that the distributions are not considered for purposes of determining the taxable amount for social security benefits.

Another benefit of a Roth is that the distributions in the future are potentially tax free. Also, when you convert an IRA that is at a loss, that loss is considered a capital loss. Therefore, you might be able to deduct the loss against capital gains and then up to $3,000 against ordinary income.

If you are looking for some more information on the Inflation Reduction Act, listen to the full “Inflation Reduction Act” episode of the Pulse of the Podcast on your preferred platform (Apple, Spotify, Stitcher) or on our blog post, “Understanding the Inflation Reduction Act of 2022.”

2. Small businesses and gig work

If any of your clients started a new business or took on some extra gig work, it is imperative that they open a separate bank account and credit card for the business or gig income and expenses. By opening a separate bank account, it will be much easier for your clients to differentiate deductible business gig expenses from non-deductible personal expenses. The separate bank account will also help to keep track of business cash flow.

Keep your client’s estimated tax payments in mind. Co-proprietors and gig workers must make estimated tax payments four times a year on their business gig income. However, if the taxpayer is also an employee, they may be able to make adjustments to cover the extra income. To avoid penalties, estimated tax payments must be made on time and cover income and self-employment taxes earned in the months covered by the payment. For example, the third estimated tax payment was due on September 15. This estimated payment should have covered the income you made from your business or gig in June, July, and August.

Sole proprietors can start contributing to a retirement plan like an IRA. Even if your client is covered by an employer’s plan, your income falls below the inflation-adjusted cap.

If you have a business or gig income in addition to a job, contribute some of the extra money to a retirement plan or set up a Roth or traditional IRA and contribute. You can contribute up to $6,000 — or 100% of compensation or less — to a Roth or a traditional IRA. If your client is over 50, they can contribute an extra $1,000. If they participate in an employer retirement plan, the amount of their IRA contribution that they can deduct varies based on their income. The amount they can deduct begins to phase out at $109,000 for married filed jointly and $68,000 for single and head of household. No deduction is allowed when income is over $129,000 from married filing jointly or $78,000 for single and head of household. Different rules apply when only one spouse is covered by an employer plan. If they cannot make an additional IRA because of income, they can still make a non-deductible contribution through a traditional IRA or to a Roth IRA, depending upon their adjusted gross income.

3. Getting married

Getting married is a major life event and if any of your clients got married in the past year, it is essential to go over the filing status with them. Make sure you do the math with your clients and figure out what filing status is best for them: married filing jointly or married filing separately.

Married filing jointly usually pays the least tax, but sometimes married filing separately is better. “For example, if one spouse makes more money and the other spouse has a lot of medical expenses, then married filing singles might make more sense,” said Michael Sonnenblick.

Your clients may see some advantages to filing a joint tax return with their spouse. Taxes and deductions are two focal points you can focus on with your clients who choose to file jointly. If your clients do choose to file jointly, they will receive a larger standard deduction that will allow them to deduct a considerable amount of income when calculating their taxable income.

In certain circumstances, your clients may choose to file separately. Typically, if a couple decided to file separately, there is a major life event that has caused a large amount of out-of-pocket medical expenses. Filing separate returns in a situation like this may be beneficial for your clients as it allows them to claim more of the available medical deductions by applying the threshold to only one of their incomes. When filing separately, each of your clients who are filing must take the standard deduction or both must itemize their deductions. One spouse cannot itemize their deductions while the other spouse takes the standard deduction.

The Social Security Administration will have to be notified of their marriage — along with your client’s new name, social security number, and change of address.

4. Getting a divorce

Just like weddings, thousands of divorces occur each year as well. One of the first things you should go over with your client if they file for a divorce is establishing if they will be filing as single or head of household.

Your client may be able to file as single before the divorce is finalized if they are already living apart from their spouse under a written agreement. It doesn’t have to be an uncomfortable conversation here — make your client feel comfortable and ensure them you want them to get the most out of their return.

To qualify for head of household, your client must have a qualifying dependent. If their qualifying dependent is their child, they may claim head of household if the child lives with them for more than half of the year and they are paid more than one-half of the cost of keeping up the home.

If not officially divorced, your client may be able to claim head of household if they lived apart from their spouse for the previous six months of the year, the qualifying dependent lives with them, and they paid for more than one-half the cost of keeping up their home.

For divorces after 2018, alimony is no longer deductible by the payer spouse or includable in the payee spouse’s income. But, if you were divorced before 2018 and you make a substantial change to your divorce agreement, the new rule where alimony is not deductible may apply.

5. Having a child

Clients who had a child in the past year will need to make sure they meet dependency requirements and apply for the baby’s Social Security number. This allows your clients to file their new child as a dependent.

Newborns are expensive and if your client falls in the right tax bracket, it is important to provide an overview of the Child Tax Credit program. This allows new parents the ability to claim the child tax credit, which will ultimately lower their tax bill.

If any of your clients send their children to a daycare center, they might be able to claim the Child and Dependent Care Credit.

Another aspect new parents need a breakdown on is primarily focusing on their out-of-pocket expenses. Medical expenses that exceed 7.5% of your client’s income may be deductible on Schedule A.

Keep in mind: deductible medical expenses are qualified medical expenses that are not paid or reimbursed by insurance; expenses paid out of the health savings account, Archer medical savings account, or another account where contributions were made on a pre-tax basis are non-deductible.

“Deductible medical expenses include transportation to and from medical appointments and hotel stays if your client needs to travel for care,” elaborated Michael Sonnenblick. If your client experiences medical expenses, it is imperative that they know to document all of their out-of-pocket expenses.

6. Adopting a child

Adopting a child is a very exciting and emotional time for the family. To take off some of the overarching stress for your client, make sure you provide an overview of the adoption credits with them.

Costs that count towards the adoption credit include reasonable and necessary adoption fees, court costs and attorney fees, travel expenses that include meals and lodging while away from home, and other expenses that are directly related to — and for — the principal purpose of the legal adoption of an eligible child. In general, you can claim the adoption credit in the year you pay the expenses, or when the adoption is finalized.

Adopting parents who receive adoption assistance from their employer may also be able to exclude the entire credit from their income. If your client has enough expenses, they may be able to claim both the credit and the exclusion. “For example,” Sonnenblick continued, “if your client paid $30,000 for qualified adoption expenses and your employer reimburses you for $14,890 of those expenses, they can exclude $14,890 from their gross income for 2022.”

Adoption credits and exclusion have income caps, so if your clients are planning to adopt, you might have to do some income planning to help your clients avoid exceeding the caps. It’s important to note that people who are married and filing separately cannot claim the adoption credit or exclusion.

7. Clients with older children

If any of your clients have children who work, especially during the summertime, make sure they are filing a return if any taxes with this were withheld from their pay. This is the only way to claim a refund if more taxes were withheld than the child owes.

Do not forget to let your clients know that kids of any age with earned income can contribute to a Roth IRA. A parent or other adult will need to open the custodial Roth IRA for the child but if the child has a refund coming, your client can have the child's refund directly deposited into the Roth account. If your client has a business, they can employ their child and the child can use those earnings to fund a Roth IRA.

Other things your clients can do are using the child’s refund to buy up to $5,000 of I bonds — these can be purchased when filing the child's tax return. Dependent minors must file a tax return if their earned income is greater than $12,950, which is the standard deduction as of 2022.

If a child only had unearned income, then the threshold is $1,150. If the child has both earned and unearned income, then the threshold is greater than $1,150, or the child's earned income plus $350. So, depending on how much money the client’s child earns, it may be better to allow the child to file their own return and not claim the child for tax credits, including the credit for other dependents.

8. Home improvements

After two years of staying at home due to the pandemic, many homeowners have been making home improvements. Inform your clients that there are two credits available for residential home improvements.

The first is the Residential Energy Efficient Property Credit (REEP). In 2022, the credit is 26% of the applicable cost and in 2023 it will be 22%. Property that qualifies for the REEP credit includes qualified solar electric property, solar water heaters, geothermal heat pumps, small wind turbines, fuel cell property, qualified biomass fuel property, and energy storage technology or batteries.

The second credit for residential home improvements is the Non-business Energy Property Credit. In 2022, the credit is 30% of the amount paid for qualifying energy-efficient improvements. The credit is allowed for improvements to a principal residence, such as installing insulation, exterior caulking, and weather stripping; exterior doors and windows; and central air conditioning and heat pumps.

The credit is capped at $1,200 per year, except there is an annual limit of $600 for windows and skylights and $250 for any exterior door. There is a $2,000 annual limit that applies to purchases of specified heat pumps, heat pump water heaters, and biomass stoves and boilers. Also, there is a credit of up to $150 available for a home energy audit.

9. Buying a home

It is an exciting time for anyone who goes through the journey of buying a home — if any of your clients took that leap in the past year, be sure to go over the tax breaks available to them.

One of the main tax benefits for homeowners is the mortgage interest deduction that allows your clients to deduct the interest they pay on their mortgage to buy, build, or improve their main or second home. Something to note: if the money is used to consolidate debt, cover college costs, or fund some other expense, your clients will not qualify for the deduction.

Also, if your clients pay for mortgage insurance as part of their monthly mortgage payments, they may qualify to deduct that expense from their taxable income. Mortgage insurance protects the lender if your clients are unable to make a mortgage payment.

There is an eco-friendly tax break for homeowners known as the residential energy-efficient property credit. The incentive applies to energy improvement made to a home, which might include installing solar panels or wind turbines.

10. Buying a car

There is a large tax relief for any of your clients buying an electric car. The Qualified Plug-in Electric Drive Motor Vehicle Credit provides a maximum credit of $7,500. For 2022, the credit phases out after a vehicle manufacturer sells more than 200,000 plug-in vehicles in the U.S.

For example, there is no credit if your client buys a Tesla and there is no credit for certain General Motors electric vehicles. However, the Inflation Reduction Act eliminates the limitation on the number of vehicles eligible for the credit, so your clients might want to wait until January 2023 if they want credit for buying an electric vehicle (EV) that is currently affected by the 200,000+ car limit.

There is no credit for your clients with modified adjusted gross incomes above $300,000 married filing jointly, $225,000 head of household, or $150,000 for singles. In addition, there is no credit if the purchase price of the vehicle is the manufacturer’s suggested retail price, which is more than $55,000, or $80,000 for pickups, vans, and SUVs.

The act also provides a credit for used EV vehicles purchased after 2022. The credit is the lesser of $4,000 or 30% of the purchase price; the maximum purchase price is $25,000. The credit is not allowed for married filing jointly with a modified adjusted gross income of $150,000. The limit is $112,500 for the head of household and $75,000 for singles.

11. Hobbies

Do your clients have any hobbies? Ask them what they do in their free time. Do they have any hobbies where they are selling a product? It might be a promising conversation to provide an overview of the difference between a business and a hobby.

A hobby is any activity a person pursues for enjoyment and with no intention of making a profit. This differs from a business, which is an activity operated with the intention of making a profit.

If your clients make income from their hobby, that income is considered taxable income and must be reported. Keep in mind, hobby losses cannot be deducted because miscellaneous itemized deductions aren’t allowed for tax years before 2026.

Here are some bullet points if any of your clients are unsure if their hobby is a business or not

• A business is pursued with continuity and regularity.
• A business is engaged in the primary purpose of making a profit.
• A business is an activity that has generated profit for three out of the last five years. According to the IRS in an information release they put out in 2007, the IRS presumes an activity is a business if it makes a profit during at least three of the last five years, including the current year, and at least two of the last seven years for activities that consist primarily of breeding, training, showing, or racing horses.

Conclusion

Year-end accounting is about preparation — ensuring that individuals and businesses are taking the proper steps to plan for their future by staying on top of tax regulations and life changes. By taking the appropriate steps to ensure accounting compliance and utilizing the most current tools, accountants can easily navigate their clients’ year-end tax planning.