Mesa Money Minute

The Inflation Reduction Act of 2022 implemented some new and changed other energy efficiency credits for home improvements. Certain types of home energy efficient upgrades, including exterior doors, windows, skylights, and insulation, central air conditioners, water heaters, furnaces, boilers and heat pumps, biomass stoves and boilers, and home energy audits, qualify for a credit up to 30% of the cost of the expenses, with a max of $1200 (heatpumps, biomass stoves, and boilers, have a separate limit of $2000) with no lifetime max. Further, other types of home energy efficient upgrades, such as solar, wind and geothermal power generation, solar water heaters, fuel cells, and battery storage are eligible for a credit of up to 30% with no lifetime limit or annual max. For more information on what types of property qualifies, visit energy.gov/save.

The Inflation Reduction Act of 2022 implemented and changed many of the clean energy credits available to both individual and business taxpayers. The electric vehicle (EV) credit is available for individual taxpayers with adjusted gross income of less than $300k for married taxpayers and $150k for single taxpayers. For a vehicle to qualify, it must be purchased new for personal use, and must have a battery capacity of at least 7kWh, and have a gross vehicle weight rating of less than 14,000 lbs. It also must be made by a qualified manufacturer, and undergo final assembly in North America. Lastly, the manufacturer's suggested retail price must be less than $80,000 for SUV's and pick-up trucks, and $55,000 for other vehicles. If a vehicle meets all these requirements, it could be eligible for a credit of up to $7,500. Additionally, there is a Colorado credit of up to $5,000. The requirements are complex, so be sure to do your research before purchasing a new EV! For more information, visit energy.gov and search for clean vehicle credits.

January 21-27 is National Data Privacy Week. It's a good time to review the steps you're taking to protect your personal sensitive information and make any adjustments for the new year. Check your security settings on your devices, and especially when you set up a new device. Device manufacturers often release new security features with software updates, so stay updated and familiarize yourself with any new settings. Default passwords should be changed as soon as possible. Never email sensitive information; instead utilize client portals and secure file transfer systems. Review your bank and credit card statements regularly for any unfamiliar charges. Don't use public, unsecured wifi for things like banking and shopping. Set up alerts on your bank account and credit card accounts so you are immediately notified of any unusual spending. Set up an account on irs.gov to monitor your tax account, and request an Identity Protection PIN. Consider freezing your credit with the credit bureaus until you need to apply for a loan. For more tips on protecting your personal data, go to staysafeonline.org.

Colorado Family and Medical Leave Insurance (FAMLI or "Famli") leave is available to use beginning January 1, 2024. If you are an employee and need leave for an eligible reason, typically parental leave for birth or adoption of a child, medical leave to care for a person with a serious medical condition, whether that person is yourself or a family member, leave to support family members who are in the military, or to attend the needs of a person (including yourself) who has experienced domestic abuse. Leave is available for up to 12 weeks, and is available on an intermittent basis. MyFAMLI+ is the portal where employees will go to apply for leave. They may apply up to 30 days before a planned leave, or up to 30 days after the first absence. Workers will not receive the full amount of their normal wages, but a reduced amount based on their average wages, not to exceed $1,100 a week. Employers are not responsible for the employees' wages during this period; however, they must hold the job for the employee upon their return from leave. For more information, visit famli.colorado.gov.

Amid the recovery efforts from COVID-19, many businesses took advantage of the Employee Retention Credit (ERC) which allowed a credit for keeping employees on payroll. However, the regulations and requirements of the credit are complex, and many businesses may have discovered after the fact that the claimed the credit in error. IRS has been stepping up enforcement action on incorrect ERC claims in recent months. If a business loses the ERC under audit, they'll be liable to repay the credit plus penalties and interest. However, for businesses who claimed the ERC in error or by mistake, IRS has announced a Voluntary Disclosure program which allows those businesses to return 80% of the credit and not be subject to penalties. There are many requirements for eligibility for this program, so be sure to consult with your CPA to determine if you are eligible. For more information, visit irs.gov and search for ERC voluntary disclosure program.

On December 19, the IRS announced a new program to help taxpayers who have been hit with penalties for 2020 and 2021, but were unaware of the accumulating penalties due to a pandemic-era policy to halt sending penalty notices. IRS had temporarily stopped sending automated reminders to pay past due tax bills in February 2022. Penalties, however, continued to accrue, sometimes without the knowledge of the taxpayer. The IRS will resume its normal process of sending automated reminders this month. However, to ease the transition, it will automatically forgive penalties for certain taxpayers affected by this situation. Eligible taxpayers include individuals, businesses, trusts, estates, and not-for-profit entities with less than $100,000 of taxes for the tax years 2020 and 2021. The IRS will automatically grant the relief and refund the penalty if it has already been paid, or credit it to another outstanding liability. Check your tax transcript at irs.gov to determine if you received penalty relief, and if a refund is pending. You may contact the IRS after March 31 with questions about this program.

Contrary to popular belief, you don't need to wear a lab coat or discover a new element to be eligible for a research and development (or R&D) tax credit. If your business is creating or improving a product, process, or software, you may qualify. For expenditures to qualify, they must be "incurred in connection with the taxpayer's trade or business" and must "represent research and development costs in the experimental or laboratory sense". According to the regulations, the "experimental or laboratory sense" is "for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product." If you're a start-up making less than $5 million annually and are under 5 years old, R&D credits can be used to offset up to $250,000 of your payroll taxes per year. If you're an established small business but don't have taxable income this year, you can carry the credit forward for up to 20 years. R&D credits require a lot of documentation so be sure to track your expenses diligently. If you think some of your business activities might be eligible for an R&D credit, contact your CPA to find out more about this complex topic.

What is Section 179D? Sounds intimidating doesn't it? Section 179D is a tax incentive for qualifying energy efficient commercial buildings. It allows for a deduction of up to $5/square foot if all energy efficiency and prevailing wage requirements are met. The deduction is primarily for building owners, but in certain circumstances it can be allocated to the designers, architects, engineers, and contractors of public buildings. The incentive is available for new construction projects as well as upgrades and retrofits of existing buildings. Commercial buildings and residential buildings with four or more stories are eligible. Single family homes or multi-family homes with three or fewer stories are not eligible. A taxpayer cannot prepare the claim on their own. A licensed engineer must complete a certification to validate the deduction. Consult your CPA if you want to explore your eligibility for a Section 179D deduction!

The Colorado Department of Labor and Employment rolled out its new employer platform for paying unemployment premiums, reporting wages, and responding to claims last month. Employers will need to register their accounts on the new platform to report wages and pay premiums. Every employer should have received either an activation email or letter with the information necessary to register a new account. If you haven't received your activation information, you can call the division or visit their website to obtain your activation code. If you use a third party administrator (or TPA), such as a payroll service or accountant, you will still need to activate your new account and authorize your TPA to use the account. Due to some issues with the new system, the deadline for third quarter unemployment insurance premiums and wage reports has been extended from October 31 to November 30. More information is available at myuiemployer.coworkforce.com.

What is Proposition HH? Prop HH would make various changes to state property taxes and changes to state revenue limits, including reducing the residential property tax assessment rate and subtracting a set amount of money from a property's taxable value before applying the assessment rate; creating two new subclasses of residential property effective in 2025; providing funds to local governments to make up for decreased property tax revenues, referred to as backfilling; creating a limit on local government property tax revenue; and creating a new cap on state revenue allowing the state to retain revenue up to the newly created cap that it would otherwise be required to refund to residents under TABOR. If Prop HH passes, the state sales tax refund every taxpayer has received on their Colorado tax return would be a flat amount, increasing for taxpayers of low- and middle-income, and decreasing for higher income individuals. The bottom line is that property taxes would decrease but TABOR refund credits would also decrease for most taxpayers over the next ten years. For more information visit leg.colorado.gov/bluebook. Don't forget to vote by November 7!

Whether you're a sole proprietor, a partnership, or a small corporation, you're probably wondering what you can "write off" or deduct from your taxes. Any expenditure that is ordinary and necessary to the operations of your business can generally be deducted, with many exceptions noted in the code. A commonly overlooked deduction available for your sole proprietorship is the use of a home office. If you use a space in your home regularly and exclusively for your business, you can deduct a portion of your mortgage interest or rent, utilities, insurance, maintenance, and HOA dues. Another useful deduction almost all small business owners can take advantage of is the portion of your cell phone that you use for business. If you have multiple lines on your account, you should break out the portion of the bill that is only for your line, and estimate a reasonable business use portion such as 25 or 30% of that line. Another simple but valuable deduction is mileage on your personal vehicle. You will need to substantiate this deduction should you be audited, so be sure to keep a digital or paper log of your business drives, and remember that commuting between your home and place of work is not deductible. Speak with your CPA about other business deductions you might be overlooking.

The gig economy or sharing economy is a term for the activities in which people earn income by providing services or goods on an on-demand basis, usually connected through digital platforms. Income from the gig economy is taxable even if it is part time, temporary, not reported on any tax form like a W-2 or 1099, or paid in any form including cash, crypto, or with a trade. If you're employed in the gig economy, be prepared to track and report your income and expenses just like any other business. You are required to file a tax return if you have net earnings from gig work or other types of self-employment of $400 or more. As a gig worker who is an independent contractor, you will be required to pay both income and self-employment taxes on your income, and you may need to pay quarterly estimated taxes if you do not have a job where you can have additional withheld from your check to cover your gig work income. The upside is that you can deduct expenses related to your work, such as mileage on your vehicle, the portion of your cell phone you use for work, and possibly even a home office. Consult your CPA for more information on the taxation of your gig!

For the second year in a row, many Colorado residents are eligible for a refundable state sales tax refund credit, which is a mechanism to refund tax revenue in excess of limits established by the Taxpayers' Bill of Rights amendment, or TABOR, added to the Colorado Constitution in 1992. The credit is allowed only to those individuals who lived in Colorado for the entire year. In order to claim the credit, taxpayers must file a Colorado income tax return or a Colorado Property Tax/Rent/Heat Rebate Application. If the taxpayer has either a Colorado tax liability or Colorado withholding, they are still eligible to claim the credit on an extended return until the due date of the return. Unfortunately for many seniors and low income individuals, if an individual had neither Colorado withholding nor Colorado tax liability, they must have filed their tax return or property tax rebate form by the original due date of April 18th, even if they extended their federal income tax return. Some industry groups such as the Colorado Society of CPA's has brought the unfairness of this rule to the attention of the Colorado Department of Revenue and to lawmakers and there is some hope for a resolution by year-end.

August means back to school! There are lots of tax benefits for higher education. The American Opportunity Credit is a credit of up to $2,500 per year for the first four years of college. The Lifetime Learning Credit is a credit of up to $2,000 per year for years after the first four years of higher education. Child not college age yet? You can still get a tax benefit by setting aside savings to a Qualified Tuition Program, also known as a 529 plan. Contributions to eligible plans are deductible for state purposes, and withdrawals from such an account are not taxable if used for education expenses. Withdrawals from 529 plans can now also be used for qualified K-12 expenses, up to $10,000 per year. There are other tax benefits for education, including penalty-free IRA withdrawals, student loan interest deductions, and gift-tax exceptions. Speak with your CPA about the methods that are best for your situation.

The taxation of gifts is complex, but the vast majority of us will never actually pay gift taxes, at least under current tax code. Gifts are generally not taxable to the recipient, however, if a gift of an asset such as a rental property is made, and then that property begins generating income, that income will be taxable to the new owner of the property (the recipient). Any potential gift taxation is the responsibility of the giver, not the recipient. There is currently a gift tax exclusion of $17,000 per year per recipient, meaning that you can gift that amount to an unlimited number of people with no tax or reporting consequences. You can also split gifts with your spouse, meaning a married couple can gift up to $34,000 per year per recipient with no reporting requirement. This is known as the annual exemption. Gifts for medical or education expenses paid directly to an institution are not counted against the annual gift exclusion. Once you get above those limits, you must report those gifts on a Form 709 Gift Tax Return, which is due on April 15 of the year following the year of the gift. Generally any gifts you give above the limit use up what is known as the Uniform Lifetime Credit. This credit essentially allows each individual to transfer, either by gift while living or by bequeathment after death, up to $12.92 million over their lifetime. Gifts above the annual exclusion amount eat into this limit, which is adjusted for inflation every year. Unless Congress acts, this exclusion drops to $7 million in 2026.

What is the best account to use for your retirement savings, a 401(k) or an Individual Retirement Account (IRA)? Each has pro's and cons. With a 401(k) you can set aside more each year (up to $22,500 in 2023, or $30,000 if you're over age 50); it is easy for an individual to set up (usually your employer takes care of deducting your contributions from your paycheck each month and depositing them to the account); there are no income limits; and often employers offer matching contributions to boost your savings. IRA's are a bit more flexible than 401(k)'s (you can make contributions until the filing deadline [usually April 15]) whereas generally 401(k) contributions must be made by December 31; you can contribute any type of earned income to an IRA so you don't have to rely on your employer to offer the plan. However, you are responsible for setting aside and making your contributions; the max contribution to the plan is lower ($6,500 in 2023 or $7,500 if you're 50 or older); and there are income limits that apply if you or your spouse are also covered by an employer plan. There are also many other types of retirement plans to consider, such as SEP's and Simples. It's best to confer with your advisers to determine which plans are best for your circumstances.

Biden signed the Fiscal Responsibility Act on June third, ending the debt limit crisis. The act increases the federal debt limit and suspends the federal debt limit until January 2025. It also ends the current student loan repayment pause, meaning that student loan repayments will resume towards the end of the summer. It also cuts about $20 billion of the $80 billion funding provided to the IRS by the Inflation Reduction Act. This could mean that the anticipated improvements in IRS taxpayer services will be delayed or canceled. What this means for you is that you can likely continue to expect long delays in processing, especially of paper filed returns and requests, and that if you have an IRS issue, expect it to take many months to resolve. The IRS, however, has said that it will continue with its plans to ramp up enforcement, and is focusing on high net worth individuals for audit selection. Ideally what this means is that it can shift some focus away from audits of low- to medium-income taxpayers.

June is an estimate month! Generally individuals and businesses must submit their income tax payments to the IRS and state agencies four times per year. There is an exception if your tax bill, after withholding and other payments, is less than $1,000. However, if you don't meet this or other exceptions then there can be penalties for not paying estimated tax payments. The penalty rate is similar to interest and is applied on a daily basis. Currently the penalty rate is 7%, so it is similar to paying 7% annually on a credit card. These penalties are usually calculated and paid with your tax bill at the end of the year. To calculate your estimated tax payments, calculate the tax due on your estimated taxable income for the year, subtract any withholding or other payments, and divide the result by four. This is the amount you should pay each quarter. There is also a safe harbor available, known as protective estimates, in case you cannot or don't want to estimate your current year's tax liability. The safe harbor is 100% of last year's tax liability, or 110% of last year's tax liability if your income was more than $150,000. Protective estimates will prevent penalties on not paying estimated tax payments, even if you owe much more than you paid. Consult with your CPA for assistance calculating and paying estimated tax payments.

It's graduation season! What if you didn't end up needing all your college savings for college? Maybe you got scholarships, went to a free school overseas, or decided not to pursue higher education after all and now you're wondering what do with the funds leftover in your 529 plan. Starting in 2024, the SECURE Act 2.0 passed last year allows you to convert some of the funds in your 529 tuition plan to a Roth Individual Retirement Account, so you can jump start your retirement savings. There are some limitations however; the funds must have been in the account for at least five years, the transfer must be directly from the 529 plan to the Roth, the annual limit for Roth contributions applies (which is $6,500 for 2023), and the lifetime maximum is $35,000. Contact your CPA if you have questions about this strategy.

On May 3, the Federal Reserve once again raised interest rates by 0.25%, the latest in a series of rate hikes. However, they also hinted that they may be done raising interest rates for the time being. The latest rate hike was the 10th in a row, starting in March of 2022, in an attempt to curb the rampant inflation in the economy after the the pandemic. Inflation has slowed, from a high of 9.1% in June of 2022 to 4.98% in March. While this is still greater than the fed's 2% target, the fed has to balance managing inflation with the possibility of tipping the economy into a recession. What does all this mean for you? It means that rates for savings and CD's may be at a zenith. It may be a good time to consider a CD if you have some extra cash you won't need for some time. Speak with your banker and investment advisor before making any investment decisions.