Tax Tips for Everyone is created to provide updates on current tax topics and increase understanding of terms and issues on income and other taxes.
Sales Tax Holidays
The annual Tennessee Sales Tax Holiday for computers, clothing, and school supplies begins at 12:01 a.m. Friday, July 29, 2022, and lasts until 11:59 p.m. Sunday, July 31, 2022. Consumers may purchase clothing, school supplies, and even computers tax-free during this time. Online purchases for these items are also eligible. Items must be purchased for personal use. There are certain restrictions. Items of general apparel, such as shirts, pants, shoes, etc. are limited to $100 or less per item. School and art supplies are also limited to a purchase price of $100 or less per item, such as binders, backpacks, drawing pads, etc. Computers for personal use with a purchase price of $1,500 or less are also exempt from sales tax during this timeframe.
A new sales tax holiday for 2022 is the Sales Tax Holiday for Food and Food Ingredients. Beginning at 12:01 a.m. Monday, August 1, 2022, through 11:59 p.m. Wednesday, August 31, 2022, all food and food ingredients will be exempt from sales tax. Items not included in the tax exemption include prepared food, dietary supplements, candy, alcoholic beverages, and tobacco products.
Also, for 2022-2023, the Tennessee General Assembly has approved a sales tax holiday on gun safes and gun safety devices beginning at 12:01 a.m. on July 1, 2022 and ending at 11:59 p.m. on June 30, 2023. Guns are NOT included in the tax exemption.
Income Tax Withholding May Need Review
With the mid-year past, some taxpayers may want to review their current withholding from their pay and self-employed farmers and others may want to review their expenses and potential income for the remainder of the year. Self-employed may need to adjust their quarterly tax payments looking at the increased expenses and estimating potential income during the second half of the year. Salaried individuals, especially those who have held more than one job, may find the need to update their W-4 to ensure the amount of tax being withheld is correct. While overpaying tax may create a bigger refund next year many taxpayers need the funds now. However, keep in mind a significant underpayment of income tax can create a potential penalty along with the tax due. Changes to the child tax credit and decreased earned income credit are two potential causes of withholding needing adjustment. IRS does have a withholding estimator to help determine if it is on track.
Tax Impact of higher home prices
Increases in home selling prices has created a potential tax situation. Current tax law generally allows for exclusion of $250,000 of income from the sale of your personal home for individuals and $500,000 for couples. After reducing the income from a home sale by the basis (purchase price plus improvements) the income might exceed the exclusion and capital gains tax may be due. Also, upon the death of one spouse the surviving spouse generally has two years to sell the home and still use the full $500,000 exclusion.
IRAs and 401Ks
From both a tax saving and investment perspective it may be wise to review the mix of investments in retirement accounts. Many investments in stocks and related investments have seen a decrease in value during the first half of 2022. While funds deposited into traditional IRAs and 401ks do typically provide a tax deduction, it may be prudent to review the mix of investments and rebalance to provide more security and less risk in the coming months. It is easy to over react in a down market. Depending on how far someone is from retirement and needing the funds may impact the level of risk desired. Consult with an investment advisor to help make the best plans moving forward.
The current exclusion for estate taxes is $12,060,000 per individual. This means unless your estate is worth more than the exclusion amount no estate tax will be due. With proper planning a couple can exclude over $24,000,000. This exclusion amount is set to expire in 2026 and the exclusion amount will drop to $5,000,000 adjusted for inflation since 2018. Most taxpayers will not be impacted even if the exclusion amount decreases. However, with the increasing home and land values it is wise to stay abreast of changes to the estate tax laws.
Current federal tax laws allow an individual to give up to $16,000 per year in cash or property with no tax reporting required. For example, a couple could give each child up to $32,000 per year. When the $16,000 is exceeded, IRS tax form 709 must be filed with the tax return. Generally, NO TAX is due by the giver or receiver of the gift. The amount exceeding the $16,000 is deducted from the estate tax exclusion mentioned above. Tennessee no longer has a state gift tax. If a taxpayer gifted more than the estate tax exclusion, it could cause estate taxes to be due upon the death of the taxpayer. Good estate and tax planning is always recommended.
IRS Voice Bot Improves Service
The IRS has implemented a new voice bot system to reduce the hold time for taxpayers needing to verify their identity or to set up or modify a payment plan. This change and other self-service options on the IRS website should enable taxpayers to obtain information quicker.