The recent start of calendar year 2023 means that the start of the 2023 tax filing season is not far away. The IRS announced that the 2022 federal income tax filing season will officially start January 23, 2023.
During January, federal employees and retirees will be getting via regular mail or email their 2022 tax documents (including W2’s, 1099’s, 1098’s, confirmation letters from charities, etc.) that they will need to in order to prepare their 2022 federal and state income tax returns. This column presents 10 recommendations for federal employees and retirees for getting ready to either prepare their tax returns themselves or getting their documents and information together in order for a paid preparer to prepare their returns in the most efficient and least costly way.
The following recommendations are not listed in any particular order of importance:
1. Make every effort to electronically file (e-file) one’s tax returns, rather than filing a paper tax return.
Individuals who submit paper tax returns risk an array of problems including IRS key-punch errors on name or taxpayer ID numbers or a tax form being dropped on the floor at the IRS Service Center where the tax returns are processed. When the COVID-19 pandemic struck the nation, IRS mandated COVID relief tasks such as processing stimulus payments diverted IRS resources from tax returns processing. A huge portion of the IRS work backlog was processing paper tax returns. For example, when the IRS reported in August 2022 that they have 9 million unprocessed 2020 individual tax returns, 7 million of them were paper tax returns. In short, paper tax processing continues and will continue to cause the IRS headaches.
2. Check 2022 W-2 wage forms, 1099 forms and K-1/K-2/K-3 statements when they are received.
2022 W-2 forms will be made available online or mailed to employees by January 31, 2023. 1099 forms (this includes 1099-INT, 1099-DIV, 1099-B, 1099-R, 1099-MISC and 1099-NEC forms) should be made available online or mailed out to recipients no later than February 15, 2023. Partnership K-1/K-2/K-3 statements may not be available until at least March 15, 2023.
The Office of Personnel Management (OPM) should make available online or mail CSA-1099-R forms to federal annuitants (and CSF-1099-R forms to federal survivor annuitants) by the last week of January 2023. Those federal annuitants who are receiving Social Security monthly disability or retirement benefits should receive form 1099-SSA from the Social Security Administration (SSA) by January 31, 2023.
Employees are encouraged to examine their 2022 W-2’s to verify that Box 1 (“Wages, Tips and Other Compensation”) have been reported correctly. They should also check to make sure that the cumulative amount of federal and state income taxes has been reported correctly, as well as the total amount of TSP contributions (both traditional and Roth). They may do so by comparing what they see on their 2022 W-2 and what appears on their last leave and earnings statement (LES) they received during 2022.
If they received interest from a bank via a 2022 1099-INT, they should compare the total interest paid shown on their 1099-INT to the cumulative amount of interest paid paid during 2022, as reported on their December 2022 bank statement.
If they have received dividends and capital gains in a non-retirement brokerage account, they should compare what is shown on their 1099-DIV and 1099-B to what is shown on their December 2022 year-to-date brokerage statement.
Any errors/omissions on W-2 statements and 1099 forms should be reported to Human Resources Offices, to OPM’s Retirement Office, to the SSA, to banks or credit unions, or to brokerage firms in order to reconcile any differences. A corrected W-2 or 1099 form may have to be reissued.
3. Beware of the April 18, 2023 filing deadline for filing 2022 federal income tax returns.
As a result of the COVID pandemic, the deadline for filing 2019 federal income tax returns was extended three months to July 15, 2020. The deadline for filing 2020 federal income tax returns was extended to May 17, 2021, also as a result of COVID pandemic.
The deadline for filing 2021 federal income taxes was not extended, and the deadline for filing 2022 federal income taxes is April 18, 2023. Individuals who miss the April 18, 2023 filing deadline without filing for a filing extension will be subject to failure-to-file and failure-to-pay penalties equal to 5 percent or more of the tax due per month, plus interest. Also, most state income tax filing deadlines follow the federal filing deadline and will not be extended. Federal employees and retirees who live in states with state and local income taxes also need to consider their state’s 2022 filing tax deadline.
Bottomline: Ignoring the April 18, 2023 filing deadline for filing 2022 income tax returns could greatly increase one’s tax woes.
4. If meeting the April 18,2023 filing deadline is not possible, then look for other options to file and to pay.
All individuals are entitled to a 6-month filing extension to October 16,2023 in order to file their 2022 federal income tax return. They may do so by simply filing IRS Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return).
It is important for individuals to be reminded that an extension to file is not an extension to pay federal income taxes due. As part of filing Form 4868, an estimate of any federal income taxes due must be made and, if there is any balance due based on federal taxes paid via withholding during 2022, the balance must be paid as part of the filing extension. In case an individual cannot afford to pay the balance due with the extension, the IRS has options for those who cannot afford to pay their taxes in April. But the individual will need to contact the IRS if in that situation.
5. Expect a smaller refund or have a balance due on your 2022 federal income tax return.
Individuals should not expect to receive a hefty tax refund after filing their 2022 federal income tax returns. They are likely to receive a smaller refund compared to what they received after filing their 2021 federal income tax returns. They in fact may owe rather than receive a refund. Among the reasons why refunds will be smaller or there may be a balance due:
(1) While most individuals received their 2021 stimulus checks automatically, some individuals received the money as a “recovery rebate credit” of $1,400 per person on their 2021 income tax return. No “recovery rebate credit” appears on 2022 federal income tax returns;
(2) No enhanced child credit. The enhanced child tax credit for 2021 of $3,000 for children under age 18 and $3,600 for children under age 6 is not the case for 2022. For 2022, the child tax credit reverts to $2,000 for children under age 17;
(3) No nonitemized charitable deductions. Congress did not extend this temporary tax break that allows a special charitable deduction for individuals who take the standard deductions. The $300 deduction individuals who did not itemize could take ($600 for married couples) could take on 2021 federal, will not be available for tax year 2022, resulting in a slight increase in federal income tax liability; and
(4) Investment gains and losses. During 2022, some mutual funds sold more holdings than usual and distributed gains to fund investors. That could mean larger tax bills for fund investors, even though their portfolios shrank. On the other hand, investors who sold cryptocurrency or tech stocks, at a loss, can use those losses to offset capital gains, up to $3,000 of ordinary income.
6. Advice for gig economy entrepreneurs and workers.
In recent years, many individuals for a variety of reasons have engaged in the “gig economy.” Individuals must report their gig economy earnings on a tax return – whether they earned that only through a part-time gig or a “side.”
The IRS’ Gig Economy Tax Center (www.irs.gov/businesses/gig-economy-tax-center) provides information and resources for assistance and help in reporting gig economy earnings. Expenses related to gig economy may be deductible. Those individuals who engaged in gig economy during 2022 are highly encouraged to talk to a tax professional about how to their gig earnings and deductions.
7. Make sure that any family member and other relative who are claimed as dependents can be claimed under IRS rules as tax dependents.
For children to be claimed as dependents, a child must be age 18 or younger, or if the child is age 19-23 the child must be attending school full-time for at least five months during the year, have lived with the parents more than half of the year and did not provide more than half of their own support.
It is also important that the parent(s) claiming a child make sure that a different individual cannot claim that same child as a dependent. A divorced parent who is entitled to claim a child but is not claiming the child as a dependent on his or her 2022 federal tax return (allowing the child’s other parent to claim the child as a dependent on his or her federal income tax return) must complete and sign IRS Form 8332 (Release of Exemption for Child) and give the signed Form 8332 to the other parent. The other parent who is claiming the child as a dependent will then attach Form 8332 to his or her 2022 federal income tax return.
8. A federal annuitant should check to make sure all 2022 1099-R or 1099-SSA (if receiving Social Security disability or retirement benefits) are correct.
A CSA 1099-R is issued by OPM’s Retirement Office to any federal annuitant who received a monthly CSRS or FERS annuity check during 2022. A 1099-R is issued from the Thrift Savings Plan to a federal annuitant who: (a) Took a withdrawal from his or her TSP; (b) Rolled over a portion of his or her TSP account to a qualified retirement plan or to a traditional IRA; or (c) Requested a rollover of a portion of traditional TSP to a Roth IRA.
A 1099-R is issued from an IRA custodian to an employee or to a retiree who:
(a) Rolled over a traditional IRA to a traditional IRA;
(b) Performed a Roth IRA conversions – converting a traditional IRA to a Roth IRA;
(c) Took a distribution from a traditional IRA; or
(d) Took a distribution from a Roth IRA in which the distribution was not “qualified”.
9. If a principal residence was sold during 2022, then the sale may or may not have to be reported on one’s federal income tax return.
Under the Internal Revenue Code, an individual whose principal residence was sold during 2022 may have to report the sale on their federal income tax (Schedule D). Whether the sale has to be reported on Schedule D depends on the following factors:
(a) The individual’s filing status (single or married filing joint);
(b) The amount of capital gain or profit (net selling price less personal residence “cost basis”); and
(c) The amount of capital gain exclusions ($250,000 or $500,000) permitted by the Internal Revenue Code on the sale of a principal residence.
Those federal employees who sold their principal residences during 2022 are advised to consult with a tax professional in order to understand the tax consequences of their principal residence sale and in particular whether the sale has to be reported on their 2022 tax return. In the meantime, they should gather together as much “cost basis” information about their principal residence as possible. “Cost basis” information includes what they originally paid for the principal residence, any capital improvements made to the residences during the years of ownership, and any carryover of capital gain from the sale of a previously owned principal residence.
10. If using a tax professional to preparer for your 2022 tax returns, be as organized as possible when presenting requested documents to the tax professional.
Being organized includes not coming to the tax preparer on April 14 with a shopping bag of unopened and incomplete records and presenting to the tax preparer an incomplete list of items requested. The less time a tax preparer has to work – and time includes organizing a client’s receipts and documents – the less cost for preparing the return.