American households have been feeling the full effects of inflation all year with rates at their highest since early 2008. To support a healthy U.S. economy, the Federal Reserve, also known as the Fed, has raised its federal funds rate. Put simply, the federal funds rate is a suggested interest rate for banks to use when lending money. The Fed raises and lowers the rate accordingly to control the money supply and help keep inflation under control.
Fed Rate Hikes in 2022
In 2022, the fed funds rate has increased seemingly every other month. So far, the Fed has made the following adjustments:
March 2022: The Fed raised its rate from 0.25% to 0.50%
May 2022: The Fed raised its target rate range between 0.75% and 1% and announced it was reducing its holdings of Treasury and mortgage-backed securities.
June 2022: The Fed raised its target rate range between 1.5% and 1.75%, the largest rate hike in nearly 20 years.
July 2022: The Fed raised its rate to a target range between 2.25% and 2.5%
September 2022: The Fed raised its target rate range between 3% and 3.25% and announced the anticipated rate by the end of 2022 to be 4.4%.
November 2022: The Fed raised its target rate range between 3.75% and 4%, the highest level since 2008.
What’s Next For the Fed?
In October 2022, the Consumer Price Index (CPI), which is used to measure inflation, showed some signs of cooling prices in some areas. While this may sound encouraging, the Fed has announced that it does not view the small change as a victory. The option of raising their rate range in the December policy meeting is very much a possibility that Americans should prepare for. In fact, several financial institutions have predicted a rate of over 5% by March 2023.
What The Fed Rate Hikes Mean for Americans
The Fed rate hikes impact anyone who uses or is seeking financing because of rising interest rates. Home buyers have experienced higher interest rates on mortgages, meaning less buying power. On the flipside, home sellers might see a decrease in demand because it’s more expensive to purchase a home right now. Credit card debt also becomes more expensive since consumer debt interest rates rise after rate hikes. One of the few positives of rate hikes is that rates on savings accounts have increased slowly. Putting money into a high-yield savings account or a CD during inflation can result in greater interest yields.
Tax Relief for Those Affected by Fed Rate Hikes
Just about everyone in the U.S. has been affected by fed rate hikes, either directly or indirectly. On the tax side of things, the IRS has increased their interest rates for overpayments and underpayments to 6% per year, compounded daily. This rate is up from July’s rate of 5%. Higher rates make it a worse time to fall behind on tax payments, so staying compliant is even more crucial during this time. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Generally speaking, most income sources are taxable. However, there are some income types that are exempt from taxes. CEO David King and Lead Tax Attorney Philip Hwang discuss different kinds of income that may or may not get taxed and provide insight on how you can find out if your income is taxable or not. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
Filing taxes after a divorce can be complicated, especially when sorting out the tax liability that the parties are legally responsible for. CEO David King and Lead Tax Attorney Philip Hwang discuss how married couples should file their taxes, as well as how they can end up with a tax balance after a divorce – and what they can do about it. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
Whether you’re a frequent or seasonal giver, you should know how giving affects taxes. Giving can affect taxes in several ways, primarily through deductions and credits. Here are some frequently asked questions on how to maximize tax benefits of gifts.
What is a tax-deductible donation?
The IRS considers a tax-deductible donation to be any contribution of money or goods to a qualified tax-exempt organization. In order to deduct these contributions during tax season, you must itemize your deductions by filing Schedule A.
How much can I deduct?
Typically, you can deduct up to 60% of your adjusted gross income (AGI) if you are donating to a charitable organization. If you are donating to another type of organization like a private foundation or fraternal society, the limit is much smaller. These can range from 20% to 50%. If you exceed the limit for the year, you can carry over the excess contributions over the next five tax years.
Some contributions may lead to only a partial credit. For particular donations, a taxpayer will only receive a portion of a credit. For example, if you purchase a shirt that is a part of a charitable cause, the entire price of the shirt is not deductible. The fair market value must be determined and subtracted from the cost of your purchase in order to determine the amount of your donation.
What are qualified organizations?
A qualified organization is one that you make a charitable donation to that can be deducted during tax time. Some of these organizations include religious organizations, governments, nonprofit schools and hospitals, war veterans’ organizations, and others. Some that do not qualify for tax-deductible donations are social or sports clubs, most foreign organizations, lobbyist groups, homeowners’ associations, individuals, political groups and more. More common forms of donations like blood, time and services, and raffle tickets may not be deducted. However, you may deduct out-of-pocket expenses that related to volunteering if they were not reimbursed. These can include mileage, gas, and supplies.
Tax Relief for Gift Givers
Before you give, it’s important to learn how to maximize tax benefits of gifts. Whenever you donate, it’s important to keep records, no matter how big or small the contribution amount. Bank statements or charity receipts will suffice for monetary donations. If you make donations automatically through paycheck deductions, the contribution amounts will show on your W-2 or pay stubs. If you donate goods, you are allowed to deduct the fair market value of the items. In other words, you may deduct the price a willing buyer would pay for them. The rules surrounding tax-deductible donations can be tricky. However, Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
Certain business owners, including sole proprietors, businesses and rental property owners, can deduct expenses related to maintenance and repairs. The deductions must apply to their property and equipment or vehicles. However, once the repair becomes classified as a betterment, restoration, or adaptation to the property or asset, other rules will apply. Here’s a quick overview of how to expense business repairs.
Routine Repairs & Maintenance
According to the IRS, routine maintenance to a property or business helps increase the value and prolongs its usefulness. Because routine maintenance keeps the property or asset in normal working order, these expenses can be deducted in full during tax time. For example, repairing a leak in the roof of your rental property would be considered a fully deductible repair, while renovating the kitchen would be considered a capital improvement, which has other tax implications.
Capitalization
Capitalization, on the other hand, is considered to be a betterment, restoration, or adaptation to the property. In this case, you must capitalize and depreciate the expense over several years. Betterments are repairs that improve a property or business asset. This can include expanding a property or fixing a defect that existed before you purchased the property. Restorations are repairs that restore an asset to its normal condition, like replacing a roof. Adaptations are repairs that change how the property or asset is used. For example, converting a garage into additional office space would be considered an adaptation and would need to be capitalized. Generally, when depreciating these expenses, it is done over a 27.5-year period.
Home Offices
For smaller business owners or remote workers, there are home office deductions you can take advantage of during tax time. The IRS divides home office expenses into a couple categories: direct and indirect expenses. Direct expenses benefit your home office only while indirect expenses benefit both your office and your home as a whole. The rules of repairs and improvements also apply to home office expenses. Repairs are entirely deductible while improvements must be depreciated. You can determine if the expense needs to be depreciated if it fits the standards of being a betterment, restoration, or adaptation.
Tax Relief for Business Owners
The rules for expensing business repairs and improvements can become tricky. The most basic rule to remember is to deduct the expense when it is a repair that doesn’t qualify as an improvement to your property or business asset. You must capitalize and depreciate expenses that are considered a betterment, restoration or adaptation to your property or business asset. There are some exceptions to these guidelines, referred to as “safe harbors.” You should always check with a knowledgeable tax professional to ensure you remain compliant when capitalizing and depreciating expenses. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
