If you’ve reached age 70½, you can make cash donations directly from your IRA to IRS-approved charities. These qualified charitable distributions (QCDs) may help you gain tax advantages.
QCDs can be made from your traditional IRA(s) free of federal income tax. In contrast, other traditional IRA distributions are wholly or partially taxable, depending on whether you’ve made nondeductible contributions over the years.
Unlike regular charitable donations, you can’t claim itemized deductions for QCDs. That’s OK because the tax-free treatment of QCDs equates to a 100% deduction.
To be a QCD, an IRA distribution must meet the following requirements:
Under the SECURE 2.0 Act, the annual QCD limit is now adjusted for inflation. In 2024, the limit is $105,000, up from $100,000 last year. In 2025, it will jump again to $108,000.
If both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate QCD limit. If you inherited an IRA from the deceased original account owner, you can make a QCD with the inherited account if you’ve reached age 70½.
QCDs have at least five tax-saving advantages:
The QCD strategy is a tax-smart opportunity for many people. It’s especially beneficial for seniors with charitable inclinations and more IRA money than they need for retirement. Contact us if you have questions or want assistance with QCDs.
© 2024
Tax planning is only a small component of estate planning — and usually not even the most important one for most people. The primary goal of estate planning is to protect your family, and saving taxes is just one of many strategies you can use to provide for your family’s financial security. Another equally important strategy is asset protection. And a spendthrift trust can be an invaluable tool for preserving wealth for your heirs.
A spendthrift trust prohibits a beneficiary from directly tapping its funds or transferring its rights to someone else. The trust can also deny access to creditors or a beneficiary’s ex-spouse.
Instead, the trust beneficiary relies on the trustee to provide payments based on the trust’s terms. These could be in the form of regular periodic payouts or on an “as needed” basis. The trust document will spell out the nature and frequency, if any, of the payments. Once a payment has been made to a beneficiary, the money becomes fair game to any creditors.
Be aware that a spendthrift trust isn’t designed primarily for tax-reduction purposes. Typically, this trust type is most beneficial when you want to leave money or property to a family member but worry that he or she may squander the inheritance.
For example, you might think that the beneficiary doesn’t handle money well based on experience, or that he or she could easily be defrauded, has had prior run-ins with creditors or suffers from an addiction that may result in a substantial loss of funds.
If any of these scenarios are possible, a spendthrift trust can provide asset protection. It enables the designated trustee to make funds available for the beneficiary without the risk of misuse or overspending. But that brings up another critical issue.
Depending on the trust’s terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, how much and when. The trustee may even decide if there should be any payment at all.
Or perhaps someone will direct the trustee to pay a specified percentage of the trust’s assets depending on investment performance, so the payouts fluctuate. Similarly, the trustee may be authorized to withhold payment upon the occurrence of certain events (for example, if the beneficiary exceeds a debt threshold or declares bankruptcy).
The designation of the trustee can take on even greater significance if you expect to provide this person with broad discretion. Frequently, the trustee will be a CPA, attorney, financial planner or investment advisor, or someone else with the requisite experience and financial know-how. You should also name a successor trustee in the event the designated trustee passes away before the term ends or otherwise becomes incapable of handling the duties.
Be aware that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, government agencies may be able to access the trust’s assets — for example, to satisfy a tax obligation.
It’s also essential to establish how and when the trust should terminate. It could be set up for a term of years or for termination to occur upon a stated event, such as a child reaching the age of majority.
Contact us if you have questions regarding a spendthrift trust.
© 2024
Do you own your principal residence? If so, you’re likely aware that you can benefit from the home’s build-up in equity, realize current tax breaks and pocket a sizable tax-exempt gain when you sell it.
And from an estate planning perspective, it may be beneficial to transfer ownership of your home to a qualified personal residence trust (QPRT). Using a QPRT, you can continue to live in the home for the duration of the trust’s term. When the term ends, the remainder interest passes to designated beneficiaries.
When you transfer a home to a QPRT, it’s removed from your taxable estate. The transfer of the remainder interest is subject to gift tax, but tax resulting from this future gift is generally reasonable. The IRS uses the Section 7520 rate, which is updated monthly, to calculate the tax. For September 2024, the rate is 4.8%, down from the year’s high thus far of 5.6% in June.
You must appoint a trustee to manage the QPRT. Frequently, the grantor will act as the trustee. Alternatively, it can be another family member, friend or professional advisor.
Typically, the home being transferred to the QPRT is your principal residence. However, a QPRT may also be used for a second home, such as a vacation house.
What happens if you die before the end of the trust’s term? Then the home is included in your taxable estate. Although this defeats the intentions of the trust, your family is no worse off than it was before you created the QPRT.
There’s no definitive period of time for the trust term, but the longer the term, the smaller the value of the remainder interest for tax purposes. Avoid choosing a term longer than your life expectancy. Doing so will reduce the chance that the home will be included in your estate should you die before the end of the term. If you sell the home during the term, you must reinvest the proceeds in another home that will be owned by the QPRT and subject to the same trust provisions.
So long as you live in the residence, you must continue to pay the monthly bills, including property taxes, maintenance and repair costs, and insurance. Because the QPRT is a grantor trust, you’re entitled to deduct qualified expenses on your tax return, within the usual limits.
When a QPRT’s term ends, the trust’s beneficiaries become owners of the home, at which point you’ll need to pay them a fair market rental rate if you want to continue to live there. Despite the fact that it may feel strange to have to pay rent to live in “your” home, at that point, it’s no longer your home. Further, paying rent generally coincides with the objective of shifting more assets to younger loved ones.
Note, also, that a QPRT is an irrevocable trust. In other words, you can’t revise the trust or back out of the deal. The worst that can happen is you pay rent to your beneficiaries if you outlive the trust’s term, or the home reverts to your estate if you don’t. Also, the beneficiaries will owe income tax on any rental income.
Contact us to determine if a QPRT is right for your estate plan.
© 2024
A common question, and one where many taxpayers often make mistakes, is whether it is better to receive a home as a gift or as an inheritance. Generally, from a tax perspective, it is more advantageous to inherit a home rather than receive it as a gift before the owner’s death. This article will delve into the tax aspects of gifting a home, including gift tax implications, basis considerations for the recipient, and potential capital gains tax implications. Here are the key reasons why inheriting a home is often the better option.
Let’s first explore the tax ramifications of receiving a home as a gift. Gifting a home is a generous act with significant implications for both the donor and the recipient, particularly regarding taxes. Most gifts of this nature occur between parents and children, making it essential to understand the tax consequences.
When a homeowner gifts their home, the primary tax consideration is the federal gift tax. The Internal Revenue Service (IRS) requires individuals to file a gift tax return if the gift exceeds the annual exclusion amount of $18,000 per recipient for 2024. This amount is adjusted for inflation annually. Since a home’s value typically exceeds this amount, filing a Form 709 gift tax return is often necessary.
While a gift tax return may be required, actual gift tax may not be due because of the lifetime gift and estate tax exemption. For 2024, this exemption is $13.61 million per individual, meaning a person can gift up to this amount over their lifetime without incurring gift tax. The value of the home will count against this lifetime exemption.
The basis of the gifted property is a critical concept for the recipient. The recipient’s basis in the property is the same as the donor’s basis, known as “carryover” or “transferred” basis. For example, if a parent purchased a home for $200,000 and later gifts it to their child when its fair market value (FMV) is $500,000, the child’s basis in the home would be $200,000. If the parent made $50,000 in improvements, the adjusted basis would be $250,000, which would be the child’s starting basis.
This carryover basis can significantly impact the recipient if they sell the home. The capital gains tax will be calculated based on the difference between the sale price and the recipient’s basis. If the home has appreciated significantly, the recipient could face a substantial capital gains tax bill.
Homeowners who sell their homes may qualify for a $250,000 ($500,000 for married couples) home gain exclusion if they owned and used the residence for 2 of the prior 5 years. However, this gain qualification does not automatically pass on to the gift recipient. To qualify, the recipient must meet the 2 of the prior 5 years qualification. Thus, it may be tax-wise for the donor to sell the home, take the gain exclusion, and gift the cash proceeds.
The capital gains tax implications for the recipient of a gifted home are directly tied to the property’s basis and the donor’s holding period. If the recipient sells the home, they will owe capital gains tax on the difference between the sale price and their basis in the home. Given the carryover basis rule, this could result in a significant tax liability if the property has appreciated.
Sometimes, a homeowner may transfer the title but retain the right to live in it for their lifetime, establishing a de facto life estate. In such situations, the home’s value is included in the decedent’s estate upon their death, and the beneficiary’s basis would be the FMV at the date of death, potentially offering a step-up in basis and reducing capital gains tax implications.
There are significant differences between receiving a property as a gift and as an inheritance.
When you inherit a home, your basis in the property is generally “stepped up” to the FMV at the date of the decedent’s death. For example, if a home were purchased for $100,000 and is worth $300,000 at the time of the owner’s death, the inheritor’s basis would be $300,000. If sold for $300,000, there would be no capital gains tax on the sale.
The holding period for inherited property is always long-term, meaning gains are taxed at more favorable long-term capital gains rates.
The accumulated depreciation is reset for inherited property used for business or rental purposes, allowing the new owner to start depreciation afresh. This is not the case with gifted property, where the recipient takes over the giver’s depreciation schedule.
While each situation is unique and other factors might influence the decision, from a tax perspective, inheriting a property is often more beneficial than receiving it as a gift. Considering the overall estate planning strategy and potential non-tax implications is crucial. Consulting with a tax professional can provide personalized advice based on specific circumstances.
In the landscape of financial planning and tax optimization, Qualified Charitable Distributions (QCDs) stand out as a powerful mechanism for individuals looking to enhance their philanthropic impact while optimizing their tax situation. This article delves into the core of QCDs, providing insights into how they can serve as a strategic tool in your charitable giving and financial planning.
Qualified Charitable Distributions allow individuals aged 70½ or older to directly donate up to $100,000 from their Individual Retirement Accounts (IRAs) to a qualified charity, tax-free. This unique provision supports your philanthropic endeavors and offers a tax-efficient way to meet Required Minimum Distributions (RMDs), particularly for those aged 73 and above. QCDs differ from regular IRA distributions, which is typically taxable, by excluding these donations from your taxable income, thus achieving the dual objective of aiding charitable causes and reducing your tax liability.
QCDs embody the essence of strategic giving, allowing you to see the impact of your generosity firsthand. This proactive approach to philanthropy provides a more immediate and gratifying experience compared to traditional legacy giving. With the onset of charity-focused events early in the year, it’s an opportune time to consider QCDs as a key element of your giving strategy.
Effective tax planning is a crucial element of sound financial management. Utilizing QCDs can significantly improve the tax efficiency of your charitable contributions. By transferring funds directly from your IRA to a charity, the donation does not count as taxable income, therefore not only advancing your charitable objectives but also potentially reducing your overall tax burden. This can be especially beneficial in light of increased standard deductions, which may diminish the tax advantages of itemized deductions for many taxpayers.
To fully benefit from QCDs, accurately navigating associated regulations is essential. You must be at least 70½ years old at the time of the distribution and the donation must go directly to a qualifying charity, excluding private foundations and donor-advised funds. The annual limit for QCDs is $100,000 per individual, with recent updates allowing for inflation adjustments. Ensuring that your IRA trustee correctly processes the QCD is required for it to qualify for tax-free treatment.
Opting to donate your RMD through a QCD enables you to embody your philanthropic values, creating a legacy of support and impact. This strategy provides the satisfaction of contributing to worthy causes and smartly aligns with your tax planning, potentially influencing various tax considerations such as Social Security taxation and Medicare premiums.
Leveraging Qualified Charitable Distributions within your philanthropic and financial strategy can offer substantial rewards. QCDs enable impactful contributions to the community and present an intelligent way to manage your tax obligations. Consulting with your financial advisor and tax professional is advised to ensure that your charitable giving initiatives are well integrated with your overall financial objectives. By incorporating QCDs into your planning, you can achieve a fulfilling balance between meaningful giving and prudent financial management.
To ensure that this strategy aligns with your overall financial goals and tax situation, it is crucial to seek the advice of your CPA or certified financial planner. They can provide personalized guidance to determine if QCDs are the right choice for you.
The 3.8% net investment income tax (NIIT) is an additional tax that applies to some higher-income taxpayers on top of capital gains tax or ordinary income tax. Fortunately, there are strategies you can use to soften the blow of the NIIT.
You’re potentially liable for the NIIT if your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 for joint filers and qualifying widows or widowers; $125,000 for married taxpayers filing separately). Generally, MAGI is the same as adjusted gross income. However, it may be higher if you have foreign earned income and certain foreign investments.
The NIIT is calculated by multiplying 3.8% by the lesser of:
1) net investment income (NII), or
2) the amount by which MAGI exceeds the applicable threshold.
For example, if you’re single with $250,000 in MAGI and $75,000 in NII, your MAGI will exceed the $200,000 threshold for singles by $50,000, which is less than your NII. So, your NIIT will be 3.8% × $50,000, which equals $1,900.
But if your MAGI instead is $300,000, your NIIT will be 3.8% × $75,000, which equals $2,850. This is because your $75,000 NII is less than the $100,000 amount by which your MAGI will exceed the $200,000 threshold.
NII generally includes net income from taxable interest, dividends, capital gains, rents, royalties and passive business activities. Several types of income are excluded from NII, such as wages, most nonpassive business income, retirement plan distributions and Social Security benefits. Also excluded are alimony and nontaxable gain on the sale of a personal residence.
Given the way the NIIT is calculated, you can reduce or defer the tax by reducing either your MAGI or your NII. Consider:
You also might be able to transfer — either directly or in trust — assets that generate investment income to lower-income family members who aren’t subject to the NIIT. With this strategy, though, be careful not to inadvertently trigger NIIT because of the transfer. For example, trusts have a dramatically lower income threshold level at which NIIT applies.
If you own rental real estate, talk to your tax advisors about how you can avoid NIIT and obtain other tax benefits by qualifying as a materially participating “real estate professional.”
If you hold interests in pass-through entities — such as partnerships, limited liability companies and S corporations — it’s important to consider the interplay between the NIIT and other taxes. For instance, it may be possible to avoid the NIIT by increasing your level of participation to convert a pass-through investment from passive to nonpassive. But in some cases, doing so may also trigger self-employment (SE) or payroll taxes, so it’s important to weigh the NIIT savings against the potential SE or payroll tax costs.
There are many potential strategies for reducing or deferring NIIT, but it’s important to consult with your tax advisor before you implement them. Tax reduction is an important objective, so long as it doesn’t come at the expense of prudent investment decision-making.
© 2023
Life insurance can provide peace of mind, but if your estate will be large enough that estate taxes will be a concern, it’s important to not own the policy at death. The policy’s proceeds will be included in your taxable estate and may be subject to estate tax. To avoid this result, a common estate planning strategy is to draft an irrevocable life insurance trust (ILIT) to hold the policy.
Generally, the proceeds of a life insurance policy aren’t included in your taxable estate if you don’t own the policy. However, life insurance proceeds will be included if you possess any “incidents of ownership” over the policy. This goes beyond mere ownership. If you have the right to amend the policy — say, by changing the beneficiaries — or you can borrow against the cash value, it’s treated as an incident of ownership.
Avoiding incidents of ownership can be important because the top estate tax rate is currently 40%. Fortunately, with your gift and estate tax exemption, you can shelter up to $12.92 million (for 2023) of assets from federal gift and estate tax. But be aware that, without congressional action, after 2025 the exemption is scheduled to revert to $5 million (indexed for inflation).
Furthermore, you may have to contend with estate or inheritance tax at the state level. In any event, the estate tax treatment of life insurance policies is a prime consideration in estate planning, especially for wealthier individuals.
A common method for avoiding these estate tax complications is to use an ILIT. This may be accomplished by setting up a trust as the owner of the life insurance policy when the coverage is purchased or by transferring an existing policy to the trust.
The trust must be “irrevocable,” as the name states. In other words, you must relinquish any control over the ILIT, such as the right to revise beneficiaries or revoke the trust. Similarly, acting as the trustee of the ILIT will be treated as an incident of ownership that invalidates the trust.
You’ll designate the ILIT as the primary beneficiary of the life insurance policy. On your death, the proceeds are deposited into the ILIT and held for distribution to the trust’s beneficiaries, such as your spouse, children, grandchildren or other family members.
Naming your surviving spouse as the sole beneficiary can be problematic, however. It may merely delay estate tax liability until your spouse dies.
There are several pitfalls to watch for when transferring an insurance policy to an ILIT. Significantly, if you transfer an existing policy to the ILIT and die within three years of the transfer, the proceeds will be included in your taxable estate. One way to avoid this is to have the ILIT purchase the policy on your life and then fund the trust with enough money over time to pay the premiums.
Also bear in mind that the transfer of an existing policy to an ILIT is considered a taxable gift. Further, subsequent transfers to the trust would also be treated as gifts. The gifts can be sheltered from tax by your available gift and estate tax exemption.
Life insurance is a powerful estate planning tool. It creates an instant source of wealth and liquidity to meet your family’s financial needs after you’re gone. To shield proceeds from estate tax, consider creating an ILIT to hold your policy. Contact your estate planning advisor to determine if an ILIT is right for your estate plan.
© 2023
If leaving a charitable legacy is important to you, you may be thinking about establishing a private foundation or other vehicle for managing your philanthropic activities. Private foundations can be highly effective, but they’re expensive to set up and operate. Donor-advised funds (DAFs) are popular alternatives, but they also have potential drawbacks.
Why use a foundation or DAF? Can’t you just write checks to your charities of choice? Of course, but contributing funds to a private foundation or DAF allows you to enjoy immediate charitable tax deductions without needing to identify specific beneficiaries or make contributions right away. It gives you more time to research potential recipients or change the organizations you support from year to year.
These vehicles also allow you to involve your family in your charitable endeavors. You can name family members to the board of a private foundation or even hire loved ones to manage it. Many DAFs allow you to designate a successor advisor.
A private foundation is a charitable organization, typically structured as a trust or corporation and designed to accept donations from a small group of people, such as you and your family. Private foundations usually make grants to other charitable organizations rather than provide charitable services themselves.
A DAF is an investment account, controlled by a sponsoring organization — usually, a public charity or community foundation — and often managed by an investment firm. The fund accepts tax-deductible contributions from investors, who advise the fund on how their charitable dollars should be spent.
DAFs generally can be set up in a matter of days — or even hours. Setting up a private foundation, however, takes time, since it involves establishing a legal entity. Another advantage of DAFs is that they’re inexpensive (or free) to create, and minimum initial contributions can be as low as $5,000. In contrast, starting a private foundation involves significant legal and accounting fees. Foundations also require much larger initial contributions — typically hundreds of thousands or even millions of dollars — to justify their start-up and ongoing administrative expenses.
Here are other ways the two vehicles compare:
Operating expenses. DAFs typically charge management and investment fees of around 1% to 2% of your account balance. Managing a private foundation is much more expensive since you’ll need to appoint a board, hold periodic meetings, keep minutes, file separate tax returns, and incur ongoing legal and accounting costs, in addition to paying investment fees. You’ll also need to hire a staff or engage a third-party administrator, and pay an excise tax on net investment income (currently 1.39%).
Distribution requirements. DAFs aren’t subject to required minimum distributions, so investments can grow tax-free indefinitely (subject to any rules of the sponsoring organization). But private foundations must distribute at least 5% of their net market value each year.
Charitable recipients. Distributions from DAFs must be made to public charities. Private foundations can make grants to a wider range of charitable recipients, including individuals (subject to certain restrictions).
Tax deductibility. Cash contributions to DAFs are tax deductible up to 50% of the donor’s adjusted gross income (AGI), while noncash contributions are generally deductible up to 30% of AGI. For private foundations, the deduction limits are 30% and 20%, respectively. Typically, you can deduct the market value of appreciated assets donated to a DAF. Deductions for donations to foundations are limited to your cost basis (except for publicly traded stock).
Privacy. DAFs are permitted to accept donations privately, so it’s possible for contributors to remain anonymous. Private foundations must publicly disclose the names of donors who give more than $5,000.
Control. This is an area where private foundations have a clear advantage. You and other board members retain full control over the foundation’s investments and distributions. DAF contributions become the sponsor’s property and your role in managing investments and distributions is strictly advisory. Practically speaking, however, sponsors almost always follow contributors’ advice.
The right charitable giving vehicle for you depends on many factors, including your financial resources, the charities you wish to support and the level of control you desire. Talk to your advisors about designing a philanthropic strategy that meets your needs.
© 2023
In business, where every decision can tip the scales of success or failure, a robust financial strategy is imperative. Enter Financial Planning & Analysis (FP&A) – an often underappreciated yet pivotal function that can revolutionize how businesses plan, analyze, and project their financial future.
What exactly is FP&A? At its core, FP&A serves as the bridge between strategic planning and its execution. It’s the analytical arm of the finance department, scrutinizing past performances and forecasting future trends. While traditional accounting looks backward, detailing where a company has been, FP&A looks forward, charting where it’s headed. It complements the accounting function by bringing an analytical and predictive dimension to the table. Together, they provide a holistic view of a company’s financial health.
FP&A is more than a tool reserved for accountants or financial experts. It’s an invaluable financial guide that acts as a compass for every entrepreneur and project manager. This financial guide offers:
By analyzing financial trends, FP&A drives strategic direction, ensures profitable revenues, and assists in budgeting and forecasting. It’s no wonder that businesses integrating FP&A report a 30% increase in forecast accuracy.
The business world is in constant flux. The days of static annual reviews have been left behind. With rapidly changing market dynamics, agility in financial planning isn’t a luxury—it’s a necessity. This fluid approach ensures that businesses remain proactive, ready to seize opportunities or avoid impending challenges.
Steps to Seamlessly Integrate FP&A in Project Planning
By understanding the nuances of FP&A and weaving it into business processes, companies can make informed decisions, minimize risks, and amplify profitability. In the unpredictable world of modern commerce, FP&A stands as a trusted compass, guiding firms towards a brighter future.
Inheritance brings its own set of challenges. Within the vast world of financial legacies, inherited Individual Retirement Accounts (IRAs) stand out thanks to their annual withdrawal requirements, also known as Required Minimum Distributions (RMDs). With these RMDs comes the caveat of taxation. However, when the Secure Act of 2019 was introduced, it brought clarity and confusion, mainly by introducing new beneficiary categories.
The Secure Act ushered in three beneficiary categories, each with distinct withdrawal rules:
Many beneficiaries, particularly NEDBs, found these rules intricate. The real task was classifying themselves correctly and adhering to the associated RMD rules to avoid tax penalties.
In response to the confusion stemming from the Secure Act’s implementation, the IRS released Notice 2022-53 in October 2022. For those beneficiaries whose original IRA owner had begun their RMDs, they must commence their own RMDs in the year following the owner’s passing. Furthermore, the complete balance should be dispensed by the 10th year after the owner’s death.
Recognizing the challenges arising from the Secure Act, the IRS also waived penalties for NEDBs who missed RMDs in 2021 and 2022 to show its commitment to assist during these regulatory transitions.
Things to remember:
To navigate the inherited IRA terrain confidently, beneficiaries should:
Although financial regulations seem intimidating, beneficiaries can efficiently manage their inherited IRAs with the right guidance and proactive approach. By understanding their specific obligations under the Secure Act and seeking expert advice, beneficiaries can comply with regulations and make informed decisions that honor their inheritances and bolster their financial futures.
If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Let’s take a look at a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).
SEPs are intended as an attractive alternative to “qualified” retirement plans, particularly for small businesses. The features that are appealing include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.
If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $66,000 for 2023. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.
There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.
Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.
For 2023, SIMPLE deferrals are up to $15,500 plus an additional $3,500 catch-up contributions for employees ages 50 and older.
Contact us for more information or to discuss any other aspect of your retirement planning.
© 2023
The new Secure Act 2.0 legislation expands upon the Secure Act of 2019 with updates to retirement savings plans across the country. Here’s what you need to know.
Plan sponsors of 401(k) and 403(b) plans will be required to automatically enroll eligible employees with a starting contribution of 3% of their salary beginning in 2025. This amount will increase annually by 1% until the deferral amount reaches 10% of their earnings. Employees can opt-out if they do not wish to enroll in the sponsored retirement plan. This goes into effect for all existing defined-contribution plans if the employer has more than 10 employees and has existed for more than three years. Government and churches are excluded.
In addition, unenrolled participant notification requirements have been eliminated except for an annual reminder of plan requirements and their opportunity to participate.
Over the next 10 years, the age when required minimum distributions go into effect will increase. Here are the highlights:
For those who failed to make their required minimum contribution, the Act reduces the penalty from 50% to 25%.
Certain hardships are eligible for penalty-free early withdrawals from retirement accounts, where retirement account owners are only responsible for applicable taxes instead of the early withdrawal fee. Eligible hardships have been expanded to include victims of domestic violence, terminally ill patients, and certain personal financial emergencies. In addition, victims of qualified federal disasters who have experienced significant financial impact may take an early withdrawal without penalty within 180 days of the disaster.
Currently, taxpayers aged 50 or older can make catch-up contributions to eligible retirement plans, like a 401(k) or IRA. Beginning in 2025, The Secure Act 2.0 increases limits to the greater of $10,000 or 50% more than the original catch-up amount for those aged 60, 61, 62, or 63. In addition, IRA catch-up limits will no longer be set to $1,000 per year but will increase with inflation. In 2024, catch-up contributions will also be subject to after-tax (ROTH) rules.
The Secure Act 2.0 permits qualified 403(b) and governmental 457(b) plans to allow employees to designate employer matching, nonelective contributions, and student loan matching contributions as pre- or post-tax contributions. Take note that Roth-designated employer contributions must be 100% vested.
If a part-time worker has worked for an employer for at least three consecutive years and worked a minimum of 500 hours per year for those three years, the plan sponsor must allow them to contribute to qualified 401(k) plans. Effective for 401(k) and 403 (b) plans beginning after December 31, 2024, the three-year requirement has been reduced to two years.
Beginning in 2023, businesses with 50 employees or fewer can take a credit of up to 100% of the startup costs for workplace retirement plans, up to the annual cap of $5,000. This is an increase from the 50% credit previously offered.
To review how your tax strategy is affected by the Secure Act 2.0, reach out to our team of knowledgeable professionals.
The Silent Generation and Baby Boomers are incredibly fortunate generations—and so might be their heirs. Cerulli’s U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021 report predicts these generations will transfer $72.6 trillion in assets to heirs and $11.9 trillion to charities through 2045.
That’s a lot of money, and it presents a unique opportunity for Gen Xers and Millennials to secure their financial futures. But it’s important to remember that this wealth won’t just magically appear. It will take planning and communication between the generations to transfer it smoothly.
Managing expectations is one of the biggest challenges heirs face when inheriting wealth from their parents or grandparents. Many Gen Xers and Millennials believe they will inherit a large sum of money, but this may not be the case.
Older generations are living longer and may spend a large percentage of their estate before it can be passed on. Others might give away too much money now and need financial support from their adult children later.
The first step in any estate planning discussion is getting honest about what heirs hope to receive and what the older generation can afford to give.
Older generations can find it difficult to talk about their death. They may feel like they are losing control over their life and finances. Or they may be afraid that their heirs won’t be able to handle the responsibility of inheriting wealth.
However, it’s essential for members of different generations to have open communication about estate planning. That way, everyone is on the same page when the time comes to hand over the reins.
Involving a third party—a CPA, financial advisor, or attorney—in these conversations can help. These professionals do more than ensure the estate planning documents are in order and help navigate tax issues. They can also help facilitate difficult conversations between family members and negotiate any conflicts that might arise during the process. By working with these professionals, families can avoid costly legal disputes and ensure that their wealth is transferred seamlessly from one generation to the next.
Even if the younger generation has a good idea of how much they’ll inherit, there may be some surprises. For example, they may inherit assets that must be managed carefully, such as a business or real estate. Or they may be expected to take over their parent or grandparents’ philanthropic activities.
Members of the younger generation who were kept in the dark about these decisions often struggle to live up to expectations.
If you plan on leaving a legacy for your heirs, start educating them about your intentions. Make sure they understand the role you expect them to play in managing and using the wealth you leave behind.
Every estate plan is unique, but with a long runway and proper planning, most estate tax is avoidable. The key is to start right away—as soon as it’s clear that are assets you want to transfer.
Some simple strategies you can start implementing now include:
When transferring wealth from one generation to the next, specific strategies will vary depending on whether you own a business, have philanthropic inclinations, and who your heirs are. However, what doesn’t change from one estate plan to the next is the need for communication.
For any generational wealth transfer to be successful, heirs need to understand why the wealth is being transferred, how it will be managed, and their role in the process.
Failure to communicate effectively can lead to many problems, including family feuds and lost money. So, families need to have open discussions about generational wealth transfer early on—before any decisions are made. Managing expectations and having honest conversations can help your family avoid misunderstandings and ensure the transition goes as smoothly as possible.
If you have money invested in the stock market, you’re well aware of potential volatility. Needless to say, this volatility can affect your net worth, thus affecting your lifestyle. Something you might not think about is the potential effect on your estate tax liability. Specifically, if the value of stocks or other assets drops precipitously soon after your death, estate tax could be owed on value that has disappeared. One strategy to ease estate tax liability in this situation is for the estate’s executor to elect to use an alternate valuation date.
Typically, assets owned by the deceased are included in his or her taxable estate based on their value on the date of death. For instance, if an individual owned stocks valued at $1 million on the day when he or she died, the stocks would be included in the estate at a value of $1 million.
Despite today’s favorable rules that allow a federal gift and estate tax exemption of $12.06 million, a small percentage of families still must contend with the federal estate tax. However, the tax law provides some relief to estates that are negatively affected by fluctuating market conditions. Instead of using the value of assets on the date of death for estate tax purposes, the executor may elect an “alternate valuation” date of six months after the date of death. This election could effectively lower a federal estate tax bill.
The election is permissible only if the total value of the gross estate is lower on the alternate valuation date than it was on the date of death. Of course, the election generally wouldn’t be made otherwise. If assets are sold after death, the date of the disposition controls. The value doesn’t automatically revert to the date of death.
Furthermore, the ensuing estate tax must be lower by using the alternate valuation date than it would have been using the date-of-death valuation. This would also seem to be obvious, but that’s not necessarily true for estates passing under the unlimited marital deduction or for other times when the estate tax equals zero on the date of death.
Note that the election to use the alternate valuation date generally must be made with the estate tax return. There is, however, a provision that allows for a late-filed election.
The alternate valuation date election can save estate tax, but there’s one potential drawback: The election must be made for the entire estate. In other words, the executor can’t cherry-pick stocks to be valued six months after the date of death and retain the original valuation date for other stocks or assets. It’s all or nothing.
This could be a key consideration if an estate has, for example, sizable real estate holdings in addition to securities. If the real estate has been appreciating in value, making the election may not be the best approach. The executor must conduct a thorough inventory and accounting of the value of all assets.
If your estate includes assets that can fluctuate in value, such as stocks, be sure your executor knows about the option of choosing an alternate valuation date. This option allows flexibility to reduce the chances of estate tax liability. Contact your estate planning advisor for additional information.
© 2022
How much can you and your employees contribute to your 401(k)s next year — or other retirement plans? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for pensions, as well as other qualified retirement plans for 2023. The amounts increased more than they have in recent years due to inflation.
The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (up from $20,500 in 2022). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.
The catch-up contribution limit for employees age 50 and over who participate in 401(k) plans and the other plans mentioned above will increase to $7,500 (up from $6,500 in 2022). Therefore, participants in 401(k) plans (and the others listed above) who are 50 and older can contribute up to $30,000 in 2023.
The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $61,000 to $66,000. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will increase in 2023 to $750 (from $650 for 2022).
Deferrals to a SIMPLE plan will increase to $15,500 in 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500 in 2023, up from $3,000.
The IRS also announced that in 2023:
The 2023 limit on annual contributions to an individual IRA will increase to $6,500 (up from $6,000 for 2022). The IRA catch-up contribution limit for individuals age 50 and older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.
Current high inflation rates will make it easier for you and your employees to save much more in your retirement plans in 2023. The contribution amounts will be a great deal higher next year than they’ve been in recent years. Contact us if you have questions about your tax-advantaged retirement plan or if you want to explore other retirement plan options.
© 2022
What makes Roth IRAs so appealing? Primarily, it’s the ability to withdraw money from them tax-free. But to enjoy this benefit, there are a few rules you must follow, including the widely misunderstood five-year rule.
To understand the five-year rule, you first need to understand the three types of funds that may be withdrawn from a Roth IRA:
Contributed principal. This is your after-tax contributions to the account.
Converted principal. This consists of funds that had been in a traditional IRA but that you converted to a Roth IRA (paying tax on the conversion).
Earnings. This includes the (untaxed) returns generated from the contributed or converted principal.
Generally, you can withdraw contributed principal at any time without taxes or early withdrawal penalties, regardless of your age or how long the funds have been held in the Roth IRA. But to avoid taxes and penalties on withdrawals of earnings, you must meet two requirements:
The withdrawal must not be made before you turn 59½, die, become disabled or qualify for an exception to early withdrawal penalties (such as withdrawals for qualified first-time homebuyer expenses), and
You must satisfy the five-year rule.
Withdrawals of converted principal aren’t taxable because you were taxed at the time of the conversion. But they’re subject to early withdrawal penalties if you fail to satisfy the five-year rule.
As the name suggests, the five-year rule requires you to satisfy a five-year holding period before you can withdraw Roth IRA earnings tax-free or converted principal penalty-free. But the rule works differently depending on the type of funds you’re withdrawing.
If you’re withdrawing earnings, the five-year period begins on January 1 of the tax year for which you made your first contribution to any Roth IRA. For example, if you opened your first Roth IRA on April 1, 2018, and treated your initial contribution as one for the 2017 tax year, then the five-year period started on January 1, 2017. That means you were able to withdraw earnings from any Roth IRA tax- and penalty-free beginning on January 1, 2022 (assuming you were at least 59½ or otherwise exempt from early withdrawal penalties).
Note: If you’re not subject to early withdrawal penalties (because, for example, you’re 59½ or older), failure to satisfy the five-year rule won’t trigger a penalty, but earnings will be taxable.
If you’re withdrawing converted principal, the five-year holding period begins on January 1 of the tax year in which you do the conversion. For instance, if you converted a traditional IRA into a Roth IRA at any time during 2017, the five-year period began January 1, 2017, and ended December 31, 2021.
Unlike earnings, however, each Roth IRA conversion is subject to a separate five-year holding period. If you do several conversions over the years, you’ll need to track each five-year period carefully to avoid triggering unexpected penalties.
Keep in mind that the five-year rule only comes into play if you’re otherwise subject to early withdrawal penalties. If you’ve reached age 59½, or a penalty exception applies, then you can withdraw converted principal penalty-free even if the five-year period hasn’t expired.
You may be wondering why the five-year rule applies to withdrawals of funds that have already been taxed. The reason is that the tax benefits of Roth and traditional IRAs are intended to promote long-term saving for retirement. Without the five-year rule, a traditional IRA owner could circumvent the penalty for early withdrawals simply by converting it to a Roth IRA, paying the tax, and immediately withdrawing it penalty-free.
Note, however, that while the five-year rule prevents this, it’s still possible to use a conversion to withdraw funds penalty-free before age 59½. For example, you could convert a traditional IRA to a Roth IRA at age 45, pay the tax, wait five years and then withdraw the converted principal penalty-free.
Generally, one who inherits a Roth IRA may withdraw the funds immediately without fear of taxes or penalties, with one exception: The five-year rule may still apply to withdrawals of earnings if the original owner of the Roth IRA hadn’t satisfied the five-year rule at the time of his or her death.
For instance, suppose you inherited a Roth IRA from your grandfather on July 1, 2021. If he made his first Roth IRA contribution on December 1, 2018, you’ll have to wait until January 1, 2023, before you can withdraw earnings tax-free.
Many people are accustomed to withdrawing retirement savings freely once they reach age 59½. But care must be taken when withdrawing funds from a Roth IRA to avoid running afoul of the five-year rule and inadvertently triggering unexpected taxes or penalties. The rule is complex — so when in doubt, consult a tax professional before making a withdrawal.
The consequences of violating the five-year rule can be costly, but fortunately, there are ordering rules that help you avoid inadvertent mistakes. Under these rules, withdrawals from a Roth IRA are presumed to come from after-tax contributions first, converted principal second, and earnings third.
So, if contributions are large enough to cover the amount you wish to withdraw, you will avoid taxes and penalties even if the five-year rule hasn’t been satisfied for converted principal or earnings. Of course, if you withdraw the entire account balance, the ordering rules won’t help you.
© 2022
On October 21, 2022, the Internal Revenue Service (IRS) announced the updated contribution limits to retirement plans in Notice 2022-55. The new limits are valid beginning in tax year 2023. These limits are important, as they cap the tax benefits that can be realized from retirement plan savings contributions each year and are adjusted to account for annual inflation.
There are several options available under the ‘Employer Contribution Plans’ category. These plans are typically funded through an employer and may or may not have contributions paid for by the employer. For 401(k), 403(b), the federal government’s Thrift Savings Plan, and most 457 plans, the contribution limit will increase from $20,500 in 2022 to $22,500 in 2023.
Individuals aged 50 years and above can contribute additional funds, called ‘Catch Up Contributions.’ The catch-up contribution limit or the employer-sponsored plans mentioned above will increase from $6,500 in 2022 to $7,500 in 2023. This means those with a qualifying employer-sponsored plan who are 50 or older can contribute up to $30,000 to tax-beneficial retirement plans.
Depending on income, the IRS provides tax benefits to non-employer-sponsored retirement accounts called Individual Retirement Arrangements (IRAs). The traditional IRA offers a deduction for the income in the tax year the contribution is made, while a Roth IRA offers tax benefits when the funds are withdrawn after the qualifying retirement age.
The IRS has increased the contribution limit to these types of accounts to $6,500 in 2023 from $6,000 in 2022. For individuals eligible for a catch-up contribution, the additional contribution amount remains at $1,000.
Keep in mind that there is an income limit on both Traditional IRA and Roth IRA accounts before the tax benefits start to phase out. These limits are:
Traditional IRA |
|
| Single Filers/Heads of Household | $73,000 to $83,000* |
| Married Filing Jointly (spouse contributing covered by employer plan) | $116,000 to $136,000* |
| Married Filing Jointly (contributor not covered by employer plan, but spouse is) | $218,000 to $228,000* |
| Married Filing Separate (contributor covered by an employer plan) | $0 to $10,000* |
Roth IRA |
|
| Single Filers/Heads of Household | $138,000 to $153,000* |
| Married Filing Jointly | $218,000 to $228,000* |
| Married Filing Separate | $0 to $10,000* |
Retirement Savings Contributions Credit |
|
| Single Filers/Married Filing Separate | $36,500 |
| Married Filing Jointly | $73,000 |
| Heads of Household | $54,750 |
*Note: Contribution limits to Traditional IRA and Roth IRA accounts phase out over the noted income range.
Need assistance understanding the tax benefits and contribution limits attached to the different tax-beneficial retirement accounts? Our team of knowledgeable professionals is here to help. Give us a call to discuss your tax strategy for retirement savings today.
You and your small business are likely to incur a variety of local transportation costs each year. There are various tax implications for these expenses.
First, what is “local transportation?” It refers to travel in which you aren’t away from your tax home (the city or general area in which your main place of business is located) long enough to require sleep or rest. Different rules apply if you’re away from your tax home for significantly more than an ordinary workday and you need sleep or rest in order to do your work.
The most important feature of the local transportation rules is that your commuting costs aren’t deductible. In other words, the fare you pay or the miles you drive simply to get to work and home again are personal and not business miles. Therefore, no deduction is available. This is the case even if you work during the commute (for example, via a cell phone, or by performing business-related tasks while on the subway).
An exception applies for commuting to a temporary work location that’s outside of the metropolitan area in which you live and normally work. “Temporary,” for this purpose, means a location where your work is realistically expected to last (and does in fact last) for no more than a year.
On the other hand, once you get to the work location, the cost of any local trips you take for business purposes is a deductible business expense. So, for example, the cost of travel from your office to visit a customer or pick up supplies is deductible. Similarly, if you have two business locations, the costs of traveling between them is deductible.
If your deductible trip is by taxi or public transportation, save a receipt if possible or make a notation of the expense in a logbook. Record the date, amount spent, destination, and business purpose. If you use your own car, note miles driven instead of the amount spent. Note also any tolls paid or parking fees and keep receipts.
You’ll need to allocate your automobile expenses between business and personal use based on miles driven during the year. Proper recordkeeping is crucial in the event the IRS challenges you.
Your deduction can be computed using:
From 2018 – 2025, employees, may not deduct unreimbursed local transportation costs. That’s because “miscellaneous itemized deductions” — a category that includes employee business expenses — are suspended (not allowed) for 2018 through 2025. However, self-employed taxpayers can deduct the expenses discussed in this article. But beginning with 2026, business expenses (including unreimbursed employee auto expenses) of employees are scheduled to be deductible again, as long as the employee’s total miscellaneous itemized deductions exceed 2% of adjusted gross income.
Contact us with any questions or to discuss the matter further.
© 2022
Most individuals saving for retirement outside of a defined work plan use an Individual Retirement Account, better known as an IRA. These accounts come with two vastly different types, depending on what tax benefits account holders would like to take advantage of. The first, the Traditional IRA, allows the account holder to deduct contributions made during the tax year, thus lowering their adjusted gross income (AGI). The Roth IRA, on the other hand, is funded with post-tax dollars, and money can be withdrawn after retirement age completely tax-free.
Don’t fret! If the Roth IRA sounds like a better option for you, but you have money in a Traditional IRA account, you could potentially convert it to a Roth IRA. Below, you’ll discover the basics of how to convert the account and why now might be a good time to do so.
Roth IRAs offer a way for savers to put aside money for retirement using post-tax dollars. Because of this, the contributions cannot be used as a tax deduction, and withdrawals on deposits and gains are tax-free after retirement age (59 ½). Contributions to a Roth IRA begin at $6,000 and decrease the higher your income. Once a married couple reaches $214,000 in AGI, the ability to contribute directly to a Roth IRA is eliminated.
Traditional IRA accounts can be converted to Roth IRA accounts so that the money in the account can then grow tax-free. In addition to the tax-free gains, there are several other benefits of a Roth IRA, including:
The process is typically simple.
The funds are transferred directly from a Traditional IRA to a separate ROTH IRA. Tax will be due on the amount transferred; however, growth with the market recovery will now be in your non-taxable account.
In short, converting a Traditional IRA to a Roth IRA can hold several tax and wealth management benefits for account holders. Completing the process when the stock market has dipped, and income tax rates are low can decrease the tax liability on the transferred balance, making the IRA conversion more advantageous to investors.
To discuss your specific situation and whether a Roth IRA conversion is the best move for you, reach out to our team of tax professionals today!
Please note that the information provided in this article is current as of July 2022. It is intended for general informational purposes only. It is not intended to be used for the purpose of avoiding penalties under the Internal Revenue Code. Consult with your financial advisor about your specific situation.
Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy self-employment income and want to contribute substantial amounts to a retirement nest egg.
This strategy is geared toward self-employed individuals, including sole proprietors, owners of single-member limited liability companies, and other one-person businesses.
With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.
For 2022, you can make an “elective deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25%.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:
Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business.
Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.
If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.
Bottom line: For a one-person business, a solo 401(k) can be a smart retirement plan choice if:
Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple, but they can allow you to make substantial and deductible contributions to a retirement nest egg. Contact us before signing up to determine what’s best for your situation.
© 2022
With inflation rates reaching historical highs and driving up the cost of doing business, business owners are seeking out creative ways to fight inflation. The Series I Savings Bond is one tool that’s been getting some buzz.
Also known as I Bonds, these low-risk savings products depend on higher inflation to produce better returns. The higher the inflation rate, the more interest you earn, rendering the investment inflation-proof.
And they’re not just available to individuals. Business owners can buy I Bonds for multiple entities, including corporations and partnerships.
There are rules specific to I Bonds, and there are more tax considerations for businesses than for individuals. To take full advantage of I Bonds, business owners must know the compliance and reporting rules.
How I Bonds work
A Series I Savings Bond is a security that earns interest based on both a fixed rate and a variable rate based on inflation. The fixed rate will remain for the life of the bond, whereas the variable changes every six months based on inflation levels measured in the U.S. Consumer Price Index.
I Bonds will earn interest for up to 30 years if they aren’t cashed out before then.
I Bonds vs. inflation
One of the advantages of I Bonds is they shield money from inflation. Based on current rates, the returns on an I bond are slightly outpacing the rate of inflation.
The U.S. inflation rate reached 9.1% in June, a 40-year high for the cost of the nation’s goods and services. By comparison, the current interest rate on new Series I savings bonds is 9.62% where it will remain through October 2022.
It’s worth noting this rate applies to the six months after the bond is purchased. So even if you buy an I Bond in October 2022, the bond will earn 9.62% interest for the next six months.
When leveraged and reported appropriately, I Bonds can generate respectable returns.
How to Buy I Bonds
While individuals can purchase I bonds electronically and in paper form (up to $5,000 each year by using their federal income tax refund), businesses, including corporations, partnerships, and other entities, can only do so in electronic form.
To purchase I bonds electronically, buyers must set up an account on TreasuryDirect, the federal government’s clearinghouse for purchasing and cashing in U.S. savings bonds, where they can purchase up to $10,000 in electronic bonds each year. However, if you own multiple business entities, each one can buy up to the $10,000 maximum, as long as the money is in a separate account for each business.
If you’re buying both personal and business I Bonds, keep them in separate accounts and avoid transferring funds from one account to another if you have purchased the annual maximum for both.
Tax Considerations
Series I Bonds are not subject to state or local taxes, but federal taxes are required on any interest you earn. You can choose between one of two methods to pay these taxes:
Any interest you earn on an I bond must be reported on Schedule B of Form 1040.
Gifting
There are considerable differences when it comes to tax breaks for individuals and businesses:
Cashing in
The minimum term of ownership for an I Bond is one year. If you redeem your bond before the five-year mark, you will forfeit the interest from the previous three months. There is no interest penalty after that point.
I Bond compliance and reporting can get complicated, especially when managing a business in a challenging financial climate. If you need help navigating the savings bond landscape, our team of professionals can help you take full advantage of this investment vehicle.
Are you a partner in a business? You may have come across a situation that’s puzzling. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner.
Why does this happen? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent a partner from currently using his or her share of a partnership’s loss to offset other income.)
Pass through your share
While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions, and credits. This makes it possible to pass through to partners their share of these items.
An information return must be filed by a partnership. On Schedule K of Form 1065, the partnership separately identifies income, deductions, credits, and other items. This is so that each partner can properly treat items that are subject to limits or other rules that could affect their correct treatment at the partner’s level. Examples of such items include capital gains and losses, interest expense on investment debts, and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.
Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (the determination of which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners just reduce their basis by the amount of the distribution. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.
Illustrative example
Two people each contribute $10,000 to form a partnership. The partnership has $80,000 of taxable income in the first year, during which it makes no cash distributions to the two partners. Each of them reports $40,000 of taxable income from the partnership as shown on their K-1s. Each has a starting basis of $10,000, which is increased by $40,000 to $50,000. In the second year, the partnership breaks even (has zero taxable income) and distributes $40,000 to each of the two partners. The cash distributed to them is received tax-free. Each of them, however, must reduce the basis in his or her partnership interest from $50,000 to $10,000.
More rules and limits
The example and details above are an overview and, therefore, don’t cover all the rules. For example, many other events require basis adjustments and there are a host of special rules covering noncash distributions, distributions of securities, liquidating distributions, and other matters. Contact us if you’d like to discuss how a partner is taxed.
© 2022
The IRS recently released guidance providing the 2023 inflation-adjusted amounts for Health Savings Accounts (HSAs). High inflation rates will result in next year’s amounts being increased more than they have been in recent years.
HSA basics
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident, and specific disease insurance).
A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage and $10,000 for family coverage.
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
Inflation adjustments for next year
In Revenue Procedure 2022-24, the IRS released the 2023 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2023, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $3,850. For an individual with family coverage, the amount will be $7,750. This is up from $3,650 and $7,300, respectively, for 2022.
In addition, for both 2022 and 2023, there’s a $1,000 catch-up contribution amount for those who are age 55 and older at the end of the tax year.
High deductible health plan defined. For calendar year 2023, an HDHP will be a health plan with an annual deductible that isn’t less than $1,500 for self-only coverage or $3,000 for family coverage (these amounts are $1,400 and $2,800 for 2022). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, for 2022).
Reap the rewards
There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care, and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.
© 2022
From Super Bowl commercials to teenage NFT millionaires — and even Elon Musk’s support of the dog meme-inspired currency Dogecoin — cryptoassets have been making a play for mainstream acceptance.
By the end of 2021, the global cryptocurrency market was worth more than $3 trillion, up from $14 billion just five years earlier. About 16% of U.S. adults — approximately 40 million people — have invested in, traded, or used cryptocurrency, according to a White House analysis of findings by The Pew Research Center. And more than 100 countries are exploring or piloting Central Bank Digital Currencies (CBDCs), a digital form of a country’s sovereign currency.
Cryptoassets have been taking off so quickly that President Biden signed an executive order in March outlining a government approach to address the risks and harness the benefits of cryptocurrency while urging the research and development of a U.S. Central Digital Bank Currency.
Yet, for all the attention cryptoassets are receiving, many business leaders are still trying to understand what they are, how they work, and the pros and cons of using them.
What Are Cryptoassets?
Cryptocurrency is any digital or virtual currency that uses encryption to secure and verify transactions. What sets cryptocurrencies apart from traditional forms of currency is that they rely on a decentralized, unregulated system to issue them and record transactions.
Because a central issuing authority such as a bank or regulatory authority like the federal government doesn’t control these currencies, cryptoassets can avoid government manipulation or intervention.
Types of cryptoassets include:
How Do Cryptoassets Work?
Instead of relying on banks, cryptoassets leverage decentralized networks based on blockchain technology for distribution. Blockchain is a distributed public ledger that records all digital and virtual transactions.
Since cryptoassets are not tangible, people who possess them instead own a key — a secret, randomly generated number with hundreds of digits — that allows them to move cryptoassets from one entity to another without the intervention of a financial institution.
What Are the Pros, Cons of Cryptoassets?
Decentralization is one of the key selling points of cryptoassets. Because developers control who uses them, they aren’t beholden to regulatory and government controls and interventions. That means there isn’t one entity that can dictate the currency’s value and distribution.
Other benefits include:
There are also some drawbacks, the least of which is a shortfall of protection. Although cryptoassets proponents prefer the currency because of its lack of government control, that same lack of regulation puts cryptoassets owners at risk of tremendous losses. There is no FDIC protection for cryptocurrency, nor is there a way to safeguard digital assets if a tech issue wipes out your transaction records. Insurance policies are available, but ultimately, it’s up to a business to protect itself against losses.
Other concerns include:
Cryptoassets are still in their infancy, and business leaders who may want to use them are learning as they go. If you’re trying to wrap your head around cryptoassets, our team of professionals can help your business navigate this new form of currency.
If your business doesn’t already have a retirement plan, now might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions.
For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).
More options
Other small business retirement plan options include:
Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
Deadlines to establish and contribute
Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.
Important: The SECURE Act provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.
For example, the deadline for the 2021 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 17, 2022, if you extend your 2021 tax return. The deadline for making the contribution for the 2021 tax year is also October 17, 2022. However, to make a SIMPLE-IRA contribution for the 2021 tax year, you must have set up the plan by October 1, 2021. So, it’s too late to set up a plan for last year.
While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan alternatives. Be aware that, if your business has employees, you may have to make contributions for them, too.
© 2022
In today’s economy, many small businesses are strapped for cash. They may find it beneficial to barter or trade for goods and services instead of paying cash for them. Bartering is the oldest form of trade and the internet has made it easier to engage with other businesses. But if your business gets involved in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.
How it works
Here are some examples:
In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.
In addition, if services are exchanged for property, income is realized. For example,
Barter clubs
Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.
In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.
If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate.
Reporting to the IRS
By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.
Conserve cash, reap benefits
By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. If you need assistance or would like more information, contact us.
© 2022
Do you want to withdraw cash from your closely held corporation at a minimum tax cost? The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits.” It’s also not deductible by the corporation.
Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five areas where you may want to take action:
1. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the debt repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
2. Salary. Reasonable compensation that you (or family members) receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient. The same rule applies to any compensation in the form of rent that you receive from the corporation for the use of property. In both cases, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
3. Loans. You may withdraw cash from the corporation tax-free by borrowing from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
4. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
5. Property sales. Another way to withdraw cash from the corporation is to sell property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
If you’re interested in discussing any of these approaches, contact us. We’ll help you get the most out of your corporation at the minimum tax cost.
© 2022
The long-awaited $1 trillion Infrastructure Investment and Jobs Act (IIJA) received the U.S. House of Representatives’ approval Friday, November 5, 2021, to provide funding for improvements to highways, bridges, and other road safety measures. The bill also offers plans to reconnect communities previously divided by highway building and expand national broadband networks.
According to White House projections, investments outlined in the infrastructure act will add approximately 2 million jobs per year over the next decade.
A portion of the original bill was held back, and there were not as many tax provisions as originally expected, which could mean additional changes may be coming in a fiscal year 2022 budget reconciliation.
What’s in the $1T Infrastructure Act?
There are several key tax provisions found in the IIJA.
Other Tax Provisions
What Else is Included?
Here’s a breakdown of what’s included:
Where does the Build Back Better plan stand?
The BBB is set to be the largest social policy bill brought to a vote in recent years, bringing funding to address issues such as climate change, health, education, and paid family and medical leave.
House leaders hope to pass the Build Back Better plan later when they return November 15 after a weeklong recess.
The Build Back Better plan and IIJA have many intricate details. We’ll continue to provide more information as it becomes available.
If you need help understanding how the changes will impact your individual or business tax strategy, please reach out to our team of experts. We’ll help you navigate these changes and make any necessary adjustments to your plan.
The COVID-19 pandemic caused many families to rethink their child care situation. Nannies became a popular choice for many, as they decreased the risk of sending children to child care centers and provided the benefit of helping those same children through online schooling while their parents worked. As the pandemic has ebbed and flowed, nannies have remained a popular option. Many families, however, were unprepared with how to transition to a household employer.
As a household employer, you’re responsible for paying your employee’s Social Security and Medicare taxes (i.e., the nanny), even if that person works part-time or on a seasonable basis. If you miss the payments or misfile the forms, you could be subject to fines or, worse, tax evasion.
Do you need to pay taxes?
As long as you pay the nanny directly, whether through cash, check, money transfer, etc., you’re considered the employer. If the payments exceed $2,300 for the year (as of 2021), the nanny cannot be considered a contractor, and you can’t use a Form 1099 to report wages.
As a household employer, you must pay Medicare and Social Security taxes (also known as Federal Insurance Contributions Act, or FICA) that are split evenly between your household funds and those the nanny/household employee receives. However, those younger than 18 are exempt from FICA. You may also potentially claim an exemption if the employee is your child and younger than 21 or a parent or spouse who is providing the care.
Household employers should also remember they are not required to withhold federal income taxes unless they and their employee agree to it. Even still, some states will not allow them to withhold state income taxes. Reach out to a knowledgeable tax professional to determine your state’s withholding rules.
Important forms, filings for household employers
Once you confirm you’re considered a household employer, understanding which forms you must file is important. Keep these forms in mind:
Tax credits, deductions
Families with children younger than 13 in child care may be eligible for tax credits and deductions. For starters, if an employer offers a Dependent Care FSA, they can contribute up to $10,500 in 2021 before deducting taxes from their pay. Those funds must be used to cover eligible dependent care expenses.
Any funds not paid for by the FSA may be eligible for the Child and Dependent Care Tax Credit. Qualifying taxpayers are eligible to take a credit for a portion of the cost of care for a qualifying dependent that enables the taxpayer to work or actively look for work, up to $2,100. Click here for more information on the Child and Dependent Care Tax Credit.
Outsourcing payments to mitigate risk
Several options are available for household employers who are new to employing care staff or may not have the time to handle all tax payments and filings properly. Outsourcing a part or all of the process can be done through:
For more information on the nanny tax and how it could affect your household, reach out to our team of tax professionals today.
Employers offer 401(k) plans for many reasons, including to attract and retain talent. These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about participating in a plan at work, here are some of the features.
Under a 401(k) plan, you have the option of setting aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income, and defer tax on the amount until the cash (adjusted by earnings) is distributed to you. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.
Tax advantages
Your wages or other compensation will be reduced by the amount of pre-tax contributions that you make — saving you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis (these are Roth 401(k) contributions). With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.
Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. For 2021, the maximum amount permitted is $19,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. For 2021, that additional amount is $6,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2021 is $26,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2021, $58,000, whichever is less.
Typically, you’ll be permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.
Getting money out
Another important aspect of these plans is the limitation on distributions while you’re working. First, amounts in the plan attributable to elective contributions aren’t available to you before one of the following events: retirement (or other separation from service), disability, reaching age 59½, hardship, or plan termination. And eligibility rules for a hardship withdrawal are very stringent. A hardship distribution must be necessary to satisfy an immediate and heavy financial need.
As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s 401(k) plan may allow you to receive a plan loan, which you pay back to your account, with interest. Any distribution that you do take can be rolled into another employer’s plan (if that plan permits) or to an IRA. This allows you to continue deferral of tax on the amount rolled over. Taxable distributions are generally subject to 20% federal tax withholding, if not rolled over.
Employers may opt to match contributions up to a certain amount. If your employer matches contributions, you should make sure to contribute enough to receive the full match. Otherwise, you’ll miss out on free money!
These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have.
© 2021
Managing cash flow is essential to business management. Revenue can fluctuate, and expenses need to be paid on time to maintain a positive working relationship with vendors, utility companies, and employees.
Thankfully, there’s a way to know what your cash flow could look like down the road so you can plan appropriately, and forecasting can provide these insights for business leaders.
What is forecasting?
Forecasting is the practice of using existing business data to create a model for what your business looks like now, as well as weeks, months, and even years down the road. This essential reporting is what allows business leaders to make real-time decisions based on the health of the business.
While there are different types of forecasting, rolling forecasting provides more information about the future by using existing data to predict performance in a certain time period. Whichever method you choose, building accurate models using complete data is essential.
Tips for accurate forecasting
As a business leader, you can make decisions on the direction of your business all day. If the data you’re using to make those decisions is not accurate, you could end up with less than stellar results or unexpected cash flow issues. Here are some tips to ensure you have the right numbers to base your decisions on.
What to include in forecasting
When creating your forecasts, you should include certain elements to ensure sure you’re getting the most accurate outlook possible. This includes:
While it’s important to create a budget and stick to it, forecasting is an equally important business function that can help direct the future of your company. Forecasts will allow you to foresee upcoming roadblocks or cash flow concerns so you can plan for and adjust around them.
Our firm is available to help you with regular forecasting data, setting up a system for you to create forecasts, audit your current system, and provide outsourced CFO services. Reach out to us to discuss how we can help you today!
Cryptocurrency, a type of virtual currency that utilizes cryptography to validate and secure transactions digitally recorded on a distributed ledger, such as a blockchain, has been on the rise over the past several years. ‘ Approximately 14 percent of Americans own at least one share of virtual currency. Therefore, it’s essential to understand the tax implications associated with receiving, buying, and selling these currencies, mainly because the IRS is starting to crack down on reporting for capital gains and losses associated with them.
Keep reading to learn more about the tax implications associated with cryptocurrency and what the IRS is doing to sharpen its focus on crypto transactions.
What you need to know about virtual currency tax reporting:
Much like when you hold investment accounts, cryptocurrency owners must recognize gains and losses when filing their taxes. While gains are typically subject to capital gains taxes, losses can sometimes be used to counteract those gains.
Here are some important details:
What about using virtual currency as a form of payment?
Whether you’re using virtual currency to pay someone or receiving virtual currency as payment for something, there can be tax implications. When reporting virtual currency received, use the fair market value on the day you received payment. Here are a few popular reasons virtual currency can be exchanged between two parties:
While it may seem tedious to track every single purchase, exchange, trade, or receipt of virtual currencies, there are online platforms available that analyze the transactions and report to you when you have gains or losses to recognize.
What the IRS is doing with cryptocurrency reporting:
The IRS is partnering with TaxBit to help verify cryptocurrency tax calculations during an audit. This tax automation company is automating the cryptocurrency transaction analysis process for the IRS to understand how much money was made or lost from transactions. When the IRS is auditing a tax filing with cryptocurrency, they’ll request the report from TaxBit, who will then provide it to the IRS and the taxpayer.
In addition to these reports, which some taxpayers may see beginning next year, the IRS has also added a question to Form 1040 asking if the taxpayer has sold, exchanged, sent, received, or otherwise acquired any financial interest in virtual currency. With the IRS requiring taxpayers to treat virtual currency as property for Federal income tax purposes, it shows they recognize virtual currencies aren’t going away any time soon.
The Treasury is currently exploring the possibility of requiring reporting on any virtual currency transfers over $10,000. We’re monitoring this and will keep you posted as more information comes to light.
For help reporting virtual currencies on your tax filings, reach out to our team of tax professionals today. Establishing a system to track purchases, sales, and transfers before the end of the year will help ease the burden of preparing for tax season.
If you are in possession of business or investment property, or looking to exchange real property for others, you might want to get acquainted with “like-kind exchanges,” also known as a 1031 exchange. As with all tax code, changes are consistently made to clarify previous unclear areas or adjust the language based on new policy. In 2020, there were some larger changes noted to section 1031 of the tax code, which deals with like-kind exchanges of real property.
Here are some of the bigger changes.
1. Defining “Real Property.” In the past, the definition of real property held more ambiguity, and there was little deference to the state and local definitions. The new language allows real property to be defined by local and state guidelines in addition to the list included in the final regulations, and property that passes a facts and circumstances test. The final regulations include categories such as “land and improvements to land, unsevered natural products of land, and water and airspace superjacent to land.” Note that property previously excluded prior to the 2017 TCJA is still excluded.
2. Inherently Permanent. The “purpose or use test” that was previously required to determine whether the property contributed to unrelated income is no longer applicable. Instead, the final rules state that if the tangible property is both permanently affixed and will remain affixed to the real property indefinitely, it’s considered inherently permanent and a part of the real property. Note, this does not automatically include installed appliances, sheds, carports, Wi-Fi systems, and trade fixtures. In addition, if interconnected assets serve an inherently permanent structure together, they are now analyzed as one distinct asset. (e.g., a gas line powering a heating unit would qualify as part of the heating unit. However, if the gas line solely powered a stove or oven, it would not qualify).
3. Facts and Circumstances Test. For fixtures and assets not automatically included by the Inherently Permanent rule, use the facts and circumstances test to determine if it’s eligible to be considered a part of the real property. For each fixture, ask:
While there is still some room for improvement, the facts and circumstances test are a vast improvement, as the previous rule may have led to costly and inefficient cost segregation studies.
4. Incidental Property. In the past, non-real property that could be transferred as part of an exchange could potentially violate the escrow rules allowing for a Qualified Intermediary to facilitate an exchange not made in real-time (a third-party exchange). The new regulations now allow some leeway, defining that if the fixtures or non-real property is deemed as typical for the type of property transfer, or if the aggravate value does not exceed 15 percent of the fair market value of the real property, it is considered incidental and will not be in violation of the escrow rules. Keep in mind, the real property is still considered a separate transaction and not included in the gains deferment of the exchanged real property.
5. Qualified Intermediaries. The new regulations maintain the transaction must be structured as an exchange and that the seller cannot receive funds from the sale before taking ownership of the new property. Qualified intermediaries can hold the properties or funds in an escrow within the time limit, so that the transaction looks like an exchange.
Most of the time, the sale of any investment property, which is property not considered your primary residence, can result in capital gains tax. Using a 1031 like-kind exchange can help defer that tax until later and possibly result in a lower tax liability down the road.
On April 28, 2021, President Biden introduced a new economic plan that would impact 1031 exchanges. The Biden proposal would abolish 1031 exchanges on real-estate profits of more than $500,000. As we move further into 2021, we will continue to monitor the impact.
If you would like to discuss tax strategies in business or investment properties, give us a call. Our team can help you understand if the decision you are making falls in line with applicable tax laws and if it’s the best strategy for your real property investments.
Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.
However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.
Determining reasonable compensation
There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.
There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:
You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.
Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).
SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing.
Uncomplicated paperwork
If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $58,000 for 2021. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.
There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.
SIMPLE Plans
Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.
For 2021, SIMPLE deferrals are up to $13,500 plus an additional $3,000 catch-up contributions for employees age 50 and older.
Contact us for more information or to discuss any other aspect of your retirement planning.
© 2021
If a relative needs financial help, offering an intrafamily loan might seem like a good idea because they allow you to take advantage of low interest rates for wealth transfer purposes. But if not properly executed, such loans can carry negative tax consequences — such as unexpected taxable income, gift tax or both. Here are five tips to help avoid any unwelcome tax surprises:
1. Create a paper trail. In general, to avoid undesirable tax consequences, you need to be able to show that the loan was bona fide. To do so, document evidence of:
Be sure to make your intentions clear — and help avoid loan-related misunderstandings — by also documenting the loan payments received.
2. Demonstrate an intention to collect. Even if you think you may eventually forgive the loan, ensure the borrower makes at least a few payments. By having some repayment history, you’ll make it harder for the IRS to argue that the loan was really an outright gift. And if a would-be borrower has no realistic chance of repaying a loan, don’t make it. If you’re audited, the IRS is sure to treat such a loan as a gift.
3. Charge interest if the loan exceeds $10,000. If you lend more than $10,000 to a relative, charge at least the applicable federal interest rate (AFR). Be aware that interest on the loan will be taxable income to you. If no or below-AFR interest is charged, taxable interest is calculated under the complicated below-market-rate loan rules. In addition, all of the forgone interest over the term of the loan may have to be treated as a gift in the year the loan is made. This will increase your chances of having to use some of your lifetime exemption.
4. Use the annual gift tax exclusion. If you want to, say, help your daughter buy a house but don’t want to use up any of your lifetime gift and estate tax exemption, you can make the loan and charge interest and then forgive the interest, the principal payments or both each year under the annual gift tax exclusion. For 2020, you can forgive up to $15,000 per borrower ($30,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. But you will still have interest income in the year of forgiveness.
Here is an example of how an intrafamily loan can save on taxes:
A $2 million interest-only loan is made from parent to child at an interest rate of 0.38%. If the loan proceeds are invested and grow at a rate of 5%, after repayment of interest and principal in year 5, the child is left with approximately $510,000 estate and gift tax-free. This arrangement also offers the flexibility to utilize the gift tax exemption at any time.
5. Forgive or file suit. If an intrafamily loan that you intended to collect is in default, don’t let it sit too long. To prove this was a legitimate loan that soured, you’ll need to take appropriate legal steps toward collection. If you know you’ll never collect and don’t want to file suit, begin forgiving the loan using the annual gift tax exclusion, if possible.
© 2020
Americans share at least one dilemma when it comes to retirement planning. From the worker to the employer to the policymaker, everyone is living longer. On May 23, 2019, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, receiving almost unanimous bipartisan support, offers the most significant shift to retirement plans and opportunities since the Pension Protection Act of 2006. In the bill, there are over 25 changes and provisions that expressly aim to encourage retirement savings among all workers. This bill, along with the Senate’s Retirement Enhancement Securities Act (RESA), addresses the apparent need for a worker’s wealth to run (and finish) the race with them. These documents may face modification before being signed into law, but one thing is clear: change is coming. Below we have prepared a synopsis of the changes that present the most opportunity.
Pooled Employer Plans
Many businesses are without affiliation and are too small to offer a savings retirement plan on their own. The new bill will reduce fiduciary responsibility and lower the overall costs associated with providing 401(k) plans by expanding the option to run multi-employer plans through a plan administrator. Sec. 106 goes a step further to incentivize smaller businesses to offer a retirement savings plan. The Act introduces a $500 tax credit for automatic enrollment into their retirement plan.
Annuities
The SECURE Act eases the liability concern over offering annuities. Most businesses have shied away from annuity providers because of their inherent risk. Section 204 updates safe harbor provisions, thus opening the door for employees to take advantage of converting their 401(k) balances to a pension-like payout plan. Another provision of the bill will allow workers to transfer a defunct annuity contract to an IRA while maintaining contributions. The only criticism on this update is the broad guidelines surrounding annuity providers. Some fear that ambiguity will lead to insurance companies offering shoddy plans.
Required Minimum Distribution (RMD) Age
The current law requires that most individuals begin withdrawing a minimum distribution from their retirement savings at the age of 70.5. Six-months-past-70 has invited an unnecessary amount of confusion since its inception in the Tax Reform Act of 1986. The SECURE Act seeks to simplify matters by raising the RMD age to 72. If the RESA Act passes in the Senate, the age requirement will be raised even higher to 75.
IRA Contributions
One of the most confounding retirement rules is the age limitation on IRA contributions, currently set at 70.5. The SECURE Act repeals the age limitation for traditional IRA contributions.
Benefit to Parents
Section 113 removes the 10 percent penalty tax from qualified early retirement plan withdrawals. Parents will be able to take an aggregate amount of $5,000 within one year of the adoption or birth of a child, penalty free. Section 302 expands section 529 plans by allowing withdrawals of as much as $10,000 for repayments of some student loans.
Stretch Provisions
Currently, beneficiaries of inherited retirement plans like 401(k), traditional IRAs, and Roth IRAs can spread the distributions until their dying breath. The new revenue provisions (Section 401) changes the rules, requiring most beneficiaries to distribute the account over a 10-year period and pay any taxes due. The tax-generating change will accelerate the depletion of many inherited accounts but will not affect surviving spouses and minor children.
Disclosures
Another administrative improvement provided in the Act requires employers to provide a lifetime income disclosure once every 12 months. The disclosures are meant to show the amount of monthly payments the participant or beneficiary would receive based on the total accrued benefit.
Kiddie Tax
Under the current law, the unearned income of children would be taxed at their parent’s marginal tax rate. Section 501 repeals the “kiddie tax” measures that were added by the 2017 Tax Act. The new provision states that unearned income of children would not be taxed at trust rates. Taxpayers can retroactively elect to not pay the taxes. The bill benefits many Americans, including families of deceased active-duty service members, survivors of first responders, children who receive certain tribal payments, and college students receiving scholarships.
Other changes proposed in bill include increased penalties for failures to file and the portability of lifetime income options. The SECURE Act is as likely to pass as it is to undergo slight modifications. We will keep an eye on the state of the bill and keep you abreast of its status. In the meantime, our professionals are standing by to answer your questions and address your concerns.
