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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.

Personalized & Goal-Based Solutions to help you build life-long wealth

We all know the future will come, however we still put off financial planning for “a better time”. The truth is, a better time may never come or may come too late. There is no need to put off planning – the time is now.

The key to building lifelong wealth is strategic planning and collaboration from the various financial professionals in your life. Our Wealth Management, Asset Management, Legal, Tax, and Insurance Planning Services allow us to provide clients with thoughtful and highly individualized solutions.

We have assembled a team of experts to assist our clients in reaching their financial and life goals. By applying our service team approach to client needs, we identify a course of action needed for financial, tax and life management success.

Our Approach
We are dedicated to helping our clients maintain financial viability in the present while taking a proactive approach to achieve future goals. We accomplish this by systematically addressing 5 key areas.

Wealth Management

Every day we face challenges managing our finances. Stock market swings, fluctuating interest rates, taxes, debt and inflation – the effects can be unsettling. Many put off financial planning for “a better time”. Unfortunately, a better time may never come or may come too late.

We can help you achieve your financial goals and will give you the guidance to:

Asset Management

In an ever-changing landscape, the global economy is swiftly becoming smarter and more nimble in many ways. We believe the management of your investment portfolio should be smarter and more nimble as well. Through our portfolio hedging techniques and focused “Building Block” strategies we seek to:

Tax Planning

Effective tax planning and preparation require proactive involvement of a quality CPA. We can review your financial situation and develop thoughtful strategies to minimize your tax liability. Our comprehensive tax planning and preparation services include:

Insurance Planning

You will likely have different life insurance needs at different stages of your life. And with people working and living longer, customized solutions are more critical than ever. In fact, almost all insurance companies have now updated their life expectancy tables to reflect the fact that we are now living longer. If your policy is more than 2 years old, you should have your policy reviewed by a knowledgeable insurance professional. There is a very good chance, assuming the applicant is still in good health, they may be able to dramatically increase the amount of coverage at no additional cost or lower their cost of their current coverage.

We can create a customized plan that meets all your goals and objectives. Our Insurance Services include life insurance, long-term care and premium financing.

Legal Services

Protecting your assets is another component of planning for the future. Building generational wealth requires proactive planning to mitigate and avoid adverse legal actions. We work closely with attorneys to help you build and safeguard your assets. Our legal services include

When you work with us you benefit from our unique perspective as a multi-disciplinary practice of law, wealth management, insurance, and asset management services and a full-service CPA Firm, we can identify opportunities that others may miss. You also get advisors who provide a hands-on approach to serving you. You’ll hear from us through-out the year, not just once a year at a review.

Contact us today to learn how we can help you live the life you want to live while building life-long wealth.

Disclaimer:

We believe our clients are best served by integrating the primary financial professional in their lives. Together, through our relationship with Heritage Family Offices, LLP and their family of companies, we can provide our clients with attorneys, financial advisors, insurance brokers, and business consultants. Please note, however, that not all professionals hold all professional licenses. Please carefully take note of our respective professional licenses, or ask for clarification, when engaging any professional in our firm. Our goal is to provide continuous full transparency to our clients and prospective clients. Hamilton Investment Advisors is a Registered Investment Advisory Firm.  Investment advisory services are offered by Heritage Wealth Management, LLC – 2355 E. Camelback Road, Suite 425, Phoenix, Arizona 85016. Heritage Wealth Management is a Registered Investment Advisory firm. For further information please reference Heritage’s firm brochure and ADV: https://www.adviserinfo.sec.gov/IAPD/IAPDFirmSummary.aspx?ORG_PK=287909. Insurance services are offered through Heritage Insurance Advisors, LLC. Legal services are provided by HFO Law Group, LLP