Category: Blog

Individuals are always looking for tax deductions that can reduce their tax liability. But what is the actual tax benefit derived from a tax deduction? There is no straightforward answer because some deductions are “above the line”, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax. In other words, there are many factors to consider, and the tax benefits differ for everyone, depending on their particular situation and tax bracket.

For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 12% tax bracket, a $1,000 deduction would save you $120 in taxes. On the other hand, if you are in the 32% tax bracket, the $1,000 deduction will save you $320 in taxes. Even so, if your taxable income is close to transitioning into the next-lower tax bracket, the benefit will be lower.

You also need to consider whether the deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings. Currently, the maximum federal tax bracket is 37%, meaning the most benefit that can be derived from a $1,000 income tax deduction is $370. Some individuals justify making discretionary purchases just because they are tax-deductible. Even in the highest tax bracket, you are still paying $630 out of pocket ($1,000 − $370), so it does not make sense to incur a tax-deductible expense just for the tax deduction.

Some deductions, such as IRA and self-employed retirement plan contributions, alimony, and student loan interest, are adjustments to income or what we call above-the-line deductions. These deductions, to the extent permitted by law, provide a dollar deduction for every dollar claimed. On the other hand, deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit can be derived. In addition, medical deductions are reduced by 7.5% of your adjusted gross income (AGI), and most cash charitable deductions are limited to a maximum of 60% of your AGI. Under the tax reform that became effective in 2018, the deduction for state and local taxes is currently capped at $10,000 per year.

The most beneficial deductions are business deductions that offset both income tax and, depending upon the circumstances, self-employment tax. For 2023, the self-employment tax rate is 12.4% of the first annually inflation adjusted $160,200 of net self-employment income plus 2.9% for the Medicare tax, with no cap. Contact this office for rates applicable to other years. Some high-income taxpayers may pay an additional 0.9% Medicare tax. For self-employed businesses with less than $160,200 of net income, the self-employment tax rate is 15.3%. Thus, for small businesses with profits of less than $160,200, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%. For example, for a taxpayer in the 24% tax bracket, the benefit could be as much as 39.3% (24% + 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $806 or more, when the taxpayer’s state income tax bracket is included.

In addition to deductions, taxpayers also benefit from tax credits. Tax credits reduce the tax, not the taxable income, dollar for dollar. These credits come in different varieties. Some, referred to as non-refundable will only reduce a taxpayer’s tax liability to zero while refundable credits will reduce the tax liability to zero and any balance is refunded. In addition, some unused non-refundable credits can be carried to other years. The following are examples of 2023 tax credits:

• Earned Income Tax Credit (EITC) – This inflation adjusted credit is for lower income taxpayers based on their earned income and overall income for the year. The credit can be as much as $7,430, and is a refundable credit.
• Home Solar Credit – Is 30% of the cost of a home solar electric system put into service in 2023. The credit is non-refundable, but unused credit carries over to future years.
• Credit for Energy Efficient Home Modifications – This credit is 30% of the cost ofmaking qualifying energy saving improvements to your existing home. The costs, and thus the credit, is limited by the type of home improvement and the annual maximum credit is $1,200. However, this is a non-refundable credit and there is no carryover.

So when evaluating the tax benefit of a tax credit one must consider whether it is a refundable credit; if any unused amounts carry over to be used in other years; and whether there are any limits on the dollar amount of the credits.

If you are planning an expenditure and expect the tax deduction or tax credit to help cover the cost, please call before making the purchase to ensure that the tax benefit will be what you anticipate.

If your 2022 refund or balance due turns out not to be the desired amount, you may want to consider adjusting your withholding based on your projected tax for 2023. If you need assistance, please call this office.

W-9 Collection – If you are operating a business, then you are required to issue a Form 1099-NEC to each service provider to which you have paid at least $600 during a given year. It is a good practice to collect a completed W-9 form from every service provider (even if you are paying less than $600), as you may use that provider again later in the year and may have difficulty getting a W-9 after the fact—especially from providers that do not plan to report all of their income for the year.

Estimated Tax Payments – If you are self-employed, then you prepay each year’s taxes in quarterly estimated payments by sending 1040-ES payment vouchers or making electronic payments. For the 2023 tax year, the first three payments are due on April 18, June 15, and September 15, 2023, and the final payment is due on January 16, 2024. Generally, these payments are based on the prior year’s taxable income; if you expect any significant changes in either income or deductions relative to the previous year, please contact this office for help in adjusting your payments accordingly.

Charitable Contributions – If you marginally itemize your deductions, then you can employ the bunching strategy, which involves taking the standard deduction one year but itemizing your deductions in the next. However, you must make this decision early in the year so that you can make two years’ worth of charitable contributions in the bunching year.

Required Minimum Distributions – Each year, if you are 73 (a recent law change increased it from 72 in 2022) or older, you must take a required minimum distribution from each of your retirement accounts or face a substantial penalty. By taking this distribution early in the year, you can ensure that you do not forget and accidentally subject yourself to penalties.

Gifting – If you are looking to reduce your estate-tax exposure or if you just want to give some money to family members, know that each year, you can gift up to an inflation-adjusted amount, which for 2023 is $17,000, to each of an unlimited number of beneficiaries without affecting your lifetime estate-tax exclusion amount or paying a gift tax.

Retirement-Plan Contributions – Review your retirement-plan contributions to determine whether you can afford to increase your contribution amounts and to make sure that you are taking full advantage of your employer’s contributions to the plan.

Beneficiaries – Marriages, divorces, births, deaths, and even family clashes all affect whom you include as a beneficiary. It is good practice to periodically review not just your will or trust but also your retirement plans, insurance policies, property holdings, and other investments to be sure that your beneficiary designations are up to date.

Reasonable Compensation – With the advent a few years ago of the 20% pass-through deduction, which is available to most businesses other than C-corporations, the issue of reasonable compensation took on new importance, particularly for shareholders of S corporations. This has been a contentious issue in the past, as it has allowed shareholders who are not just investors but who are actually working in the business to take a minimum salary (or no salary at all) so that all their income passed through the K-1 as investment income. This strategy allows such shareholders and the S corporation to avoid payroll taxes on income that should be treated as W-2 compensation. A number of issues factor into a discussion of reasonable compensation, including comparisons to others working in similar businesses and to employees within the same business, as well as the cost of living in the business’s locale. This is a subjective amount, and it generally must be determined by a firm that specializes in making such determinations.

Business-Vehicle Mileage – Generally, vehicles with business use also have some amount of nondeductible personal use in a given year. It is always a good practice to record a vehicle’s mileage at the beginning and at the end of each year so as to determine its total mileage for that year. The total mileage figure is then used when prorating the personal- and business-use expenses related to that vehicle.

College-Tuition Plans – Contribute to your child’s Section 529 plan as soon as possible; the funds begin accumulating earnings as soon as they are in the account, which is important because the student will likely begin using that money at age 18 or 19.

Only a few of the tax-related actions that you take during a year will benefit yourself or others. The most important of these actions is keeping timely and accurate tax records; for businesses in particular, this is of the utmost importance. Those who have well-documented income and expense records generally come out on top when the IRS challenges them.

If you have any questions related to your taxes or if would like an appointment for tax projections or tax planning, please contact our office.

People who think accountants aren’t very fun have never met our team! Throughout the year, we shared meals, laughs, and even threw a few axes.

Here are a some highlights from our 2022 firm activities:

It was coworker vs. coworker at Battle of the Stars: Coworker Feud. It was a very close match between the Blue Star team (left) and the White Star team (right), but in the end, the Blue Star team won!

2022 was a fun year for our firm. We can’t wait to see what 2023 has in store!

As the name suggests, cash flow is a term used to describe the money coming into and out of a business. Cash received – like money being paid to the business from its customers – would be inflow. Cash spent – like the funds being paid to vendor partners and other operational costs – would be outflow.

Obviously, it’s always important to have more money coming into your business than going out in most situations. But whether this is true is not the only factor you should be accounting for. Instead, it should be seen for what it really is – a metric that tells just one small part of a much larger story.

The Ins and Outs of Business Cash Flow: Breaking Things Down

One of the reasons why keeping an eye on cash flow is so important is because it helps paint a vivid picture of a business’s liquidity. The more liquid a company is, the more flexible it is

A significant amount of positive cash flow relative to outflow indicates that a company’s liquid assets are increasing. This is something that should happen naturally over time as a business continues to grow and scale. This doesn’t just mean that they’re comfortable when it comes to handling their financial obligations. They can take some of that money and strategically invest it back into the business itself where it can make the biggest impact.

This type of positive cash flow also acts as a viable buffer against any uncertainty or even challenges that may develop. Case in point: everything that has been going on over the last few years with the still-ongoing COVID-19 pandemic. When the pandemic first hit in March 2020, businesses of all types found their doors suddenly closed. The ones that were able to survive to the point where they could re-open again – or at least remain afloat for as long as possible – were those that had liquidity through positive cash flow.

In a larger sense, there are a few different types of cash flow to concern yourself with. Operating cash flow refers to the amount of money that a company is generating via everyday activities. Investment cash flow, as the name suggests, is income generated from investment actions like purchasing securities.

Financing cash flow goes into more detail about how money is moving between a business and a number of other entities like investors, owners, and even creditors.

Again, tracking business cash flow is all about the insight it generates. Not only does it allow you to keep the doors open because you know you have enough money to handle your obligations, but it also helps to meet your short and long-term goals for expansion as well. In essence, it helps those business leaders come up with the best possible plan for the future – which is also why this is something you need to be taking a look at on a regular basis.

Tracking Cash Flow: An Overview

All told, tracking cash flow over the long term is something that will be accomplished through a few different financial statements. The first of these is the balance sheet, which simply puts together an outline of a company’s current assets and liabilities.

Next, we have the income statement. This is a document that helps highlight a company’s profitability at a particular moment in time.

Finally, you have the actual cash flow statement. Think of this as something like a checkbook in nature – the cash flow statement confirms that all the other data on the statements mentioned above is as accurate as possible.

The cash flow statement provides a detailed overview of a company’s cash-based transactions, both going in and coming out of the business. It can also help indicate how many unpaid invoices may be out there. Collecting them can help reconcile the books and improve cash flow as much as possible.

In the end, business cash flow is always an essential part of any organization. You need visibility into where money is coming from and where it’s going in order to make the most informed decisions possible at all times. That’s why it’s always recommended that you enlist the help of a professional to handle this critical matter on your behalf – that way you can leverage their expertise to your advantage, all so that you can focus more on your business, the way it should be.

So if you’d like to get additional insight into business cash flow, or if you just have any additional questions that you’d like to go over with someone in a bit more detail, please don’t delay – contact us today.

Over the last decade, in particular, the definition of the term “career” has changed.

Rather than being employed by a single entity for which you receive a W2 at the end of the year, many are now participating in the “gig economy” in a variety of ways. They’re not just working a day job. They’re also driving for a ride-sharing service like Uber. They’re delivering food for companies like DoorDash. They’re leaning into the versatility that the fast-paced digital world has brought with it, enjoying the type of freedom that people didn’t previously have.

Of course, this newfound sense of freedom brings with it a number of potential disadvantages, especially when it comes to tax season. But thankfully, there are still ways to enjoy all the benefits of the “gig economy” with as few of the potential tax-related downsides as possible. You just need to be savvy about planning ahead, and you need to keep a few key things in mind along the way.

Taxes and Gig Work: An Overview

By far, the most important thing to understand about this process is that any time you increase your income – be it by picking up “gig work” in addition to your primary job, or by getting additional employment where you receive a second W2 form at the end of the year – it will always potentially increase your taxes.

For the sake of example, let’s say that yours is a situation where you A) work for a small business, and B) also run a business like Etsy on the side. The first source of employment would almost certainly give you a W2 at the end of the year. In the second, you’d be left with self-employment income – which itself increases your tax liability almost immediately.

In that situation, you would want to pay quarterly estimated tax payments using form 1040-ES to increase your income tax withholding at your W2 job as much as you could to offset the liability that your self-employment income would bring with it. Yes, this means a little less money in your pocket right now – but that’s almost certainly better than getting hit with a major tax bill at the end of the year.

Along the same lines, you would want to make sure that you’re always keeping receipts for your self-employment job so that you can write off whatever you can at the end of the year. In the Uber example, that would include any maintenance and other work that you’ve had done to your car. In other “gig economy” examples, that might include money that you’ve spent on supplies that are expressly needed to complete this second job.

If you use your car for your “gig work” at all, you would want to keep a journal of all the miles that you’ve traveled. This, too, will help give you more to write off so that you can reduce your income tax liability moving forward.

Why Gig Workers Might Need Professional Tax Advice

Overall, your taxes are almost certainly going to be more complicated if you have “gig work” that you are accounting for. Not only do you need to think about how much is being withheld from every paycheck from your primary job, but you also have an increased liability when it comes to things like Social Security tax, Medicare tax, and more. In a normal situation, half of that would be paid by your traditional employer. In a self-employed situation, you’re responsible for both sides of the equation.

That’s why, if you have any questions or if you just aren’t sure how to proceed, you shouldn’t be afraid to enlist the help of a trained professional. Not only can they help you reduce your tax liability as much as possible, but they can also maximize your overall income, so you’re taking home every dollar that you’ve earned without being concerned about getting hit with a tax bill that you can’t handle down the road.

In the end, “gig work” is certainly something to be celebrated – after all, it gives people a freedom when it comes to how their careers play out that would have been unthinkable even as recently as a decade ago. Having said that, it certainly isn’t without its potential consequences – but with the right approach, you can still take them into consideration and enjoy all the advantages of “gig work” at the same time.

If you’d like to find out more information about the tax consequences of “gig work,” or if you’d just like to speak to someone about your own needs in a bit more detail, please don’t hesitate to contact us today to speak to one of our professionals.

Required Minimum Distributions (RMD) are required taxable distributions from qualified retirement plans and are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to indefinitely keep funds in their qualified retirement plans. Eventually, these assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, then he or she may have to pay a 50% penalty on the required distribution amount that is not distributed.

The penalty can be waived where the failure to take the required distribution was due to reasonable cause and steps are being taken to remedy the shortfall. The penalty waiver must be applied for, creating additional hassle, not to mention the potential additional tax created by multiple-year distributions in one year.

Note: RMDs do not apply to Roth IRAs while the account owner is alive.

Individuals must begin taking RMDs in the year they reach age 72. The first year’s distribution for those turning age 72 in 2022 can be delayed to no later than April 3 of 2023. However, delaying the first distribution means taking two distributions in 2023, which could have adverse tax consequences.

RMDs for 2022 are determined based upon the values of the accounts as of December 31, 2021, divided by the distribution period. The distribution period is based on the taxpayer’s life expectancy determined from the Uniform Lifetime Table for the taxpayer’s current age.

If you have been calculating your RMD in the past, be aware that a new uniform lifetime table applies effective in 2022, as illustrated below.

Example: Don’s oldest age during 2022 is 75 and he has a single IRA account with a value of $150,000 at the close of the business day on December 31, 2021. Using the Uniform Lifetime Table effective for 2022, we find that the distribution period for age 75 is 24.6 years. Thus, Don’s RMD for 2022 is $6,098 ($150,000/24.6).

When an owner of a retirement plan or an IRA dies before receiving his or her entire RMD in the year of death, the unpaid amount must be distributed to the named beneficiaries or, if none, the decedent’s estate.

Where an individual has multiple retirement plans and/or IRAs some additional complications may be encountered as to which accounts the distributions must be withdrawn from. Note that distributions from a 401(k) or other qualified retirement plans can’t be used to satisfy the RMD of an IRA or vice versa.

If you need to make your 2022 RMD by December 31 and haven’t yet done so, keep in mind that the 31st, is not a business day, and may be observed as the New Year’s holiday by many financial institutions. So, a word to the wise: don’t wait until New Year’s Eve to arrange for the distribution.

If you need assistance related to your RMD, please contact this office.

Have you seen those ads on television or received email solicitations promoting a large tax credit? The large tax credit they are referring to is the employee retention tax credit (ERTC). The ERTC is a government-sponsored program to keep workers employed during 2020 and 2021 because of the COVID pandemic by providing refundable tax credits to employers that kept their workers on payroll during the COVID crisis. Unlike most tax credits, this is a credit against the employer’s payroll taxes.

Even though this credit only applies for 2020 and part of 2021 for most businesses, if your business qualifies, and you haven’t already claimed the credit, it can still be claimed by amending the payroll tax returns for those years. So that you can determine if you might qualify for the credit and avoid being misguided by the credit promoters, the following is a summary of the qualifications to claim the ERTC.

The credit is available to all employers regardless of size, including tax-exempt organizations, tribal businesses, and businesses in U.S. Territories. There are only two exceptions: State and local governments and their instrumentalities. For eligible employers, the credit is available for wages paid:

• March 13, 2020, through Sept. 30, 2021, and
• July 1, 2021, through December 31, 2021, for certain start-up companies

Eligible Employers fall into one of two categories:

• Business Operations Curtailed: Eligible employers are employers who were carrying on a trade or business during any quarter in 2020 or during the calendar quarter for which the credit is determined, for calendar quarters beginning after December 31, 2020, and for which the operation of that business is fully or partially suspended.
  
  The operation may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can continue to operate but not at its normal capacity.
• Significant Decline in Gross Receipts: For 2020, employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in 2019 are also eligible. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019. This cutoff of eligibility upon return to 80% of a comparable 2019 quarter’s gross receipts is removed for 2021.
  
  For 2021, a significant decline is defined as gross receipts being 80% or less than the gross receipts for the same calendar quarter in 2019 (i.e., there’s a 20% decline in gross receipts). The employer has the option to elect to satisfy the gross receipts test by using the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019. If an employer was not in existence as of the beginning of the same calendar quarter in calendar year 2019, substitute ‘2020’ for ‘2019’. 

The credit is a refundable payroll tax credit and for 2020 is 50% of qualified wages, up to a maximum wage of $10,000 per employee. Thus, $5,000 is the maximum credit for qualified wages paid for any employee for 2020.

For 2021, the credit is 70% of qualified wages, up to a maximum wage of $10,000 per employee per quarter. Thus, the per-employee maximum credit is $7,000 for each quarter of quarters 1, 2 and 3 in 2021.

But the limitation is $50,000 each in quarters 3 and 4 of 2021 for a “recovery start-up business” – generally an employer that began a business after February 15, 2020, and had average annual gross receipts of less than $1 million for the 3-taxable year period ending with the taxable year which precedes the calendar quarter for which the credit is determined. The activity suspension and decline in gross receipts requirements don’t apply to these businesses.

If you think your business may be eligible for this credit and it hasn’t already been claimed, keep the following cautions in mind:

Caution #1: An employer who secured an SBA Paycheck Protection Program (PPP) loan is prevented from using the same wages for forgivable PPP loans and the employee retention credit. No double dipping.

Caution #2: No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the same employee.

Caution #3: Although many companies legitimately qualify for the ERTC, there is substantial concern related to abuse and fraud, especially with companies that are relying on government shutdowns, and particularly supplier shutdowns, to justify their claims based on the business operations curtailed qualification.

Please call this office to determine if your business can legitimately qualify for the ERTC.

As the country emerges from the COVID pandemic and supply chain issues, along with the fallout from the war in Ukraine, the country has been experiencing high inflation rates that negatively impact the cost of everyday living, including food, gas for your vehicle, utilities and more.

But there is one shining light: tax-related inflation adjustments that will benefit most taxpayers. However, many media outlets have been touting the IRS’ recently released inflation adjustments for 2023 as if taxpayers will see the benefits this coming spring when they file their tax returns. What much of the hype fails to mention is that the 2023 increases will show up on your 2023 tax return which will be filed in 2024. So most people will have to wait until 2024 to see the approximately 7% inflation adjustment to tax benefits.

But there was an approximately 3% inflation adjustment for 2022 from which you will benefit when you file your 2022 tax return in early 2023.

If you are an employee, you may notice some reduction in the amount of income tax withheld from your wages starting in January, as the 2023 tax withholding calculation will take into account some of the items affected by the inflation adjustments, such as the increased standard deduction and widened tax rates.

Standard Deduction: The table illustrates the increases in the standard deduction for 2022 and 2023. As shown in the table, for taxpayers filing married joint returns the increase was $800 from 2021 to 2022 and $1,800 between 2022 and 2023. For a married couple filing jointly these amounts are not subject to income tax. Taking this a step further, if that married couple were in the 22% tax bracket their tax savings would be $176 (0.22 x $800) in 2022 and $396 (0.22 x $1,800) in 2023.

Tax Brackets: Tax brackets are also affected by the inflation adjustments as illustrated in the tables below. For example, you will note that for an unmarried taxpayer using the single filing status for 2022 the table shows that when the individual’s taxable income reaches $89,076 the marginal tax rate increases from 22% to 24%. However, that transition between 22% and 24% occurs at $95,376 for 2023, or a difference of $6,300 that is taxed at 2% less than in 2022. Inflation adjustments are made annually for all the marginal rate brackets.  

Besides the standard deduction and tax brackets there are a large number of other tax attributes that are subject to inflation adjustment as well. Here are some examples. 

As of this writing, the IRS has not yet released the 2023 maximum contributions to IRAs, 401(k)s and other retirement plans. It is anticipated that these amounts will also increase substantially due to the adjustment for inflation. 

Please contact this office if you have any questions.

If your traditional IRA is invested in stocks and/or mutual funds, the recent substantial downward slide by the stock markets may provide a unique opportunity to convert your traditional IRA to a Roth IRA at a low cost, and then benefit when the markets recover.

Why would you want to do that? Because Roth IRA distributions provide tax free retirement benefits while payouts from Traditional IRAs are taxable.

Of course there is no assurance that the markets will not continue to decline, and this may not be the most opportune time to make a conversion in your specific circumstances but is something you may want to consider. Conversions provide the most benefit to younger individuals who can look forward to many years of the tax-free growth provided by a Roth IRA.

You don’t have to convert all of your traditional IRA in one year. You can convert what you can afford to pay the tax on each year.

Here Is How It Works – The tax code allows individuals to convert any portion of their traditional IRA to a Roth IRA by paying tax on the conversion as though taking a distribution from the traditional account. Thus, if you make a conversion you are taxed on the conversion based upon the tax rates that apply to your normal income plus the traditional IRA amount being converted.

Of course, if in 2022 you have an abnormally lower income, that could make the conversion tax even less. The following table includes the marginal tax rates for 2022.

Example When Using the Table – Let’s say you are filing single and your taxable income without an IRA conversion amount is $45,000, which has a marginal rate of 12%, and you are converting $40,000. This brings your taxable income to $85,000, which is still in the 12% bracket (it’s more than $41,775 but less than $89,075, the start of the next rate). This means the tax on the conversion would be $4,800 (12% of $40,000). If you did the conversion in a year when your other income was more and when combined with the conversion amount you are in the 22% bracket, the tax on the conversion would be $8,800, $4,000 more than when you are in the 12% bracket.

Other Issues:

• There is no income limitation on making a conversion, thus anyone can do a conversion. 
• Higher income taxpayers can use the conversion to circumvent the AGI limits for contributing to a Roth IRA. 
• Once a conversion is made it cannot be undone. 
• Some individuals for various reasons have made non-deductible contributions to their traditional IRAs. For distribution or conversion purposes, all an individual’s IRAs (except Roth IRAs) are considered as one account and any distribution or converted amounts are deemed taken ratably from the deductible and non-deductible portions of the traditional IRA, and the portion that comes from the deductible contributions would be taxable. 

Give this office a call if you would like to explore the possible benefits of a traditional to Roth IRA conversion.