Month: December 2023

The 2023 Tax Planning Guide

2023 Tax Planning GuideIt’s that time of year again: time for year-end tax planning. With the end of 2023 coming fast, the time to act is now. In this article, we’ll look at the moves you can make to optimize your tax situation in 2023 as an individual taxpayer.

Itemized Deductions

Flexing your timing on itemized deductions is a solid strategic move. It can help you shift to a bigger itemized deduction in 2023 versus 2024 (but not both). This can be advantageous if you expect to be in a higher tax bracket in one year compared to the other. Key itemized deductions to consider are home interest, state and local taxes, charitable deductions, and medical expenses.

Electric Vehicles

If you are in the market for a new car, consider buying an electric vehicle (EV) to save some taxes as well. Many new EVs can get you a credit of up to $7,500 and used versions up to $4,000. The credit is limited based on the cost of the vehicle, with more expensive models ineligible for the tax credit. Generally, the MSRP of a sedan cannot exceed $55,000, and SUVs, trucks, and vans cannot be more than $80,000. 

In addition to the price limit on the EV itself, the credit is limited by taxpayers’ income levels. Married couples’ modified gross income cannot be more than $300,000 to get the credit on a new EV and $225,000 for a used version. Single taxpayers are capped at $150,000 for a new version or $75,000 for a used EV.

One important distinction here is that if you buy an EV in 2023, you’ll need to claim the credit via your tax return, which means you won’t get the benefit right away. In 2024, however, you can choose to transfer the credit to the car dealer when you buy the vehicle and pay less as a result immediately. So, if you plan to buy now or in early 2024, it may be better to wait if you have the choice.

Home Improvements

There are two tax credits you can get related to making “green” upgrades to your home. The first is the residential clean energy property credit, which is installing alternative energy systems such as solar, wind, geothermal, etc., giving you a credit of up to 30 percent of the materials and cost of installation. The second is the energy-efficient home improvement credit. This applies to smaller upgrades like boilers, central air-conditioning systems, water heaters, windows, etc., that meet qualifications for specific energy efficiency ratings. The credit is for 30 percent of the cost, with $1,200 yearly maximum (from all upgrades).

Charitable Donations

If you are considering making charitable donations, consider donating appreciated property, like stocks or mutual funds, where you have unrealized gains. This way, you’ll get to deduct the full amount of the fair market value without having to sell and pay taxes on the gains first.

Beware Required Minimum Distribution (RMD) Rules for IRAs

The penalty for failing to take your RMD dropped from 50 percent down to 25 percent with the Secure 2.0 Act in 2023, but it is wise to avoid the still hefty penalty. The general rule is that taxpayers 73 and older must take annual payouts, and there is a specific calculation behind it based on your age and account balance. You can also be subject to RMDs at a much younger age if you inherited an IRA. If you don’t feel comfortable making this determination, it’s best to check with your CPA or financial advisor to ensure you withdraw the right amount.

Max Out Retirement Plans

The deadline to fund workplace 401(k) plans is December 31, 2023, while 2023-year IRA contributions are allowed up until April 15, 2024. Taxpayers can contribute up to $22,500 in a 401(k) ($30,000 if age 50 or older); and $6,500 for IRAs ($7,500 if over 50). 

Capital Gains and Tax Loss Harvesting

The capital markets have seen a volatile year, and interest rates are at highs not seen in quite some time. This may create situations where tax loss harvesting is advantageous.

Generally, if you have losses in some securities, understand that you can take losses against positions with gains up to the number of gains you realize, plus a maximum of $3,000 against other income. Excess losses are carried forward to future years. So, if you have a combination of winners and losers in your portfolio, consider tax loss harvesting to lower your tax bill.

Beware of the wash-sale rules, however. The wash-sale rules forbid you to sell and then repurchase “substantially identical” securities within 30 days of the sale on loss positions. One nuance here is that cryptocurrencies are not subject to the wash-sale rule as of yet.

Increase Your Withholdings

If you expect to have a hefty tax bill, then it may be wise to have additional amounts withheld from your paycheck or make an estimated payment. This can help you avoid a penalty for underpayment of taxes. As long as you prepay via tax payments or withhold a minimum of 90 percent of your 2023 total tax bill or 100 percent of what you owed for 2022 (110 percent if your 2022 AGI exceeded $150,000), you are clear of the penalty.

Conclusion

As we prepare to enter the final month of 2023, now is the time to take a look at your financial and tax situation to see if there are any moves you can make to minimize your 2023 tax liabilities and maximize your wealth.

Wage Garnishment Considerations for Business Owners

Wage GarnishmentAccording to the United States Department of Labor’s Consumer Credit Protection Act (CCPA), wage garnishments are a complex legal process for employers to account for when it comes to employment matters. This article specifically refers to Title III of the Consumer Credit Protection Act. 

Usually authorized through a court order, a wage garnishment directs an employer to withhold or garnish an employee’s wages for a certain amount or percentage to satisfy an outstanding debt. Wage garnishments also can be implemented for delinquent tax obligations and other debts owed to federal agencies of the U.S. federal government, as well as for state-level tax collectors. 

Another consideration for Title III is that for a single debt, employees may not be fired; but if an employee’s earnings are garnished for two or more distinct debts, an employer has the discretion to involuntarily separate an employee from its business. This law also permits varying amounts and percentages of an employee’s “disposable earnings” that may be withheld.

The first step is determining how earnings are defined in the course of deciding the final wage garnishment calculation. Examples include but are not limited to retirement and pension payments to the employee, hourly wages, yearly salaries, commissions, bonuses, along with profit sharing, etc.

When it comes to lump-sum payments, the CCPA requires counting earnings that are for personal services but not including non-personal service-related lump-sum payment compensation as the first step when calculating the final wage garnishment. 

Defining Disposable Earnings

The final amount able to be garnished is determined by the employee’s disposable earnings. This is defined as the earnings remaining once legally mandated deductions are factored into an employee’s earnings. Example deductions include local, federal, and state taxes, along with withholdings for unemployment, Medicare, and Social Security taxes. Voluntary deductions, such as health premiums, voluntary retirement plan contributions, etc., are not factored into the disposable earnings calculation.

When it comes to regular garnishment guidelines, which include non-support, bankruptcy, or tax-based requests, for both state and federal taxes, the maximum weekly amount is the smaller amount of either one-fourth of the worker’s disposable earnings or how much the worker’s disposable earnings exceed 30 times the U.S. minimum wage of $7.25 per hour x 30 hours = $217.50 (as of June 2023).

Looking at a weekly view, if disposable earnings are $217.50 or less, no garnishment can occur. If disposable earnings between $217.50 and up to $290 are considered, only $72.50 may be garnished, depending on how much the outstanding debt is in total. If the worker’s disposable earnings exceed $290 for a weekly pay period, up to one-fourth of the pay period’s disposable earnings can be considered to be garnished. It’s important to note that some bankruptcy court orders, state/federal tax debts, and court orders for child support and/or alimony are not necessarily subject to the garnishment ceilings discussed above.

While this information is not comprehensive for employers, it’s important to understand all the federal, state and local regulations to ensure compliance is achieved to reduce the chances for adherence complications.

How to Manage Taxes in Retirement

How to Manage Taxes in RetirementThe biggest difference between managing taxes throughout your career versus during retirement is that when you are retired, you are responsible for calculating how much you owe and paying it on a timely basis. Retirees normally have several different income sources, and not all automatically withhold taxes from distributions.

Retirement Income Sources

Having multiple sources of income during retirement is a good strategy, as it helps protect you from market declines, tax legislation changes, and potential defaults or cutbacks in pensions or entitlement programs. However, be aware that the more income sources you have, the more effort it takes to determine how much you owe in taxes for the year.

As a general rule, retirement income is taxed as either ordinary income or long-term capital gains. Ordinary income includes:

  • Employer wages
  • Taxable interest payments
  • Ordinary dividends
  • Short-term capital gains (on assets held a year or less)
  • Taxable withdrawals from retirement accounts
  • Taxable Social Security benefits
  • Withdrawals from health savings accounts (HSAs) for nonqualified expenses
  • Annuity payouts
  • Rental income
  • Pension payouts

Income subject to long-term capital gains is taxed at 0 percent, 15 percent, or 20 percent, depending on your total taxable income. This type of income is generated from:

  • Profits from the sale of a business (assuming you started and sold the business over more than 1 year)
  • Real estate (excluding rental income)
  • Securities
  • Most other investments held for over a year
  • Qualified dividends

Additional Investment Tax

Single taxpayers may be subject to an additional 3.8 percent net investment income tax (NIIT) on income generated from invested assets – if their modified adjusted gross income (MAGI) is $200,000 or more ($250,000 or more if a married couple filing jointly). Examples of investment assets include interest, dividends, long- and short-term capital gains, rental income, royalty income, and nonqualified annuities.

Automate Tax Withholding

One way to make tax planning easier in retirement is to have taxes automatically withheld whenever you take income distributions. Much like having payroll taxes withheld from your paycheck, when you file year-end taxes, you reconcile the amount owed by either paying more or receiving a refund.

There are certain income sources on which taxes are automatically withheld, but be aware that a fixed percentage (e.g., 10 percent) may not be the appropriate amount for all taxpayers. The fixed percentage withheld may vary by investment type, and in many cases, the account holder can change the default withholding. The following shows how taxes are handled for different retirement income sources.

  • 401(k), 403(b), and other qualified workplace retirement plans – Basic distributions are typically subject to 20 percent withholding. However, required minimum distributions (RMDs) are subject to a 10 percent withholding. Note that if the plan balance is high enough for the RMD to place the taxpayer in a higher tax bracket, a 10 percent withholding may be too low. Set up or change the withholding percentage by submitting Form W-4R to the plan administrator.
  • IRA (Traditional, SEP, and SIMPLE) – Unless the retiree specifies otherwise, non-Roth IRAs typically withhold 10 percent of distributions. Set up or change the withholding percentage by submitting Form W-4R to the custodian.
  • Annuity – Annuities are taxed as ordinary income, thus subject to a tax rate based on the total amount of income the retiree receives throughout the year. Note that a non-qualified annuity is usually comprised of already taxed income plus earnings. When a retiree starts receiving distributions, only the earnings portion is taxed. Set up or change the withholding percentage by submitting Form W-4P to the issuer.
  • Pension – Pensions are taxed as ordinary income, thus subject to the total amount of taxable income received throughout the year. Set up or change the withholding percentage by submitting Form W-4P to the payer.
  • Social Security – If Social Security benefits and all other income totals less than $25,000 per year, the beneficiary generally does not have to pay income taxes. However, if a retiree earns a higher amount through a combination of income sources, including tax-exempt income, up to 85 percent of Social Security benefits may be taxable. In this scenario, the retiree can request that the government withhold a fixed percentage (7 percent, 10 percent, 12 percent, or 22 percent) from his Social Security paychecks. Set up or change the withholding percentage by submitting Form W-4V to the local SSA office.
  • Taxable bank or brokerage accounts – These accounts may give you the option to have a percentage of taxes (10 percent or choose your own percentage) withheld from investments with realized capital gains, dividends, or other asset-based income. Retirees who withdraw regular income or periodic high distributions may want to elect a percentage of taxes withheld to reduce their tax liability at the end of the year. You can make this election at the time you set up your withdrawal.

Develop a Tax Payment Plan

One of the best ways to enjoy retirement is to automate your tax payment plan. You can do this by actively selecting a withholding percentage for each income source you own and varying it based on the amount and frequency you tend to draw down each year.

Another option is to pay estimated quarterly taxes (due Jan. 15, April 15, June 15, and Sept. 15 every year). This is how most independent business owners and contractors self-pay their taxes in order to avoid an underpayment penalty. This strategy works best if you receive unexpected income throughout the year, earn self-employment income, or receive rental or taxable investment income.

The good news is that after your first full year of retirement, you will have set the bar for how much you owe in taxes – referred to as your safe harbor. Thereafter, you’re not subject to an underpayment penalty as long as you pay at least:

  • 90 percent of the prior year’s full tax bill or
  • 100 percent of the prior year’s full tax bill (if AGI is $150,000 or less;$75,000 or less if married filing separately), or
  • 110 percent of the prior year’s full tax bill (if AGI is more than $150,000; more than $75,000 for individuals or married couples filing separately)

Remember that in addition to creating a retirement income plan, it’s important to develop a tax payment plan as well. This will help make tax season go a whole lot easier.

4 Smart Ways to Maximize Your IRA Contributions

Maximize Your IRA ContributionsUnless you’re near retirement, chances are you’re depositing a certain amount of cash each year in your IRA at tax time, then kind of forgetting about it, not thinking much about it until the next year. This dynamic can cost you a lot of money – today and at retirement age. Here are a few ways to make all your hard-earned money work even harder.

Invest your money; don’t simply fund it. According to a Vanguard study, two-thirds of last-minute IRA contributions end up just sitting in money market funds. The result? They’re just a little more than a checking account with a fancy name. Lesson: Don’t let your funds sit idle. They should be placed in the right investment, perhaps a target-date mutual fund. Maybe a bond fund or some carefully selected stocks. Do the work now. Take time to analyze what’s right for you so you can max out your investment.

Convert to a Roth. This scenario might not apply to you, but it’s a reality that quite a few have encountered: A sharp mid-career income loss, say, because of the pandemic, which would put you into a lower tax bracket. If this applies to you, it’s a good time to convert your traditional IRA to a Roth. Another scenario where converting might be a good idea is if tax rates are temporarily lowered by Congress. There’s also the backdoor Roth, which is a good tax reduction strategy; it works best for people who have high salaries (think C-suite) and access to a workplace retirement plan that causes them to be ineligible to deduct their traditional IRA contributions in the first place. It’s easy. Open a new traditional IRA, make non-deductible contributions, then convert it to a Roth. All said and done, no matter where you fall on the income spectrum, Roth IRAs are well worth looking into.

Avoid the procrastination penalty. Sure, making a full-sized IRA contribution right before your filing deadline feels good. You’re doing what you’re supposed to do, right? Taking the tax break for the prior year, right? Yes, but not so fast. (Just to refresh, it’s $6,500 for individuals in 2023; $7,500 for people 50 and older; the contribution cap is $7,000 for individuals in 2024 and $8,000 for people 50 and older.) But here’s the rub: You’ve left more than 15 months of potential investment income on the table. What? Yes, that is $6,500 that you should have invested during the previous year, maybe placed in a mutual fund or stock that could have been earning for you. So, think again about waiting until the last minute to contribute. It might end up being quite costly.

Invest in stocks and bonds – strategically. If you’ve been lucky enough to maximize your tax-advantaged account contributions and have some cash left over in your standard investment accounts, think about buying bonds in your IRA and stocks in your standard account. But why? Bond dividends are taxed as ordinary income. Stocks and stock-filled mutual funds generally generate capital gains. Specifically, these gains aren’t simply regular payments you get from your stocks. They’re the increase in their sticker price each year. It’s important to understand the difference. Capital gains, which only occur when you sell a stock or fund, are taxed at a lower rate. It makes sense to put them in taxable investment account and then save your tax-advantaged accounts for larger investments. Regardless of which IRA you decide upon, you won’t pay taxes on money while it stays put in your account.

Saving for retirement is one of the most important things you can do. Granted, life happens, and sometimes you get off track. But if you keep your eyes on your future nest egg and max out contributions while you’re working, you’ll be better prepared to enjoy your next season of life.

Sources

https://www.forbes.com/advisor/retirement/maximize-ira-contribution

Impact of Digital Currency on Businesses’ Accounting

The emergence of digital currency is reshaping how businesses operate and account for financial transactions. As accounting professionals navigate this transformative wave, understanding the profound impact of digital currency on business accounting becomes not just relevant but imperative.

What is digital currency?

Digital currency is a form of currency that exists only in electronic or digital form, without a physical counterpart like coins or banknotes. There are two main types of digital currencies.  First, there are decentralized cryptocurrencies such as Bitcoin or stablecoins such as USDC (that track to the US dollar at 1-1). Cryptocurrencies are always based on blockchain technology.  The other main type and more likely to serve as a substitute for traditional government issued currencies are digital currencies such as central bank digital currencies (CBDCs).  Unlike crypto-currencies, CBDCs are centralized and issued by issuing authority and also are not necessarily based on a blockchain or immutable ledger systems.

Immutable ledger systems ensure transparency, traceability, and security in financial transactions. The technology has also given rise to decentralized finance, or DeFi, designed to offer access to financial services without the need for institutions such as banks. This translates into a paradigm shift for accounting professionals, as digital currency and cryptocurrency are continually adopted to make payments and investments and as a reservoir of value.

The Impact of Digital Currency on Business Accounting

  1. Enhance Financial Reporting – Digital currencies facilitate real-time transactions, eliminating the lag time associated with traditional banking processes. This newfound speed provides accounting professionals with instant access to financial data, enabling quicker and more accurate financial reporting. Businesses can now assess their financial health daily, leading to more informed decision-making.
  2. Smart Contracts Streamline Auditing Processes – Smart contracts, self-executing contracts with the terms of the agreement written directly into code, bring automation to the auditing process. This reduces the risk of human error and accelerates auditing procedures. Accounting professionals can leverage smart contracts to automate routine tasks, allowing them to focus on higher-value analytical work.
  3. Cross-Border Transactions Simplify Global Accounting – Accounting for international transactions has historically been intricate due to varying currencies and exchange rates. With digital currencies, businesses can streamline these processes, reduce the complexities associated with global accounting, and provide accounting professionals with standardized data for analysis.
  4. Enhanced Financial Inclusion Accounting for a Broader Audience – Digital currencies can enhance financial inclusion by providing access to financial services for unbanked or underbanked individuals. Accounting professionals will need to consider the unique accounting challenges associated with this expanded user base, such as diverse transaction volumes and varying levels of financial literacy.

Challenges of Digital Currencies

Accounting professionals face both challenges and opportunities as businesses increasingly adopt digital currencies for transactions. Accounting standards may need to evolve to accommodate the unique characteristics of digital currencies.

The integration of digital currencies with traditional accounting systems is another critical consideration. Businesses will likely operate in a hybrid financial environment for the foreseeable future, necessitating seamless integration between digital and conventional accounting systems. Accounting professionals must adapt to this coexistence, ensuring data accuracy and integrity across platforms.

The volatile nature of digital currencies poses both risks and opportunities for businesses. While the potential for significant gains exists, so does the risk of value fluctuations. Accounting professionals play a pivotal role in developing robust risk management strategies, ensuring businesses can thrive in the evolving landscape of digital currency without exposing themselves to undue financial risks.

The regulatory environment surrounding digital currencies is still evolving. Accounting professionals must stay abreast of changing regulations to ensure businesses remain compliant. This adaptability is crucial as governments define and regulate digital currencies worldwide. For instance, the lack of a precise classification of digital currencies poses difficulties in determining their financial treatment. The absence of standardized guidelines complicates valuation, reporting, and compliance, requiring accountants to navigate a complex landscape where traditional classifications may not fully capture the distinctions of these evolving assets. Therefore, a proactive approach to compliance will be integral to the long-term success of businesses in this space.

As digital currencies evolve, accounting professionals must commit to continuous learning. Staying ahead of technological advancements, regulatory changes, and industry best practices is paramount. Professional development in areas such as blockchain technology, cryptocurrency taxation, and digital auditing will be essential for accounting professionals aiming to thrive in the digital era.

Conclusion

The impact of digital currency on business accounting is transformative and far-reaching. Accounting professionals are at the forefront of this paradigm shift, navigating the challenges and harnessing the opportunities presented by the digital revolution. Embracing innovation, adapting to changing regulations, and continuously honing skills will ensure businesses survive and thrive in this dynamic era of digital currency.

Expanding Benefits for Veterans and Extending Government Funding Until Jan. 19, 2024

A bill to amend Title 38, United States Code, to extend and modify certain authorities and requirements relating to the Department of Veterans Affairs, and for other purposes. (S 2795) – This bill was introduced on Sept. 13 by Sen. Don Tester (D-MT). This act extends various Department of Veterans Affairs (VA) programs and benefits, including extending the use of contract healthcare professions for disability exams from three to five years; extending authorization for VA emergency preparedness for public health emergencies through fiscal year 2028; and extending certain fee rates under the VA’s home loan program through Nov. 15, 2031. The bill passed in the Senate on Sept. 13, the House on Sept. 26, and was signed into law by the President on Oct. 6.

Wounded Warrior Access Act (HR 1226) – This bill requires the VA to develop and maintain a secure online website that will allow claimants to request records related to their VA claims and benefits, as well as a process for reporting violations. The legislation was introduced by Rep. Pete Aguilar (D-CA) on Feb. 28. It passed in the House on March 7, the Senate on Nov. 2 and was signed into law on Nov. 13.

Korean American Valor Act (HR 366) – This act amends U.S. Code Title 38 to treat certain members of the armed forces of the Republic of Korea, who served in Vietnam under the Armed Forces of the United States, as veterans for purposes of qualifying for healthcare by the VA. The legislation was introduced on Jan. 13by Rep. Mark Takano (D-CA), and was passed in the House on May 22 and in the Senate on Oct. 19. The bill was enacted by President Biden on Nov. 13.

A bill to amend Title 38, United States Code, to strengthen benefits for children of Vietnam veterans born with spina bifida, and for other purposes. (S 12) – Introduced by Sen. Mike Braun (R-IN) on Jan. 26, this bill requires the VA to provide healthcare, job training and monetary benefits to children of Vietnam veterans who were born with spina bifida – for the duration of the child’s life. The bill also requires the VA to establish an advisory council responsible for the care, coordination and ongoing outreach to assist with any care changes over time. The bill passed in the Senate on July 13, the House on Sept. 19, and was signed into law on Oct. 6.

Further Continuing Appropriations and Other Extensions Act, 2024 (HR 6363) – This continuing resolution (CR) was introduced by Rep. Kay Granger (R-TX) on Nov. 13. It is part of a two-step process to continue funding most government programs and activities at fiscal year 2023 levels for the current fiscal year (2024). The CR expires on Jan. 19, 2024, by which time budget legislation will need to be passed in order to avoid a government shutdown. This CR passed in the House on Nov. 14, the Senate on Nov. 15, and was signed by the President on Nov. 16.