Why you might want to file early and answers to other tax season questions
The IRS announced it opened the 2023 individual income tax return filing season on January 23. That’s when the agency began accepting and processing 2022 tax year returns. Even if you typically don’t file until much closer to the mid-April deadline (or you file for an extension), consider filing earlier this year. The reason is you can potentially protect yourself from tax identity theft.
Here are some answers to questions taxpayers may have about filing.
How can your tax identity be stolen?
In a typical tax identity theft scam, a thief uses another individual’s personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.
The actual taxpayer discovers the fraud when he or she files a return and is told by the IRS that the return is being rejected because one with the same Social Security number has already been filed for the tax year. Ultimately, the taxpayer should be able to prove that his or her return is the legitimate one, but tax identity theft can be time consuming and frustrating to straighten out. It can also delay a refund.
Your best defense may be to file early. Why? If you file first, the tax return filed by a potential thief will be rejected.
What are this year’s deadlines?
This year, the filing deadline to submit 2022 returns or file an extension is Tuesday, April 18 for most taxpayers. The due date is April 18, instead of April 15, because the 15th falls on a weekend and the District of Columbia’s Emancipation Day holiday falls on Monday, April 17.
If you’re requesting an extension, you’ll have until October 16, 2023, to file. Keep in mind that an extension of time to file your return doesn’t grant you any extension of time to pay your taxes. You should estimate and pay any taxes owed by the regular deadline to help avoid penalties.
When will your W-2s and 1099s arrive?
To file your tax return, you need all of your Form W-2s and 1099s. January 31 is the deadline for employers to issue 2022 W-2s to employees and, generally, for businesses to issue Form 1099s to recipients of any 2022 interest, dividend or reportable miscellaneous income payments (including those made to independent contractors).
If you haven’t received a W-2 or 1099 by February 1, first contact the entity that should have issued it. If that doesn’t work, ask us how to proceed.
Are there any other advantages to filing early?
In addition to protecting yourself from tax identity theft, another advantage of early filing is that, if you’re getting a refund, you’ll get it sooner. The IRS expects most refunds to be issued within 21 days. The time may be shorter if you file electronically and receive a refund by direct deposit into a bank account.
Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable or caught in mail delays.
Need assistance?
If you have questions or would like an appointment to prepare your return, please contact us. We can help ensure you file an accurate return and receive all of the tax breaks to which you’re entitled.
Getting into data analytics without breaking the bank
Most business owners would probably agree that, in today’s world, data rules. But finding, organizing and deriving meaning from the terabytes upon terabytes of information out there isn’t easy.
How can your company harness the power of data without throwing dollars into the technological void? By investing in a formal initiative to incorporate data analytics into your decision making and strategic planning. However, as is so often the case, this is much easier said than done.
What is it?
Data analytics is the science of collecting and analyzing sets of data to develop useful insights, make connections between data points, and identify trends or patterns.
The process incorporates research, computer programming and statistical analysis to produce various types of data analytics — such as predictive, prescriptive, diagnostic and descriptive. The information used can come from both internal and external sources. Internal sources typically include a company’s financial statements, sales records and customer database. External data may be obtained from government websites, industry associations, publicly distributed surveys and social media.
What are the advantages?
There are several potential advantages of data analytics for businesses. When done right, it will shed light on what could help or hinder you in fulfilling strategic objectives and improving performance in a cost-efficient way. More specifically, data analytics can enable you to:
- Evaluate the feasibility of an expensive ad campaign or product development idea,
- Narrow down who your most potentially valuable customers are and how to reach them,
- Decide whether to obtain outside financing and, if so, how much, and
- Streamline operations and/or cut costs with a clear idea of what the positive outcomes will be.
Perhaps best of all, data analytics facilitates fact-based discussions and planning. This can head off emotionally based arguments and diminish the impact of “office politics” on whether the company should make a major move.
Will I need special software?
Generally, a business will need to invest in data analytics software to reap the advantages. If you decide to do so, it’s important not to put the cart before the horse. That is, you don’t want to run out and buy an expensive product and then figure out how to use it. Your company’s informational needs should dictate what you buy.
Today’s software can produce thousands of metrics, so you’re best off first determining which ones you want to track — now and down the road. You also need to ensure that the solution you buy comes with strong cybersecurity protections and complies with any applicable privacy and security regulations.
Additionally, you should determine how well a prospective data analytics solution would integrate with your other applications and data. If the software can’t access vital information, or employees have to input data manually, it will likely be a poor investment.
Is it right for you?
Properly used, and supported by the right software, data analytics can give your business a competitive edge. But it can be a costly endeavor that may call for an outside consultant to get you up and running. Contact us for help identifying which metrics you should target as well as forecasting the requisite costs — both upfront and ongoing — likely to be involved.
Is now the time for your small business to launch a retirement plan?
Many small businesses start out as “lean enterprises,” with costs kept to a minimum to lower risks and maximize cash flow. But there comes a point in the evolution of many companies — particularly in a tight job market — when investing money in employee benefits becomes advisable, if not downright mandatory.
Is now the time for your small business to do so? More specifically, as you compete for top talent and look to retain valued employees, would launching a retirement plan help your case? Quite possibly, and the good news is the federal government is offering some intriguing incentives for eligible smaller companies ready to make the leap.
Late last year, the Consolidated Appropriations Act, 2023 was signed into law. Within this massive spending package lies the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). Its provisions bring three key improvements to the small employer pension plan start-up cost tax credit, beginning this year:
1. Full coverage for the smallest of small businesses. SECURE 2.0 makes the credit equal to the full amount of creditable plan start-up costs for employers with 50 or fewer employees, up to an annual cap. Previously only 50% of costs were allowed — this limit still applies to employers with 51 to 100 employees.
2. Glitch fixed for multiemployer plans. SECURE 2.0 retroactively fixes a technical glitch that prevented employers who joined multiemployer plans in existence for more than three years from claiming the small employer pension plan start-up cost credit. If your business joined a pre-existing multiemployer plan before this period, contact us about filing amended returns to claim the credit.
3. Enhancement of employer contributions. Perhaps the biggest change wrought by SECURE 2.0 is that certain employer contributions for a plan’s first five years now may qualify for the credit. The credit is increased by a percentage of employer contributions, up to a per-employee cap of $1,000, as follows:
- 100% in the plan’s first and second tax years,
- 75% in the third year,
- 50% in the fourth year, and
- 25% in the fifth year.
For employers with between 51 and 100 employees, the contribution portion of the credit is reduced by 2% times the number of employees above 50.
In addition, no employer contribution credit is allowed for contributions for employees who make more than $100,000 (adjusted for inflation after 2023). The credit for employer contributions is also unavailable for elective deferrals or contributions to defined benefit pension plans.
To be clear, though the name of the tax break is the small employer pension plan start-up cost credit, it also applies to qualified plans such as 401(k)s and SIMPLE IRAs, as well as to Simplified Employee Pensions. Our firm can help you determine whether now is indeed the right time for your small business to launch a retirement plan and, if so, which one.
Tax-saving ways to help pay for college — once your child starts attending
If you have a child or grandchild in college — congratulations! To help pay for the expenses, many parents and grandparents saved for years in tax-favored accounts, such as 529 plans. But there are also a number of tax breaks that you may be able to claim once your child begins attending college or post-secondary school.
Tuition tax credits
You can take the American Opportunity Tax Credit (AOTC) of up to $2,500 per student for the first four years of college — a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning Credit (LLC) of up to $2,000 per family for every additional year of college or graduate school — a 20% credit for up to $10,000 in tuition and fees.
The AOTC is 40% refundable up to $1,000 (meaning you can get a refund if the credit amount is greater than your tax liability). Both credits are phased out for married couples filing jointly with modified adjusted gross income (MAGI) between $160,000 and $180,000, and for singles with MAGI between $80,000 and $90,000.
Only one credit can be claimed per eligible student in any given year. To claim the education tax credits, a taxpayer must receive a Form 1098-T statement from the school. Other rules may apply.
Scholarships
Scholarships are exempt from income tax if certain conditions are satisfied. The most important is that the scholarship generally can’t be compensation for services, and it must be used for tuition, fees, books and supplies (not for room and board).
However, a tax-free scholarship reduces the amount of expenses that may be taken into account in computing the AOTC and LLC and may reduce or eliminate those credits.
Employer educational assistance
If your employer pays your child’s college expenses, the payment is a fringe benefit, and is taxable to you as compensation, unless it’s part of a scholarship program that’s “outside of the pattern of employment.” Then, the payment will be treated as a scholarship (if the requirements for scholarships are satisfied).
Tuition payments by grandparents and others
If someone gives you money to pay your child’s college expenses, the person is generally subject to gift tax, to the extent the payments exceed the annual exclusion of $17,000 per recipient for 2023. Married donors who split gifts may exclude gifts of up to $34,000 for 2023.
However, if the person (say, a grandparent) pays your child’s tuition directly to an educational institution, there’s an unlimited exclusion from gift tax for the payment. This unlimited gift tax exclusion applies only to direct tuition costs (not room and board, books, supplies, etc.).
Retirement account withdrawals
You can take money out of your IRA or Roth IRA any time to pay college costs without incurring the 10% early withdrawal penalty that usually applies to distributions before age 59½. However, the distributions are subject to tax under the usual IRA rules.
You also may be able to borrow against your employer retirement plan or take withdrawals from it to pay for college. But before you do so, make sure you understand the tax implications, including any penalties that you may incur.
Plan ahead
Not all of the above breaks may be used in the same year, and some of them reduce the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation. Contact us if you’d like to discuss any of the above options, or other alternatives.
How the new SECURE 2.0 law may affect your business
If your small business has a retirement plan, and even if it doesn’t, you may see changes and benefits from a new law. The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) was recently signed into law. Provisions in the law will kick in over several years.
SECURE 2.0 is meant to build on the original SECURE Act, which was signed into law in 2019. Here are some provisions that may affect your business.
Retirement plan automatic enrollment. Under the new law, 401(k) plans will be required to automatically enroll employees when they become eligible, beginning with plan years after December 31, 2024. Employees will be permitted to opt out. The initial automatic enrollment amount would be at least 3% but not more than 10%. Then, the amount would be increased by 1% each year thereafter until it reaches at least 10%, but not more than 15%. All current 401(k) plans are grandfathered. Certain small businesses would be exempt.
Part-time worker coverage. The first SECURE Act requires employers to allow long-term, part-time workers to participate in their 401(k) plans with a dual eligibility requirement (one year of service and at least 1,000 hours worked or three consecutive years of service with at least 500 hours worked). The new law will reduce the three-year rule to two years, beginning after December 31, 2024. This provision would also extend the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.
Employees with student loan debt. The new law will allow an employer to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.” This means that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers into retirement plans. This will take effect beginning after December 31, 2023.
“Starter” 401(k) plans. The new law will allow an employer that doesn’t sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan) that would require all employees to be default enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit with an additional $1,000 in catch-up contributions beginning at age 50. This provision takes effect beginning after December 31, 2023.
Tax credit for small employer pension plan start-up costs. The new law increases and makes several changes to the small employer pension plan start-up cost credit to incentivize businesses to establish retirement plans. This took effect for plan years after December 31, 2022.
Higher catch-up contributions for some participants. Currently, participants in certain retirement plans can make additional catch-up contributions if they’re age 50 or older. The catch-up contribution limit for 401(k) plans is $7,500 for 2023. SECURE 2.0 will increase the 401(k) catch-up contribution limit to the greater of $10,000 or 150% of the regular catch-up amount for individuals ages 60 through 63. The increased amounts will be indexed for inflation after December 31, 2025. This provision will take effect for taxable years beginning after December 31, 2024. (There will also be increased catch-up amounts for SIMPLE plans.)
Retirement savings for military spouses. SECURE 2.0 creates a new tax credit for eligible small employers for each military spouse that begins participating in their eligible defined contribution plan. This became effective in 2023.
These are only some of the provisions in SECURE 2.0. Contact us if you have any questions about your situation.
Answers to your questions about taking withdrawals from IRAs
As you may know, you can’t keep funds in your traditional IRA indefinitely. You have to start taking withdrawals from a traditional IRA (including a SIMPLE IRA or SEP IRA) when you reach age 72.
The rules for taking required minimum distributions (RMDs) are complicated, so here are some answers to frequently asked questions.
What if I want to take out money before retirement?
If you want to take money out of a traditional IRA before age 59½, distributions are taxable and you may be subject to a 10% penalty tax. However, there are several ways that the 10% penalty tax (but not the regular income tax) can be avoided, including to pay: qualified higher education expenses, up to $10,000 of expenses if you’re a first-time homebuyer and health insurance premiums while unemployed.
When do I take my first RMD?
For an IRA, you must take your first RMD by April 1 of the year following the year in which you turn 72, regardless of whether you’re still employed.
How do I calculate my RMD?
The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is 10 or more years younger than the owner.
How should I take my RMDs if I have multiple accounts?
If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You don’t have to take a separate RMD from each IRA.
Can I withdraw more than the RMD?
Yes, you can always withdraw more than the RMD. But you can’t apply excess withdrawals toward future years’ RMDs.
In planning for RMDs, you should weigh your income needs against the ability to keep the tax shelter of the IRA going for as long as possible.
Can I take more than one withdrawal in a year to meet my RMD?
You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the total annual minimum amount by December 31 (or April 1 if it is for your first RMD).
What happens if I don’t take an RMD?
If the distributions to you in any year are less than the RMD for that year, you’ll be subject to an additional tax equal to 50% of the amount that should have been paid out, but wasn’t.
Plan ahead wisely
Contact us to review your traditional IRAs and to analyze other aspects of your retirement planning. We can also discuss who you should name as beneficiaries and whether you could benefit from a Roth IRA. Roth IRAs are retirement savings vehicles that operate under a different set of rules than traditional IRAs. Contributions aren’t deductible but qualified distributions are generally tax-free.
Does your family business’s succession plan include estate planning strategies?
Family-owned businesses face distinctive challenges when it comes to succession planning. For example, it’s important to address the distinction between ownership succession and management succession.
When a nonfamily business is sold to a third party, ownership and management succession typically happen simultaneously. However, in the context of a family business, there may be reasons to separate the two.
Retaining control
From an estate planning perspective, transferring ownership of assets to the younger generation as early as possible allows you to remove future appreciation from your estate, thereby minimizing estate taxes. Proactive estate planning may be especially relevant today, given changes to the federal estate and gift tax regime under the Tax Cuts and Jobs Act.
For 2023, the unified federal estate and gift tax exemption will be $12.92 million, or effectively $25.84 million for married couples. That’s generous by historical standards. In 2026, the exemption is set to fall to about $6 million, or $12 million for married couples, after inflation adjustments — unless Congress acts to change the law.
However, when it comes to transferring ownership of a family business, older generations may not be ready to hand over the reins — or they may feel that their children aren’t yet ready to take over. Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the company. Providing heirs outside the business with equity interests that don’t confer control may be an effective way to share the wealth.
Possible solutions
Several tools may allow you to transfer family business interests without immediately giving up control, including:
- Trusts,
- Family limited partnerships,
- Nonvoting stock, and
- Employee stock ownership plans (ESOPs).
Owners of smaller family businesses may perceive ESOPs as a complex tool, reserved primarily for large public companies. However, an ESOP can be an effective way to transfer stock to family members who work in the company and other employees, while allowing the owners to cash out some of their equity in the business.
Owners can use this newfound liquidity to fund their retirements, diversify their portfolios or provide for family members who aren’t involved in the business. If an ESOP is structured properly, an owner can maintain control over the business for an extended period even if the ESOP acquires a majority of the company’s stock.
Conflicting needs
When it comes to succession planning, older and younger generations of a family business may have conflicting objectives and financial needs. If any of the strategies mentioned here interest you, or you’d like to discuss other aspects of succession planning, please contact us.
Do you qualify for the QBI deduction? And can you do anything by year-end to help qualify?
If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.
The QBI deduction is:
- Available to owners of sole proprietorships, single-member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
- Intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
- Taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
- Available regardless of whether you itemize deductions or take the standard deduction.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2022, if taxable income exceeds $170,050 for single taxpayers or $340,100 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. For 2023, these amounts are $182,100 and $364,200, respectively.
The situations in which the QBI deduction may be limited include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in.
Year-end planning tip
Some taxpayers may be able to achieve significant savings with respect to this deduction (or be subject to a smaller phaseout of the deduction), by deferring income or accelerating deductions at year-end so that they come under the dollar thresholds for 2022. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so contact us with questions and consult with us before taking the next steps.
Selling stock by year-end? Watch out for the wash sale rule
If you’re thinking about selling stock shares at a loss to offset gains that you’ve realized during 2022, it’s important to watch out for the “wash sale” rule.
The loss could be disallowed
Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, it’s possible the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)
The wash sale rule even applies if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.
Although a loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of in the future (other than in a wash sale).
Let’s look at an example
Say you bought 500 shares of ABC, Inc. for $10,000 and sold them on November 4 for $3,000. On November 29, you buy 500 shares of ABC again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.
If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you’d be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that’s disallowed under the wash sale rule would be added to your cost of the 300 shares.
If you’ve cashed in some big gains in 2022, you may be looking for unrealized losses in your portfolio so you can sell those investments before year-end. By doing so, you can offset your gains with your losses and reduce your 2022 tax liability. But be careful of the wash sale rule. We can answer any questions you may have.
Timing is everything when it comes to accounting software upgrades
“Well, it still works, and everyone knows how to use it, but….”
Do these words sound familiar? Many businesses stick with their accounting software far too long for these very reasons. What’s important to find out and consider is everything that comes after the word “but.”
Managers and employees often struggle with systems that don’t provide all the functionality they need, such as being able to generate certain types of reports that could help the company better analyze its financials. Older software might constantly freeze up or crash. In some cases, the product may even be so old that support is no longer provided.
When it comes to accounting software upgrades, timing is everything. You don’t want to spend money unnecessarily if your system is fully functional and secure. But you also don’t want to wait too long and risk losing a competitive edge, suffering data loss or corruption, or incurring a security breach.
Building a knowledge base
The first question to ask yourself is: When was the last time we meaningfully upgraded our accounting software?
Many more products may have hit the market since you bought yours — including some that were developed specifically for your industry. Although most accounting software has the same essential features, it’s these specialized functions that hold the most potential value for certain types of companies.
To make an educated choice, business owners and their leadership teams need to gain a detailed understanding of their specific needs and the technological savvy of their employees. You can go about this knowledge-building effort in various ways, including conducting a user survey and putting together a comprehensive, detailed comparison of three or four accounting software products that appear best-suited to your business.
If it appears highly likely that a new accounting system would markedly improve your financial tracking and reporting, you’ll be able to make a confident and well-advised purchasing decision.
Preparing for the transition
Bear in mind that buying the software will be the easy part. Transitioning to the new system will probably be much more challenging. When changing or significantly upgrading their accounting software, companies have to walk a fine line between:
- Rushing the timeline, potentially mishandling setup issues and not providing sufficient training, and
- Dragging their feet, potentially falling behind on financial reporting.
You might need to engage an IT consultant to help oversee the data transfer from the old system to the new, catch and clean up errors, and ensure strong cybersecurity measures are in place.
It’s a big decision
Moving onward and upward from a long-used accounting system is a big decision. Let us help you determine what software features would be most beneficial to your business, identify which current products would best fulfill your needs, and develop a sensible budget for the purchase.