Categories for

Maintaining a clear and effective budget is crucial for success. Yet, many businesses are overwhelmed by day-to-day operations, often making financial decisions without a solid forecast. This can lead to unexpected financial troubles and missed growth opportunities. As accounting professionals, we understand the challenges you face. We are here to offer insights on how a well-structured budget, crafted with the help of an accounting expert, can be your roadmap to financial stability and success.

The Importance of Budgeting

Budgeting is more than just a financial exercise; it’s a strategic tool that helps you plan for the future, allocate resources efficiently, and make informed decisions. A well-crafted budget provides a clear picture of your financial health, highlighting areas where you can cut costs, invest more, or adjust your strategies. It acts as a financial blueprint, guiding your business toward its goals while ensuring you stay on track.

However, creating and sticking to a budget can be daunting, especially when juggling multiple responsibilities. This is where the expertise of an accounting expert becomes invaluable.

Creating Realistic Budgets

One of the primary roles of an accounting expert is to help you create a realistic budget that aligns with your business goals. Here’s how we do it:

1. Understanding Your Financial Landscape: We start by analyzing your current financial situation, including income, expenses, debts, and assets. This comprehensive overview allows us to identify patterns and areas that need attention.
2. Setting Achievable Goals: Based on your financial analysis, we help you set realistic financial goals. Whether it’s increasing revenue, reducing costs, or saving for future investments, having clear objectives is essential for effective budgeting.
3. Forecasting and Planning: Using historical data and market trends, we create financial forecasts that predict future income and expenses. This helps you anticipate potential challenges and opportunities, allowing you to make proactive decisions.
4. Allocating Resources: We assist in allocating resources efficiently, ensuring that every dollar is spent wisely. This includes prioritizing essential expenses, identifying areas for cost-cutting, and planning for unexpected costs.

Examples of How Budgets Work

To illustrate the power of budgeting, let’s consider a few examples:

1. Small Business Expansion: Imagine a small retail business looking to expand its operations by opening a new store. Without a budget, the business might overspend on the new location, leading to cash flow issues. By working with an accounting expert, the business can create a detailed budget that includes projected costs for the new store, anticipated revenue, and a timeline for profitability. This budget helps the business allocate funds appropriately, avoid overspending, and ensure a smooth expansion.
2. Seasonal Business Planning: A landscaping company experiences fluctuating income throughout the year, with peak seasons in spring and summer. With a budget, the company can manage cash flow during the off-season. An accounting expert can help create a budget that accounts for seasonal variations, setting aside funds during peak months to cover expenses during slower periods. This approach ensures the business remains financially stable year-round.
3. Cost Reduction Strategy: A manufacturing company notices that its operating expenses are steadily increasing, impacting profitability. By analyzing the company’s financial data, an accounting expert identifies areas where costs can be reduced, such as renegotiating supplier contracts or optimizing production processes. The accounting expert then creates a budget that reflects these cost-saving measures, helping the company improve its bottom line.

Types of Budgeting

Different types of budgeting can be employed depending on the specific needs and circumstances of your business:

1. Zero-Based Budgeting: This method starts from scratch each period, with every expense needing justification. It’s particularly useful for businesses in financial distress or those looking to re-evaluate their spending habits.
2. Static or Incremental-Based Budgeting: This approach uses historical data to add or subtract a percentage from the previous period’s budget. It’s straightforward and works well for stable businesses with predictable expenses.
3. Performance-Based Budgeting: This method emphasizes the cash flow per unit of product or service, making it ideal for businesses focused on efficiency and productivity.
4. Activity-Based Budgeting: This method works backward from the company’s goals to determine the cost of attaining them. It’s beneficial for businesses with clear, goal-oriented strategies.
5. Value Proposition Budgeting: This approach assumes no line item should be included in the budget unless it directly provides value to the organization. It’s a stringent method that ensures every dollar spent contributes to the company’s objectives.

Monitoring Financial Performance

Creating a budget is just the first step; sticking to it requires ongoing monitoring and adjustments. An accounting expert plays a crucial role in this process by:

1. Regular Financial Reviews: We conduct regular financial reviews to compare actual performance against the budget. This helps identify variances and understand the reasons behind them, allowing for timely adjustments.
2. Cash Flow Management: Effective cash flow management is vital for business sustainability. We monitor your cash flow to ensure you have enough liquidity to meet your obligations and take advantage of growth opportunities.
3. Financial Reporting: We provide detailed financial reports that offer insights into your business’s financial health. These reports help you make informed decisions and stay on track with your budget.
4. Advisory Services: Beyond numbers, we offer strategic advice to help you navigate financial challenges and seize opportunities. Our goal is to empower you with the knowledge and tools needed to achieve long-term success.

The Discipline to Get Started

Sometimes, all it takes to get started is a bit of discipline and the right guidance. As your accounting partner, we provide the structure and support needed to implement and maintain a successful budget. We understand that running a business is demanding, and financial management can often take a backseat. That’s why we’re here to take that burden off your shoulders, allowing you to focus on what you do best—growing your business.

How the Advice of an Accounting Professional Benefits You

The guidance of an accounting professional extends beyond just creating a budget. Here are additional ways their expertise can benefit your business:

1. Strategic Financial Planning: Accounting experts help you develop long-term financial strategies that align with your business goals. This includes planning for major investments, expansions, and other significant financial decisions.
2. Tax Optimization: An accounting expert can identify tax-saving opportunities and ensure compliance with tax regulations, potentially saving your business a substantial amount of money.
3. Risk Management: Accounting experts assess financial risks and develop strategies to mitigate them. This includes managing debt, ensuring adequate insurance coverage, and preparing for economic downturns.
4. Performance Metrics: By establishing key performance indicators (KPIs), accounting experts help you measure and track your business’s financial performance. This data-driven approach enables you to make informed decisions and adjust strategies as needed.
5. Technology Integration: Accounting experts can recommend and implement financial software and tools that streamline accounting processes, improve accuracy, and enhance financial reporting.
6. Regulatory Compliance: Staying compliant with financial regulations is crucial for avoiding legal issues and penalties. Accounting experts ensure your business adheres to all relevant laws and standards.
7. Financial Education: Accounting experts educate business owners and managers on financial best practices, empowering them to make better financial decisions and understand the implications of their actions.

Budgeting is a powerful tool that can drive your business towards financial success. With the expertise of an accounting expert, you can create a realistic budget, monitor your financial performance, and make informed decisions that align with your business goals. Don’t let the complexities of budgeting hold you back. Take the first step towards financial stability and growth by partnering with a professional who understands your needs.

Next Steps

Ready to take control of your finances and set your business on the path to success? Contact our office today to schedule a consultation. Let us help you create a budget that works for you and provides the financial clarity you need to thrive. Together, we can build a stronger financial future for your business.

Tax season should be a time to reclaim some of your hard-earned money, not a source of stress and anxiety. Yet, for many taxpayers, tax-related identity theft is a very real threat. Imagine filing your return, only to find out that someone else has already cashed in your refund.

This is a harsh reality for countless taxpayers each year. So, how can you protect yourself from this increasingly common crime? We’ve put together a comprehensive guide to help you understand the complicated world of tax-related identity theft and safeguard your financial well-being.

Understanding Taxpayer Identity Theft

Tax-related identity theft occurs when someone uses your stolen personal information, including your Social Security number, to file a fraudulent tax return and claim a refund. The first sign of trouble often comes when you attempt to e-file, only to find that a return has already been filed under your SSN.

Alternatively, you might receive an unexpected notice from the IRS about a suspicious return. Remember, the IRS only makes contact via USPS – do not trust phone calls, emails, or other forms of communication claiming to be from an IRS official.

Recognizing the Red Flags

Stay on guard for these signs that you might be a victim of taxpayer identity theft:

• An IRS letter about a suspicious return you didn’t file.
• Inability to e-file because of a duplicate SSN.
• Unrequested tax transcripts arriving by mail.
• Notices of an online IRS account created or accessed without your knowledge.
• IRS notices about additional tax owed or refund offsets for a year you didn’t file.
• IRS records showing wages from an unfamiliar employer.
• An Employer Identification Number (EIN) assigned that you didn’t request.

Immediate Actions for Victims

If your personal information is compromised:

Continue Filing and Paying Taxes: Do not neglect to pay your taxes owed, even if it means filing a paper return.

Complete IRS Form 14039: IRS Form 14039, The Identity Theft Affidavit, should accompany your return.

Respond Promptly to IRS Notices: Immediately responding to any IRS notices helps mitigate further issues.

Report the Theft: As soon as you realize there’s an issue, use IdentityTheft.gov to file a report and create a personal recovery plan.

Place a Fraud Alert: Contact Equifax, Experian, or TransUnion to alert them of potential fraud. This can help reduce the amount of issues you have after your identity is stolen.

Close Compromised Accounts: Secure any financial accounts opened by the thieves or compromised when your personal information was stolen.

Protecting Your Information

Prevention is key to preventing taxpayer identity theft. Here’s how you can shield your data from illicit activity:

Secure Personal Documents: Keep tax records and your Social Security card in a safe place. It is also wise to shred old documents before disposing of them.

Enhance Online Security: Use multi-factor authentication for tax preparation software. Do not respond to emails or text messages sent from sources you don’t recognize, especially if they ask for financial data.

Request an IRS Identity Protection PIN: This six-digit number adds an extra layer of security, making it harder for thieves to file a return in your name. You can request an IP PIN here.

What If Someone Uses Your SSN for Work?

If someone uses your SSN to earn income, you might receive a notice from the IRS about unreported earnings. In such cases, you should review your Social Security work history.

You can access this information by creating an account. If you find errors, contact the Social Security Administration to rectify discrepancies.

The Role of the IRS and the Security Summit

The IRS collaborates with state tax agencies and the tax industry through the Security Summit to safeguard taxpayer data. In 2023 alone, the IRS flagged over one million federal tax returns for identity theft, according to a CNBC report. This led to an increase in security measures.

Recent initiatives include:

Enhanced Filters: The IRS now uses over 236 filters to detect fraudulent returns.

Proactive Measures: Tax returns flagged as potentially fraudulent are held until taxpayer identity is verified.

Real-Life Examples

Tax-related identity theft isn’t just a hypothetical problem. It’s a real issue that affects thousands of people each year. Here are some real-life examples of how this crime can unfold:

The Illinois Case: An Illinois man was sentenced to 29 months in prison for using stolen identities to file false tax returns. Wilmer Alexander Garcia Meza, of Waukegan, fraudulently obtained Individual Taxpayer Identification Numbers (ITINs) from the IRS by using others’ personal identifying information. From 2013 to 2017, Garcia filed tax returns using these stolen identities, claiming thousands of dollars in fraudulent refunds. He then used identification documents in those same names to cash the refund checks issued by the IRS, causing a tax loss of approximately $221,923. In addition to his prison term, Garcia was ordered to serve three years of supervised release and pay approximately $221,923 in restitution to the United States .

The Austin Indictment: In March 2024, a federal grand jury in Austin indicted seven individuals for conspiracy to commit mail and wire fraud and other crimes related to defrauding the IRS using stolen identities. From 2018 to 2021, Abraham Yusuff and his co-conspirators used stolen identities of accountants and taxpayers to file at least 371 false tax returns, claiming over $111 million in refunds. The scheme involved changing the addresses on file with the IRS to those controlled by the conspirators and using prepaid debit cards to receive the fraudulent refunds. The conspirators laundered the funds by purchasing money orders and luxury items, ultimately causing significant financial damage. If convicted, the defendants face severe penalties, including up to 20 years in prison for each count of mail and wire fraud .

It is worth noting that assistance is available if you are victimized by identity thieves. One anonymous taxpayer who, despite filing her returns properly, faced identity theft that delayed her refunds and disrupted her financial stability. With the help of the Taxpayer Advocate Service (TAS), she managed to resolve her issues and obtain necessary tax transcripts for her daughter’s college application.

Tax-related identity theft is a growing concern, but by staying informed and proactive, you can protect yourself from falling victim. Keep your personal information secure, recognize the warning signs, and act quickly if you suspect foul play. Remember, the IRS and services like TAS are there to help, ensuring that you can navigate tax season with confidence and peace of mind.

For more information and resources, visit the IRS’s Taxpayer Guide to Identity Theft or contact the tax agency directly. Stay vigilant and protect your financial future.

Article Highlights

• Standard Deduction
• IRA Options
• Self-Employed Parent
• Employing Your Child
• Tax Benefits

Children who are dependents of their parents are subject to what is commonly referred to as the kiddie tax. This generally applies to children under the age of 19 and full-time students over the age of 18 and under the age of 24.

The kiddie tax originated many years ago as a means to close a tax loophole where parents would put their investments under their child’s name and social security number so that their investment income would be taxed at lower tax rates. Enter the kiddie tax, under which unearned income (investment income) more than a minimum amount is taxed at the parent’s highest marginal tax rate.

Tax-Free Income – On the bright side, a child’s earned income (income from working) is taxed at single rates, and   the standard deduction for singles is $14,600 for 2024. This means that your child can make $14,600 from working and pay no income tax (but will be subject to Social Security and Medicare payroll taxes), and if the child is willing to contribute to a traditional IRA, for which the 2024 contribution cap is $7,000, the child can make $21,600 from working—federal income tax free.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you, a grandparent, or others have the financial resources, the amount of an IRA contribution could be gifted to the child, giving your child a great start toward their retirement savings and hopefully a continuing incentive to save for their retirement.

Employing Your Child – If you are self-employed (an unincorporated business), a reasonable salary paid to your child reduces your self-employment (SE) income and your income tax by shifting income to the child.

For 2024, when a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules if their investment income is upward of $2,600. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $1,300 standard deduction. However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $400 or the regular standard deduction for the year, which is $14,600. If a child has no other income, the child could be paid $14,600 and incur no income tax. If the child is paid more, the next $11,600 he or she earns is taxed at 10%.

Example: You are in the 22% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,500 for the year. You reduce your income by $16,500, which saves you $3,630 of income tax (22% of $16,500), and your child has a taxable income of $1,900 ($16,500 less the $14,600 standard deduction) on which the tax is $190 (10% of $1,900). The net income tax saved by the family is $3,440 ($3,630 – $190).

If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.

Example: Using the same circumstances as the example from above, and assuming  your business profits are $180,000, by paying your child $16,500, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $442 (2.9% of $16,500 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($168,600 for 2024) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion, $1,889 (12.4% of $16,500 x 92.35%), in addition to the 2.9% HI portion for a total savings of $2,331 ($442 + $1,889).   

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by their parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of the child’s parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings – Additional savings are possible if the child is paid more and deposits the extra earnings into a traditional IRA. For 2024, the child can make a tax-deductible contribution of up to $7,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction of $14,600 and the maximum deductible IRA contribution of $7,000 for 2024, a child could earn $21,600 of wages and pay no income tax.

However, referring back to our original example, the child’s tax to be saved by making a $7,000 traditional IRA contribution is only $190, so it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $190 savings.

If you have questions about the information provided here and other possible tax benefits or issues related to hiring your child, please give this office a call.

Article Highlights:

• Understanding Underpayment Penalties
• De Minimis Exception
• Safe Harbor Payments
• Payment Timing
• Withholding
• Annualized Payments
• Farmers and Fishermen

Underpayment penalties are a common concern for taxpayers, and many are unaware of how substantial they can be. These penalties are assessed by the Internal Revenue Service (IRS) when taxpayers fail to pay enough of their tax liability through withholding or estimated tax payments throughout the tax year. The interest rate for underpayments has been 8% per year, compounded daily, since October 1, 2023 and at least through June 30, 2024. That is up from 3% just two or three years ago.

Understanding underpayment penalties and the strategies to avoid them can save you from unnecessary financial stress and penalties. This article will delve into the intricacies of underpayment penalties and offer guidance on how to navigate these waters effectively.

Understanding Underpayment Penalties – Underpayment penalties are essentially the IRS’s way of ensuring that taxpayers are paying their taxes on a quarterly basis rather than waiting until the tax filing deadline. The IRS requires that you pay at least 90% of your current year’s tax liability or 100% of the tax shown on your return for the previous year (110% if you’re considered a higher-income taxpayer) throughout the year. If you fail to meet these thresholds, you may be subject to the underpayment penalty. Think of it this way: the IRS is effectively charging you interest on the tax money you kept instead of sending it to the government.

The penalty is calculated on a quarterly basis, meaning that if you underpaid in any given quarter, you might be penalized for that quarter even if you overpaid in another. The rate of the penalty is determined by the IRS and can vary from quarter to quarter. For self-employed individuals or those without sufficient withholding, estimated tax payments are a critical tool in managing tax liability and avoiding underpayment penalties. You would think that a quarter of the year would be 3 months, but for the purpose of this calculation, the “quarters” are uneven and cover January – March (3 months), April and May (2 months), June, July and August (3 months) and finally the last 4 months of the year.

De Minimis Exception – The de minimis exception is one way to avoid underpayment penalties. If your total tax liability minus your withholdings and tax credits is less than $1,000, you won’t be subject to underpayment penalties. This rule is particularly beneficial for taxpayers who have a relatively small tax liability.

Safe Harbor Payments – Safe harbor payments are essentially benchmarks set by the IRS that, if met, protect taxpayers from underpayment penalties, regardless of their actual tax liability for the year. These benchmarks are designed to ensure that taxpayers pre-pay a minimum amount of their tax obligation throughout the year, either through withholding or estimated tax payments.

The general rule for safe harbor payments requires taxpayers to prepay the lesser of 90% of the current year’s tax or 100% of the previous year’s tax. However, for those with an adjusted gross income (AGI) over $150,000 ($75,000 if married filing separately), the rules tighten. These individuals must pay the lesser of 90% of the current year’s tax or 110% of the previous year’s tax to qualify for this safe harbor. Thus, the safe harbor that works for any eventuality is 110% of the previous year’s tax liability. In addition, if you had no tax liability in the prior year, then you are exempt from an underpayment penalty.

Since these pre-payments consist of both withholding and estimated tax payments, the timing of these payments is also critical for payments to qualify for the safe harbor penalty exception.  Estimated tax payments are due in four installments: April 15, June 15, September 15, and January 15 of the following year, approximately 2 weeks after the end of the “quarters” noted above. If any of these dates falls on a Saturday, Sunday, or legal holiday, the due date will be the next business day. Caution: Some states have different estimated payments dates and, in some cases, amounts for state estimated payments.

Withholding – Unlike estimated payments, withholding is considered paid evenly throughout the year, regardless of when it occurs. This can be particularly useful for taxpayers who realize they may fall short of their safe harbor requirements as the year progresses and boost their withholding by one means or another depending upon the increase required.

• An employee can increase their withholding for the balance of the year by providing their employer with a modified W-4 form that will cause the employer to increase withholding for the balance of the year.
• Where the increased withholding need is discovered closer to the end of the year, a cooperative employer might be willing to withhold a lump sum amount.
• 10% is the default withholding rate for nonperiodic withdrawals from traditional IRA accounts when you fail to provide a Form W-4R to the payer that indicates your desired withholding rate (0% – 100%). Thus by submitting a Form W-4R, or a revised one, to the payer of the IRA, requesting a higher withholding rate, additional withholding can be achieved. Where you are not employed (or even if you are), you can create more tax withholding by taking a distribution and then rolling the distribution amount back into the traditional IRA or a qualified retirement plan within the statutory 60-day time frame. To achieve this strategy you will need to make up for the withholding with other funds when making the rollover and make sure you did not have another rollover in the prior 12 months since taxpayers are only allowed one IRA rollover in a 12-month period.
• Form W-4R is also used to advise payers of an eligible rollover distribution from an employer retirement plan of the desired withholding rate if it is other than the default rate of 20%.
• Form W-4P should be completed to have payers withhold the correct amount of federal income tax from the taxable portion of a periodic pension, annuity (including commercial annuities), profit-sharing and stock bonus plan, or IRA payments. Periodic payments are made in installments at regular intervals (for example, annually, quarterly, or monthly) over a period of more than 1 year.

Calculating the Penalty – If you file your return, owe more than $1,000 and don’t meet an exception, the IRS will compute the underpayment penalty and bill you for it.  However, IRS Form 2210 (2210-F for farmers and fishers) can be used to calculate the required annual payment and determine if you have underpaid in any quarter of the tax year. The form considers the amount of tax owed, estimated tax payments made, and any withholding. It then calculates the penalty based on the underpayment for each quarter until the due date of the tax return or until the underpayment is paid, whichever comes first.

If your income varies significantly throughout the year, the annualized income installment method can help reduce or eliminate underpayment penalties. This method allows you to calculate your tax liability and corresponding estimated payments based on your actual income for each quarter, rather than assuming an even income distribution throughout the year.

Farmers and Fishermen – There are special estimated tax requirements for farmers and fishermen. Farmers and fishermen, with at least two-thirds of their gross income for the prior year or the current year from farming or fishing, have two options:

• They may pay all their estimated tax by January 15th (which is the 4th quarter due date for estimated taxes), or
• They can file their tax return on or before March 1st and pay the total tax due at that time.

The required estimated tax payment for farmers and fishermen is the lesser of:

• 66 2/3% of the current year’s tax, or
• 100% of the prior year’s tax.

These provisions are designed to accommodate the unique income patterns of farmers and fishermen, who may not have steady income throughout the year and often realize the bulk of their income at specific times of the year.

Navigating the complexities of underpayment penalties requires a proactive approach to tax planning and payment. By understanding the rules and utilizing strategies such as adjusting withholdings, making estimated tax payments, and taking advantage of the safe harbor rule and the de minimis exception, taxpayers can avoid the financial sting of underpayment penalties. Remember, the goal is to manage your tax liability throughout the year effectively, so you’re not caught off guard come tax season.

If you’re unsure about your tax situation, please contact this office for personalized advice and peace of mind.

The tax code places limits on the amounts that individuals can gift to others (as money or property) without paying taxes. This is meant to keep an individual from using gifts to avoid the estate tax that is imposed upon the assets owned by the individual at their death. This can be a significant issue for family-operated businesses when the business owner dies; such businesses often must be sold to pay the resulting estate taxes. This is, in large part, why high-net-worth individuals invest in estate planning.

Exclusions – Current tax law provides both an annual gift tax exclusion and a lifetime exclusion from the gift and estate taxes. Because the two taxes are linked, gifts that exceed the annual gift tax exclusion reduce the amount that the giver can later exclude for estate tax purposes. The term exclusion means that the amount specified by law is exempt from the gift or estate tax.

Annual Gift Tax Exclusion – This inflation-adjusted exclusion is $18,000 for 2024 (up from $17,000 for 2023). Thus, an individual can give $18,000 each to an unlimited number of other individuals (not necessarily relatives) without any tax ramifications. When a gift exceeds the $18,000 limit, the individual must file a Form 709 Gift Tax Return. However, unlimited amounts may be transferred between spouses without the need to file such a return – unless the spouse is not a U.S. citizen. Gifts to noncitizen spouses are eligible for an annual gift tax exclusion of up to $185,000 in 2024 (up from $175,000 in 2023).

Example: Jack has four adult children. In 2024, he can give each child $18,000 ($72,000 total) without reducing his lifetime exclusion or having to file a gift tax return. Jack’s spouse can also give $18,000 to each child without reducing either spouse’s lifetime exclusion. If each child is married, then Jack and his wife can each also give $18,000 to each of the children’s spouses (raising the total to $72,000 given to each couple) without reducing their lifetime gift and estate tax exclusions. The gift recipients (termed “donees”) are not required to report the gifts as taxable income and do not even have to declare that they received the gifts on their income tax returns.

If any individual gift exceeds the annual gift tax exclusion, the giver must file a Form 709 Gift Tax Return. However, the giver pays no tax until the total amount of gifts more than the annual exclusion exceeds the amount of the lifetime exclusion. The government uses Form 709 to keep track of how much of the lifetime exclusion an individual has used prior to that person’s death. If the individual exceeds the lifetime exclusion, then the excess is taxed; the current rate is 40%.

All gifts to the same person during a calendar year count toward the annual exclusion. Thus, in the example above, if Jack gave one of his children a check for $18,000 on January 1, any other gifts that Jack makes to that child during the year, including birthday or Christmas gifts, would mean that Jack would have to file a Form 709.

Gifts for Medical Expenses and Tuition – An often-overlooked provision of the tax code allows for nontaxable gifts in addition to the annual gift tax exclusion; these gifts must pay for medical or education expenses. Such gifts can be significant; they include.

• tuition payments made directly to an educational institution (whether a college or a private primary or secondary school) on the donee’s behalf – but not payments for books or room and board – and
• payments made directly to any person or entity who provides medical care for the donee.

In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursements to the donee do not qualify.

Lifetime Exclusion from Gift and Estate Taxes – The gift and estate taxes have been the subject of considerable political bickering over the past few years. Some want to abolish this tax, but there has not been sufficient support in Congress to do that; instead, the lifetime exclusion amount was nearly doubled as of 2018 and has been increased annually due to an inflation-adjustment requirement in the law. In 2024, the lifetime exclusion is $13.61 million per person. By comparison, in 2017 (prior to the tax reform that increased the exemption), the lifetime exclusion was $5.49 million. The lifetime estate tax exclusion and the gift tax exclusion have not always been linked; for example, in 2006, the estate tax exclusion was $2 million, and the gift tax exclusion was $1 million. The tax rates for amounts beyond the exclusion limit have varied from a high of 46% in 2006 to a low of 0% in 2010. The 0% rate only lasted for one year before jumping to 35% for a couple of years and then settling at the current rate of 40%.

This history is important because the exclusions can change significantly at Congress’s whim – particularly based on the party that holds the majority. In fact, absent Congressional action, the exclusion amount is scheduled to return to the 2017 amount, adjusted for inflation, in 2026, estimated to be just over $6 million per person.

Spousal Exclusion Portability – When one member of a married couple passes away, the surviving member receives an unlimited estate tax deduction; thus, no estate tax is levied in this case. However, as a result, the value of the surviving spouse’s estate doubles, and there is no benefit from the deceased spouse’s lifetime unified tax exclusion.  For this reason, the tax code permits the executor of the deceased spouse’s estate (often, the surviving spouse) to transfer any of the deceased person’s unused exclusion to the surviving spouse. Unfortunately, this requires filing a Form 706 Estate Tax Return for the deceased spouse, even if such a return would not otherwise be required. This form is complicated and expensive to prepare, as it requires an inventory with valuations of all the decedent’s assets. As a result, many executors of relatively small estates skip this step. As discussed earlier, the lifetime exclusion can change at the whim of Congress, so failing to take advantage of this exclusion’s portability could have significant tax ramifications.

Qualified Tuition Programs – Any discussion of the gift and estate taxes needs to include a mention of qualified tuition programs (commonly referred to as Sec 529 plans, after the tax code section that authorizes them). These plans are funded with nondeductible contributions, but they provide tax-free accumulation if the funds are used for a child’s postsecondary education (as well as, in many states, up to $10,000 of primary or secondary tuition per year). Contributions to these plans, like any other gift, are subject to the annual gift tax exclusion. Of course, these plans offer tax-free accumulation when distributions are made for eligible education expenses, so it is best to contribute funds as soon as possible.

Under a special provision of the tax code, in a given year, an individual can contribute up to 5 times the annual gift tax exclusion amount to a qualified tuition account and can then treat the contribution as having been made ratably over a five-year period that starts in the calendar year of the contribution. However, the donor then cannot make any further contributions during that five-year period.

Basis of Gifts – Basis is the term for the value (usually cost) of an asset; it is used to determine the profit when an asset is sold. The basis of a gift is the same for the donee as it was for the donor, but this amount is not used for gift tax purposes; instead, the fair market value as of the date the gift is made is used.

Example: In 2024, Pete gifts shares of stock to his daughter. Pete purchased the shares for $6,000 (his basis), and they were worth $25,000 in fair market value when he gifted them to his daughter. Their value at the time of the gift is used to determine whether the gift exceeds the annual gift tax exclusion. Because the gift’s value ($25,000) is greater than the $18,000 exclusion, Pete will have to file a Form 709 Gift Tax Return to report the gift; he also must reduce his lifetime exclusion by $7,000 ($25,000 – $18,000). His daughter’s basis is equal to the asset’s original value ($6,000); when she sells the shares, her taxable gain will be the difference between the sale price and $6,000. Thus, Pete has effectively transferred the tax on the stock’s appreciated value to his daughter.

If Pete’s daughter instead inherited the shares upon Pete’s death, her basis would be the fair market value of the stock at that time (let’s say it is $28,000) and if she sold the shares for $28,000, she would have no taxable gain.

This is only an overview of the tax law regarding gifts and estates; please call this office for further details or to get advice for your specific situation.

A frequent question, and a situation where taxpayers often make tax mistakes, is whether it is better to receive a home as a gift or as an inheritance. It is generally more advantageous tax-wise to inherit a home rather than to receive it as a gift before the owner’s death. This article will explore the various tax aspects related to gifting a home, including gift tax implications, basis considerations for the recipient, and potential capital gains tax implications. Here are the key points that highlight why inheriting a home is often the better option.

RECEIVED AS A GIFT 

First let’s explore the tax ramifications of receiving a home as a gift. Gifting a home to another person is a generous act that can have significant implications for both the giver (the donor) and the recipient (the donee), especially when it comes to taxes. Most gifts of this nature are between parents and children. Understanding the tax consequences of such a gift is crucial for anyone considering this option.

Gift Tax Implications – When a homeowner decides to gift their home to another person (whether or not related), the first tax consideration is the federal gift tax. The Internal Revenue Service (IRS) requires individuals to file a gift tax return if they give a gift exceeding the annual exclusion amount, which is $18,000 per recipient for 2024. This amount is inflation adjusted annually. Where gifts exceed the annual exclusion amount, and a home is very likely to exceed this amount, it will necessitate the filing of a Form 709 gift tax return.

It’s worth mentioning that while a gift tax return may be required, actual gift tax may not be due thanks to the lifetime gift and estate tax exemption. For 2024, this exemption is $13.61 million per individual, meaning a person can gift up to this amount over their lifetime without incurring gift tax. The value of the home will count against this lifetime exemption.

Note: The lifetime exclusion was increased by the Tax Cuts and Jobs Act (TCJA) of 2017, which without Congressional intervention will expire after 2025, and the exclusion will get cut by about half.

Basis Considerations for the Recipient – For tax purposes basis is the amount you subtract from the sales price (net of sales expenses) to determine the taxable profit. The tax basis of the gifted property is a critical concept for the recipient to understand. The basis of the property in the hands of the recipient is the same as it was in the hands of the donor. This is known as “carryover” or “transferred” basis.

For example, if a parent purchases a home for $200,000 and later gifts it to their child when its fair market value (FMV) is $500,000, the child’s basis in the home would still be $200,000, not the FMV at the time of the gift. If during the parent’s time of ownership, the parent had made improvements to the home of $50,000, the parent’s “adjusted basis” at the time of the gift would be $250,000, and that would become the starting basis for the child.

If a property’s fair market value (FMV) at the date of the gift is lower than the donor’s adjusted basis, then the property’s basis for determining a loss is its FMV on that date.  

This carryover basis can have significant implications if the recipient decides to sell the home. The capital gains tax will be calculated based on the difference between the sale price and the recipient’s basis. If the home has appreciated significantly since it was originally purchased by the donor, the recipient could face a substantial capital gains tax bill upon sale.

Home Sale Exclusion – Homeowners who sell their homes may qualify for a $250,000 ($500,000 for married couples if both qualify) home gain exclusion if they owned and used the residence for 2 of the prior 5 years counting back from the sale date. However, when a home is gifted that gain qualification does not automatically pass on to the gift recipient. To qualify for the exclusion the recipient would have to first meet the 2 of the prior 5 years qualifications. Thus, where the donor qualifies for home gain exclusion it may be best taxwise for the donor to sell the home, taking the gain exclusion and gift the cash proceeds net of any tax liability to the donee.

Of course, there may be other issues that influence that decision such as the home being the family home that they want to remain in the family.

Capital Gains Tax Implications – The capital gains tax implications for the recipient of a gifted home are directly tied to the basis of the property and the holding period of the donor. If the recipient sells the home, they will owe capital gains tax on the difference between the sale price and their basis in the home. Given the carryover basis rule, this could result in a significant tax liability if the property has appreciated since the donor originally purchased it. Capital gains are taxed at a more favorable rate if the property has been held for over a year. For gifts the holding period is the sum of the time held by the donor and the donee, sometimes referred to as a tack-on holding period.

Special Considerations – In some cases, a homeowner may transfer the title of their home but retain the right to live in it for their lifetime, establishing a de facto life estate. In such situations, the home’s value is included in the decedent’s estate upon their death, and the beneficiary’s basis would be the FMV at the date of the decedent’s death, potentially offering a step-up in basis and significantly reducing capital gains tax implications, i.e., treated as if they inherited the property.

AS AN INHERITANCE

There are significant differences between receiving a property as a gift or by inheritance.

Basis Adjustment – When you inherit a home, your basis in the property is generally “stepped up” to the fair market value (FMV) of the property at the date of the decedent’s death. However, occasionally this could result in a “step-down” in basis where a property has declined in value. Nevertheless, this day and age, most real estate would have appreciated in value over the time the decedent owned it, and the increase in value will not be subject to capital gains tax if the property is sold shortly after inheriting it.

For example, if a home was purchased for $100,000 and is worth $300,000 at the time of the owner’s death, the inheritor’s basis would be $300,000. If the inheritor sells the home for $300,000, there would be no capital gains tax on the sale.

In addition, the holding period for inherited property is always considered long term, meaning inherited property gain will always be taxed at the more favorable long-term capital gains rates.

Note: The Biden administration’s 2025–2026 budget proposal would curtail the basis step-up for higher income taxpayers.

In contrast, if a property is received as a gift before the owner’s death, the recipient’s basis in the property is the same as the giver’s basis. This means there is no step-up in basis, and the recipient could face significant capital gains tax if the property has appreciated in value, and they decide to sell it.

Using the same facts as in the example just above, if the home was gifted and had a basis of $100,000, and the recipient later sells the home for $300,000, they would potentially face capital gains tax on the $200,000 increase in value.

Depreciation Reset – For inherited property that has been used for business or rental purposes, the accumulated depreciation is reset, allowing the new owner to start depreciation afresh on the inherited portion and since the inherited basis is FMV at the date of the decedent’s death, the prior depreciation is disregarded. This is not the case with gifted property, where the recipient takes over the giver’s depreciation schedule.

Given these points, while each situation is unique and other factors might influence the decision, from a tax perspective, inheriting a property is often more beneficial than receiving it as a gift. However, it’s important to consider the overall estate planning strategy and potential non-tax implications.

Please contact this office for developing a strategy that is suitable for your specific circumstances.

The landscape of tax legislation in the United States has been marked by constant evolution, with changes often reflecting the broader economic and political priorities of the time. One area that has seen significant shifts, and consequent uncertainty, involves the treatment of research and development (R&D) expenses. Historically, businesses could immediately deduct R&D expenses in the year they were incurred, a provision that encouraged innovation and investment in new technologies.

However, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a significant change that has since cast a shadow of uncertainty over the ability of companies to deduct these expenses: the requirement to amortize R&D expenses over five years, or fifteen years for research conducted outside the U.S., starting from the midpoint of the tax year in which the expenses were paid or incurred.

This shift, effective for tax years beginning after December 31, 2021, represents a departure from previous tax treatment and poses a challenge for businesses engaged in R&D activities. The immediate deduction of R&D expenses was a critical factor in lowering the effective cost of investment in innovation. By spreading the deduction over several years, the TCJA provision increases the short-term tax burden on companies, potentially discouraging investment in R&D activities that are crucial for technological advancement and economic growth.

The Impact of Amortization

The requirement to amortize R&D expenses affects cash flow and financial planning for businesses. Immediate expensing allows companies to reduce their taxable income in the year expenses are incurred, providing a more immediate cash benefit. Amortization, on the other hand, delays this benefit, which could lead to reduced investment in R&D due to tighter cash flow, especially for startups and small businesses that are often more sensitive to cash flow constraints.

Moreover, the change complicates tax planning and increases administrative burdens. Companies must track R&D expenses over the amortization period, adjusting for any changes in their R&D investment strategies. This complexity adds to the cost of compliance and may divert resources away from productive R&D activities.

Legislative Responses and Uncertainty

In response to concerns raised by the business community and tax professionals, bipartisan bills have been introduced in both the House of Representatives and the Senate aiming to repeal the amortization requirement. If enacted, these bills would allow companies to continue fully deducting R&D expenses in the year they are incurred, maintaining the United States’ competitive edge in innovation and technology development.

However, the legislative process is inherently uncertain, and the outcome of these proposals is not guaranteed. The uncertainty surrounding the tax treatment of R&D expenses makes it difficult for businesses to plan their investment strategies. Companies may adopt a more cautious approach to R&D spending, awaiting clearer signals from Congress and the administration on the future of these tax provisions.

Early in 2024, a glimmer of hope emerged with the proposal of the Tax Relief for American Families and Workers Act, aimed at reversing these changes. However, the legislative process has been slow, leaving businesses in a state of limbo. The implications of this uncertainty are profound, influencing the way R&D expenses are reported.

The Potential Outcomes and Their Implications

Should the bill pass retroactively, businesses would once again be able to fully expense U.S.-based R&D costs for the current tax year through 2025. This would delay the requirement to amortize these expenses, providing significant relief.

However, if the bill does not become law, the current requirements under Section 174 will persist, necessitating the amortization of R&D expenditures over the stipulated periods. This could considerably impact your business’s financial planning and tax liabilities.

Alternative R&D Credit for Small Businesses

Amidst this uncertainty, there is a silver lining for small businesses in the form of the Research and Development (R&D) Tax Credit. This credit, aimed at encouraging businesses to invest in research and development, has been made more accessible to small businesses, including startups, through recent legislative changes.

For tax years beginning after December 31, 2015, qualified small businesses can elect to apply a portion of their R&D tax credit against their payroll tax liability, up to a maximum of $250,000 ($500,000 after December 2022). This provision, part of the Protecting Americans from Tax Hikes (PATH) Act, is particularly beneficial for startups and small businesses that may not have a significant income tax liability but still incur substantial payroll expenses.

To qualify, a business must have less than $5 million in gross receipts for the tax year and no gross receipts for any tax year preceding the five-tax-year period ending with the tax year.

This definition opens the door for many startups and small businesses to benefit from the R&D tax credit, supporting their investment in innovation even in the early stages of their development.

The Future

The legislative uncertainty surrounding the ability to deduct R&D expenses or having to amortize them over five years poses a significant challenge for businesses engaged in research and development. The potential shift from immediate expensing to amortization could have far-reaching implications for innovation, cash flow, and tax planning. As Congress considers proposals to repeal the amortization requirement, businesses must navigate this uncertainty, potentially adjusting their investment strategies to account for the changing tax landscape.

For small businesses, the R&D tax credit offers a valuable opportunity to offset some of the costs associated with innovation, providing a critical lifeline amidst broader legislative uncertainty. By allowing small businesses to apply the credit against payroll taxes, the government is reinforcing its commitment to fostering innovation across all sectors of the economy.

As the debate over the treatment of R&D expenses continues, it is clear that the outcome will have significant implications for the future of innovation in the United States.

Businesses, policymakers, and tax professionals alike must stay informed and engaged to ensure that the tax code supports, rather than hinders, investment in the technologies and ideas that will drive economic growth in the years to come.

How We Can Help

As your accounting partners, we understand the complexities and challenges the current legislative environment poses. We are committed to keeping you informed and providing strategic advice tailored to your situation. Whether you’re currently engaged in R&D activities or planning for future innovation, we can help you navigate the tax implications and explore all available options to optimize your financial position.

Our team closely monitors legislative developments and is ready to assist you in evaluating their potential impact on your business. Should the need arise, we can also guide you through filing for an extension or amending your tax returns to take advantage of any changes in the law.

Top Reasons Taxpayers End Up in Court and How to Avoid Them

Tax law is as complex as it is daunting. Each year, countless taxpayers find themselves entangled in disputes that lead to the tax court. Understanding the most litigated tax issues can empower you and your business to navigate the tax maze more effectively, ensuring compliance and avoiding unnecessary disputes with the Internal Revenue Service (IRS).

Here, we delve into the common areas of the tax code that frequently end up in tax court, offering insights and best practices to help you avoid IRS scrutiny. If you find yourself in a dispute with the IRS or another agency, remember that help is just a call away.

The Battlefield of Gross Income Disputes

Gross income, which encompasses unreported or underreported income, is at the top of the list of tax disputes. The IRS is keen to ensure that all income is accurately reported. Discrepancies often arise from misunderstandings about what constitutes taxable income or from simple oversight.

Best Practice: Maintain meticulous records of all income sources and consult with a tax professional to ensure you report all income accurately

The Dreaded Penalties: Filing and Payment Errors

Penalties for failing to file or pay taxes on time are also hotspots for litigation. These penalties can accumulate quickly, turning a small oversight into a significant financial burden.

Best Practice: Mark your calendar with all tax deadlines, and consider setting up electronic payments to ensure timely submissions. If you anticipate a delay, proactively communicate with the IRS to explore options such as payment plans.

The Quagmire of Itemized Deductions

Itemized deductions on Schedule A are another frequent subject of tax court cases. Taxpayers often struggle with understanding which expenses are deductible and the documentation required to support these deductions.

Best Practice: Keep detailed records of all potential deductions and seek guidance on their eligibility. When in doubt, err on the side of caution and consult a tax advisor.

The Sole Proprietorship Conundrum

For business taxpayers, especially sole proprietors, income and expenses reported on Schedule C are scrutinized. The IRS closely examines these to ensure that personal expenses are not being improperly deducted as business expenses.

Best Practice: Separate personal and business finances and record all business-related expenses. Regularly review IRS guidelines on deductible business expenses.

Innocent Spouse Relief: A Complex Escape Hatch

Taxpayers seeking innocent spouse relief navigate one of the more complex areas of tax law. This relief is sought when one spouse believes they should not be held responsible for a tax liability due to the actions of their spouse or ex-spouse.

Best Practice: Understand the eligibility criteria for innocent spouse relief and communicate openly about tax matters with your spouse. Documentation is key, as is timely action if you believe you qualify for this relief.

Steering Clear of Tax Disputes

Navigating the tax landscape requires diligence, knowledge, and proactive leadership. As tax and accounting professionals, we advocate for a leadership approach emphasizing education, meticulous record-keeping, and proactive engagement with tax obligations. Cultivating a culture of compliance within your organization or personal finances can significantly reduce the risk of disputes.

We’re Here to Help

Disputes with the IRS or other agencies can arise despite your best efforts. When they do, having experienced professionals by your side is crucial. Our team is equipped to guide you through the complexities of tax law, ensuring that your rights are protected and working towards a favorable resolution.

If you’re facing a dispute or want to ensure you’re on solid ground with your tax obligations, don’t hesitate to call our office. Our experts are here to provide the support and guidance you need to navigate the tax maze confidently.

In the labyrinth of financial planning and tax-saving strategies, Health Savings Accounts (HSAs) emerge as a multifaceted tool that remains underutilized and often misunderstood. An HSA is not just a way to save for medical expenses; it’s also a powerful vehicle for retirement savings, offering unique tax advantages. This article delves into who qualifies for an HSA, the tax benefits it offers, and how it can serve as a supplemental retirement plan.

Qualifying for a Health Savings Account – At the heart of HSA eligibility is enrollment in a high-deductible health plan (HDHP). As of the latest guidelines, for tax year 2024, an HDHP is defined as a plan with a minimum deductible of $1,600 for an individual or $3,200 for family coverage. The plan must also have a maximum limit on the out-of-pocket medical expenses that you must pay for covered expenses, which for 2024 is $8,050 for self only coverage and $16,100 for family coverage. But having an HDHP is just the starting point. To qualify for an HSA, individuals must meet the following criteria:

• Coverage Under an HDHP: You must be covered under an HDHP on the first day of the month.
• No Other Health Coverage: You cannot be covered by any other health plan that is not an HDHP, with certain exceptions for specific types of insurance like dental, vision, and long-term care.
• No Medicare Benefits: You cannot be enrolled in Medicare. This rule applies to periods of retroactive Medicare coverage. So, if you delay applying for Medicare and later your enrollment is backdated, any contributions to your HSA made during the period of retroactive coverage are considered excess, are not tax deductible and subject to penalty, if not withdrawn from the account.
• Not a Dependent: You cannot be claimed as a dependent on someone else’s tax return.
• Spouse’s Own Plan: Joint HSAs aren’t allowed; each spouse who is eligible and wants an HSA must open a separate HSA.

These criteria ensure that HSAs are accessible to those who are most likely to face high out-of-pocket medical expenses due to the nature of their health insurance plan, providing a tax-advantaged way to save for these costs.

It should also be noted that unlike IRAs, 401(k)s and other retirement plans, it is not necessary to have earned income to be eligible for an HSA.

Tax Benefits of Health Savings Accounts – HSAs offer an unparalleled triple tax advantage that sets them apart from other savings and investment accounts:

• Tax-Deductible Contributions: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. This deduction applies whether you itemize deductions or take the standard deduction. Rather than being a tax deduction, HSA contributions made by your employer are just not included in your income.
• Tax-Free Growth: The funds in an HSA grow tax-free, meaning you don’t pay taxes on interest, dividends, or capital gains within the account.
• Tax-Free Withdrawals for Qualified Medical Expenses: Withdrawals from an HSA for qualified medical expenses are tax-free. This includes a wide range of costs, from doctor’s visits and prescriptions to dental and vision care, and even some over-the-counter medicine, whether or not prescribed.

The combination of these benefits makes HSAs a powerful tool for managing healthcare costs both now and in the future.

HSAs as a Supplemental Retirement Plan – While HSAs are designed with healthcare savings in mind, their structure makes them an excellent supplement to traditional retirement accounts like IRAs and 401(k)s. Here’s how:

• No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts, HSAs do not require you to start taking distributions at a certain age. This allows your account to continue growing tax-free indefinitely.
• Flexibility for Non-Medical Expenses After Age 65: Once you reach age 65, you can make withdrawals for non-medical expenses without facing the 20% penalty that would apply to nonqualified distributions at a younger age, though these withdrawals will be taxed as income. This feature provides flexibility in how you use your HSA funds in retirement.
• Continued Tax-Free Withdrawals for Medical Expenses: Regardless of age, withdrawals for qualified medical expenses remain tax-free. Considering healthcare costs often increase with age, having an HSA in retirement can provide significant financial relief.

To maximize the benefits of an HSA as a retirement tool, consider paying current medical expenses out-of-pocket if possible, allowing your HSA funds to grow over time. This strategy leverages the tax-free growth of the account, potentially resulting in a substantial nest egg for healthcare costs in retirement or additional income for other expenses.

Establishing and Contributing to an HSA – Opening an HSA is straightforward. Many financial institutions offer HSA accounts, and the process is like opening a checking or savings account. An individual can acquire a Health Savings Account (HSA) through various sources, including:

• Employers: Many employers offer HSAs as part of their benefits package, especially if they provide high-deductible health plans (HDHPs) to their employees. Enrolling through an employer might also come with the benefit of direct contributions from the employer to the HSA.
• Banks and Financial Institutions: Many banks, credit unions, and other financial institutions offer HSA accounts. Individuals can open an HSA directly with these institutions, like opening a checking or savings account.
• Insurance Companies: Some insurance companies that offer HDHPs also offer HSAs or have partnered with financial institutions to offer HSAs to their policyholders.
• HSA Administrators: There are companies that specialize in administering HSAs. These administrators often provide additional services, such as investment options for HSA funds, online account management, and educational resources about using HSAs effectively.

When choosing where to open an HSA, it’s important to consider factors such as fees, investment options, ease of access to funds (e.g., through debit cards or checks), and customer service.

Once established, you can make contributions up to the annual limit, which for 2024 is $4,150 for individual coverage and $8,300 for family coverage. Individuals aged 55 and older can make an additional catch-up contribution of $1,000.

What Happens If I Later Become Ineligible – If you have an HSA and then later become ineligible to contribute to it—perhaps because you’ve enrolled in Medicare, are no longer covered by a high-deductible health plan (HDHP), or for another reason—several key points come into play regarding the status and use of your HSA:

• Contributions Stop: Once you are no longer eligible, you cannot make new contributions to the HSA. For example, enrollment in Medicare makes you ineligible to contribute further to an HSA. However, the specific timing of when you must stop contributing can vary based on the reason for ineligibility. If you enroll in Medicare, contributions should stop the month you are enrolled.
• Funds Remain Available: The funds that are already in your HSA remain available for use. You can continue to use these funds tax-free for qualified medical expenses at any time. This includes expenses like copays, deductibles, and other medical expenses not covered by insurance, but not insurance premiums.
• Investment Growth: The funds in your HSA can continue to grow tax-free. Many HSAs offer investment options, allowing your account balance to potentially increase through investment earnings.
• Use for Non-Medical Expenses: As noted previously, if you are 65 or older, you can withdraw funds from your HSA for non-medical expenses without facing the 20% penalty, though such withdrawals will be subject to income tax. This makes the HSA function similarly to a traditional IRA for individuals 65 and older, with the added benefit of tax-free withdrawals for medical expenses.
• No Required Minimum Distributions (RMDs): Unlike traditional IRAs and 401(k)s, HSAs do not have required minimum distributions (RMDs), so you can leave the funds in your account to grow tax-free for as long as you want.

• After Death: Upon the death of the HSA owner, the account can be transferred to a surviving spouse tax-free and used as their own HSA. If the beneficiary is not the spouse, but is the beneficiary’s estate, the account value is included in the deceased’s final income tax return, subject to taxes. If any other person is the beneficiary, the fair market value of the HSA becomes taxable to the beneficiary in the year of the HSA owner’s death.

In summary, while you can no longer contribute to an HSA after losing eligibility, the account remains a valuable tool for managing healthcare expenses and can even serve as a supplemental retirement account, especially given its tax advantages.

Health Savings Accounts stand out as a versatile financial tool that can significantly impact your tax planning and retirement preparedness. By understanding who qualifies for an HSA, leveraging its tax benefits, and recognizing its potential as a supplemental retirement plan, individuals can make informed decisions that enhance their financial well-being.

Whether you’re navigating high-deductible health plans or seeking additional avenues for tax-efficient savings, an HSA may be the key to unlocking substantial long-term benefits.

Contact this office for additional information and how an HSA might benefit your circumstances.

Ditching manual transaction entry should be your number one priority now that QuickBooks Online streamlines the process of importing transactions from your bank. When you manually input transactions, you open the door to data transposition errors, potentially leading to inaccuracies in customer billing, reports, and taxes. Plus, it’s a time-consuming task that eats into hours you could spend running other aspects of your business.

If you’re still manually entering transactions into your accounting software, consider connecting your online bank accounts to QuickBooks Online. Once your transactions automatically transfer to your QuickBooks Online system, you can easily review their completeness before storing them. Finding and accessing your transactions whenever you need them becomes a breeze.

Here’s a breakdown of how it all works:

Connecting Accounts

To get started, make sure you’ve set up usernames and passwords for any online bank accounts you want to link. In QuickBooks Online, navigate to Bookkeeping > Transactions > Bank transactions. Click “Link account” on the right-hand side.

If your financial institution isn’t listed, enter its name in the search field. Choose the correct option and click “Continue.” Follow any security steps required by your financial institution. Next, select the account type (checking, credit card, etc.) from the drop-down list and follow the on-screen instructions to complete the connection.

Viewing Transactions

Once your bank accounts are connected, you’ll see them listed on the “Bank Transactions” page along with their balances and the number of transactions. Clicking on an account will show its register, along with three labeled bars: “For Review,” “Categorized,” and “Excluded”.

From here, you can view all transactions and filter by date, type, or description.

Individual Transactions

It is easy to review each downloaded transaction. Simply click on a transaction to open its detail box, where you can add or edit details like Vendor/Customer, Category, and Customer (if billable). Ensure accuracy before confirming the transaction.

Connecting your banks in QuickBooks Online is straightforward, but you are not alone if you have any problems. Reach out to us for assistance—we’re here to help ensure your transactions are processed accurately from the start, saving you time and headaches down the road.

The current American economy is characterized by inflation, rising credit card debt, and the looming threat of a recession. As a result, small to medium-sized business owners face many challenges. A recent report indicating a GDP growth of 1.6% in the first quarter of 2024 – well below the expected 2.5% – alongside predictions of a recession by mid-2024, indicates the urgency business owners face to safeguard their finances. This article showcases comprehensive strategies business owners like you can use to navigate challenging economic headwinds, ensuring operations remain stable and cash flow positive.

Understanding the Economic Context

The economic indicators are clear: with credit card delinquency rates rising and retail sales experiencing a downturn, businesses of all kinds are dealing with financial difficulties. Challenges like these often starkly highlight the fact that cast flow management is key in tough economic times. If you’ve been tightening your company’s purse strings, read on.

Critical Strategies for Cash Flow Management

1. Enhanced Cash Flow Monitoring

Establishing an effective cash flow monitoring system is the first step in safeguarding your business against economic fluctuations. This involves keeping a close eye on cash inflows and outflows, ensuring you always clearly understand your financial position. Accurate cash flow projections can help you anticipate future financial needs and adjust your strategies accordingly.

2. Operational Efficiency

Operational efficiency is more important than ever in times of economic uncertainty. Reevaluating your business operations to identify areas for improvement can lead to significant cost savings, helping you and your core employees thrive in what could have otherwise been difficult times. This might involve outsourcing non-core activities, reducing part-time staff during slower periods, and renegotiating vendor contracts to secure better terms. Such measures can reduce operational costs without compromising the quality of your products or services.

3. Leveraging Technology

Technology can be a powerful tool in streamlining business processes and improving efficiency. Modern accounting software, for example, can simplify the task of budgeting and cash flow forecasting, providing a comprehensive view of your financial health. Additionally, artificial intelligence (AI) platforms can help you save hours a day and potentially allow you to reduce staffing needs. Embracing technological advancements can help your business succeed, especially if your competitors are slow to adapt.

4. Debt Management and Financing Options

In challenging economic times, managing debt and exploring financing options becomes crucial. Refinancing existing high-interest debt can reduce financial burdens while securing lines of credit during financially stable periods can provide a safety net for future downturns. Alternatively, financing options such as invoice factoring can offer immediate cash flow relief, allowing you to access funds tied up in unpaid invoices.

5. Building a Cash Reserve

A cash reserve can act as a financial buffer, enabling your business to navigate unexpected downturns or seize growth opportunities without straining your cash flow. Balancing growth capital with working capital is challenging but essential for long-term sustainability. A financial planner or tax advisor can help you develop a savings plan that works for your company.

6. Inventory and Sales Management

Optimizing your inventory and focusing on high-demand products and services can enhance your sales and improve cash flow. Regularly reviewing your inventory to eliminate underperforming items can free up cash and reduce holding costs, allowing you to invest in more profitable areas.

7. Seeking Professional Advice

As we noted, seeking professional financial advice can be invaluable with the complexity of businesses’ economic challenges today. A financial advisor or accountant can provide personalized guidance tailored to your business’s specific needs and circumstances, helping you confidently navigate these uncertain times and future economic fluctuations.

What’s Ahead

As small to medium-sized business owners grapple with the possibility of a recession, adopting a strategic approach to cash flow management is more critical than ever. By enhancing cash flow monitoring, improving operational efficiency, leveraging technology, managing debt wisely, building a cash reserve, and optimizing inventory and sales, businesses can position themselves for resilience and growth no matter what is happening economically. Remember, the economy will always ebb and flow – all you can control is your preparedness!

Our office is here to support you in these efforts. If you’re facing financial challenges or seeking to enhance your cash efficiency, we invite you to schedule a meeting with us. Together, we can develop a strategic plan to navigate these turbulent economic times and secure the future of your business.