News

July 2023

IRS Offers Disaster Protection Tips
Salvage current tax relief

So far this year, we have witnessed disasters caused by storms, tornados, wildfires and other forces of nature. And the year is only half over. Do not think that you are immune from danger.

Saving grace: If you suffer a personal loss in a federally-designated disaster area, at least you may be able to claim a casualty loss deduction. Although the Tax Cuts and Jobs Act (TCJA) generally suspends deductions for casualty losses from 2018 through 2025, you can still deduct disaster-area losses, subject to limits. Only the excess above 10% of adjusted gross income (AGI) is deductible after subtracting $100 per casualty.

Business losses may also be deductible without regard to these limits. The TCJA did not affect business casualty losses.

Recently, the IRS posted five tips to help you protect important financial and tax information as part of a comprehensive plan.

1. Keep key documents safe. Original documents such as tax returns, Social Security cards, birth certificates and deeds should be placed inside a waterproof container in a safe space. You are encouraged to make copies of these important documents and store them in another location such as a safe deposit box or with a trusted person who lives in a different area. Also, scanned documents can be stored on a flash drive for easy portability.

2. Create a record of valuables and equipment. All property, especially high-value items, should be recorded. A simple list with current photos or videos may also help support claims for insurance or tax benefits after a disaster.

3. Reconstruct records. Reconstructing or replacing records after a disaster may be required for tax purposes, claiming federal assistance or insurance reimbursement. The more accurate the loss estimate, the more loan and grant money may be available.

4. Employers should check fiduciary bonds. Employers using payroll service providers should check if the provider has a fiduciary bond in place that can protect the employer in the event of default by the payroll service provider. The IRS reminds employers to rely on expert professionals.

5. Take advantage of postponements. After a major disaster or an emergency measure has been declared, the IRS frequently postpones tax filing and payment deadlines for taxpayers who reside in or have a business in certain counties affected by the disaster. The IRS also provides details on states and counties that have been issued relief on its disaster relief page.

You can find more valuable information relating to natural disaster losses in IRS publications, including worksheets for various purposes. Visit the IRS website, www.irs.gov, for more details.

Finally, be aware of this special tax relief. If you suffer a disaster-area loss in 2023, you do not have to wait until you file your 2023 return—in 2024—to realize the tax benefits. You can claim the loss on the return for the year preceding the year the casualty event occurs, subject to the usual limits. This may require you to file an amended 2022 return.

Consult with your professional tax advisors concerning your personal situation.

Investigating the R&D Tax Credit
Rules benefit qualified businesses

How can your business separate itself from the pack in today’s competitive environment? It helps to be on the cutting-edge of the latest technology. To this end, your company may conduct research activities to improve existing products and cultivate new ones. Furthermore, if certain requirements are met, the business may qualify for a sizeable research and development (R&D) tax credit for its expenditures.

Background: The R&D credit is generally equal to 20% of the amount of qualified research expenses for the year exceeding a base amount. The base amount is a fixed-base percentage (not to exceed 16%) of average annual receipts for the prior four years. In no case, however, can it amount to less than 50% of the annual qualified research expenses.

Alternatively, a business can elect to use a simplified credit based on 14% of the amount by which qualified expenses exceed 50% of the average for the three previous tax years.

However, the R&D credit is not automatic. The following three requirements must be met to claim the credit.

• The expense must qualify as a “research and experimentation expenditure” under Section 174 of the tax code. Such expenses include in-house wages and supplies attributable to qualified research; certain time-sharing costs for computer use in qualified research; and 65% of contract research expenses (i.e., amounts paid to outside contractors in the U.S. for conducting qualified research).

• The expense must relate to research undertaken for the purpose of discovering information that is technological in nature and the application of which is intended to be useful in developing a new or improved business component.

• Substantially all of the activities of the research constitute elements of a process of experimentation that relates to a new or improved function, performance, reliability or quality.
Note that the same or similar expenses may qualify for tax benefits under Section 174. Prior to recent legislation, a business could claim a current deduction for expenses not allocated to the R&D credit. Beginning in 2023, Section 174 expenses must be capitalized and amortized over a five-year period.

Special rule: A qualified small business can make a credit election against up to $500,000 of payroll taxes if it had less than $5 million in gross receipts over the last five years and zero gross receipts before the five-year period. Essentially, this limits the payroll tax break to start-ups or businesses that have been around for less than five years.
Previously, the maximum allowable offset was $250,000, but the Inflation Reduction Act (IRA) doubled it to $500,000, beginning in 2023.

When a business makes the election, it applies the credit amount against the Social Security tax component of federal payroll tax. For 2023, the employer’s share of Social Security tax is 6.2% of each employee’s wages up to the $160,200 wage base.

Finally, a business may also qualify for tax breaks for research activities on a state tax level.

In summary: The R&D tax credit is an important incentive for businesses of all sizes. Coordinate your efforts to maximize the tax benefits available under current law. Your professional tax advisors can provide assistance.

Q’s and A’s Before Retirement
Answer these key questions first

Are you nearing retirement or contemplating calling it quits early? In either event, this requires a thorough analysis of your situation. Although everyone’s circumstances are different, here are several key questions you should be asking yourself—and answering.

Q. Can I afford to retire?

A. This is often the ultimate question, but it should likely be addressed first. Retirement planning is complex, but things often boil down to whether you have enough income, after subtracting your living expenses, to live comfortably. Take the time now to project future costs such as housing, entertainment and travel, health care, taxes and so on. Add up estimated amounts to be generated by assets such as investments in securities and real estate, retirement plan accounts and IRAs, Social Security benefits and others. Clearly, if your expenses will significantly outpace your income, you are not in the best position to retire.

Q. Do I have any debt?

A. If you are overburdened by debt, reducing or eliminating this obligation should be one of your top priorities. Ongoing debts could significantly erode your retirement savings if you are not careful. In some cases, it might adversely affect your living conditions. If you cannot pay off debts soon, consider a consolidation that enables you to benefit from a reasonable interest rate over time.

Q. What is my investment allocation?

A. The time to begin shifting assets to meet your retirement goals is before you actually retire. Develop an overall plan designed to provide sufficient retirement income without incurring more risk than you would like to assume. This requires a careful balancing act with the assistance of your financial advisors. Review the plan periodically to ensure it continues to meet your needs and make any adjustments that are necessary.

Q. When should I apply for Social Security?

A. This is a tricky proposition and usually requires a thorough analysis. Generally, you can begin collecting benefits at age 62, but at a reduced amount from what you would receive at “full retirement age” (FRA). FRA varies according to your date of birth. For example, it is 67 years old for someone turning age 62 in 2023. Alternatively, you can receive a bigger benefit if you postpone your application until age 70. Crunch the numbers for your situation.

Q. What will I do in retirement?

A. This can be a “wild card” in retirement planning and leads back to the first question. Do you intend to travel extensively or enjoy other expensive pursuits? What about downsizing your home and/or moving to a different climate? Do you expect to transfer part of your wealth to the younger generation? Your vision of what your retirement will be can have a significant impact on your decision to retire and when.

Q. Should I meet with my financial and tax advisors?

A. For most people, the answer is an unequivocal “yes.” Your professional advisors can help you set your objectives, fine-tune your plans and help with important decisions involving taxes, retirement account options, investments and the like. Do not delay.

The Basic Tools of Estate Planning
How to address your personal needs

It is a common misconception that estate planning only applies to extremely wealthy people. That simply is not true. If you take time to add up the value of your personal assets, you may be surprised at what you want to protect for your heirs.

Fortunately, proper planning can reduce or eliminate estate tax, while addressing any special needs. Here are some of the basic estate planning tools you may utilize.

Simple will: A simple will gives most of your property to one or two persons (e.g., your spouse or your parents) and makes some smaller bequests to some others. At the very least, you should have a simple will so that you can decide how your assets will be transferred at your death. If you do not have a will, state law generally controls who receives your property.

Complex will: As the name implies, a complex will involves more complicated matters while offering greater flexibility than a simple will. For example if your children are minors (or one or more child is disabled), a complex will may be used to establish a trust for their benefit. The trustee pays out funds to the beneficiaries as needed for healthcare expenses, education, etc. Similarly, a complex will may also be used to make charitable bequests.

Living trust: A living trust allows you to pass assets to your beneficiaries without going through the probate process. This may save time and money. If you do implement a living trust, you may arrange to have assets passing under your will “pour over” into the trust.

Irrevocable life insurance trust (ILIT): If properly structured, this trust enables you to transfer vast amounts of wealth free of estate or gift tax. Simply put, you transfer a life insurance policy to the trust. Each year you put money in the ILIT to pay the premiums. Result: The proceeds are not subject to federal estate tax upon your death (unless you die within three years of the transfer of the policy to the trust).

Other trusts: You may design other trusts to take advantage of the current generous estate and gift tax provisions in the law. For example, the unified estate and gift tax exemption for a decedent dying in 2023 is $12.92 million (but is scheduled to drop to $5 million after 2025). In addition, trusts may be used for various other purposes, such as shielding assets from creditors or an ex-spouse. Consult with an experienced estate planning expert.

Power of attorney: A power of attorney can be established for someone to act on your behalf if you are incapacitated. A “durable” power of attorney remains intact if you are incapacitated. This document should be coordinated with a living will and other health care directives that can provide guidance in medical emergencies.

Finally, remember that these are just brief descriptions. Have your situation analyzed to determine which estate planning devices should be included in your toolbox.

Beware of False ERC Claims

The IRS is targeting false claims made for the Employee Retention Credit (ERC) initially offered during the pandemic. Specifically, it has announced is stepping up efforts to audit employers as aggressive promoters continue to offer fraudulent refunds. This type of scheme was recently named to the list of the Dirty Dozen tax scams for 2023.

Typically, promoters charge a large upfront fee or one that is based on the amount of the reputed refund. Also, they may not inform you that wage deductions on the federal income tax return for the business must be reduced by the credit amount.

Seek advice from an experienced and reputable firm as to whether your business is entitled to an ERC refund or if it faces exposure to an audit.

Facts and Figures
Timely points of particular interest

IRS Funding—The Inflation Reduction Act (IRA) signed into law last year allocates $80 billion in funding over ten year to the IRS for enforcement activities. But the new debt ceiling agreement in June takes back $1.4 billion right away, among other changes. The exact nature of the rollback has not been specified, but it will not affect IRS efforts to modernize or improve taxpayer services. Watch out for future developments in this area.

What’s in a Name?—If you are changing the name of your small business, you must notify the IRS. The specific steps required may depend on several factors. For example, if your Employer Identification Number (EIN) was recently assigned and filing liability has yet to be determined, you must send the name change request to the IRS address where the return is filed. In some cases, you may need a new EIN. Your professional tax advisors can provide assistance.

June 2023

How to Cope With the NIIT
Figuring out the tax liability

What is the NIIT? It sounds like some sort of federal agency or maybe a new form of artificial intelligence. But actually NIIT stands for “net investment income tax.” This tax generally applies to higher-income taxpayers, but it could easily sneak up on others if they are not careful.

Background: The NIIT is equal to 3.8% of the lesser of your net investment income (NII) or the amount by which your modified adjusted gross income (MAGI) exceeds an annual threshold of $200,000 for single filers and $250,000 for joint filers. Significantly, these figures are not indexed for inflation, so the reach of the NIIT extends as your income increases over time. The tax is also imposed on trusts and estates with income above the threshold based on the dollar amount of the highest tax bracket.

For this purpose, the definition of NII includes interest and dividends; distributions from annuities (other than tax-deferred distributions); rent and royalties; gains from investments in passive activities; trades of financial instruments and commodities; and net capital gain from the sale of property (other than property held in an active trade or business). In other words, much of your regular investment income probably falls into this category.

However, NII does NOT include salary or wages; distributions from IRAs and qualified retirement plans; taxable Social Security income; active trade or business income; self-employment income; gain on the sale of active interests in a partnership, S corporation or limited liability company; income from tax-exempt municipal bonds; and tax-deferred income from nonqualified annuities. So there is some tax relief.

Here are three examples showing when you may or may not owe this stealth tax.

• You are a single filer with NII of $25,000 in 2023. At tax return time, it is determined that your MAGI is $250,000. Because the NII of $25,000 is less than the excess MAGI of $50,000, you owe a tax of $950 (3.8% of $25,000).

• You are a single filer with NII of $40,000 in 2023. At tax return time, it is determined that your MAGI is $220,000. Because the excess MAGI of $20,000 is less than the NII of $40,000, you owe a tax of $760 (3.8% of $20,000)

• You are a joint filer with NII of $100,000 in 2023. At tax return time, it is determined that your MAGI is $225,000. Because the MAGI does not exceed the $250,000 threshold, you do not owe the tax.

If you have already exceeded the NII threshold for 2023, there is not much you can do about it now. However, if you still have some flexibility, consider various strategies for reducing NII and/or MAGI, including postponing large capital gains, selling real estate on the installment basis, investing in tax-free municipal bonds, converting assets in a traditional IRA to a Roth IRA in a low tax year or using a charitable remainder trust (CRT), just to name a few.

Practical advice: Coordinate one or more of these strategies with assistance from your professional advisors. They can help you maximize investment earnings at the lowest tax cost.

More Flexibility for Section 529 Plans
New law authorizes rollover to Roth

A Section 529 plan is a tax-favored way to save for a child’s higher education. Now the new law called SECURE 2.0 provides an option for using 529 account funds for retirement savings.

Background: Named after the tax code section authorizing its use, Section 529 plans are educational savings plans, generally operated by individual states, that encourage families to build up funds for the future education of the younger generation. If certain requirements are met, there is no tax due on the accumulation of earnings or qualified distributions.

There are two main types of Section 529 plans: Prepaid tuition plans and college savings plans.

1. Prepaid tuition plans: Essentially, the plan is guaranteed to keep pace with the rising cost of college tuition. For instance, say that it currently costs $20,000 annually to send a child to a state university. You pay $20,000 now to buy shares plan for a youngster. When the child is ready to go to school, your shares can pay for an entire year of tuition, no matter what it costs at that point.

This type of plan offers some peace of mind. There is no risk of loss of principal and the investment is usually guaranteed by the state.

2. College savings plans: In contrast, there is no guaranteed lock on future tuition costs under a college savings plan. In fact, the savings may not be enough to cover all of the costs. But you have a bigger potential upside as well, since it is possible to generate a better return with this type of plan. (Of course, there are no guarantees.)

Usually, the plan will feature an asset allocation strategy geared to the current age of the child or the year they will enter school. Most college savings plan also offer a wide variety of risk-based asset allocation portfolios managed by professionals.

Anyone can contribute to a Section 529 plan on behalf of a named beneficiary.
Each state is responsible for setting its own limits on the amount of contributions. Check the limits in the applicable state.

In the event a child decides to not attend college or attends school in another state, you may be able to transfer funds to another plan or “roll over” funds to an account for a successor beneficiary (e.g., a younger child). But amounts withdrawn for nonqualified expenses are fully taxable.

New rule: SECURE 2.0 Act provides another option. Beginning in 2024, a 529 plan account owner can roll over up to $35,000 in unused funds to a Roth IRA without paying any tax. To qualify for this tax break, the account must have been open for at least 15 years.

With a Roth IRA in existence at least five years, funds paid out after age 59½ are completely exempt from tax and penalties. So a 529 plan can now help fuel both higher education savings and retirement savings.

Ultimate question: Does a 529 plan or a rollover of unused funds to a Roth IRA make sense for your family? Investigate the possibilities.

Ten Job-Hunting Mistakes to Avoid
Be smart about employment search

Employers are desperately searching for top-quality workers, so it may a good time to make a move. But that does not mean that finding the right job will be easy. What’s more, your job search may be hampered by costly blunders. Here are ten common mistakes that could derail your chances.

1. You do not identify your goals. It is important from the get-go to figure out what you are aiming to accomplish. Start by listing the qualities you are seeking in a job, including compensation, opportunities, responsibilities, scheduling, etc. Concentrate on both short-term and long-term objectives.

2. You ignore the latest techniques. Job-hunting has changed dramatically over the last decade, but you might still be practicing what was preached “back in the day.” Utilize the tools at your disposal like social media, online services and apps that pertain to your industry or profession.

3. You spell out job responsibilities on your resume, but not accomplishments. Focus more on what your achieved than what your duties were. Employers want to know the reason they should hire you instead of someone else.

4. You list everything you have ever done on your resume. There is no need to overload on details. For instance, it is usually not necessary to list a brief job you had between grad school and your first career-related position.

5. You pester the employer for results. Job-seekers are sometimes advised to check in with employers. But this might backfire if the employer, who is often inundated with resumes and hard-pressed to spend time interviewing candidates, becomes peeved. Try to remain patient.

6. You do not prepare for interviews. Practice answers to likely questions and be ready to provide examples to illustrate why you should be hired. If you have not prepared, you could be passed over for the job, even though it might be a perfect fit.

7. You do not do anything to stand out. In a competitive environment, you need to set yourself apart. But that does not mean relying on gimmicks. Show that you are a qualified candidate by pointing out your successes and being responsive, engaging and enthusiastic.

8. You pay little (or no) attention to references. If you are in line for a job, you should not have to scramble to find the boss you worked for years ago or someone else who has retired or moved. Stay in touch with potential references that will be easy to reach if needed—and give them a heads up if they should expect a reference call about you.

9. You fail to spot the “red flags.” Although you may want a particular job, do not insert yourself into an untenable position. Watch out for warning signs like extremely high turnover rates, a rude or abrasive boss or an overly negative workplace.

10. You become bitter and disillusioned. If you run into roadblocks, do not allow your frustrations to boil over. Your body language and attitude in in-person interviews or on Zoom might hinder employment opportunities. Keep a positive outlook that will encourage an employer to bring you on board.
Of course, there are no guarantees, but avoiding these ten common mistakes should help. The rest is up to you.

Beware the Dirty Dozen Tax Scams
IRS releases updated list for 2023

As it has done for more than three decades, the IRS has published its annual list of the “Dirty Dozen” tax scams to watch out for. This year’s list, summarized below, includes some new twists and turns.

1. ERC claims: Under legislation enacted during the pandemic, an employer could claim an Employee Retention Credit (ERC) for retaining workers. Now aggressive promoters are trumpeting falsehoods about claims for ERC refunds and stealing vital information.

2. “Phishing” and “smishing” schemes: More than a cute rhyme, these are two variations of scam emails.

• Phishing: The scammer claims to work for the IRS or another organization and entices victims with phony refunds or threatens them with legal actions.

• Smishing: Using the same principle, smishing is communicated via text message.

Remember that the IRS will never contact you by email or text.

3. Online accounts: A scammer posing as a third party helping the IRS will request sensitive personal information like your address, phone number, Social Security number (SSN) or Taxpayer Identification Number (TIN). But the IRS doesn’t authorize third parties to conduct these services.

4. Fuel tax credit claims: The fuel tax is limited to certain taxpayers engaged in activities like agriculture and transportation. In this scam, taxpayers are convinced they can qualify for refunds and are charged exorbitant fees for the privilege.

5. Fake charities: Following a disaster, scammers may prey on your generosity by soliciting donations for a worthy cause. Except that the cause is not legitimate and the crooks abscond with the funds.

6. Shady tax professionals: Some red flags of unscrupulous practitioners are as follows.

• Charging fees based on refund size;

• Ignoring clients after giving bad advice;

• Refusing to sign returns or provide a Professional Taxpayer Identification Number (PTIN);

• Asking you to sign a blank return; and

• Fraudulently claiming credits or deductions.

7. Social media schemes: Social media can circulate inaccurate or misleading tax information. These schemes encourage people to submit false claims with the goal of getting a refund.

8. Spearphishing: This is a phishing attempt tailored to a specific organization or business. The IRS is warning tax professionals about spearphishing because there’s the potential for great damage if the tax preparer has a data breach.

9. Offer in compromise mills: The Offers in Compromise (OIC) program helps taxpayers settle their federal tax debts. But “mills” can churn out misleading information that can lead to increased tax liabilities and penalties.

10. High-income filer schemes: The IRS urges you to resist questionable tax practitioners and independent promoters selling schemes aimed at wealthy taxpayers. The potentially abusive arrangements involve techniques like Charitable Remainder Annuity Trusts (CRATs) and monetized installment sales.

11. Abusive tax avoidance schemes: These scams take many shapes, ranging from abusive deals involving syndicated conservation easements and micro-captive insurance arrangements.

12. Schemes with international elements: The IRS continues to scrutinize attempts to hide assets in offshore accounts and accounts holding digital assets such as cryptocurrency. It has also cited IRAs misusing treaties with foreign countries like Malta.

Finally, the IRS concluded its list of Dirty Dozen tax scams for 2023 with a reminder to be vigilant throughout the year—not just during tax season. Heed this advice!

Salute to Military Spouse Credit

The new SECURE 2.0 law creates a band-new tax credit for small businesses that encourages retirement saving by spouses of military personnel.

Call to arms: A qualified employer with 100 or fewer employees last year is eligible for a $200 credit if a military spouse participates in a defined contribution plan such as a 401(k). Also, a credit of up to $300 is available for employer contributions to the plan made for a military spouse. Thus, the maximum total annual credit is $500 for each military spouse.
The credit may be claimed the tax year in which the spouse starts participating in the plan and for the following two years. Other rules apply, so seek professional guidance.

Facts and Figures
Timely points of particular interest

New Reporting Rules—After a year’s delay, new reporting rules for third-party networks that facilitate transactions like Venmo, PayPal and E-Bay take effect this year. Under the new rules, third parties must report payments of over $600 on a Form 1099-K for the 2023 tax year. Previously, 1099-Ks were sent only if recipients had over 200 transactions exceeding $20,000. This will affect numerous taxpayers with side gigs. Caveat: The rules could change again, so stay tuned for possible new developments.

Measuring Sticks—How can you tell if your business is a success? There is no absolute formula, but these five measuring sticks should give you a reasonably good indication: (1) Profit; (2) a thriving customer base; (3) customer satisfaction; (4) employee satisfaction; and (5) personal satisfaction. Do not overlook the last one—if you are not happy, are you truly successful?

May 2023

Dividing up Interest Expenses
When you can claim deductions

Interest rates have gone up over the last few years. Saving grace: You may be able to deduct interest expenses depending on the type of expense incurred. Notably, there are four main categories for tax purposes.

1. Mortgage interest: Generally, you can deduct mortgage interest paid during the year. To qualify, you must be legally obligated to pay the mortgage and the loan must be secured by a qualified residence (i.e., your principal residence or one other home). Then you have to determine if the debt is an acquisition debt or a home equity debt.

• Acquisition debt: This is a debt incurred to buy, build or substantially improve a qualified home. Under the Tax Cuts and Jobs Act (TCJA), only the interest paid on up to the first $750,000 million of acquisition debt is deductible, down from $1 million. (However, certain prior debts are “grandfathered” so the higher limit may still apply.)

• Home equity debt: Other debts (e.g., a home equity loan or line of credit) are generally treated as home equity debt. Previously, the interest paid on up to $100,000 of home equity debt was deductible, but the TCJA suspends this write-off for 2018 through 2025.

Note that a home equity debt may be converted into an acquisition debt if the loan proceeds are used for substantial home improvements like adding an in-ground pool or finishing a basement.

2. Investment interest: If you borrow funds to buy property held for investment purposes (e.g., securities or real estate), the interest paid on the loan is treated as investment interest. The amount of investment interest you can deduct is generally limited to the amount of your “net investment income” for the year. Any excess is carried over to the next year.

Net investment income includes gross income from property held for investment such as interest, annuities and royalties. But it does not include capital gains and qualified dividends eligible for tax-favored treatment. The maximum tax rate for long-term capital gain and qualified dividends is generally 15% (20% for some high-income taxpayers) in contrast to ordinary income taxed at rates up to 37%. Note: You can elect to include long-term capital gain and qualified dividends as net investment income if you are willing to forfeit the preferential tax rate.

3. Business interest: The interest incurred by your business may be fully deductible. However, under the TCJA, the annual deduction for business interest is currently capped at 30% of adjusted taxable income (ATI). Key exception: A small business with average gross receipts of $25 million or less for the past three years (indexed to $29 million in 2023) is exempt from the limit.

4. Personal interest: If an interest expense does not fall into one of the other three categories, it is generally treated as nondeductible personal interest. This includes most credit card debt. Key exception: You may be able to deduct student loan interest paid for qualified higher education expenses— like tuition, room and board and books and fees—if the loan is in your name. This maximum deduction of $2,500 is phased out for high-income taxpayers.

This is only a brief summary of a complex set of rules. Obtain professional advice for your situation.

New Options for Emergency Expenses
Two tax provisions for 401(k)s

Do you have a 401(k) plan at work? This is a tax-favored way for employees to save for retirement. Unfortunately however, you may have to tap into your plan early due to extenuating circumstances. At least in some cases you may be able to avoid the tax penalty on early withdrawals.

Now the new legislation called SECURE 2.0 gives employees even more bandwidth. It includes two key provisions providing tax relief for emergency situations.

How it all works: Employees participating in a 401(k) plan can elect to defer part of their salary to their accounts on a pre-tax basis, subject to annual limits. For 2023, the limit is $22,500. If you are age 50 or older, you can make an additional “catch-up contribution” of $7,500, for a total of $30,000. (SECURE 2.0 further enhances the catch-up contributions for workers aged 60 through 63, beginning in 2025.)

An employer can also make “matching contributions” on behalf of employees up to a stated percentage of their compensation. All these amounts compound without any current tax erosion until withdrawals are made—usually, in retirement. These distributions are taxed at ordinary income rates currently topping out at 37%.

Caution: If an employee makes a withdrawal prior to age 59½, they are also liable for a 10% tax penalty, unless a special tax code exception applies. For instance, no penalty is assessed for distributions of substantially equal periodic payments (SEPPs) made over at least five years or until the employee turns age 59½, whichever comes later.

SECURE 2.0 includes the following two provisions intended to benefit 401(k) participants with emergency expenses:

1. Emergency savings accounts: Beginning in 2024, employers may allow plan participants to use a separate emergency savings account (ESA). This “sidecar account” is capped at $2,500 annually. Employees may be automatically enrolled at up to 3% of their compensation, up to the $2,500 cap, although plan participants can choose to opt out.

Participants must be allowed to take at least one withdrawal per month. (The first four withdrawals per year are not subject to fees.) Otherwise, the funds may be invested in a variety of approved methods.

Contributions to these ESAs must be eligible for the same matching contributions that apply to elective 401(k) deferrals. However, any matching contributions are made to the regular plan—not the ESA.

2. Unforeseen financial needs: Another SECURE 2.0 provision allows a participant to make a penalty-free withdrawal from their retirement account of up to $1,000 per year to pay for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” An employer may rely on an employee’s written certification that they are facing a qualified expense. But there is a catch: A withdrawal made for this purpose must be repaid within three years.
If you do not repay the distribution in a timely fashion, you are prohibited from making any further withdrawals until repayment is made. This provision also takes effect in 2024.

Bottom line: Weigh all the tax and financial ramifications before making any withdrawals from your 401(k). Seek guidance from your professional advisors.

Favorable Results With a Crummey Trust
Benefits of unique estate planning technique

Despite its derogatory-sounding name, a “Crummey trust” can provide a favorable outcome for individuals looking to transfer a significant amount of assets to the younger generation. This device might be incorporated into a comprehensive estate plan.

Background: One time-tested way of saving estate tax is to utilize the annual gift tax exclusion during your lifetime. Currently, this provision enables you to give away up to $17,000 each year to each recipient without paying any federal gift tax ($34,000 for a joint gift by a married couple). For example, if you have two adult children and three grandchildren, you and your spouse can give each one $34,000 for a grand total of $170,000 in tax-free gifts.

This is a relatively simple way to reduce your taxable estate. Gifts in amounts above the annual exclusion may be sheltered from gift tax by the lifetime gift tax exemption of $12.92 million in 2023, but this reduces the effective estate tax shelter.

When you make an outright gift to a child, however, you give up control over the assets. In other words, you run the risk that the money may be squandered—especially if the child is young or financially irresponsible. Instead, if the assets are transferred to a trust with the child as a beneficiary, you can appoint a trustee to manage the property. After a specified period of time (e.g., when the child reaches a certain age), the assets are distributed to the child.

Potential problem: To qualify for the annual exclusion, the gift must be one of a “present interest.” When a gift is placed in a trust and is not distributed to the beneficiary for a period of years, it is generally considered a “future interest.” This triggers a taxable gift.

The Crummey trust was devised as a solution to this problem. (It is named for the landmark case that authorizes its use). Typically, the beneficiary of the trust is granted the right to withdraw trust principal shortly after it is transferred to the trust. Because the beneficiary has a present right of withdrawal, the gift qualifies for the gift tax exclusion.

Of course, if you are the donor of the trust, you may not want your child to withdraw the assets. Nevertheless, these so-called “Crummey powers” are usually not exercised. While the beneficiary must be notified of the withdrawal power, they may be too young to understand the implications. The trust principal does not have to be paid out when the beneficiary reaches a certain age, so the trust can continue for a long period of time.

Final words: Be aware that there are several variations on this theme. Typically, this is not a do-it-yourself proposition. Setting up and administering a Crummey trust usually requires expert assistance. Do not hesitate to seek professional guidance.

Key Issues Relating to Job Termination
Know your rights and responsibilities

It can be difficult for a small business owner to fire an employee from their job, but sometimes it is necessary. Unfortunately, however, that may not be the end of the story. Certain legal challenges can arise as a result of the termination in employment. Employers who ignore those rights do so at their own peril.

Keeping that in mind, following is a list of several key legal issues relating to job terminations. Caveat: This list is by no means all-inclusive so seek professional guidance with respect to your situation.

Vacation pay: In most companies, employees accrue vacation time and draw from that accrued time when they take vacation. Depending on state law, vacation time that is accrued and not yet taken may have to be paid. The method for accruing the pay is set by the employer.

Sick pay: In companies where sick leave is accrued and limited, as with vacation time, the employee may be entitled to be compensated for unused sick days upon termination.
Again, state law controls.

Severance pay: As a general rule, severance pay is not legally obligated. The right to receive severance pay depends on company policy as well as any employment or union contracts.

401(k) plan rollovers: Termination of employment means that you can no longer contribute to the employer’s 401(k) plan. However, you can roll over the funds tax-free to another qualified plan or a traditional IRA.

Job search assistance: Again, in the case of an involuntary termination, many companies provide professional assistance in finding new employment. This is a function of policies included under the company employment manual or a union contract.

Unemployment benefits: The state unemployment office, not the employer, makes the decision about whether an ex- employee will receive benefits. Either side may appeal the decision.

Generally, an employee is eligible for unemployment compensation if he or she was dismissed for any reason other than for misconduct. If the employee outright quits, he or she is ineligible, unless it can be shown the dismissal was for “good cause.”

Health insurance: This is often a critical issue for employees who are terminated from their jobs. Under the Consolidated Omnibus Reconciliation Budget Act, frequently referred to as COBRA, companies with 20 or more employees must provide terminated full-time employees with the right to continue group medical coverage. The employee is generally required to pay the full cost of the coverage (plus a 2% administrative fee may be added). However, since this coverage reflects a group rate, it may be less than what a person would have to pay if they bought a private policy.

Company owners and managers must take precautions to meet all the legal requirements in this area. On the other side of the coin, employees should be aware of their legal rights upon termination. Leaving a job does not mean leaving your legal rights behind.

How Tax-Friendly Is Your State?

The amount of state taxes your business must pay can have a substantial impact on your bottom line. This includes income taxes and other tax liabilities.

To give you an idea of where you stand, the Tax Foundation provides an annual update of the “best” and “worst” states for business taxes. In the latest ranking, Wyoming, South Dakota and Alaska lead the pack, while California, New York and New Jersey bring up the rear.

For the complete list, refer to the State Business Tax Climate Index at taxfoundation.org/2023-state-business-tax-climate-index.

Facts and Figures
Timely points of particular interest

The Tax Burden—According to statistics recently released by the IRS, high-income taxpayers are shouldering more of the tax load. Based on data from the 2020 tax year, the top 1% of individuals paid 42.31% of income taxes, up from 38.77% in 2019. This group reported 22.19% of adjusted gross income (AGI). It took an AGI of at least $548,336 to crack the top 1%. In comparison, the bottom 50% of filers paid only 2.32% of the total federal income tax liability.

Unclaimed Refunds—In what has become an annual occurrence, the IRS has announced that almost 1.5 million individuals across the country have unclaimed refunds for the 2019 tax year. These taxpayers face a July 17 deadline for submitting their tax returns in order to claim their refunds. The average median refund is $893 for this year. The IRS has completed a special state-by-state calculation to show how many people are potentially eligible for these refunds.

April 2023

Can You Postpone Your RMDs?
New rules take effect in 2023

During the onset of the pandemic, Congress waived the rules for participants taking required minimum distributions (RMDs) from qualified retirement plans, like 401(k) plans, and traditional IRAs for one year—2020. But then the RMD rules returned in full force in 2021.

Now new legislation enacted late last year, dubbed SECURE Act 2.0, postpones the required beginning date (RBD) for RMDs of certain senior citizens, What’s more, the new law effectively cuts in half the penalty for failing to take timely RMDs.

Background: Generally, the RBD for taking RMDs from qualified plans and IRAs is April 1 of the year following the year in which you reach a specified age. (Other more complex rules apply to individuals who have inherited retirement accounts.) The amount of the annual RMD is based on IRS life expectancy tables, updated in 2022, and the value of the account on the last day of the previous year.

In other words, your RMDs for the 2023 tax year depend on the balance in your accounts as of December 31, 2022. The RMDs are taxed at ordinary income tax rates currently as high as 37%.

If you do not comply with these rules, the IRS may assess a tax penalty on top of the regular income tax that is due. Previously, the penalty was equal to a staggering 50% of the amount that should have been withdrawn (or the difference between the required amount and any lesser amount actually withdrawn). For example, if you failed to take a $10,000 distribution on time, the penalty was $5,000.

For decades, the age threshold for beginning RMDs from qualified plans and IRAs was 70½. However, the initial SECURE Act increased the threshold to age 72, beginning in 2020. Now SECURE Act 2.0 bumps it up to age 73 for 2023 and thereafter.

Accordingly, if you are turning age 72 in 2023, you do not actually have to start taking RMDs until April 1, 2025 (although you may begin RMDs in 2024 to avoid having to double up in 2025).

Icing on the cake: Under SECURE Act 2.0, the RBD is scheduled to rise again to age 75 in 2033, barring any further legislation by Congress.

In addition, the new law significantly reduces the penalty for failing to take RMDs in a timely fashion. Specifically, it reduces the 50% penalty to 25% of the shortfall, beginning in 2023. Even better, the penalty is cut down to 10% for retirement account owners who fail to take an RMD but correct the error within two years.

Finally, owners of Roth accounts in employer-sponsored retirement plans like 401(k) plans will no longer have to take lifetime RMDs from these accounts, beginning in 2024. The tax law already exempts owners of Roth IRAs from lifetime distributions.

Bottom line: The new law provides more flexibility to retirement-savers. If you have any questions, do not hesitate to contact your professional advisors.

Five Challenges Facing Small Businesses
How to prosper in changing world

Can you remember back when you did your research at the library instead of online and only international spies had cellphones? Changes keep occurring these days at a breakneck speed and small businesses are often hard-pressed to keep up. It is important to adapt to the latest developments and be able to incorporate them into your business planning.

What sort of changes are we talking about? Here are five prime areas worthy of your attention in 2023.

1. Legal issues: Laws continue to be enacted and evolve, as interpreted by the courts, so small business owners must fine-tune operations accordingly. In recent years, we have experienced numerous changes on both the national and state levels. For instance, the new federal infrastructure law passed last year includes substantial expenditures relating to public transportation, technological improvements and climate control issues. Among other changes, 27 states have laws affecting minimum wages of workers that take effect in 2023. You can expect state legislatures to continue to keep you on your toes.

2. Technology: As alluded to above, technology has changed the way we do business. Do not expect the pace to slow down anytime soon. Savvy businesspeople will aim to keep abreast of technological advancements ranging from new production techniques to software enhancements. Learning how to embrace and accommodate the new technology can give your business a competitive edge while laggards may be left in the dust.

3. Marketing: Marketing has changed drastically over recent years. For one thing, there are different approaches available now due to technology, such as the ability to advertise online and the use of websites and social media as marketing tools. Also, small business owners should be attuned to shifts in consumer tastes and preferences, as well as being able to accentuate strengths and minimize the weaknesses of their organization. It may be helpful to “think outside the box.”

4. Financing: Generally, it is not as easy for a small business to arrange financing as it was in the not-so-distant past. In the current business environment, you must go the extra mile when presenting your case to available lending authorities or if you are trying to encourage investment from other sources. This means conducting thorough research and analysis on the main targets. Do what you can do stand out in a crowded field. It may help to customize your business plan and documentation to suit each potential funding sources.

5. Taxes: One thing that is constant is that the tax law will keep changing. For instance, Congress just enacted SECURE Act 2.0 featuring a slew of provisions affecting retirement-savers and employers providing qualified retirement plans. Meanwhile, the IRS keeps churning out new rulings and regulations and the courts regularly chime in with significant decisions. To complicate matters, Congress continues to debate tax reform proposals, although it will be difficult to reach any consensus with the current political divide.

Fortunately, you do not have to weather the storm alone. With your business advisors at your side, you can meet these challenges head-on and thrive in this ever-changing business world.

Don’t Play Around With Kiddie Tax
Minimize tax damage on returns

Did your young child have investment income in 2022? There is no getting around liability for the “kiddie tax” at this point, although you still may be able to reduce or eliminate the tax for 2023. Saving grace: Due to a recent tax law change—actually a reversion to prior law—the kiddie tax is not as imposing as it was before.

Background: If your dependent child who is under age 19 or a full-time student under age 24 receives “unearned income” above a specified annual threshold, the excess is subject to the kiddie tax. This includes capital gains, interest and dividends from investments, but not wages.

The threshold is indexed annually for inflation. It is $2,300 for 2022 and is increased to $2,500 for 2023.

If the child’s income exceeds the threshold, the excess is taxed at the top tax rate of the child’s parents. For instance, if the parents are in the top 37% bracket, the additional income is taxed at the 37% rate instead of the child’s normal rate. However, a change in the Tax Cuts and Jobs Act (TCJA) that relied on the tax rates for estates and trusts to calculate the kiddie tax has been repealed. Generally, the TCJA provision resulted in a higher kiddie tax.

At least you may be able to elect to report your child’s interest, ordinary dividends, and capital gains distributions on your return. If you make this election, your child will not have to file a tax return. To qualify for this election, you must meet the following requirements:

• Your child was under age 19, or a full-time student under age 24, by the end of the year.

• Your child’s gross income was less than $11,500 for the tax year.

• Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).

• No estimated tax payments were made for your child for the tax year and no overpayment from the previous tax year (or from any amended return) was applied to the current tax year under your child’s name and Social Security number (SSN).

• No federal income tax was withheld from your child’s income under the backup withholding rules.

• Your child does not file a joint return for the tax year.

• You are the parent qualified to make the election or you file a joint return with your child’s other parent.

• Your child is otherwise required to file a return.

What can you do to address kiddie tax concerns for 2023? Consider the following four ideas.

1. Stay under the annual $2,500 threshold. For instance, you might delay gifts of income-producing assets to your child until they are past the kiddie tax age.

2. Have your child make investments that do not produce current income.

3. Have your child invest in tax-free municipal bonds.

4. Hire your child who is a high school or college student to work part-time for your company. Reminder: Wages are not subject to the kiddie tax.

Practical advice: Consult with your professional tax advisors concerning your personal situation.

Electing the Alternate Valuation Date
Key estate tax planning consideration

Financial markets have been up and down so far this year. Due to the volatility, some of your assets, such as various securities, may have dropped in value. If this adversely affects federal estate tax liability for a decedent’s estate, there is a potential solution: An executor may be able to elect to use an “alternate valuation date” for estate tax purposes.

Background: Under current law, most families are protected from federal estate tax through two provisions. (1) The unlimited marital deduction completely shields from tax assets transferred from one spouse to another. (2) Assets passing to non-spouse beneficiaries may be covered by a unified estate and gift tax exclusion of $10 million, indexed for inflation. The figure for 2023 is $12.92 million. (The exemption is scheduled to drop to $5 million, plus inflation indexing, after 2025.)

For estates that are subject to estate tax, the top tax rate is 40%. Thus, if transfers to non-spouse beneficiaries exceed the exemption amount by $1 million, the tax is $400,000.

Normally, assets owned by a decedent are included in the taxable estate based on their value on the date of death. For instance, if a decedent owned stocks valued at $500,000 on the day they pass away, the stocks are included in the estate at a $500,000 value.

However, the tax law provides relief to estates negatively affected by fluctuating market conditions. Instead of using the value of assets on the date of death, the executor may elect the alternate valuation date of six months after the date of death. This could effectively lower the federal estate tax bill.

To qualify for alternate valuation, the following requirements must be met:

• The total value of the gross estate must be lower on the alternate valuation date than it is on the date of death. (Of course, the election generally would not be made otherwise.) If assets are sold after death, the date of the disposition controls.

• The amount of estate tax must be lower using the alternate valuation date than it would be on the date of death.

• Any assets that decline in value due to the passage of time must still be valued as of the date of death.

• The election to use the alternate valuation date must be made within one year of the estate tax filing date. What’s more, the election is irrevocable.

There is, however, one catch: The alternate valuation date must be used for all assets included in the estate. The executor cannot cherry-pick assets that have dropped in value without doing the same for all the others, including any that have appreciated in value. This can be an important consideration if the decedent owned, say, appreciating real estate.

Reminder: The estate tax return is due within nine months of the date of death. So, there is generally only a small window of opportunity for electing the alternate valuation date. Obtain professional guidance in this area.

When You Need More Time to File

Do not despair if you are having trouble getting all your tax return information together in time for the April 18 filing deadline. You may request an automatic six-month filing extension—no questions asked by the IRS. This gives you until October 16, 2023 (October 15 is a Sunday) to file your 2022 return.

Caveat: A filing extension is not an extension to pay tax. You should have a reasonable estimate made of the amount you owe and pay the IRS by April 18.

Facts and Figures

Timely points of particular interest

New Tax Directions—Under the Inflation Reduction Act (IRA) passed last year, electric vehicles (EVs) may qualify for a credit of up to $7,500, beginning in 2023. But the manufacturer’s suggested retail price can’t exceed $55,000 for sedans and $80,000 for vans, SUVs and pickup trucks. Now the IRS is providing more information about claiming the enhanced credit at www.fueleconomy.gov. Contact your professional tax advisors for further guidance.

Business Acumen—People with business acumen learn to react quickly and decisively in various business situations. Yet they are smart enough to ensure flexibility to address unexpected occurrences and other future issues. To strengthen business acumen, you should (1) focus on your thought processes, (2) develop extensive business knowledge and (3) exhibit leadership and management skills. Plus, using a healthy dose of “common sense” will not hurt.

March 2023

Can You Prove Your Charitable Deduction?
Comply with strict recordkeeping rules

Despite recent tax law restrictions on certain itemized deductions, you can still generally deduct the full amount of your contributions made to charity last year on your 2022 return. But be prepared to produce the required records if the IRS ever challenges your deductions. Here are four key tax considerations.

1. Monetary contributions: Deductions for monetary gifts, regardless of the amount, may be disallowed if the donor does not maintain a bank record—such as a cancelled check, bank statement or credit card statement—or a written communication from the charity indicating the donor’s name, donation amount and date of the donation. Technically, this covers everything from million-dollar grants made to a hospital to spare change thrown in a kettle during the holidays.

Tip: The Tax Cuts and Jobs Act (TCJA) increased the annual deduction limit for monetary contributions from 50% of adjusted gross income (AGI) to 60% of AGI for 2018 through 2025. (It was temporarily raised to 100% for 2021.) Any excess can be carried over for five years.

2. Contributions of $250 or more: The IRS also requires charitable donors to obtain a written acknowledgement from a charitable organization for gifts of $250 or more. The acknowledgement must be obtained before you file your tax return. It should include the amount donated, a detailed description of any property that was donated and the value of the benefit received if any goods or services provided in return. However, you do not have to establish a value for “intangible religious benefits.” Contributions made through payroll deductions may be substantiated by paystubs or a Form W-2.

Tip: Substantiation is not required if the organization files a return with the IRS providing the information to be included in an acknowledgement.

3. Quid pro quo contributions: If you make a “quid pro quo” contribution (e.g., a contribution made partially or fully in exchange for goods or services) for an amount above $75, you must obtain a good faith estimate from the charity detailing the value of the benefit received. For example, say you attend a fundraising dinner where the tickets cost $150 apiece and the dinner is valued at $50. The charity must provide a written statement limiting the deductible amount to $100 per ticket.

Tip: A written statement from a charity is not required if you receive token goods, minimal services or intangible religious benefits in exchange for your donation.

4. Additional recordkeeping: There are several other key points to keep in mind. For example, the current deduction for donations of capital gain property is limited to 30% of AGI. (Any excess may be carried over for five years.) Also, if you gave charitable gifts of property exceeding $500 in 2022, additional information must be attached to your tax return. When a donation of property (e.g., artwork) exceeds $5,000, you must also provide an independent appraisal of the property’s value.

Tip: Previously, such an appraisal was deductible as a miscellaneous expense, but the TCJA suspended miscellaneous expense deductions for 2018 through 2025.
Final words: The recordkeeping rules for charitable donations are stringent. However, if you have the proper documentation, you still may claim top-dollar deductions on your 2022 return.

How to Cope With Company Layoffs
Thwarting challenges by employees

Several corporate giants—including Amazon, Google, Microsoft, Disney and Yahoo—recently announced major layoffs. Could this happen to your company? Be prepared for the possibility both strategically and legally.

Background: For starters, your company must adhere to the laws of the land when it institutes a so-called reduction-in-force (RIF). This may depend on the size of the company and the prevailing laws and regulations.

The main controlling federal law in this area is the Worker Adjustment and Retraining Notification (WARN) Act. It generally applies to employers with at least 100 full-time employees. However, more than a dozen states have adopted their own versions of the WARN Act. Frequently, these laws apply to smaller employers.

Under the WARN Act, employers usually must provide notification of 60 days in advance to employees who will be laid off. In certain states, longer notice periods are required.

The WARN Act contains specific rules about providing notification to employees. Nevertheless, you should avoid using only legal boilerplate in all your communications. Reason: This may be perceived by those being laid off as being insensitive and uncaring. And, down the road, you might want to rehire some or all of the workers who are being laid off.

Otherwise, the requirements under the WARN Act and state versions are generally straightforward. However, you still might face legal problems relating to the Civil Rights Act of 1964 protecting certain groups. For instance, you cannot discriminate against someone due to race, religion, age or gender. If a RIF has a “disparate impact” on a protected class, it could lead to discrimination charges.

Consider taking the following steps as part of the process:

• Identify sensitive situations. Once you have culled a list of candidates, see if this could result in a disparate impact on one or more protected classes. For example, you may find that the layoffs would disproportionately affect workers who are older than age 40. You may want to reexamine your list with this thought in mind.

• Review personnel files. Job performance is a valid way of determining which workers stay and which go. Do you have the records to back up your choices? Have you helped those employees try to improve their performance? These files can be the proof that the RIF is not discriminatory in nature.

• Concentrate on jobs. If your plan has a disparate impact on employees in a protected class, it might be justified based on job functions. For example, you might start weeding out employees who have job functions that can be easily automated. Tip: You strengthen your position from a legal perspective if you can establish that these workers are not qualified or trained for other jobs.

• Offer early retirement packages. In some cases, you may facilitate a smooth transition by providing early retirement incentives to those who you expect to lay off. This can often cushion the blow for employees and temper the morale dip that often accompanies layoffs. But make sure it is financially feasible to do so.

Practical advice: Tread carefully. Your professional advisors can help you navigate these tricky waters.

Sprinkling in a SALT Deduction
Dollar cap remains for 2022 returns  

Despite recent calls for removing or modifying the dollar cap on state and local tax (SALT) deductions, tax legislation enacted at the end of 2022 failed to change the status quo. Barring any further changes, the cap remains in place on the 2022 return you must file in 2023 and for three years afterward.

Nevertheless, this still may be a big write-off on your 2022 return if you expect to itemize deductions.

Background: Previously, you could deduct the full amount of SALT payments on Schedule A of your return, along with other itemized deductions. This was particularly beneficial to residents of states with high tax rates.

However, the TCJA increased the likelihood that you will not itemize deductions by effectively doubling the standard deduction and suspending certain deductions. Notably, it also limits the annual SALT deduction to $10,000. In other words, if you pay $30,000 in state and local taxes this year, you can only write off $10,000. The $20,000 difference is gone for good. These changes are effective for 2018 through 2025.

Therefore, when the standard deduction is compared to your itemized deductions figuring in the $10,000 SALT limit, the standard deduction may now be higher. For 2022 returns, the inflation-indexed standard deduction is $12,950 for single filers and $25,900 for joint filers. On the other hand, if your itemized deductions exceed the standard deduction amount, you may still benefit from a maximum SALT deduction of $10,000.

Be aware that the SALT deduction is generally comprised of the following elements.

• Property taxes on real estate like your principal residence, a vacation home or land, as well as taxes on personal property.

• Income taxes paid to the appropriate state and local tax authorities.

• Sales taxes on goods and services purchased in your state (subject to certain exceptions and special rules).

Important: The SALT deduction is available only for a combination of (1) state and local property taxes and (2) either state and local income taxes OR state and local sales taxes. So you cannot count both income and sales taxes toward the $10,000 limit.

This is an easy decision for taxpayers residing in the nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—that do not impose any state income taxes on wages. Obviously, you should take the sales tax deduction. Taxpayers in states with extremely high income taxes, like California and New York, typically go the opposite way. Those in the middle should compare the numbers.

When you figure out the amount of sales tax you can deduct, you can use one of two methods.

1. If purchases are substantiated, you may write off your actual expenses. Review your records to find the annual total.

2. Alternatively, you may claim the deduction from an IRS table providing a flat amount for your state of residence and family size. This will often produce a smaller deduction than the actual expense method, but it is more convenient. Plus, you can add sales tax paid for vehicles, boats and home improvement materials to the table amount.

Is it a close call? Your professional tax advisor can provide the guidance needed to claim the maximum deduction.

Four Common Retirement Mistakes
How to fix the problems now

We are all human and we all make mistakes. But some errors are more damaging than others. For instance, as you plan for your approaching retirement, certain mistakes may come back to haunt you later on. Here are four common slip-ups and what you can do now to change things.

Mistake #1: You save too little and too late. This is probably the worst mistake you can make. If you have not accounted for estimated needs in retirement, it will be more difficult to make up for lost ground. Also, consider that life expectancies have generally been increasing in recent years, due mainly to health care advances. Your money may have to last longer than you thought.

Fortunately, you can still step up contributions to qualified plans, like 401(k)s, and IRAs while you are still working. The limit on deferrals to 401(k) plans in 2023 is $22,500 ($30,000 if you are age 50 or over) and $6,500 for IRAs ($7,500 if age 50 or over). Plus, the new SECURE Act 2.0 boosts limits for certain older individuals in future years.

Mistake #2: You fail to diversify. The rate of return on your investments is important, but it is not the be-all and end-all. In the end, you might be hurt if you simply chase after high rates of return, especially if the stock market goes into a prolonged slump prior to your retirement.

Adopt a long-term plan that emphasizes fundamentals like asset allocation and diversification. Although these strategies do not guarantee against loss of principal, especially in a declining market, they can provide less exposure to risk than you would face of you sink all your money into just a few offerings.

Mistake #3: You forget about taxes. This can backfire in two ways. First, you may be missing opportunities to reduce taxes while you save for retirement. For instance, contributions to a 401(k) effectively lower your tax bill, while pay-ins to traditional IRAs may be wholly or partially deductible, depending on your income and whether you (or your spouse, if married) actively participate in an employer-sponsored plan.

Second, you may not be considering the tax implications of amounts received in retirement. Generally, income from 401(k)s and traditional IRAs is taxed at ordinary income rates. If you receive payments from a Roth IRA, however, the amount may be tax-free. Note: The tax is constantly changing, so stay up-to-date on the latest developments.

Mistake #4: You stop saving and investing in retirement. When you finally call it quits, you may have saved and invested enough to maintain a comfortable lifestyle. But retirement planning does not come to a grinding halt just because you are no longer working full-time.

This is an-going process. Optimally, you can avoid mistakes like mismanaging a portfolio and tweak your plan as needed. Remember that longer life expectancies may result in you outliving your savings despite your best intentions.

Finally, one last mistake is failing to seek expert guidance. Your professional advisers can help you develop a plan for the long term that sidesteps the pitfalls that often trip up retirement-savers.

A Switch in Time

Depending on your situation, it may be beneficial to switch from the C corporation form of business ownership to S corporation status. This provides taxation on an individual level, like a partnership, with no corporate-level tax. But the setup is not the best approach for everyone.

The deadline for a change is the 15th day of the third month of the company’s tax year. So a calendar-year corporation has until March 15, 2023 to make a switch that is effective for 2023.

Facts and Figures

Timely points of particular interest

Auto Enrollment 401(k)s—The new SECURE Act 2.0 generally requires employers to use automatic enrollment with an escalation feature for new 401(k) plans. To clarify the rules, these new requirements apply to employers that adopt a new plan on or after December 29, 2022, for plan years beginning after 2024. Note that companies with 15 or fewer employees and those in existence for less than three years are exempt from the requirements.

Super Bowl Indicator—The Kansas City Chiefs just won the Super Bowl. What does this mean for your investments? If you believe one theory, it will be a down year for the stock market because the team is from the AFC division. This supposed indicator was “discovered” by a sportswriter back in the late seventies and has been accurate about 75% of the time. Better approach: Instead of relying on this indictor, base your investment decisions on sound fundamental principles.