Newsletters

A Dozen Tax Eggs About to Crack

Key TCJA provisions set to expire 

The massive Tax Cuts and Jobs Act (TCJA) passed during the first Trump administration includes numerous provisions scheduled to expire after 2025. When Congress returns in January, several or all changes may be extended or revised, including the following twelve key items.

1. Individual tax rates: The TCJA revamped the graduated tax rate structure for individuals. It established a top tax rate of 37% (down from 39.6%) and modified the income ranges for each bracket, with inflation indexing.

2. Standard deduction: In conjunction with the revised tax rate structure, the tax law hiked the standard deduction from $6,500 to $13,000 for single filers and $12,000 to $24,000 for joint filers, with inflation indexing. On 2024 returns, the standard deduction is $14,600 for single filers and $29,200 for joint filers.

3. Child Tax Credit: Among other changes for the Child Tax Credit (CTC), the maximum amount was doubled from $1,000 to $2,000. The TCJA also created a new $500 credit for non-child dependents. These tax breaks are supposed to vanish after 2025.

4. Alternative Minimum Tax: The complex calculation for the Alternative Minimum Tax (AMT) for individuals may result in extra tax liability. The exemption amounts, which were increased by the TCJA, are set to return to prior levels.

5. Personal exemptions: Previously, individual taxpayers could claim personal exemptions for themselves and their qualified dependents (e.g., young children). This tax break was suspended and is scheduled to be restored.

6. SALT payments: Prior to the TCJA, payments for state and local taxes (SALT) were generally deductible in full by itemizers. But the TCJA capped the annual SALT deduction at $10,000.

7. Moving expenses: An individual could previously deduct their job-related moving expenses if a two-part test was satisfied. The TCJA suspended this deduction (except for military personnel on active duty) as well as the tax exclusion for moving expense reimbursements.

8. Qualified business income: The TCJA created a new deduction of up to 20% of qualified business income (QBI) of owners of pass-through entities and self-employed individuals. The QBI deduction is subject to phase-outs with special rules applying to specified service trade or businesses (SSTBs).

9. Miscellaneous expenses: Under prior law, individuals could deduct various miscellaneous expenses (e.g., unreimbursed employee business expenses) above 2% of adjusted gross income (AGI). But the itemized deduction for miscellaneous expenses was suspended.

10. Mortgage interest: The TCJA reduced the deduction limit for interest paid on the first $1 million of qualified acquisition debt to $750,000. It also suspended the mortgage interest deduction for interest paid on up to $100,000 of home equity debt.

11. Casualty losses: Under prior law, deductions were allowed for unreimbursed casualty and theft losses above 10% of AGI (after subtracting $100 per event.) The TCJA allows deductions only for casualty losses sustained in a federal disaster area.

12. Estate tax exemption: Finally, the TCJA doubled the federal estate tax exemption for a decedent from $5 million to $10 million, with inflation indexing. The exemption for 2024 is $13.61 million ($13.99 million in 2025). This amount is set to revert to $5 million, with inflation indexing, after 2025.

Besides these provisions, other permanent TCJA changes, such as the flat 21% tax rate on corporate income, could be in Congress’ crosshairs. We will update you on any significant developments.

Beware the Additional Medicare Tax

Hidden tax trap for high earners

Federal payroll taxes can take a big bite out of your paycheck. For starters, FICA tax is comprised of two portions: the Social Security tax portion and the Medicare tax portion. The Social Security tax is 6.2% on the first of $168,600 of wages in 2024. This “wage base” is increasing to $176,100 in 2025, up $7,500. The 1.45% Medicare tax applies to all wages.

Adding insult to injury, if you earn too much income during the year, you could be hit with the “Additional Medicare tax.” This surtax, which often flies under the radar, only affects taxpayers with annual wages above a specified level.

How it works: Social Security and Medicare taxes are withheld from an employee’s regular pay. The employer is required to deposit these taxes with the IRS. In addition, the employer must pay and deposit its corresponding share of the full FICA tax for each employee.

For example, say the owner of a small business earns $200,000 in 2024.The FICA computation is as follows:

Social Security tax: 6.2% x $168,600 = $10,453.20

Medicare tax: 1.45% x $200,000 = $2,900

Total tax: $10,453.20 + $2,900 = $13,353.20

That can make a big dent in your take-home pay. But that is not the end of the story. For high wage-earners, the Additional Medicare tax may come into play. This surtax was introduced in 2013 by the Affordable Care Act (ACA). It is equal to 0.9% of the amount above one of these annual thresholds based on the employee’s tax filing status.

• $250,000 if you are married and file a joint tax return
• $125,000 if you are married and file separate tax returns
• $200,000 if you are single and all other taxpayers

The Additional Medicare tax is only imposed on the excess above the threshold. Of course, the employee still must pay the regular FICA tax. Suppose that a joint filer earns $500,000 in 2024. In this case, the Additional Medicare tax comes to $2,250 (0.9% x $250,000 excess). That is on top of the FICA tax of $17,703.20 ($10,453.20 + $7,250) on $500,000 in wages.

The employer is responsible for withholding the Additional Medicare tax. But it does not have to cough up an equivalent amount like it does with FICA tax.

Comparable rules apply to self-employed individuals who pay self-employment tax in lieu of FICA. Although the usual tax rates are doubled for these businesspeople, they can deduct half of their self-employment tax on their personal tax returns. The thresholds for the Medicare surtax are the same for self-employed individuals as they are for employees with wages.

Note that the thresholds for the Additional Medicare tax are NOT adjusted for inflation. Therefore, if your income continues to rise each year, so does the resulting payroll tax liability. And the wage base for the Social Security tax portion keeps going up each year, too.

Best approach: Coordinate year-end planning strategies with your professional tax advisor to maximize the tax benefits and minimize the tax damages.

Passing the Tax Test on Student Loans

When loan interest is tax-deductible

The future of student loan forgiveness programs and other government initiatives is uncertain as we head into 2025. Silver tax lining: At least taxpayers who pay student loan interest in 2024 may be in line for some limited tax relief when they file their tax returns next year.

Background: As of July 2024, about 42.8 million borrowers were saddled with federal student loan debt in the U.S., totaling a staggering $1.753 trillion. If you borrow money to attend school, you can deduct part or all of the student loan interest above-the-line on your Form 1040. In other words, the write-off is available even if you do not itemize deductions (i.e., you claim the standard deduction).

However, the deduction is phased out for upper-income taxpayers. Thus, if the parents of a student take out the loan, the family may not derive any tax benefit from the interest payments. The IRS says that the deduction, if any, belongs to whomever is named on the loan.

If you qualify, the annual deduction is limited to the first $2,500 of interest paid for qualified expenses. The list of qualified expenses includes tuition and fees; room and board; books, supplies and equipment; and other necessary expenses, such as transportation.

Note: The lender must be an authorized source like a bank. You cannot deduct any interest paid on an intra-family loan like one you get from a rich aunt or uncle. And the proceeds must be paid to an accredited educational institution.

The loan proceeds can be for the education of yourself, your spouse or your dependent. Whoever is receiving the money must have been enrolled in school at least part-time.

Tax law test: Under longstanding IRS rules, student loan interest may be deductible only if ALL the following apply.

• You paid interest on a qualified student loan in the tax year of the tax return.

• You are legally obligated to pay interest on a qualified student loan.

• Your filing status is not married filing separately.

• Your modified adjusted gross income (MAGI) is less than the specified annual amount.

• You or your spouse, if filing jointly, cannot be claimed as dependents on someone else’s tax return.

The MAGI limit is indexed annually for inflation (although recent increases have generally been relatively small). For the 2024 tax year, the deduction is phased out for a MAGI between $80,000 and $95,000 for single filers. The phase-out range is between $165,000 and $195,000 of MAGI for joint filers. Once you exceed the upper threshold, no deduction is allowed.

Thus, even taxpayers with relatively moderate incomes for the area in which they reside may be shut out on their tax returns.

Year-end tax planning: Should you accelerate student loan interest payments into 2024 or postpone them to 2025? Generally, it makes sense to take a current deduction, especially if you expect your income to rise next year, but it depends on your personal situation. Consult with your tax professional.

Add More Thought to Employee Reviews

Making improvements to the process 

Traditionally, the end of the year is when managers conduct one-on-one reviews for employees under their supervision. If you have been in a position of authority at a small business, you probably know the drill by heart. But are you—and the employee—getting more out of the process than just establishing a pay grade for the upcoming year?

It may be time to “up your game.” Employee reviews can be more meaningful to both parties if certain improvements are made. Of course, developing a better program will take a little extra time and effort at first, but the eventual results may be well worth it. And, once you put these extra procedures in place, it should be easy to follow them in succeeding years, until you are ready for another change.

What sort of improvements should you make? Here are several suggestions.

• Spell out the ground rules. All too often, employees are not exactly sure what the review is supposed to cover. For that reason, they tend to hold back. If pressed on a particular issue, they might become defensive or belligerent, or both. This is usually a waste of everyone’s time. On the other hand, if you establish an agenda before meeting with your employees, you are likely to accomplish a lot more.

• Keep things simple. Usually, the most effective reviews are the ones that concentrate on a single purpose. The primary goal should be to try to help each employee realize their potential. Do not get sidetracked by peripheral issues.

• Encourage open dialogue. The review should not be a one-way street. By giving employees a chance to express their opinions, you are more likely to resolve any problems. Instead of dwelling on what has already occurred, focus on ways to resolve problems for the future.

• Offer constructive criticism in small doses. Employees will be turned off if you immediately confront them with a laundry list of complaints. For example, do not wait until the review to tell an employee that they are spending too much time on personal matters. Those types of problems should be addressed when they occur. Reserve this time for an overall evaluation.

• Be organized and disciplined. Prior to the review, prepare a list of items you want to go over. Jot down a few notes under each heading. As you proceed, you can check off the items you have discussed to make sure you have covered the most important points on the list.

If all you do is go item-by-item on an ap­praisal form, there is usually little ben­e­fit, if any, to be gained. Your employees will quickly recognize the difference between a perfunctory review and a substantive one. Turn the process into a meaningful one—this is a once-in-a-year opportunity, so make it count.

Retirement Plan COLAs on Tap

The IRS recently announced cost-of-living adjustments (COLAs) for qualified retirement plans. Here is a comparison of 2024 and 2025.

	Limit for 2024	Limit for 2025
Maximum annual dollar benefit for a defined benefit plan	$275,000	$280,000
Maximum dollar limit on additions to a defined contribution plan	$69,000	$70,000
Maximum amount of compensation taken into account for qualified retirement plans	$345,000	$350,000
Dollar limit for elective deferrals to a 401(k) plan	$23,000 ($30,500 if age 50 or over)	$23,500 ($31,000 if age 50 or over)*
Dollar limit for contributions to a SIMPLE plan	$16,000 ($19,500 if age 50 or over)	$16,500 ($20,000 if age 50 or over)*

 

*Beginning in 2025, a higher “catch-up contribution” limit applies to employees age 60-63. See your tax professional for details.

Note: The annual limit for contributions to traditional and Roth IRAs remains at $7,000 for the 2025 tax year ($8,000 if age 50 or over). The phase-out levels for IRA and Roth contributions have also been adjusted upward. 

Facts and Figures

Timely points of particular interest

Tax ID Protection—As tax return season rapidly approaches, the IRS is encouraging individual taxpayers to take an important step to safeguard their identities by signing up for an identity protection personal identification number (IP PIN). This simple yet critical step can provide an extra layer of security and help guard against tax-related identity theft. An IP PIN can be obtained online via the IRS website. Note: The IP PIN system is down for maintenance in December and will not be available again until January.

IRA Gifts to Charity—Do not forget that individuals age 70½ or older can avoid tax consequences by contributing IRA funds directly to charity. This qualified charitable distribution (QCD) is not taxable but cannot be deducted either. The IRS recently announced that the QCD limit for 2025 is increasing from $105,000 to $108,000. These amounts are doubled for a married couple if both spouses independently qualify. Extra benefit: A QCD counts as a required minimum distribution (RMD) for other tax purposes. RMDs from IRAs are generally required after age 73.

Happy Holidays—Our firm would like to wish you and your family a happy holiday season and a happy, healthy and prosperous New Year.

Year-End Tax Ideas for Individuals

Common strategies for reducing tax  

As this presidential election year draws to a close, individual taxpayers may implement tax planning strategies that can reduce their 2024 tax liability under the prevailing laws. Following are several common examples.

Charitable donations: If you itemize deductions, you can boost your charitable deduction by donating money or property to qualified charitable organizations at year-end. For 2024, the current deduction for monetary gifts is limited to 60% of your adjusted gross income (AGI). Tip: You may deduct the fair market value of gifts of property you have owned longer than one year. There is no tax on the appreciation in value—ever!

Capital gains and losses: Frequently, investors are able to use capital gains and losses to offset each other. For example, you might realize capital gains from sales of securities to absorb capital losses from earlier in the year or realize losses to offset capital gains plus up to $3,000 of ordinary income in 2024. Tip: The maximum tax rate on long-term capital gain for assets held longer than a year is 15% (20% for certain high-income taxpayers).

Medical expenses: An itemizer can deduct unreimbursed medical expenses above an annual threshold of 7.5% of AGI. Thus, if you are close to or already over the 7.5%-of-AGI threshold for 2024, you might accelerate non-emergency expenses, such as medical check-ups or dental cleanings, from 2025 into 2024. Tip: Different rules may apply on the state income tax level.

Residential energy credits: The recent Inflation Reduction Act (IRA) expands the rules for residential energy credits. Generally, you may qualify for a 30% “residential clean energy credit” for installing solar panels or other equipment to harness renewable energy this year. Also, a 30% “energy efficient home improvement credit” of up to $3,200 is available for the cost of qualified energy-efficient improvements: Tip: Dollar caps may limit credits for specific items.

Electric vehicle credits: The IRA also revised the tax credit for electric vehicles (EVs) and plug-in hybrids. Notably, you may be eligible for a credit for up to $7,500 for the cost of buying a new EV if certain requirements are met. Alternatively, you may qualify for a credit of up to $4,000 if you buy a used EV. Tip: Beginning in 2024, new car buyers can benefit from the credit at the point of the sale.

Installment sales: If you sell real estate or other capital assets, you generally owe the full amount of capital gains tax in the year of the sale. But you may benefit from installment sale reporting if you receive payments over two or more years. Essentially, you are taxed on the pro-rata share of the amount received from the sale each year. Tip: This may effectively lower your overall tax bill if more of the capital gain is taxed over several years at the 15% rate instead of 20%.

Required minimum distributions: Under current law, if you have reached age 73 (increasing to age 75 in 2033), you must take annual required minimum distributions (RMDs) from traditional IRAs and qualified plans like a 401(k). Otherwise, you are hit with a 25% tax penalty in addition to regular income tax liability (10% if corrected promptly). Tip: Complex RMD rules also apply to IRA and plan beneficiaries.

Reminder: These are just several ideas to consider. Contact your professional advisor pertaining to your personal situation.

Year-End Tax Ideas for Businesses

Popular strategies for reducing tax  

Year-end tax planning is not just for individuals. Following are several tax strategies for small business owners to consider.

Business property: Under Section 179 of the tax code, a business may “expense” up to $1.22 million of qualified business property (e.g., equipment or supplies) placed in service in 2024. This amount begins to phase out above a $3.05 million threshold. Plus, a business may be able to claim first-year “bonus depreciation” on any remaining cost. Tip: The bonus depreciation, which is being gradually phased out over five years, is 60% for 2024 (declining to 40% in 2025).

Start-up costs: Did you undertake a new business venture in 2024? Normally, start-up costs must be amortized over 180 months, but you can currently deduct up to $5,000 of qualified expenses. This includes costs normally deductible by an active business. Make sure you are legitimately “open for business” before 2025 to qualify for this tax break in 2024. Tip: The special deduction is phased out for costs above $50,000.

Cash-basis accounting: A small business often uses the cash-basis method of accounting for convenience and simplicity. But your C corporation may not have qualified in the past because it had average gross receipts above $5 million for the three prior years. Fortunately, recent tax legislation quintupled the limit to $25 million ($30 million in 2024), so a switch may be in the cards. Tip: Discuss timing and all the ramifications with a professional tax advisor.

Work Opportunity Tax Credit: If your business plans to add to its staff for the upcoming holiday season, it may claim the Work Opportunity Tax Credit (WOTC) by hiring workers from designated “target” groups. Generally, the WOTC equals 40% of the first-year wages of up to $6,000 per employee, for a maximum of $2,400. Note: For certain veterans, the credit is available for up to $24,000 in wages, for a maximum of $9,600 per employee.

Repairs and improvements: Generally, an employer can currently deduct the cost of minor repairs to the business premises made before the end of the year, but the cost of major improvements, like building an entire new wing of a building, must be capitalized. Under IRS regulations, you may benefit from a safe-harbor election to currently deduct certain expenses. Tip: If repairs are lumped in with improvements, they may have to be capitalized.

Long-distance travel: Have you returned to long-distance business travel? If so, you may decide to push business trips initially planned for 2025 into 2024 to increase your current deduction. Generally, the list of deductible expenses includes airfare, lodging and 50% of the cost of meals, as long as the primary purpose of the trip is business-related. Tip: If you mix in a little pleasure, too, that is OK and nondeductible, but the trip cannot be a cover for vacation.

Holiday party: Recent legislation generally eliminated tax deductions for business entertainment expenses. However, there is a narrow exception for holiday parties thrown by your small business. If the cost is reasonable and all employees are invited—not just the top brass—you can deduct 100% of the cost. Tip: The usual deduction allowed for qualified meal and beverage expenses is limited to 50% of the cost.

Reminder: Other tax benefits may be available at year-end. Discuss your situation with your professional tax advisors.

Just Saying “No” to an Inheritance

When to use a qualified disclaimer  

Usually, if you are in line to receive an inheritance from a parent, you would not even think of turning it down. However, in some cases, it may make sense to relinquish your rights to the assets, assuming you are otherwise in good financial shape. It all has to do with astute estate tax planning.

From a tax and legal perspective, the optimal approach may be to use a document often referred to as a “qualified disclaimer.” As long as certain technical requirements are met, this ensures that you will accomplish your goals.

Background: For most individuals, the estate and gift tax exemption is part-and-parcel of their estate plan. Recent legislation raised the exemption from $5 million to $10 million in 2018 with inflation indexing. The indexed amount for 2024 is $13.61 million. In addition, a married couple may effectively utilize the exemption for both spouses. This provides sufficient estate tax shelter for most families.

However, the exemption is currently scheduled to revert to $5 million, with inflation indexing, after 2025. It remains to be seen if this will occur, but you may want to play it safe.

By using a qualified disclaimer, an inheritance bypasses your estate and goes to the next beneficiary, or beneficiaries, in line. Thus, you can preserve your entire estate tax exemption for the future without any erosion. If you were going to pass those assets to the younger generation at some point anyway, the disclaimer speeds up the process without adverse tax consequences.

Note: A special generation-skipping transfer tax (GSTT) applies to most direct gifts or transfers that “skip” a generation, like bequests from grandparents to their grandchildren. But the GSST can also be offset by its own exemption. The amount of the GSST exemption is the same as the regular estate tax exemption.

To qualify under the legal definition of a qualified disclaimer, the document must meet the following requirements:

• It has been put in writing and signed by the disclaiming party.

• It identifies the property, or interest in property, that is being disclaimed.

• It is delivered to the person or entity charged with the obligation of transferring the assets.

• It is written less than nine months after the date the property was transferred or nine months after a minor disclaimant reaches age 21.

Note that you cannot alter the transfers after you have disclaimed the property. For instance, if the contingent beneficiaries are your nephews and nieces, you cannot later redirect the transfer to your own children. The designations made by the decedent control.

Furthermore, a person cannot disclaim property once it has been accepted. For example, if you receive money and use a small portion to pay for funeral arrangements for the decedent, the inheritance can no longer be disclaimed.

Caveat: The use of qualified disclaimers may be affected by post-election legislation. Be aware of all your options and the potential ramifications. Your professional advisors can provide guidance.

New IRS Ruling Provides Key Employee Benefit

Alternatives to matching 401(k) contributions  

A new private letter ruling issued by the IRS may pave the way for greater flexibility for employees who have traditionally benefited from matching 401(k) plan contributions

(PLR 202434006, 8/23/24). Under this new ruling, employees could have other options at their disposal.

Background: With a 401(k) plan, a participating employee can elect to defer part of their salary to their own account on a pre-tax basis. The annual limit on deferrals, which is indexed for inflation, is $23,000 in 2024. In addition, if you are age 50 or older, you can make an extra “catch-up contribution” of $7,500 in 2024, for a total of $30,500.

The contributions continue to compound within the account without any current tax erosion. In addition, the employer may choose to make matching contributions to each employee’s account up to a stated percentage of salary. These amounts belong to the employees once they have fully vested.

Typically, 401(k) participants can invest these funds in a wide range of mutual funds or comparable alternatives. The plan must adhere to strict nondiscrimination rules designed to prevent it from favoring highly-compensated employees (HCEs).

When amounts are finally withdrawn from the employee’s account, they are taxed at ordinary income rates. Plus, penalties may be imposed for taking out funds “too soon” or “too late.” Currently, distributions cannot be made without penalty before age 59½ unless an exception applies. Generally, required minimum distributions (RMDs) must begin after attaining age 73. Other special rules may apply.

New options: The new ruling permits the company’s employees to use employer-provided funds for traditional both 401(k) matching contributions and other tax-favored accounts. Specifically, the choices are as follows:

• Contributions can be made to the employee’s 401(k) account (or other defined contribution plan account) as an employer matching contribution.

• Contributions can be made to the employee’s Health Savings Account (HSA) subject to annual limits. For 2024, the HSA limits are $4,150 for individual coverage and $8,300 for family coverage.

• Amounts may be used to pay the employee’s student loan reimbursements (SLRs) through an educational assistance plan (EAP) subject to the annual limit of $5,250.

• Amounts can be contributed to a retiree Health Reimbursement Arrangement (HRA). For 2024, the HRA limit is $6,150 for single coverage and $12,450 for family coverage.

Regardless of the option chosen, the IRS says that employees cannot have the right to receive the employer funds in cash or as another taxable benefit. Your advisors can help you sort through the “alphabet soup.”

This can be a cost-effective way to give employees more control over the use of employer-provided funds. They can use the contributions as they see fit.

Reminder: A private letter ruling may be cited as authority only by the party that requested it. Nevertheless, it is an indicator of how the IRS would treat a comparable situation and such rulings may lead to formal IRS approval or even legislation. Watch out for any new developments in this area.

Tax Mileage from Commuting 

Can you deduct the cost of commuting back and forth from work as a business expense? The answer is usually “no” regardless of the distance. This is treated as a personal expense that is nondeductible.

However, there are certain exceptions to the “commuting” rule. For instance, travel between two business locations—say, separate branches of a company—constitutes a deductible business expense. This can include the cost of a ride service.

Similarly, if you meet with a client on your way to work or on the way home, the travel costs allocable to the trip between the client’s business location and your regular business location is deductible business travel.

Facts and Figures

Timely points of particular interest

Tax Gap Widens—The IRS has just released new information on the “tax gap” between the country’s projected true tax liability and the amount of tax that is actually paid on time. The new tax gap projection for the 2022 tax year (TY2022) is $696 billion. The 2022TY figure reflects an increase over tax year 2014-2016 estimates and tax year 2017-2019 projections. This amounts to an increase of $200 billion over tax years 2014-2016. Of the $696 billion gap, 77% is due to underreporting, 14% is due to underpayment and 9% is due to non-filing.

Disaster Tax Relief—Although the casualty loss deduction has been suspended from 2018 through 2025, victims in federally-declared disaster areas like those recently devastated by Hurricanes Helene and Milton can still deduct losses. The amount of the loss is limited to the excess above 10% of adjusted gross income (AGI) after subtracting $100 per event. For example, a taxpayer with a $15,000 loss and $100,000 AGI in 2024 may deduct $4,900. Added benefit: A disaster-area loss in 2024 may be claimed on a 2024 return or an amended 2023 return.

New Tax Angles to Roth 401(k) Plans

Changes under SECURE 2.0 Act

Although you are probably quite familiar with traditional 401(k) plans, you may know less about a variation, the Roth 401(k). This “newfangled” version of the 401(k) has actually been around for almost two decades. But the recent “SECURE 2.0” Act has created more interest in Roth 401(k)s.

If your employer currently does not offer a Roth 401(k) option, it will likely do so soon, because of the latest tax changes.

Basic premise: A Roth 401(k) combines several elements of traditional 401(k) plans and Roth IRAs for designated accounts. Like a traditional 401(k) plan, eligible employees can elect to defer part of their salary to a Roth-type account, up to annual limits indexed for inflation. The employer may also provide matching contributions based on a percentage of salary. Contributions and earnings continue to compound within the account without any current tax.

For 2024, a Roth 401(k) participant elect to defer up to $23,000 of their salary, plus they can add an extra $7,500 in “catch-up contributions” if they are age 50 or over, for a maximum total of $30,500. In comparison, regular Roth IRA contributions for 2024 are limited to $7,000, or $8,000 if age 50 or over. Also, the ability to contribute to a Roth IRA is phased out for high-income taxpayers, but there’s no corresponding restriction for Roth 401(k)s.

However, unlike a traditional 401(k), contributions to an employee’s Roth 401(k) account are made through payroll withholding with after-tax dollars instead of pre-tax dollars. Therefore, you cannot realize one important benefit of traditional 401(k)s.

On the other side of the coin, qualified distributions from a Roth 401(k) made after the account has been in existence at least five years are completely exempt from federal income tax, just like qualified distributions from a Roth IRA. But regular 401(k) distributions are taxed at ordinary income rates currently topping out at 37%.

For this purpose, “qualified distributions” include any distributions—

• Made after the participant has attained age 59½; or

• Made due to death or disability.

Note: Qualified distributions from a Roth IRA also include withdrawals used to pay for “first-time homebuyer expenses” (up to a lifetime limit of $10,000).

This means that you can take a Roth 401(k) distribution after age 59½ without paying a penny of federal income tax, compared to the sizeable tax bill that is often due when traditional 401(k) plan owners receive distributions. Therefore, Roth 401(k) plans may appeal to certain high-income employees.

Update: SECURE 2.0 makes several critical changes in the rules, including the following:

• Normally, participants and beneficiaries older than a specified age must take required minimum distributions (RMDs) from traditional 401(k) accounts each year. This requirement also applied to Roth 401(k)s (unlike Roth IRAs). SECURE 2.0 raises the age threshold for RMDs from age 72, increased from 70½ by the initial SECURE Act, to age 73 (scheduled to increase to age 75 in 2033).

• SECURE 2.0 repeals the mandatory RMD rules for Roth 401(k) owners, beginning in 2024, eliminating a major drawback. However, beneficiaries of Roth 401(k)s still must take RMDs under complex rules.

• Catch-up contributions to 401(k) plans must be made to designated Roth accounts for employees earning more than $145,000 a year. This provision was scheduled to begin in 2024, but has been postponed to 2026 to allow employers more time to accommodate the change. So your company may be adding this feature shortly.

Should you switch from a traditional 401(k) to a Roth 401(k) under the current rules? It depends on your situation. Seek guidance from your professional advisors. 

Big Benefits of Buy-Sell Agreements

Three methods to choose from 

When is a buy-sell agreement beneficial? The payoff can be almost immediate if a business owner is contemplating a sale of their interest. Or it may provide significant future benefits if you plan to retain ownership rights and eventually pass the business to the younger generation.

Basic premise: Having a buy-sell agreement in place is a fundamental business practice. It can protect your family’s interests in the event you become disabled or die prematurely as well as establishing ground rules for a sale. Such an agreement is often funded with life insurance.

Buy-sell agreements are viable for virtually every type of business entity, including C corporations, partnerships, S corporations and limited liability companies (LLCs). Although some variations exist within the basic frameworks, there are three main types.

1. Cross-purchase agreements: With this agreement, a business owner agrees to sell their interest to the remaining co-owners or partners. Because this is the simplest form of buy-sell agreement, it may be suitable for a small business with just two or a few owners. However, another type of agreement may be preferable for a business with numerous owners.
2. Entity-purchase agreements: As the name implies, this form of buy-sell agreement—sometimes called a “redemption agreement”—requires the business owner to sell their interest directly to the business entity. Therefore, ownership is transferred to the business.

If either of the first two types of agreements does not suffice, there is a third option.

3. Hybrid agreements: This method combines the first two types of buy-sell agreements. Generally, the owner is initially required to offer their interest to the entity or to the co-owners or partners. If that offer is declined or the purchase cannot otherwise be made, the parties or entity can purchase the shares. Note: A hybrid agreement may also enable key employees—such as long-time company officers—to acquire the interest.

If the benefits are not instantaneous, they may be realized over time. For example:

• Upon the death or disability of the owner, a ready-and-willing buyer is obligated to purchase shares at a fixed price or formula. Absent such an agreement, the estate or the disabled owner might be forced to sell the business at a bargain-basement price.

• The buy-sell provides a smooth transfer of the business in a manner agreed-upon by the owners in advance of the triggering event. This can help minimize disruptions to customers or clients while the business is in the process of reorganizing.

• The proceeds from the sale of a deceased owner’s interest can go toward certain estate settlement expenses (e.g., death taxes and estate administration costs). In addition, part of the proceeds may be allocated to help pay the living expenses of the deceased owner’s family members. If the owner is disabled, the proceeds may be used to pay all the family’s living expenses.

• The price established in the buy-sell agreement may be used to provide a valuation for federal estate tax purposes, but it is not legally binding.

Finally, be aware that state law may have an impact on buy-sell agreements. Nevertheless, the benefits are almost universal.

Reminder: This is not a do-it-yourself proposition. Rely on your business advisors for assistance before you make a commitment. 

Q’s and A’s on Charitable Donations

When to bunch year-end gifts   

Are you like millions of Americans who used to itemize deductions every year but do not do so anymore? Due to a myriad of provisions in the Tax Cuts and Jobs Act (TCJA) affecting individual taxpayers from 2018 through 2025, your approach may change year-to-year. It is not “automatic” anymore.

If you can get a clear handle on whether you will itemize in 2024, it may change your charitable gift-giving at year-end. The conventional wisdom is to “bunch” charitable contributions in a year you expect to itemize.

Q. How much can itemizers deduct?

A. The tax law limits are generous. Currently, if you make monetary contributions, you may deduct the full amount of your donations, up to 60% of your adjusted gross income (AGI). The limit is 30% of your AGI for gifts of property.

Added tax incentive: If you donate appreciated property that you have owned for more than a year, you can deduct the property’s fair market value (FMV) on the donation date instead of its cost. Thus, if you are contemplating a large gift of appreciated property like securities or artwork, do it in a year you expect to itemize.

Q. Do you need any special documentation to substantiate your charitable deduction claims?

A. Yes. For monetary contributions of $250 or more, obtain a written acknowledgement from the charitable organization. For cash contributions under $250, you must have a bank record or written receipt from the charitable organization.

Other rules apply to gifts of property. For property valued above $500, but not over $5,000, your records must also include the following:

• The way you acquired the property (e.g., purchase, gift, bequest, inheritance or exchange);

• The approximate date you received the property or, if produced for you, when the property was substantially completed; and

• The cost or other basis, and any adjustments to the basis, of the property.

Finally, if you claim a deduction for property valued over $5,000, you must obtain an independent appraisal of the property.

Q. When is a charitable donation considered to be completed?

A. The controlling date is the date of delivery. For instance, if you give or mail a check to a charity, the donation is generally complete on that date, not when the charity cashes the check. Similarly, a donation by credit card is made on the date that it is charged. Thus, you can deduct a donation made online in December on your 2024 return—even if you actually pay the credit card company in January.

Q. Can you claim any deduction if you do not itemize?

A. No. Previously, non-itemizers could deduct up to $300 of monetary contributions ($600 for joint filers), but this tax break is no longer available. It is all-or-nothing.

Practical idea: See where you stand right now. Depending on your situation, you may move charitable gifts into 2024 or postpone them to 2025 or later. Your professional tax advisor can help you with these decisions.

Steps Toward Better Behavior at Work

How to improve workplace etiquette

If your company’s employees have been working remotely most of the time until recently, you may have forgotten how rude, inappropriate or self-absorbed some people can be. In places of business across the country—including boardrooms, offices and plant floors—proper and reasonable business etiquette is often ignored. What’s more, bad behavior can sometimes lead to confrontation or even violence that may threaten someone’s well-being and the business as a whole.

Trite but true: People in glass houses should not throw stones. By making a conscious effort to improve your own habits and manners, you can help set the tone for the workplace, especially if you are an owner, officer or high-level manager. Consider these common sense suggestions.

• Put your cellphone on vibrate in meetings. Better yet, shut it off completely, especially if you tend to forget about it.

• Pay attention to the people in meetings, not your cellphone or other devices. Avoid scrolling through emails. Give your complete attention to the task at hand.

• Do not wear strong cologne or perfume if it can be helped. Dress appropriately.

• Stay home if you are sick. Do not risk spreading germs or otherwise affecting (not infecting) the workplace, especially with COVID-19 still circulating.

• Be on time for meetings. Reschedule meetings if you simply do not have enough time. It is rude to constantly keep people waiting.

• Stick to the schedule. If workers are just standing around and waiting for you, productivity suffers.

• Do not disturb others who are working. If you need to have a loud conversation or conference call, find a private place.

• Eat lunch or snacks in the break room if there is one. Do not allow strong smells to invade the workplace.

• Try to keep your voice level reasonable when you are in areas where others are congregating. This often applies to conversations in cubicles or hallways.

• Do not be quick to fly off the handle. Not only is yelling and screaming usually counter-productive, it can be embarrassing.

• Respect the property rights of others—including umbrellas hanging in closets, knickknacks on desks or drinks and snacks stored in refrigerators!

If you are in a position of authority, how can you best deal with offenders? First, do not react with bad behavior of your own. Second, take the person aside in private and explain the problem without getting emotional or angry. Sometimes, a little sympathy can go a long way. Make it a point to follow up with the worker and commend them for any improvement.

Final words: Of course, there are no guarantees that bad or rude behavior will stop. If it continues or worsens, follow the procedures under company policy, including guidelines established by the Human Resources (HR) department. Bring HR into the loop if it is required by your manual or other documents.

Tap Into Key Tax Break

A self-employed client asked: Can I use Section 179 to deduct the cost of a laptop I just bought for both business and personal use?

Answer: Yes, if the laptop is placed in service this year, but you can only write off the portion attributable to business use. For example, if you use a laptop or other electronic device 50% for business and 50% personally, the deductible amount is limited to 50% of the total cost.

In addition, you may write off the cost of off-the-shelf software programs used for business purposes. Again, the deduction is based on the percentage of business use.

Facts and Figures

Timely points of particular interest 

Extra Security—The federal government is ensuring greater protection of your sensitive tax information. Under a new Federal Trade Commission (FTC) rule, tax return professionals and other tax practitioners must use multi-factor authentication (MFA) for their businesses, including any access to client data. What’s more, the use of MFA is not merely a suggestion—the FTC requires it!

Contract Talks—When you are working out a business contract, you usually want the best deal possible. However, there is the possibility of “too much of a good thing.” If the terms are overly broad or too restrictive, you may be exposed to a legal challenge. The other party could claim the contract provides an unfair advantage without adequate compensation. Make sure you cover all the legal and tax angles.

 

New Final Regs Expand on RMD Rules

IRS addresses inherited accounts

The IRS has issued comprehensive final regulations on rules pertaining to required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs in the wake of recent legislation. The final regs take effect on September 17, 2024.

Background: Generally, participants in qualified retirement plans, like 401(k) plans, and traditional IRAs must begin taking RMDs once they reach a specified age and in each succeeding year. Under SECURE 2.0, a follow-up to the initial SECURE Act, the age threshold has been raised from 72 to age 73 (scheduled to increase to 75 in 2033). Similar rules apply to individuals who inherit qualified plan and IRA accounts.

In contrast, participants in Roth IRAs do not have to take lifetime distributions. However, participants in Roth 401(k) accounts, a Roth IRA-like version of a regular 401(k), were previously required to take lifetime RMDs, as were beneficiaries. Beginning in 2024, Roth 401(k) account owners no longer have to take RMDs.

RMDs are taxed at ordinary income tax rates currently topping out at 37%. The amount of each RMD is based on IRS-prescribed life expectancy tables and the value of the account on the last day of the prior year.

Previously, the penalty for failing to take timely RMDs was equal to 50% of the shortfall. Beginning in 2023, SECURE 2.0 reduces the penalty to 25% (10% if corrected promptly). Due to the COVID-19 pandemic, the IRS waived the penalty for failing to take RMDs for tax years spanning 2021 through 2024. It also extended the exemption for lifetime RMDs to participants in Roth 401(k) accounts (but not their beneficiaries).

Notably, the SECURE Act requires qualified plan and IRA beneficiaries to empty out an inherited account over a ten-year period, beginning in 2020. In the past, beneficiaries could take RMDs over their own life expectancies, creating so-called “stretch IRAs” that could defer tax for generations, but that has effectively been eliminated. However, the law creates exceptions for “eligible designated beneficiaries” (EDBs), including:

• A surviving spouse;

• A minor child (until they reach age 21);

• A disabled or chronically ill individual; and

• Any other individual who is not more than ten years younger than the IRA participant.

These beneficiaries have more favorable RMD options at their disposal. For instance, a surviving spouse can effectively treat an inherited account as their own.

Nevertheless, the law was not clear whether beneficiaries had to take RMDs over the course of ten years or if they could wait until the last year to take a lump-sum payout. Proposed regulations issued in 2022 provided that beneficiaries must take RMDs in years one through nine if the decedent had died after the initial owner had started RMDs. Reacting to negative public comments, the IRS then postponed the requirement to 2025.

New rules: Under the final regulations, IRA beneficiaries still must follow the ten-year rule as stated in the proposed regs. However, beneficiaries are allowed to skip annual RMDs that were required for accounts of owners who died in 2020 through 2023. For example, if you inherited an IRA in 2021, you must take RMDs only from 2025 through 2031.

The final regs also complicate matters by imposing special rules for beneficiaries who inherit a Roth 401(k) that constitutes the decedent’s “entire plan balance.” As a result, the account might have to be emptied out within ten years. On the plus side, the regulations provide more flexibility in allocating RMDs among multiple beneficiaries of a single account.

Wrap-up: The IRS is expected to issue additional guidance for participants and beneficiaries of qualified plans and IRAs. In the meantime, consult with your professional tax advisors concerning your situation.

Jumping Into the Gig Economy

How to land a temporary job

The “gig economy” keeps growing in leaps and bounds. According to TeamStage, more than one-third of all Americans—36% to be exact—are participating in the gig economy. If you have not joined yet, you may decide to take the plunge. And, if you are already participating, you might want to increase your activities.

Background: The gig economy is the common term for the widespread use of freelancers and others working on a part-time basis. Generally, they do not have a traditional 9-to-5 workday or anything close to it. This often affords workers with greater flexibility than a traditional role, not to mention the revenue that it can bring in.

Gig jobs are often associated with drivers for hire and temporary landlords, but the landscape is more expansive than that. You can find gig jobs in virtually every type of work, including high-level executive and IT jobs and positions for physicians and attorneys.

Typically, gig workers do not receive a salary like employees. They may be paid a flat rate on a per-project or contractual basis. In some cases, it may even be a one-shot deal. Because they are not usually treated as employees of the company, no tax is withheld from the compensation the gig worker receives.

This arrangement can be attractive to employers as well. They do not have to offer costly fringe benefits—including health insurance coverage and retirement plan benefits—to these workers like they do for regular employees. When the work is complete, employers are free to renew their services or move on.

Of course, being a gig worker results in some tax complications. Essentially, you are considered to be a self-employed individual, so you must report the amounts you are compensated for work as taxable income. In addition, you may be responsible for quarterly estimated tax payments (although this may be reduced or eliminated by withholding from a traditional job).

On the other hand, you may be able to deduct some of your expenses to offset the tax liability from your self-employment. This includes business expenses like travel costs, supplies and equipment needed to perform the job. The same basic tax rules for qualified expenses apply to gig workers.

Fortunately, finding part-time employment is easier than it was in the past due to technological invocations. Consider these practical suggestions:

• Identify your targets. Research the industry or profession you expect to work in and take aim.

• Hone your talents. Develop the skillset you will need even if it means taking on some “grunt work” in the short term.

• Showcase your talents. Provide a resume, portfolio and/or CV that emphasizes your work experience, education and skills.

• Browse jobs online or through apps. Use the technology at your disposal for job searches.

• Network yourself. This old-fashioned method stills works well if you can benefit from referrals and recommendations.

Reminder: Without employee fringe benefits, you must “make your own way” with health insurance and other essentials for your situation. Thus, you may consider using a gig economy job to supplement, not replace, a regular job. Take all factors into account.

Keys to Mortgage Interest Deductions

Coping with the latest tax rules

Mortgage interest rates have been dropping through the summer. As of August 5, 2024, the average rate on a 30-year fixed rate mortgage was 6.95%, the lowest it has been in a year. Accordingly, this may be a good time to purchase the dream home you always wanted or downsize to a smaller place. But what about taxes?

Fortunately, many homeowners can write off all their mortgage interest expenses if they itemize deductions on their personal tax returns. Despite recent legislation, the tax law boundaries remain relatively generous.

Main tax rules: Prior to the Tax Cuts and Jobs Act (TCJA), you could deduct mortgage interest paid on your principal residence and one other home (e.g., a vacation home) as either acquisition debt or home equity debt, or both, within certain limits.

1. Acquisition debt: This constitutes debt where the mortgage proceeds are used to buy, build or substantially improve a qualified residence. Usually, acquisition debt represents the main part of a mortgage interest deduction. The interest was deductible on loans up to $1 million.

2. Home equity debt: When permitted by state law, you could deduct the interest on home equity loans secured by a qualified residence, regardless of how the proceeds were used. Home equity debt deductions were limited to interest paid on the first $100,000 of debt. Plus, the loan amount could not exceed your equity in the home.

In addition, mortgage interest deductions were subject to the “Pease Rule,” along with certain other itemized deductions. This rule reduced deductions for certain high-income taxpayers.

However, beginning in 2018, the TCJA imposed these other restrictions.

• The threshold for deducting interest paid on acquisition debt was lowered from $1 million to $750,000 for loans originating after December 15, 2017 (or April 1, 2018, if there was a binding contract in place before December 16, 2017). Thus, existing homeowners were “grandfathered in” under the prior rules for acquisition debt. Alternatively, you can still benefit under the $750,000 threshold.

• The deduction for interest paid on home equity debt was suspended from 2018 through 2025. It does not matter when you acquired the residence. Currently, the deduction is scheduled to return in 2026.

• In conjunction with other TCJA changes for itemized deductions, the Pease rule was suspended for 2018 through 2025. It is also set to return in 2026, absent any further legislation.

Typically, these revised rules still give most homeowners plenty of leeway. Plus, you can take advantage of a special tax break: If you take out a new home equity loan or line of credit and use the proceeds for significant home improvements, the debt may be treated as an acquisition debt instead of a home equity debt. Reason: The debt is being incurred to “substantially improve” a qualified residence. Therefore, itemizers can add this mortgage interest to their deductible total.

What if you refinance an existing acquisition debt in 2024? The interest on the new loan remains deductible subject to the TCJA rules, but refinancings of pre-2018 loans are generally grandfathered under prior law.

Final words: Maximize mortgage interest deductions available under the current tax rules. When warranted, contact your professional tax advisor for guidance.

Avoid Six Common Investment Mistakes

Do’s and don’ts for equities investors

We all make mistakes, but some are worse than others. For instance, the types of errors you might commit as an investor could haunt you for years, especially with the recent stock market volatility. Practical advice: Do not keep making the same investment mistakes over and over again.

Of course, that is easier said than done. To help you out, here are six “do’s and don’ts” for investors in equities to follow.

1. DO remain diversified. No matter what the numbers say, you should not sink all your dollars into a single investment. Although diversification offers no guarantee of success in a declining market, it remains a viable way of reducing overall investment risk. Build a balanced portfolio with the assistance of your investment advisers.
   

2. DON’T be inpatient. You cannot expect “instant gratification” whenever you invest. Adopt a view of the long term and try to stay consistent with your overall plan despite any ups and downs in the short term. Recognize that you may have to hold assets for a period of time for the best results.

3. DO adapt to what the numbers are telling you. For instance, if you have a favorite stock that is consistently underperforming, you should not continue to “throw good money after bad.” Take your lumps and move on. Similarly, do not allow emotion to rule the stocks you decide to keep for the future.

4. DON’T overemphasize past performance. Are you familiar with the boilerplate language found in most investment-related documents? It states that, “Past performance is no guarantee of future results” (or something to that effect). You probably do not pay much attention to it, but it is true. Instead of relying strictly on past performance, evaluate current and future prospects.

5. Do factor in taxes. One important thing to remember as an investor is that it is how much you keep, not how much you earn, that really matters. Depending on the type of investment, and the timing of gains and losses, taxes may dilute a significant portion of your earnings. On the other hand, careful tax planning could result in gains that are offset by losses. Keep tax consequences in mind for investment decisions.

6. DON’T engage in “market timing.” Typically, market timing is based on acquiring stock when you think it will go up and selling stock when it you think it will go down. It may work sometimes, but it can also backfire if your expectations are not met. It makes more sense to build a balanced portfolio based on your particular needs and tolerance for risk.

It also helps to develop an overall investment plan rather than taking a random approach. With professional assistance, you can cut down or eliminate those mistakes that have plagued you in the past.

Run for the Tax Gold

The U.S. took home 126 medals from the Paris Olympics. Do the athletes owe any tax on this hardware?

Under a 2016 federal law, athletes are generally exempt from paying tax on the value of their medals or other prize money received from the U.S. Olympic Committee. But other income received by athletes, like wages, remains taxable.

Note: For the first time, track and field gold medalists in Paris were awarded $50,000 for their efforts (split evenly among relay team members), The tax exemption applies to these winnings.

Facts and Figures

Timely points of particular interest

 Early IRA Withdrawals—The IRS has issued new guidance on exceptions to the early withdrawal penalty for IRA owners. Normally, you would owe a 10% tax penalty, on top of regular income tax, for traditional IRA withdrawals before age 59½. But the SECURE 2.0 law carved out new exceptions for emergency personal expenses and for victims of domestic abuse. These changes take effect in 2024.

Noncompete Agreements—On August 20, 2024, a federal judge in Texas barred the “final rule” recently issued by the Federal Trade Commission (FTC) that would have banned employers from requiring employees to sign legally-binding noncompete agreements. This prohibition, which was scheduled to take effect on September 4, 2024, is now effectively overturned. The FTC says it is considering an appeal. Note: The ban would not have applied to certain high-ranking officers.

Giving Charitable Gifts With Strings Attached

Tax rules for quid pro quo contributions

If you make a donation to a charity, you may get something back in return. What are the tax consequences for itemizers? It depends on the fair market value (FMV) of the benefit you receive. The IRS has provided guidelines for these “quid pro quo contributions.”

Background: A quid pro quo contribution occurs when an individual makes a charitable donation that is partly for goods or services. The amount attributable to the FMV of the goods or services is nondeductible. For example, if you give a charity $100 in exchange for a concert ticket worth $40, your deduction is limited to $60.

Note that you must obtain a written disclosure statement for amounts above $75, even if the deductible amount is less than $75, as in our example above. The disclosure agreement must include the pertinent information about the donation and the FMV of the benefit received in return.

However, a disclosure statement is not required if you receive items of “insubstantial value” from a charity, like a coffee mug with the charity’s logo, or an intangible religious benefit.

The charitable organization can use any reasonable method to estimate the FMV of goods or services it provided to a donor, as long as it is applied in good faith. It may estimate the FMV of goods or services that generally are not commercially available by using the FMV of similar or comparable goods or services. Goods or services may be similar or comparable even if they do not have the unique qualities of the goods or services being valued.

The IRS offers the following three examples involving quid pro contributions.

Example 1: A charity provides a one-hour tennis lesson with a tennis professional for the first $500 payment it receives. The tennis professional provides one-hour lessons on a commercial basis for $100. A good faith estimate of the lesson’s FMV is $100.

Example 2: For a payment of $50,000, a museum allows a donor to hold a private event in a room of the museum. A good faith estimate of the FMV of this right can be made by using the cost of renting a hotel ballroom with a capacity, amenities and atmosphere comparable to the museum room, even though the hotel ballroom lacks the unique art displayed in the museum room. If the hotel ballroom rents for $2,500, a good faith estimate of the FMV of the right to hold the event in the museum is $2,500.

Example 3: If a donor pays $1,000, a charity provides an evening tour of a museum conducted by a well-known artist. The artist does not provide tours on a commercial basis. Tours of the museum normally are free to the public. A good faith estimate of the FMV of the evening museum tour is $0 even though the artist conducts it.

The usual rules for charitable contributions still apply. Thus, you can deduct amounts only if you itemize.

Caution: Other situations may be more complicated. If you have any questions, contact your professional tax advisor.

Who Says You Can’t Fight City Hall?

Appealing for property tax reduction

It seems like the cost of everything from college tuition to a cup of coffee keeps going up. Case in point: Property taxes for homeowners have been steadily rising throughout much of the country. But you do not necessarily have to accept the status quo if you were just informed of a tax hike.

Idea in action: Consider an appeal of your property tax assessment if you think you are on firm ground. If you prevail, you can lower the amount you must fork over to the local taxing authority.

However, do not dawdle. Depending on your location, you may have only 30 days after receiving your current tax bill to initiate an appeal. Keeping that in mind, here are several practical suggestions for strengthening your case.

• Verify the dimensions. Carefully check the property tax notice to see if it accurately states your home’s dimensions and features. If it lists more square footage or rooms than you actually have, you may be able to have the value reduced.
• Identify key factors. In some cases, assessors do not even look at your property. They may simply compare descriptions of your home with others nearby that seem to be comparable on their face. But your home may be overvalued due to extenuating issues that set it apart. For example, it could back up to or be near a highway or train track or be in a flood zone.
• Present the comps. This may be the best way you can show that your home is overvalued. Find assessment numbers on homes similar to yours based on aspects such as size, age and of course, location, location, location. The information is available at your local assessor’s office or online. If yours stands out as being high, this is your proof.
• Cut to the chase. Once you have determined that your assessment seems high, contact your assessor’s office and arrange a meeting, if possible. Bring all relevant information, including photos, data on comps, maps, etc.
• Seek an appeal. Do not immediately throw in the towel if you cannot arrange a meeting or it results in no change. You can still lodge a formal appeal with the local assessment board. Before your appeal, sit in on another public hearing. You will get a sense of what works best and what does not.
• Consider a professional. If you do not have the time or inclination to pursue everything on your own, you might hire a property tax consultant or attorney to do the grunt work. Fees may be charged by contingency (e.g., 25-50% of the amount saved in the first year) or by a flat or hourly rate.

This may be a hassle, but it could save you significant amounts of money over an extended period of time.

Silver tax lining: If you itemize deductions, you can generally write off home property taxes as part of the deduction for state and local tax (SALT) payments, up to an annual limit. Currently, the SALT cap is $10,000 per year.

Breaking Down Tax Barriers at Work 

Special deduction for qualified expenses

 If you are a small business owner, you may be familiar with the disabled access credit (DAC). Under the DAC rules, a qualified business can claim a credit of up to $5,000 for expenses incurred to meet requirements established by the Americans with Disabilities Act (ADA). For instance, the credit is available for removing barriers that hinder access by disabled individuals.

But that is not the only tax break on the books for removing barriers in the workplace. A small business may also qualify for a special deduction that is separate and apart from the DAC.

Background: The tax law permits a business of any size to deduct up to $15,000 of the costs of removing architectural and transportation barriers for the benefit of disabled people and the elderly. Normally, these costs must be capitalized. In addition, you can add any excess above the $15,000 threshold to your basis for depreciation deduction purposes.

To qualify for the deduction, the barrier removal must meet certain standards under guidelines created by ADA regulations. A few examples of expenses that qualify for the deduction are as follows:

• Providing accessible parking spaces, ramps and curb cuts;
• Installing phones, water fountains and restrooms that are accessible to persons in wheelchairs;
• Hanging signage and symbols of accessibility; and
• Widening walkways to at least 48 inches wide.

However, the deduction cannot be claimed or expenses incurred for new construction, a complete renovation of a facility or public transportation vehicle or for the normal replacement of depreciable property.

The deduction is generally claimed on the tax return for the tax year in which the qualified expenses were paid or incurred. Maintain detailed records to support the deduction. If your business fails to claim the deduction by its tax return due date, it has six months to file an amended return for the year (plus any extensions) to do so.

Be aware that a qualified small business can claim both the DAC and the architectural barrier removal deduction in the same tax year if the requirements for each tax break are met. However, in that case the deduction is limited to the difference between the total expenses and the amount of the credit claimed. For example, if a business incurs $10,000 in expenses qualifying for both the deduction and a $4,000 credit, the deduction is reduced to $6,000.

Final words: The deduction is irrevocable once it is claimed on a return. Consult with your professional tax advisor if you have any further questions.

Five Steps Toward Financial Security

Improve your future outlook

Is the financial road ahead paved with gold or filled with potholes that can wreck your plans—or somewhere in between? Although there are a number of variables, you probably have more control over the eventual outcome than you might think. In particular, the moves you make or fail to make now can have a major impact on your financial future. Here are five important considerations.

1. Maximize your retirement plans. Typically, you should plan on replacing at least 75% of your pre-retirement income when you are no longer working. Where will that income come from in retirement? Most people rely on amounts built up in qualified retirement plans to supplement investment earnings and Social Security benefits. Generally, contributions to such plans like a 401(k) can grow and compound on a tax-deferred basis until distributions are made. In addition, you may benefit from Roth or traditional IRAs, or a combination of the two, to help feather your nest egg.
2. Review your investment mix. Diversification and asset allocation are often the cornerstones of a financial plan. Review your portfolio to see if you have the proper mix of investments appropriate for your stage of life, your tolerance for risk and your objectives. Frequently, an investor in their middle age will concentrate heavily on the equities markets. Then, as retirement looms, the investor will shift to a more conservative allocation between stocks, bonds and short-term investments to minimize the impact of volatility.
3. Set your priorities. It is more than likely that you have to juggle several financial goals at the same time. For instance, you may be doling out money for a child’s college education while scrimping and saving for retirement. Establish an order that makes the most sense for your personal situation. Once you have, determine if you are still on track to meet the main objectives and react accordingly. This may require you to cut down on luxuries or change your lifestyle slightly—say, skipping an exotic vacation to contribute more for retirement—but it is generally worthwhile in the long run.
4. Create a “rainy day fund.” This advice is often dispensed by financial professionals but is seldom heeded. What would you (or your spouse, if married) do if you unexpectedly lost your job or had to deplete your funds for an emergency? The conventional wisdom is to secure enough in the way of assets to sustain your current lifestyle for a period of at least three to six months. The idea is to give yourself enough flexibility to cope with unforeseen emergencies without giving up on your goals or taking on crushing debt.
5. Evaluate your insurance needs. Finally, do not forget about obtaining sufficient protection to sustain your family through middle age and a lengthy retirement. This may cover the gamut from life insurance, health insurance, disability income insurance and long-term care insurance. By taking out insurance policies commensurate with your needs, you can avoid a financial disaster at a reasonable cost.

Remove Clutter at Work

The reality TV show “Hoarders” is about compulsive hoarders at home. But that is not the only place where things can pile up.

Small business owners often keep obsolete or unusable equipment or inventory that takes up valuable space. It might also cost the business more in insurance and inefficiency. Rule of thumb: If you have not used it in three years, you probably do not need it. Sell it, dump it or give it away.

If you cannot bear to part with the items, have another employee make the decisions for you. Note: You may be entitled to tax deductions for inventory or equipment still carried on the books.

 Facts and Figures

Timely points of particular interest

 IRS Collections—The IRS is filling its coffers with payments from the upper crust. As part of continuing compliance efforts under the Inflation Reduction Act (IRA), the agency announced that is has collected more than $1 billion in overdue taxes from high-income taxpayers since last fall. The collection efforts targeted individuals who earn more than $1 million a year and owed the IRS more than $250,000 each.

Consumer Alert—The IRS is warning taxpayers about inaccurate tax advice that has been circulating on social media sites. In brief, promoters encourage false claims for a  “Self Employment Tax Credit” with payments of up to $32,000. This credit is supposedly available to self-employed individuals and workers in the gig economy, but it does not exist. Lesson to be learned: Rely on tax professionals for tax advice.

New RMD Regs—The IRS also released new final regulations on required minimum distributions (RMDs) from qualified retirement plans and IRAs. The new regs address issues raised by recent legislation. Notably, the IRS says that beneficiaries of inherited accounts must continue to take annual RMDs even though they technically now have ten years to empty out an account. We will have more details in the next issue.