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Lessons on Higher Education Credits

Pass with flying tax colors

Is your child in college working toward an undergraduate degree? In most cases, the cost is a tough nut for parents to crack, especially if they have other hefty financial obligations like paying a mortgage.

You may be able to claim a higher education credit on your federal tax return. Generally, parents may take advantage of either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC), but not both.

Brief review: The higher education credits are available whether you itemize or choose the standard deduction. The list of qualified expenses includes tuition and related fees for both credits, but not room and board. Plus, books, supplies and equipment count for the AOTC. Although the rules for the AOTC and the LLC are similar, there are a few important distinctions, subject to recent modifications.

1. AOTC: The AOTC, which had expired and been reinstated multiple times, was finally made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015. The maximum annual credit is $2,500.

Significantly, the AOTC may be claimed for every student in your family. For example, if you have twins in college this year, the maximum credit is $5,000. Also, the credit is currently available for four years of study at college. Previously, it was limited to just two years of study.

The AOTC is phased out on 2023 returns for single filers with a modified adjusted gross income (MAGI) between $80,000 and $90,000. The phaseout range for joint filers is doubled to between $160,000 and $180,000 of MAGI. Note: These amounts are NOT indexed for inflation.

2. LLC: The tax law provision relating to the LLC was a permanent part of the tax code even before the PATH Act. But the maximum credit is only $2,000 as opposed to the maximum $2,500 AOTC. What’s more, the maximum LLC credit applies to each taxpayer, not each student.

Going back to our example of parents with twins in school at the same time, the maximum credit remains $2,000, as opposed to $5,000 for the AOTC. However, in contrast to the AOTC, the LLC is available for more than four years of study.

Prior to the Consolidated Appropriations Act (CAA), the LLC was subject to phase-out rules at lower levels than the AOTC, although the income ranges were indexed for inflation. Beginning in 2021, the CAA changed the course. Now the phase-out ranges for the LLC mirror those for the AOTC (without any indexing). Thus, one potential advantage of the LLC has evaporated.

Finally, taxpayers had yet another alternative in the past. They could claim a tuition-and-fees deduction, also subject a phase-out for upper-income taxpayers, in lieu of either higher education credit. Much like the AOTC, this deduction expired and was reinstated numerous times. But the CAA finally repealed the tuition-and-fees deduction, once and for all, after 2020. Thus, parents are now limited to a choice between the AOTC and the LLC only.

Class dismissed: After the credits are compared, a family will usually fare better with the AOTC than the LLC. The final decision is made on your 2023 return.

Watch Out for Five Big Tax Penalties

Take steps to avoid liability

Paying income tax is bad enough, but the IRS may tack on tax penalties in some cases, adding insult to injury. There are numerous no-no’s for individuals and small business owners, but here are five major pitfalls to avoid.

1. Payroll taxes: If a business willfully fails to deposit payroll taxes the “responsible person” can be held personally liable for 100% of the tax that is due. For this purpose, a small business owner may be a responsible person, even if they have designated another employee to handle payroll matters. Liability may be avoided only if you can show that the failure to deposit the taxes was due to a “reasonable cause.”

2. Required minimum distributions: After you reach age 73 (recently raised from age 72), you must begin taking annual required minimum distributions (RMDs) from qualified plans and traditional IRAs. The required amount of the annual RMD is based on life expectancy tables and your account balances on the last day of the prior year. Currently, the penalty for failing to comply is 25% (reduced from 50%) or 10% if the error is corrected in a timely fashion.

3. FBARs: An investor must file the FBAR (Report of Foreign Bank and Financial Accounts) with the government if they had amounts in foreign bank accounts exceeding a total of $10,000 at any point during the past year. This requirement is designed to discourage taxpayers from hiding funds in offshore accounts. If the violation is willful, a failure to file may result in a penalty equal to the greater of $100,000 or 50% of the balance in the account for each violation. In cases involving fraud, even steeper penalties—including possible prison time—could be imposed.

4. Early withdrawals: For early withdrawals from a qualified plan or IRA before age 59½, you generally owe a 10% penalty tax in addition to the regular income tax on the distribution. However, the tax law contains several exceptions to the 10% penalty, including one for “substantially equal periodic payments” (SEPPs). If you take an early withdrawal that is not a SEPP or does not qualify under another exception, there is no penalty or regular tax liability if you roll over this amount into a qualified plan or IRA within 60 days.

5. Underpayment penalty: If you do not pay enough “estimated tax” during the year through withholding and/or quarterly installments, the IRS may assess an underpayment penalty. Safe harbor rule: No penalty applies if you paid 90% of the current year’s tax liability or 100% of the prior year’s liability (110% if your AGI exceeded $150,000). The penalty rate for underpayments is adjusted quarterly. It was 8% for the first quarter of 2024.

Bottom line: Do not pay any more to the IRS than you are legally required to. With professional assistance, you can avoid these major penalties, as well as the others in the tax law.

Easy Ways to Motivate Employees

How to keep the juices flowing

Are your employees in a rut? It is often difficult to keep staff highly motivated over an extended period of time. Besides increasing pay or benefits, consider these no-cost or low-cost ideas for ramping things up.

• Change the corporate culture. Does your company foster a culture where workers feel respected, valued and integral to the operation? Or is there a dark cloud that pervades the atmosphere? Lighten the load by projecting a positive image. Usually, this starts at the top, with the company officers, and works its way down.

• Encourage creativity. Employees get bored with the same routine day after day. Create an environment where they are able to be innovative and try out new ideas (within limits, of course). Empowering employees to do this shows your faith in them. If things do not work out, you can turn the experiment into a learning experience. Keep employees engaged to promote greater productivity.

• Appreciate your employees. Money counts, but it is not all about the money. Employees like to feel good about the contributions they are making to the company. Recognize their efforts, when possible. It may be as simple as a shout-out in a company-wide meeting, but that small acknowledgment can go a long ways toward building loyalty.

• Emphasize teamwork. Generally, employees will embrace being part of a team that strives for a common goal. Frequently, this is an objective they would not be able to reach individually. Plus, they will learn to work with others and make accommodations for the greater good. Train your managers to lead team-building exercises that encourage collaboration.

• Set the bar high (but not too high). Provide definitive and realistic goals for staffers to reach. They will normally be motivated by the progress they demonstrate. This also makes it easier for them to visualize the impact of their performance. One idea: Give team members the option of setting goals for themselves for an enhanced sense of achievement.

• Be more flexible. In today’s hectic lifestyle, scheduling is often critical to employees, especially those with family obligations. If you allow them to have “workarounds” that meet their needs, they will likely respond with gratitude and greater dedication to the job. You may also find that an employee’s performance improves if they have more leeway over their schedules.

• Offer a path for advancement. One of the reasons why employees get stuck in rut is that they have nowhere to go in the organization. Offer training sessions and development resources to help employees grow beyond their current positions at the company. Provide opportunities for them to climb the corporate ladder with support from above.

• Remember that every employee is different. Find out what pushes each person’s buttons. Do they do outstanding work as a team member or are they better off of flying solo? Identify and understand what motivates the individual and take your cue from these insights.

Of course, there are no guarantees, but these practical suggestions can benefit both employees and employers. Use common sense for your situation.

The Path to Transportation Benefits

Tax-free payments for participants

With more employees returning to work at their regular business premises, interest is picking up steam in a tax break for commuters: transportation fringe benefits. As long as certain requirements are met, amounts paid on behalf of employees are tax-free up to a specified monthly limit, while employers can deduct the payments.

This is a statutory fringe benefit in the tax code. There are three main types of transportation benefits on the books.

1. Mass transit passes: This includes any pass, token, fare card, voucher or similar item entitling someone to ride free of charge or at a reduced rate on mass transit or in a vehicle seating at least six adults (not including the driver) if someone in the business of transporting persons for pay or hire operates it. Mass transit may be operated publicly or privately and includes transportation by bus, rail or ferry.
   

2. Commuter highway vehicle expenses: A commuter highway vehicle is any highway vehicle seating at least six adults (not counting the driver). It must be reasonably expected that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces. Furthermore, employees must occupy at least 50% of the vehicle’s seats (not counting the driver’s seat). It can take the following forms.

• Employer-operated van pools: The employer either purchases or leases vans so employees may commute together to work, or the employer contracts with and pays a third party to provide the vans, and pays some or all of the costs of operating the vans.

• Employee-operated van pools: Employees independently operate a van for commuting purposes.

• Private or publicly-operated van pools: Alternatively, a van pool can be operated either privately or publicly. The arrangement qualifies if the van seats at least six adults (excluding the driver), but the “80%/50% rule” (see above) does not have to be met.

3. Qualified parking fees: Employers may provide parking privileges for employees on or near the business premises. This also covers fees for parking on or near the location from which employees commute to work using mass transit, commuter highway vehicles or carpools. For example, the company may reimburse employees for parking fees paid at a train station, but this tax break does not extend to parking at or near the employee’s home.

Transportation benefits are tax-free only up to a prescribed monthly limit. Under current law, the monthly limit for all three transportation benefits is the same. For 2024, it is $315 per month (up from $300 per month in 2023), for an annual maximum of $3,780.

Note that the tax law previously allowed a smaller tax exclusion for qualified bicycle commuting expenses, absent any other transportation benefits. Prior to the Tax Cuts and Jobs Act (TCJA), an employee could receive up to $20 a month tax-free ($240 for the year) to pay for a bike, repairs, improvements and storage. But the TCJA suspended this tax exclusion for 2018 through 2025.

Consult with your professional advisors regarding the transportation fringe benefits that may be utilized by your company.

Tax Trap for Home Offices

Watch your step if you claim home office deductions.

Reason: Under a little-known rule, depreciation deductions attributable to a home office after May 6, 1997 must be “recaptured” as taxable income at a 25% rate when you sell your home and claim the home sale exclusion. This applies to “allowable” depreciation.

However the special recapture rule does not apply if you elect the simplified method of computing home office deductions. Rely on your professional tax advisor for guidance.

Facts and Figures

Timely points of particular interest

Employee Retention Credits—Is your business entitled to receive an employee retention credit (ERC) for workers it retained during the height of the pandemic? This tax relief eventually provided a maximum credit of $26,000 per employee. Although the ERC is not taxable, payroll deductions must be reduced by the amount of the credit. Caveat: Employers only have until April 15, 2024, to claim credits for workers in 2020.

Tax Refunds—The IRS makes it easy for taxpayers to directly receive refunds from 2023 tax returns in their personal bank accounts. In fact, you can even arrange to have a refund split into as many as three bank accounts—one for yourself, one for your spouse and one that is a joint account. But you have to compete a special form for this privilege. Note: Using the direct deposit method speeds up your refund.

Five Prime Elections on 2023 Returns   

Important tax decisions to make

In this presidential election year, you may also be casting some important “votes” on your 2023 federal income tax return. Here are five common elections that can make a significant tax difference.

1. Joint or separate returns: If you are married, one of your first tax return decisions is whether to file jointly or as marrieds filing separately. Generally, a couple fares better with a joint return, but that is not always the case. For example, one spouse might have a disproportionately large amount of deductible medical expenses. Due to the medical deduction floor of 7.5% of adjusted gross income (AGI), a couple collectively may benefit by filing separately. Caveat: This election has numerous other ramifications, so consider the overall impact.
2. Investment interest: The tax law allows you to deduct investment interest expenses up to the amount of net investment income for the year. Normally, “net investment income” for this purpose does not include capital gains. But you can elect to include capital gains for which you forgo the favorable tax rate. For 2023 returns, the maximum tax rate for long-term capital gains is 15% (20% for certain upper-income investors). Best of all, you can “cherry-pick” the gains you want to treat as net investment income.
3. Installment sales: If you sell real estate or business interests in installments over two or more years, the tax liability is spread over the time payments are actually received. In effect, you postpone the tax from the sale, as well as possibly reducing the overall tax amount if more of the gain qualifies for the 15% capital gains rate. Although this installment sale tax treatment is automatic, you can elect to pay the entire tax due in the year of the sale if it suits your purposes. This might be preferable on a 2023 return if it is otherwise a low tax year or you expect the next few years to be high tax years.
4. Home office deductions: Typically, a self-employed individual running a business from home qualifies for home office deductions. As a result, you are entitled to deduct expenses directly attributable to the home office, plus a portion of the entire home’s expenses based on the percentage of business use of the home. However, instead of keeping detailed records, you may elect to use a simplified method of $5 per square foot of the home office, up to a maximum of $1,500. Nevertheless, the actual expense method generally produces a bigger deduction and is often worth the extra work.
5. Higher education credits: Normally, parents with children in college may claim one of two higher education tax credits—the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC)—if certain requirements are met. Both credits are subject to phase-outs based on modified adjusted gross income (MAGI), but the rules vary slightly. For instance, the maximum AOTC is $2,500 per student while the maximum LLC is $2,000 per family. Compare the two credit choices.

What are your election results? Fortunately, you do not have to make these tough decisions on your own. Consult with an experienced tax professional early in tax filing season.

DOL Issues Final Rule on Worker Status

New guidance based on six factors

It is often difficult for employers to determine whether certain workers should be treated as employees or independent contractors. The determination could have broad implications for both employers and workers. Now the Department of Labor (DOL) has provided more clarity by issuing a new “final rule.” This latest DOL guidance, which focuses on six key factors, takes effect on March 11, 2024.

Background: The classification of a worker’s status under the Fair Labor Standards Act (FLSA) is critical as to the rights and responsibilities of the respective parties. For instance, if workers are treated as employees, this affects issues such as overtime pay, minimum wage requirements and eligibility for fringe benefits.

From a tax perspective, an employer must pay its share of payroll taxes on an employee’s wages, withhold the employee’s share of payroll taxes and required income taxes, and report those amounts to the IRS. In contrast, if a worker qualifies as an independent contractor, the employer is relieved of those tax obligations. Thus, employers generally prefer to treat “borderline” workers as independent contractors.

However, if an employer improperly misclassifies an employee as an independent contractor, it could owe back taxes, interest and penalties.

New guidance: Back in 2021, the DOL issued regulations on the classification of independent contractors, focusing on two “core” factors: the employer’s right to control the worker’s activities and the worker’s opportunity for profit or loss. If both factors coincided—case closed. But the new final rule replaces the 2021 guidance with a more comprehensive analysis.

Notably, the DOL says that employment status will be based on the following six factors.

1. Opportunity for profit or loss depending on managerial skill. If a worker has no opportunity to impact profit or loss, they are more likely to be an employee than an independent contractor. But if a worker can make management decisions affecting profit or loss, the opposite is true.
2. Investments by the worker and the potential employer. If a worker purchases or provides equipment or tools needed to complete the work, this investment is generally indicative of an independent contractor relationship.
3. Degree of permanence of the work relationship. This factor favors employee status if the work relationship is indefinite in duration or continuous. Conversely, if the duration is definitive or project-based, the worker is likely to be an independent contractor.
4. Nature and degree of control. This previous core factor remains critical. It relates to whether the employer sets the worker’s schedule, supervises the worker’s performance, restricts their ability to work elsewhere or reserves the right to discipline the worker.
5. Extent to which the work performed is an integral part of the potential employer’s business. This emphasizes whether the employee’s function is integral to the business. The more integral the work is, the more likely the individual is an employee.
6. Skill and initiative. If the worker has developed specialized skills outside the usual scope of employment, it is more indicative of independent contractor status.

Be mindful that these factors are not all-inclusive nor is one more influential than another. The final rule requires employers to look at the “big picture” reflecting the totality of the circumstances.

What is the tax impact? Technically, the final rule only applies to the classification of independent contractors under the FLSA. But the IRS may take its cue from the DOL and seek consistency for tax purposes. This could lead to increased challenges for misclassifications. Practical advice: When in doubt, rely on assistance from your professional advisors.

Tax Shelter in Vacation Homes

How to bask in big tax benefits 

 Do you own a cabin in the woods or a cottage by the water? If you rent out the place when your family is not using it personally, you can generally claim deductions to reduce the resulting income tax liability. In fact, you might even qualify for a tax loss, but you must be careful to observe complex tax rules.

With the summer rental season fast approaching, now is the time to coordinate your tax strategies for 2024.

Background: Typically, a vacation home owner can deduct the costs attributable to the rental to offset the income received from tenants, including mortgage interest, property taxes, repairs, utilities, insurance, etc. But there is a limit to this tax generosity. Under the passive activity loss rules, you can only use losses from a rental activity to offset losses from other passive activities.

However, if you are an “active participant” in the rental activity (e.g., you make management decisions and arrange repairs), the tax consequences for losses depend on your income level and the level of your family’s personal use. There are three basic rules to follow.

• If your income does not exceed $100,000, you can use the loss to shelter up to $25,000 of your salary and other income as long as you keep your personal use to a minimum. Your family’s personal use cannot exceed the greater of 14 days or 10% of the rental time. On the downside, when you keep your personal use below these limits, you lose a portion of your mortgage interest deduction (the portion allocable to your personal use).
• If your income exceeds $150,000, the tax law says you cannot qualify for the $25,000 loss write-off. Your total rental deductions basically cannot exceed your rental income, regardless of the amount of your personal use. However, if your personal use is greater than 14 days or 10% of the rental time, you are entitled to an additional deduction: the portion of your mortgage interest you do not claim as a rental expense.
• If your income is between $100,000 and $150,000, things are not as clear-cut. The $25,000 loss write-off is gradually phased out in this income range. The closer you are to the $150,000 level, the more likely it is you will get little in the way of a loss write-off. So you will probably want to increase your personal use—the same strategy for those with incomes above $150,000. This way, you will be able to deduct more of your mortgage interest.

Conversely, if you are closer to the $100,000 level, most of your loss write-off will be intact. Therefore, try to keep your personal use below the 14-day/10% mark, if possible.

Note that the time you spend fixing up the place and preparing it for rental use does not count as “personal use” for these purposes even other family members tag along just to enjoy the great outdoors.

Reminder: The tax rules in this area are extremely tricky and it is easy to be tripped up.  Do not hesitate to seek professional assistance regarding vacation home rentals.

Business Do’s and Don’ts to Follow

Roundup of best practices at work

Now that another year is underway, it is a good time to review a list of do’s and don’ts of common business practices. This can make or break the fortunes of a small business operation in 2024.

DO continue to seek improvement even if your business prospered last year.

It seems like you hear news every other day about another nationally-known or local business entity going under. There are simply no guarantees about the future success of your company. One of the worst enemies of a successful small business owner is complacency.

DON’T take your customers or clients for granted.

For instance, you may assume that a certain sales territory is all wrapped up or a particular client will remain loyal forever. Then the other shoe drops when a large account unexpectedly switches over to the competition. Even if you have provided quality services to someone in the past, you must show you will continue to do so tomorrow, the next day and the day after.

DO continue to expand a growing business.

It is rare to be in the enviable position of having “too much business.” More often than not, business owners tend to become complacent when they reach a comfortable plateau. When that happens, a competitor may be able to siphon off some of your revenue. Also, you may come across to clients as arrogant if you make only a half-hearted attempt to generate new business. A successful business is a growing business.

DON’T assume that you know everything you need to know about your clients.

Gathering information should be an on-going process. Periodically, you should ask customers or clients questions about any concerns and opportunities they are facing, the changes that are affecting them and any special conditions that are causing problems. If you do not keep in touch and up-to-date, you may not be able to fulfill the needs of your customers and clients in the future.

DO hope for the best and plan for the worst.

This is not to suggest that you should let gloom and doom pervade your thinking. Instead, it is meant to convey that it is better to be safe than sorry. A safer approach is to recognize the inherent uncertainty in business and to act accordingly.

 DON’T put all your eggs in one basket.

It is risky to stake your entire livelihood on just one or two accounts. Similarly, if your sales are completely price-driven, your business can go down the drain quickly if a competitor decides to undercut you. In other words, you must offer more to customers than just a low price. The way that you operate should give the impression that you intend to stay in business for the long haul.

In summary: If you take these precautions before danger signs appear, you can keep growing your business no matter what happens. However, if you wait until tough times arrive, it may be too late to take meaningful action. DO what it takes and DON’T fall into common traps.

Reporting on Beneficial Owners

The Financial Crimes Enforcement Network (FinCEN) is now accepting “beneficial ownership” reports. Under the Corporate Transparency Act of 2021, most companies operating in the U.S. are required to provide identifying information to FinCEN about the individuals who actually own or control them.

The deadline for this one-time reporting, which began on January 1, 2024, is January 1, 2025, for companies existing before 2024. New companies formed after 2023 generally have 90 days to meet the new reporting requirements. Your professional advisors can provide more guidance.

Facts and Figures

Timely points of particular interest

Open for Business—The tax filing season for individuals officially opened up on January 29, 2024. The IRS expects more than 128.7 million tax returns for the 2023 tax year to be filed by the April 15, 2024 deadline. But there is no sense in delaying matters until the last minute. Conversely, if you do need more time to collect information or for some other reason, you may obtain an automatic filing extension by making a request to the IRS by the April 15 deadline.

Still Working?—Generally, you must begin taking required minimum distributions (RMDs) from your qualified retirement plans and IRA after reaching a specified age threshold, depending on when you were born. The age threshold was recently upped from 70½ to 72 and again to 73. But you do not have to take RMDs from a qualified plan at a company where you are still working if you do not own more than 5% of the company. Caveat: This “still working” exception only applies to qualified plans—not IRAs.

 

Seven Steps for Tax Return Season

How to prepare for tax filing  

Now that New Year’s Day has passed, another event that is looming on the horizon may not be a cause for celebration: Filing your 2023 tax return. Nevertheless, you can relieve much of the stress by having your return professionally prepared and e-filed for you. Here are seven steps to guide you on the way.  

1. Assemble tax documents. Undoubtedly, you will be inundated with numerous tax forms for the 2023 tax year, including W-2s and 1099s. Employers are required to send W-2s to employees by January 31, 2024. Similarly, investors will receive 1099s with the details of their investment activities. Instead of just dumping these in a pile on your tax return preparer’s desk, review them first to ensure they are accurate. In particular, verify the cost basis used to determine the tax ramifications of securities transactions.

2. Organize financial statements. Having your bank and investment statements on hand will make it easier to trace the origin of funds and reasons for deposits or payments. For instance, it may be determined that a bank deposit constituted a tax-free gift rather than earned income. Similarly, brokerage statements might indicate a carryforward of a tax loss that can be used to offset capital gains realized in 2023.

3. Get business records in order. The same basic advice applies to business owners who are often lax with their recordkeeping. Verify 1099s if you were paid as an independent contractor. Make sure that deductible expenses can be substantiated through receipts and other documentation. Remember that the IRS pays close attention to travel expenses, including deductions for business use of vehicles, so proper recordkeeping in this area is critical.

4. Arrange IRA contributions. If it suits your purposes, you can contribute up to $6,500 to any combination of traditional and Roth IRAs ($7,500 if age 50 or over) for the 2023 tax year. Deductions for traditional IRAs are phased out for active participants in employer-sponsored retirement plans (and spouses of active participants). Roth IRA contributions are nondeductible, but generally lead to future tax-free payouts. Note: The deadline for IRA contributions for 2023 is April 15, 2024.

5. Audit-proof charitable deductions. Under the current tax rules, deductions for cash and cash-equivalent gifts to charities must be supported by records, including written acknowledgements for donations of $250 or more. For credit card charges, the appropriate statement will suffice. Stricter substantiation requirements apply to gifts of appreciated property (e.g., an independent appraisal is required for gifts valued above $5,000).

6. Speed up refunds. Direct deposit is the fastest and safest way to obtain a tax refund. You can have direct deposits made directly to bank accounts, banking apps and reloadable debit cards, but you must provide the routing and account information associated with the account. If the routing and account number cannot be located, contact your bank, financial institution or app provider.

7. Schedule a meeting. The last item on this checklist is to set up a meeting—the earlier the better—with your tax return preparer. This can head off potential problems and resolve any discrepancies. Try to avoid late scrambling that can cause stress. The IRS will begin accepting returns in late January.

Focusing on a Business Franchise Plan

Determine if the opportunity is viable 

 It is hard to open a business and turn it into a successful operation. Despite the best efforts of entrepreneurs, a vast number of new business ventures fail each year. Instead of starting from scratch, you or another family member, like an adult child, might be searching for a ready-made franchise. There are literally thousands of them in the marketplace ranging from McDonald’s to Jiffy Lube to Planet Fitness.

But how do you evaluate the merits of such a business opportunity? At the outset, it is necessary to go over the franchise business plan with a fine-toothed comb. This document, which is prepared by a franchisee for review by a franchisor, typically encompasses three main parts: introductory materials, the marketing strategies and financial aspects. Here is a brief overview of these categories.

1. Introductory materials: The first few sections of the plan will likely provide some basic information and descriptions. Check to make sure that these materials mirror the materials on the franchisee’s website. Investigate the description of the products and/or services offered, the size and nature of the business and the risks involved.

Typically, this section will describe the management team and their roles in the operation. Again, you can verify this information from other Internet sources. Also, the business plan will likely include an overview of the market you will be in and the competitive challenges. For example, you should learn how your projected territory is divided up. Finally, the plan should describe the corporate culture.

2. Marketing strategies: The sections on marketing strategies can answer several important questions, including the following:

• How is the business going to develop its customer base?
• What makes the products and/or services attractive to the public?
• What is the franchisor’s role in marketing activities?
• What resources are budgeted for marketing activities?
• What are the key components of the marketplace (e.g., territory and sector)?
• What are the marketing plans for the future?

The answers to these questions may help you determine if the franchise is a worthwhile undertaking for your situation.

3. Financial aspects: The financial sections of the franchise business plan provide information needed for a thorough analysis. It is usually divided between two main components: financial projections and financial needs.

Financial projections: This includes detailed income statements, cash-flow estimates and balance sheets for estimated income. Be suspicious of projections that seem too good to be true or skyrocket in future years. There should be some wiggle room for downturns or other complications.

Financial needs: The nitty-gritty of the plan covers all start-up and operational expenses. The total amount of capital required, as well as any loans, should be clearly stated. Review this section carefully and determine if it matches your needs and expectations, considering your willingness to take on risks, your available capital and other circumstances. Note: Exhibits and other supporting items will be attached in an appendix.

This is only a brief overview of a complex matter. Even if you are an experienced entrepreneur, you should rely on expert assistance from your professional advisors.

Reap Tax Rewards for Gifts of Property

Maximize tax benefits for itemizers

 Perhaps you are contemplating a large gift of property to a qualified charitable organization. If you give the “right kind” of property, you may benefit from a unique tax break in the law. However, if you donate the “wrong kind” of property, your deduction may be significantly smaller.

Background: If you donate property you have owned long enough for it to qualify for long-term capital gain if you had sold it—in other words, more than one year—you can deduct an amount equal to the property’s fair market value if you itemize deductions. On the other hand, if the property would not qualify for long-term capital gain treatment on a sale, your deduction is limited to your basis in the property, which is often its original cost.

Therefore, this rule can change the way you give property to charity. For instance, suppose you own stock you bought for $5,000 ten months ago. The stock is currently worth $7,000. If you give the stock to charity today, you can deduct only your basis in the stock, or $5,000. However, if you wait more than two months to donate the stock, your deduction is increased to its fair market value, or $7,000.

In other words, you receive the tax benefit of appreciation in value when you donate property held more than one year. You are never taxed on the $2,000 appreciation in value.

However, there are a few other obstacles to overcome. Significantly, if you donate property that is not used to further the charity’s tax-exempt function, your deduction is limited to your basis in the property.

For example, if you donate artwork to your alma mater, insist on having the school display the art in a place where students can view it and study it. As a result, you can deduct the art’s fair market value, assuming you owned it for more than one year. Conversely, if the school simply keeps the art locked away in a storeroom, you get no tax benefit from the appreciation in value.

What happens if the property has depreciated in value? In that case, your deduction is limited to the fair market value, regardless of how long you have held the property. You can’t deduct the difference in your basis and the fair market value. Case in point: Suppose you donate a used car to charity. If you bought the car for $25,000 and it’s now worth $10,000, you may deduct $10,000 on your tax return.

Also, be aware that certain itemized deductions are reduced for high-income taxpayers. This reduction applies to deductions for charitable gifts.

In summary: Regardless of whether property has appreciated or depreciated in value, it is recommended that you obtain an independent appraisal of the property’s current worth. This is the best proof you can have if your deduction is ever challenged. The IRS requires an independent appraisal for property donations exceeding $5,000.

Top Tips About Q-Tip Trusts

Key component of estate plan

One type of trust with an odd-sounding name, the “Q-Tip trust,” can be a valuable estate planning technique, especially for someone in a second marriage. The name is actually an acronym for a Qualified Terminable Interest Property trust. Essentially, it provides some future security for both a surviving spouse and children, while retaining flexibility.

 How it works: A Q-Tip is essentially a marital trust that is more restrictive than the usual arrangement. With a typical marital trust, a portion of the trust assets go to the surviving spouse and the other part goes to the children or other heirs. Conversely, a Q-Tip limits the spouse’s access to the trust funds.

Although the spouse receives income annually from the trust, they cannot draw on principal or ultimately determine the disposition of the assets. Upon the death of the surviving spouse, these assets are then distributed according to the grantor’s specifications.

Due to its restrictive nature, the Q-Tip trust does not automatically qualify for the unlimited marital deduction. However, an executor can elect to claim the marital deduction for the Q-Tip assets on the estate tax return of the grantor.

So why would you set up a Q-Tip trust? There are two main reasons.

1. This arrangement gives your executor flexibility in claiming the marital deduction. An executor may able to minimize the estate taxes owed by both spouses through coordination of this provision with the generous estate tax exemption ($13.61 million for decedents dying in 2024). The decision may also be based on factors such as adjustments in the value of the assets since you created your will and any significant changes in the estate tax law.

2. The second reason may be more compelling than the first. Significantly, this technique allows your estate to benefit from the marital deduction, yet you can still limit the ownership rights of a surviving spouse. As mentioned above, this may be useful regarding a surviving spouse from a second marriage if you want to ensure that the assets ultimately wind up in the hands of your children and other lineal descendants.

After the death of the surviving spouse, all the trust assets are subject to estate tax, but can be sheltered by the estate tax exemption.

Other variations on this basic theme may apply. For instance, a Q-Tip may be combined with remainder interests that will be gifted to a qualified charitable organization. This can accomplish several estate planning goals at the same time.

In summary: If structured properly under both federal and state law, a Q-Tip trust can be an important component of your estate plan. But be aware that this is not a do-it-yourself proposition. Obtain more details about Q-Tips from your professional advisors.

Fast Cash Back on Corporate Tax

Did your C Corporation overpay its estimated tax liability in 2023? You do not have to wait until you file your 2023 tax return—the due date is April 15, 2024—to recoup the overpayment.

Idea in action: You can request a fast refund from the IRS by filing Form 4466 if two requirements are met.

• The overpayment must be for at least 10% of the estimated 2023 tax liability.
• The overpayment must be for at least $500.

Typically, your company will receive its refund within 45 days. So you may get money back before your return is even filed.

Facts and Figures

Timely points of particular interest

 Catch-up Contributions—The SECURE 2.0 law enhances the rules for “catch-up contributions” to 401(k) plans with a catch: Any catch-up contributions by an employee earning $145,000 or more must be made to a Roth-type account. Initially, this requirement was scheduled to take effect on January 1, 2024, but now the IRS is giving plan administrators more leeway. It has postponed the effective date for two years to January 1, 2026.

New Mileage Rates—The IRS has announced the standard mileage rates taxpayers may use in 2024 in lieu of deducting actual expenses. The new rates are:

• 67 cents per business mile (up from 65.5 cents);
• 21 cents per mile for medical and military moving expenses (down from 22 cents); and
• 14 cents per mile for charitable driving (the same as before).

Note that these rates apply to electric vehicles (EVs) and hybrids as well as gas-powered and diesel-powered vehicles.

December 2023

Know the Need for a Succession Plan
Practical advice for business owners

 The HBO series “Succession” illustrates the importance of a business owner having a concrete succession plan in place. Otherwise, families can be ripped asunder. Yet, according to recent statistics from the Society of Human Resources (SHRM), only 35% of firms have a formal succession planning process for critical roles. Without such a plan, the business may fail.

Details: Essentially, a succession plan is a road map for heirs and business associates to follow in the event of the death, disability or retirement of the owner. It may include provisions to distribute stock and other assets, acquire or amend life and disability insurance policies, arrange buy-sell agreements, divide responsibilities among successors and tie up any other loose ends. The plan can also establish the value of the business for various purposes.

Where do you start? First, the owner must clearly establish their objectives and define the financial circumstances. Next, several critical questions must be answered, such as whether the owner intends to retain some influence in retirement, whether there is a capable successor within the ranks and if there are sufficient assets to pay any estate tax, distribute assets and still keep the business running. This also requires some frank and honest discussions with any co-owners or partners, family members and key employees.

Following are several other points to consider:

• The plan should be flexible. Business, family and health situations are ever-changing, so make the plan relatively easy to modify.
• It is important to designate the best person (or people) to take over the This can be a difficult process if there are several viable candidates among the children, siblings or business associates. Similarly, dividing up business assets in an equitable fashion can be a challenge if you hope to preserve family harmony.
• Develop a basic understanding of the prevailing federal and state estate tax laws. On the federal level, the tax law currently provides a generous $13.61 million estate tax exemption in 2024 (up from $12.92 million in 2023) with a top tax rate of 40%. Thus, most small business owners can shield their estates from federal tax, but there may be other consequences on the state level for more families.
• Be aware of gift tax benefits. Under the annual gift tax exclusion, a donor can gift up to $18,000 in 2024 (up from $17,000 in 2023) to each recipient. The amount is doubled to $36,000 per recipient for joint gifts by a married couple (up from $34,000). The exclusion is allowed in addition to the lifetime gift tax exclusion (which is unified with federal estate tax exemption).
• Consider establishing the fair market value (FMV) of the company. The FMV is usually defined as the amount that a buyer would be willing to pay under the usual circumstances. It can be incorporated in a buy-sell agreement that will keep the business afloat in the event of a sudden death or disability.

In summary: This is generally not a do-it-yourself proposition. Seek guidance from your professional advisors.

Are Health Savings Accounts the Cure? 

Tax-favored way to pay medical expenses

Are you worried about your long-term health? If you were not concerned before the pandemic, you probably are now. So you might consider the benefits of a Health Savings Account (HSA). It offers certain tax advantages to participants.

Although HSAs were initially slow to catch on with the public, they have been picking up steam in recent years.

Background: An HSA operates pretty much like an Individual Retirement Account (IRA) for medical expenses. (In fact, it has been referred to as the “Medical IRA.”) Usually, they are provided by an employer in conjunction with its health insurance plan, but may also be set up by individually.

Employees can deduct their out-of-pocket contributions to an HSA, within limits, above the line. If the company makes any contributions on behalf of employees, they are deductible on the company’s tax return.

As with a traditional IRA, there is no current tax erosion on the earnings within the account. Furthermore, distributions are completely tax-free if the funds are used to pay for qualified medical expenses. However, taxable distributions made before age 65 are assessed a 20% tax penalty (double the IRA penalty for pre-age 59½ withdrawals), unless an exception applies.

Who can participate? To qualify for an HSA, an individual must be enrolled in a high-deductible health plan (HDHP), have no other insurance and not be eligible for Medicare (i.e., be under age 65). The IRS sets the standards for meeting the thresholds for HDHPs, subject to inflation indexing.

For 2024, an HDHP is defined as a plan with a deductible of at least $1,600 (up from $1,500 in 2023) and out-of-pocket maximum of $8,050 (up from $7,500 in 2023) for individual coverage or a deductible of at least $3,200 (up from $3,000 in 2023) and out-of-pocket maximum of $16,100 (up from $15,000 in 2023) for family coverage.

How much can you contribute if you qualify? For 2024, the HSA contribution thresholds are $4,150 for individual coverage (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023). In addition, a “catch-up contribution” of $1,000 is permitted for individuals age 55 or over.

Also, be aware that any amount left over in your account at the end of the year may be used to pay medical expenses in the future. This provides a distinct edge for HSAs over flexible spending accounts (FSAs) used to pay medical expenses. Reason: Unused FSA amounts are generally forfeited when the year ends. Alternatively, however, a 2½-month grace period or carryover of up to $640 in 2024 (up from $610 in 2023) may be available for FSAs.

Note: The penalty for making HSA withdrawals for non-medical reasons is 20% instead of the 10% penalty tax for FSAs.

This is not to say that HSAs are without drawbacks. In addition to the restrictions explained above, HSA providers may charge monthly account fees or transaction fees. And the participant could be hit with extra charges for account overdrafts or deposits that do not clear.

Practical advice: If this option appeals to you, discuss the matter with your professional advisors.

Safeguard Your Computer Network

Steps for improving security measures

 Would you ask a salesperson to hold onto your wallet or pocketbook while you go shopping in their store? Of course not. Yet, in effect, some small business owners are doing virtually the same thing with their computer network when they conduct business online. It is almost like you are giving hackers license to steal your money.

What are the potential dangers? There are several ways outsiders may be able to gain access to a company’s network. One possibility is to use a password-guessing program that seeks and identifies Internet addresses. Another type of program allows users to scan multiple host computers for vulnerabilities. Also, be aware that hacking may occur from “inside” sources like your own employees or others who have access to the business premises or your computer network.

What’s more, certain complex computer programs that were originally designed as theft deterrents may be used for illicit means. In many cases, the hackers are more innovative than the creators. And that is bad news for business owners.

So can you try to stop online thieves in their tracks or, at the very least, slow them down?

For those that are inclined, you can pursue more sophisticated techniques, but at the very least you should focus on several basic safety measures as part of an overall security program. To this end:

• Maintain physical security. Is it possible for someone to walk up to your network and shut the entire system down with one flip of a switch? The network server should be kept in an area that is off-limits to most personnel. You might even install security software that limits access to the keyboard and screen.
• Install a firewall. A firewall simply separates the Internet from your company’s computer network. In effect, it screens or blocks outside intrusions that look to be suspicious. Firewalls can also be used to partition one department of your company from another.
• Review your list of network users. Make sure that passwords are changed on a regular basis. Instruct your employees to use nonsensical passwords rather than common words or family names. In addition, supervisory privileges should be limited to a select group of high-ranking employees or officers. If file sharing is too rampant, it may give outsiders easy access to sensitive data.
• Seek protection against computer viruses. The most common method is to acquire software that can help protect you against the type of viruses that could infect your network. Be sure to install the latest updates. Also, watch out for new innovations and improvements.

Naturally, there are no absolute guarantees that these precautions will provide the security you need in all cases. At a minimum, however, taking these steps can set up a good first line of defense. If you don’t have the necessary expertise to address these issues yourself, assign responsibility to someone in your firm or utilize a third party who can handle the responsibilities.

Securing a Casualty Loss Deduction

How to navigate current tax rules

The damage caused by a catastrophe like a hurricane, tornado, flood or wildfire can be devastating. It is difficult to pick up the pieces, especially if your home is destroyed. At least, you may be able to salvage a casualty loss deduction on your annual return,

“Wait a minute,” you might say. “Didn’t the Tax Cuts and Jobs Act (TCJA) eliminate deductions for casualty losses?” True, the TCJA suspends deductions for casualty losses (except for those suffered by active duty military personnel) from 2018 through 2025. But you can still deduct a personal loss suffered in a federally-designated disaster area.

In fact, you can qualify for expedited tax relief. You may even obtain a refund for a disaster occurring in 2024 a year before you file your 2024 return.

Background: Under prior law, casualty and theft losses were available for personal property damage caused by an event that was “sudden, unusual or unexpected,” including the aforementioned natural disasters, as well as fires, vandalism and even auto collisions. However, the deductible amount was limited to the excess above 10% of adjusted gross income (AGI), after subtracting $100 per event. (Congress briefly tinkered with these limits during the pandemic but those changes have expired.)

Say that a married couple had an AGI of $100,000 in a previous year. A fire caused extensive damage to their home, valued at a loss of $15,000 after insurance reimbursements were made. Based on the 10%-of-AGI/$100 floor rules, their deduction was limited to $4,900 ($15,000 – 10% of AGI – $100). The loss generally had to be claimed on the tax return for the tax year in which the damage occurred.

Due to the current suspension of most casualty loss deductions, victims of destructive events may not benefit from any casualty loss deduction on their federal returns. But some taxpayers still have a way out. A loss is deductible if it is attributable to damage in a federally-designated disaster declared by the president. The IRS provides updated lists of qualifying areas.

Special rule: Thanks to unique provision in the tax code, a taxpayer may claim a casualty loss suffered in a federal disaster area on the tax return for the year preceding the year in which the casualty actually occurred. This might provide a desperately needed quick tax refund in a pinch. For instance, suppose your home is destroyed by a crippling winter storm in January. Instead of waiting to claim the loss on your 2024 return, you may obtain relief on the 2023 return you expect to file within the next few months,

Similarly, if you incurred a disaster-area loss in 2023, you may claim the deduction on an amended 2022 return.

Finally, remember that the TCJA only suspends deductions for losses to personal property. There are no such restraints or dollar limits—including the 10%-of-AGI threshold and the $100 reduction per event—for business property losses. As was the case under prior law, these remain fully deductible. Contact your professional tax advisor for assistance relating to any personal or business losses.

IRS Raises Retirement Plan Limits

The IRS recently announced cost-of-living adjustments (COLAs) for qualified retirement plans in 2024. Here are some of the key takeaways.

 

	Limit for 2023	Limit for 2024
Maximum annual dollar benefit for a defined benefit plan	$265,000	$275,000
Maximum dollar limit on additions to a defined contribution plan	$66,000	$69,000
Maximum amount of compensation take into account for qualified retirement plans	$330,000	$345,000
Dollar limit for elective deferrals to a 401(k) plan	$22,500 ($30,000 if age 50 or over)	$23,000 ($30,500 if age 50 or over)
Dollar limit for contributions to a SIMPLE plan	$15,500 ($19,000 if age 50 or over)	$16,000 ($19,500 if age 50 or over)

 

Note: The annual limit for contributions to traditional and Roth IRAs is also increasing from $6,500 for 2023 ($7,500 if you age 50 or over) to $7,000 for 2024 ($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

 New Wage Base—Social Security taxes are going up—again. For 2024, the wage base for the 6.2% OASDI portion of the tax is increasing to $168,600, up $8,400 from $160,200 in 2023. The 1.45% HI portion of the tax continues to apply to all wages. As a result, you would pay $5,208 more in tax (6.2% of $8,400) on the same amount of wages than you did in 2023.

 Earnings Test—The earnings test for Social Security benefits is rising, too. For those attaining normal retirement age (NRA) after 2024, the threshold in 2024 is $22,320, up from $21,240. They lose $1 of benefits for every $2 of earnings above the limit. For those attaining NRA in 2024, the threshold is $59,520 up from $56,520. They lose $1 of benefits for every $3 over the limit.

Seven Year-End Tax Moves for You

Tax-saving ideas for individuals

What a year it has been! Despite the uncertainty of these times, you can still have some peace of mind by taking advantage of tax-saving strategies at the end of the year. Following are seven techniques commonly used by individuals.

1. Capital gains and losses: Under long-standing rules, investors can offset capital gains and losses against each other by “harvesting” securities transactions at year-end. Typically, you may realize capital gains from sales 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 2023.

The maximum tax rate on long-term capital gain for assets held longer than a year remains at 15% (20% for high-income taxpayers). In addition, certain low-income taxpayers (e.g., your children) may benefit from a 0% rate. Caution: Be aware of potential “kiddie tax” complications.

2. Required minimum distributions: Normally, once you have attained a specific age threshold, you must take annual required minimum distributions (RMDs) from qualified retirement plans, like 401(k)s, and traditional IRAs. Otherwise, you are hit with a tax penalty on top of your regular income tax liability. RMDs are based on life expectancy tables and the balance in your account on December 31 of the prior year.

That is the bad news. Now the good news: Beginning in 2023, the SECURE 2.0 law increases the age threshold for beginning RMDs from 72 to 73 (scheduled to go to 75 in 2033), while reducing the penalty from 50% of the shortfall to 25% (10% if you make a quick fix).

3. Charitable donations: If you itemize deductions, you can boost your charitable write-off by donating more money to charities at year-end. For 2023, the annual limit on your deduction for monetary gifts is equal to 60% of your adjusted gross income (AGI). Any excess may be carried over for up to five years.

Make sure you keep the records needed to substantiate deductions. For monetary gifts of $250 or more, you must obtain a written acknowledgement from the charity. Other special rules may apply.

4. Medical expenses: A taxpayer who itemizes can deduct unreimbursed medical expenses above an annual threshold based on AGI. The current limit of 7.5% of AGI—reduced from 10%—is permanent.

If you are near or over the 7.5%-of-AGI threshold for 2023, you might accelerate non-emergency expenses, such as physical exams or dental cleanings, from 2024 into 2023. Otherwise, you can just wait until 2024 when you may derive some tax benefit.

5. 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. However, you may benefit from installment sale reporting if you receive payments over two or more years. Essentially, you are taxed on a pro-rata basis on the amount received from the sale each year.

Not only does this defer tax, you may lower your overall tax liability if a larger portion of the capital gain is taxed over several years at the 15% rate instead of the 20% rate.

6. Electric vehicle credits: If you purchase an electric vehicle (EV) at year-end, you may qualify for an enhanced tax credit if certain conditions are met. The maximum credit of $7,500 comes right off the top of your tax bill.

However, you cannot claim the credit if you are a single filer with a modified adjusted gross income (MAGI) above $150,000 or $300,000 if you are a joint filer. Also, the credit is not available for passenger vehicles costing more than $55,000 or $80,000 for vans, sports utility vehicles (SUVs) and pickup trucks.

7. Estimated tax: If you underpay income tax during the year through any combination of withholding and installment payments, you could be liable for an estimated tax penalty. When it is appropriate, make adjustments to qualify for one of two “safe harbor” exceptions.

Generally, you can avoid the penalty by paying at least 90% of your current tax liability or 100% of the prior year’s tax liability (110% if your AGI for 2022 exceeded $150,000). A third safe-harbor rule provides flexibility for workers who earn most of their income during the holiday season.

Wrapping it up: These are just seven possibilities to consider. With assistance from your professional advisor, develop a personalized tax plan for your situation.

Seven Year-End Tax Moves for Businesses

Tax-saving ideas for business owners 

Year-end tax planning is not just for individuals. Following are seven ideas for small business owners to consider as the year winds down.

1. Business property: Under Section 179 of the tax code, you can elect to currently deduct up to $1.16 million of qualified business property placed in service in 2023. But the deduction cannot exceed the taxable income of your business. Plus, the Section 179 deduction is reduced dollar-for-dollar above a threshold of $2.89 million.

Furthermore, a business may be able to claim first-year “bonus depreciation” on any remaining cost. The previous 100% deduction is being phased out over five years, beginning in 2023 when it drops to 80% (60% in 2024). If any amount is still left over, the cost can be written off through regular depreciation deductions.

    2. Start-up costs: Are you starting a new business venture? The tax law provides a special write-off of up to $5,000 of qualified start-up expenses. This includes costs normally deductible by an active business. However, you must actually get the business up-and-running before 2024 to qualify for this tax break.

Start-up costs above $5,000 must be amortized over 180 months. In addition, the deduction begins to phase out for expenses above $50,000.

3. Business repairs: 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 must be capitalized. Under IRS regulations, you may benefit from a safe-harbor election to currently deduct certain expenses.

Be careful to have repairs made separately from capital improvements. If repairs are lumped in with improvements, the entire cost of this “general betterment plan” may have to be capitalized.

    4. Cash accounting: Generally, small business owners prefer to use the simplified cash method of accounting. However, under prior law, a C corporation that was not a personal service corporation generally could not use the cash method if its average gross receipts for the three prior tax years exceeded $5 million. This limit was recently increased to $25 million (inflation-indexed to $29 million in 2023).

Weigh the benefits of a switch to the cash accounting method. Review all the implications with your professional tax advisor.

5. Business interest: Prior to 2018, business interest was fully deductible. However, under current law, the deduction for business interest is limited to 30% of adjusted taxable income (ATI).

Determine if you qualify for a special exception. The 30%-of-ATI limit does not apply to a business with average gross receipts of $25 million ($29 million for 2023) or less for the three prior years.

   6. Work Opportunity Tax Credit: An employer looking to bolster its staff at year-end may claim the Work Opportunity Tax Credit (WOTC) for hiring disadvantaged workers from one of several specific “target” groups. Generally, the WOTC equals 40% of first-year wages of up to $6,000 per employee, for a maximum of $2,400. For certain veterans, the credit is available for up to $24,000 in wages, for a maximum of $9,600.

The WOTC has expired and been reinstated numerous times in the past. However, Congress recently extended the credit for five years, through 2025.

   7. Holiday parties: Lastly, legislation has permanently eliminated the deduction for entertainment expenses, beginning in 2018. But the law change does not affect deductions for parties and other get-togethers where the entire work staff is invited.

Best of all, the deduction for holiday parties is equal to 100% of the cost, as opposed to the usual 50% limit previously allowed for most entertainment expenses. Enjoy all the tax benefits of your year-end planning!

Age-Old Retirement Planning Benefits

Take Advantage of Favorable Provisions

There are some perks of growing older like qualifying for discounts on movie tickets and lower prices in restaurants. Even better, you may benefit from several special provisions affecting retirement-savers. Here’s a brief rundown.

Social Security benefits: Generally, you must wait until your “normal retirement age” (NRA) before you can claim the full amount of your Social Security retirement benefits. The NRA, which is based on your year of birth, maxes out at age 67. However, you may opt to claim a lower monthly benefit amount at age 62 or a higher amount by postponing your application until age 70. With professional assistance, you can crunch the numbers and figure out the best approach for your situation.

Catch-up contributions: Although the tax law provides generous annual limits on contributions to qualified retirement plans where you work, like a 401(k) plan, and traditional and Roth IRAs, you can do even better after reaching age 50. To help you save more for retirement later in your working years, you can add a “catch-up contribution” to your regular contribution. For instance, in 2023 you can increase the maximum 401(k) deferral of $22,500 by $7,500 or tack on another $1,000 to the maximum $6,500 IRA contribution. Note: Recent legislation enhances catch-up contributions after 2023.

Early distributions: Typically, you cannot withdraw funds from a qualified plan or IRA prior to age 59½ without paying a penalty tax—on top of regular income tax—unless a special exception applies. However, you may tap into a qualified plan (but not an IRA) in the year you turn age 55 if you retire, quit or are laid off from your job (age 50 for public safety workers). Another provision allows you to take substantially equally periodic payments (SEPPs) under one of three IRS-approved methods. SEPPs are made over your life expectancy or the joint life expectancies of you and a designated beneficiary.

Note: Recent legislation allows 401(k) participants to benefit from penalty-free emergency withdrawals, up to certain limits, beginning in 2024.

Required minimum distributions: On the downside, you are currently required to begin taking required minimum distributions (RMDs) from qualified plans and IRAs in the year after the year you turn age 73 (recently increased from 72). This requirement is postponed for qualified plans until you retire, however, if you are still working full-time and you do not own 5% or more of the company. Furthermore, the rule for RMDs does not apply to Roth IRAs during your lifetime.

Qualified charitable distributions: Normally, distributions from traditional IRAs are taxable at ordinary income rates, even if you subsequently donate the funds to charity. (Contributions may be deductible by itemizers.) However, if you are older than 70½, you can transfer IRA funds directly to charity with no tax consequences. This “qualified charitable distribution” (QCD) counts as an RMD.

In summary: Age clearly matters in retirement planning. Take advantage of the tax breaks at your disposal.

How to Reduce Investment Risk

Follow These Practical Suggestions

What will happen to the stock market in 2024? Unless you have a magic crystal ball, there is simply no way to be sure. But a “common sense” approach is likely to reduce your risk.

Naturally, you would like to do your best to maximize your gains and to protect yourself against losses, or at least limit your exposure to a potentially devastating loss. Here are several practical suggestions.

• Be realistic. It is important to understand that no investment is 100% risk-free and that you will incur losses as well as gains over time. If the stock market increases or decreases by, say, 10%, your equity stake will either rise or fall as well, although not necessarily by the same percentage. It is doubtful that you, and you alone, will be immune.
• Stick with a sound investment strategy. One of the key elements preached by many stock market gurus is to remain consistent. In other words, you should not race off in pursuit of the latest trend. Develop a strategy that meets your personal objectives and tolerance for risk. Although you can certainly tweak your approach, when appropriate, rely on the fundamentals.
• Invest for the long term. Jumping in and out of the stock market on the spur of the moment will often result in losses that may offset gains or vice versa. Avoid the temptation to try to “make a quick buck.” If you adopt a long-term investment outlook, you are far more likely to achieve reasonable objectives. Do not make short-term acquisitions or sales that are counterintuitive.
• Factor taxes into the equation. When you are analyzing the merits of specific investments—and whether to buy, sell or hold—remember to consider all the tax implications. This could push you in one direction or steer you away from another.
• Be disciplined. When you acquire a stock, establish the parameters that would result in the stock’s sale. Then follow through on these principles in your selling decisions. In other words, don’t sell before the time is right or become greedy by holding onto a stock too long.
• Do not overreact to media reports. Whether the news is good or bad, it does not mean you should go on a buying or selling spree. Try to stay on an even keel and avoid panic-driven moves that you might regret later on.
• View your entire portfolio. A diversified portfolio may hold different investments with different positions. Therefore, when one particular stock outperforms or underperforms, another stock will be doing the opposite. If you do not put all your eggs in one basket, your loss exposure is reduced. Instead of turning all your attention to one stock, consider your portfolio in its entirety.

Remember that volatility is to be expected. Rely on your tax and financial advisors to provide guidance when needed.

How to Boost Company Morale

Are you expecting employees to perform at a higher level in 2024? Workers are usually more productive when morale is up. Consider these ideas:

• Find out what motivates your employees. Assign them tasks accordingly.
• Give them work that is meaningful to the company’s objectives.
• Provide the resources needed to do their jobs right.
• Create a team spirit within the organization.
• Keep lines of communication open.

Finally, as a business owner or manager, it is important for you to set the proper tone. Practice what you preach.

Facts and Figures

Timely points of particular interest

 Works of Art—The IRS is warning taxpayers about scam artists promoting inflated deductions for charitable donations of art. How it works: A promoter convinces a well-to-do individual to purchase the art and then wait more than a year to donate it to charity. Then they establish an artificially high value for the art for tax deduction purposes. Avoid these schemes at all costs and use a reputable appraiser for artwork donations.

Estimated Tax Penalties—Are you required to make quarterly estimated tax payments? The IRS has been imposing more penalties for non-compliance. According to the latest available IRS statistics, there was a 24% increase in the number of estimated tax penalties levied between 2017 and 2022, following a 42% boost between 2012 and 2017. Be aware if you face this responsibility: The next installment covering the fourth quarter of 2023 is due January 16, 2024.