January 2024 Newsletter

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.