Author: KraftCPAs

If you encounter a serious cash shortfall, one potential solution is to take an early withdrawal — which is one before you’ve reached age 59½ — from your traditional IRA. But an early withdrawal is a big decision, especially considering the 10% tax penalty that usually goes with it.

Here are a few things to consider before you dive into your IRA, SEP-IRA, or SIMPLE-IRA funds.

Tax-free and not tax-free

In almost all cases, all or part of a withdrawal from a traditional IRA will constitute taxable income. The taxable percentage depends on whether you’ve made any nondeductible contributions to your traditional IRAs. If you have, each withdrawal from a traditional IRA consists of a proportionate amount of your total nondeductible contributions. That part is tax-free. The proportionate amount of each withdrawal that consists of deductible contributions and accumulated earnings is taxable. If you’ve never made any nondeductible contributions, 100% of a withdrawal is taxable.

Wide range of exceptions

Want to avoid the 10% penalty on your IRA withdrawal? There are 11 exceptions that would nullify the penalty, although some of them include additional requirements and specific details to discuss with a professional advisor.

1. Substantially equal periodic payments (SEPPs). These are annual annuity-like withdrawals that must be taken for at least five years or until the you reach age 59½, whichever comes later. Because the SEPP rules are complicated, consult with us to avoid pitfalls.

2. Withdrawals for medical expenses. If you have qualified medical expenses more than 7.5% of your adjusted gross income, the excess is exempt from the penalty tax.

3. Higher education expense withdrawals. Early withdrawals are penalty-free to the extent of qualified higher education expenses paid during the same year.

4. Withdrawals for health insurance premiums while unemployed. This exception is available to an IRA owner who has received unemployment compensation payments for 12 consecutive weeks under any federal or state unemployment compensation law during the year in question or the preceding year.

5. Birth or adoption withdrawals. Penalty-free treatment is available for qualified birth or adoption withdrawals of up to $5,000 for each eligible event.

6. Withdrawals for first-time home purchases. Penalty-free withdrawals are allowed to an account owner within 120 days to pay qualified principal residence acquisition costs, subject to a $10,000 lifetime limit.

7. Withdrawals by certain military reservists. Early withdrawals taken by military reserve members called to active duty for at least 180 days or for an indefinite period are exempt from the 10% penalty.

8. Withdrawals after disability. Early withdrawals taken by an IRA owner who is physically or mentally disabled to the extent that the owner cannot engage in his or her customary gainful activity or a comparable gainful activity are exempt from the penalty tax. The disability must be expected to lead to death or be of long or indefinite duration.

9. Withdrawals to satisfy certain IRS debts. This applies to early IRA withdrawals taken to pay IRS levies against the account.

10. Withdrawals after death. Withdrawals taken from an IRA after the account owner’s death are always exempt from the 10% penalty. However, this exemption isn’t available for funds rolled over into the surviving spouse’s IRA or if the surviving spouse elects to treat an IRA inherited from the deceased spouse as the spouse’s own account.

11. Penalty-free withdrawals for emergencies coming soon. The SECURE 2.0 law adds a new exception for certain distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year and a taxpayer has the option to repay it within three years. This provision is effective for distributions made after December 31, 2023.

Potential drawbacks

Since most or all of an early traditional IRA withdrawal will probably be taxable, it could push you into a higher marginal federal income tax bracket. You may also owe the 10% early withdrawal penalty plus, in some states, additional state income tax.

© 2023 KraftCPAs PLLC

Certain companies will soon be required to provide information related to their “beneficial owners” — the individuals who ultimately own or control the company — to the Financial Crimes Enforcement Network (FinCEN), although some will benefit from a newly extended deadline.

The reporting rules, which are included as part of the Corporate Transparency Act (CTA), were to go into effect across the board on January 1, 2024. FinCEN estimates that the rule will impact 32.6 million companies in 2024 alone. Failure to comply may result in civil or criminal penalties, or both.

AICPA, others appeal for deadline change

With many businesses not ready for the looming deadline, the American Institute of Certified Public Accountants (AICPA) and more than 50 affiliated organizations recently urged FinCEN to issue a one-year deadline extension of the effective date for the beneficial ownership information (BOI) reporting rules. In a four-page letter co-signed by CPA associations in all 50 states; Washington, D.C.; Guam; and the Virgin Islands, it requested a one-year extension of the effective date for the BOI reporting requirements for all new entities created in 2024, all entities created thereafter, and all entities making updates or corrections to their original filings.

On November 29, FinCEN announced it would extend the filing deadline for entities created or registered during 2024 to 90 days — previously 30 days — from the earlier of either:

• The date on which the company receives actual notice that its creation or registration has become effective
• The date on which the secretary of state first provides public notice that the company has been created or registered

The AICPA argues that change doesn’t go far enough.

Broad scope

The rules generally apply to both domestic and foreign privately held reporting companies. For these purposes, a reporting company includes any corporation, limited liability company or other legal entity created through documents filed with the appropriate state authorities. A foreign entity includes any private entity formed in a foreign country that’s properly registered to do business in a U.S. state.

There’s a key exemption for “large operating companies” that:

• Employ more than 20 employees on a full-time basis
• Have more than $5 million in gross receipts or sales (not including receipts and sales from foreign sources)
• Physically operate in the United States

In total, the CTA provides exemptions from the BOI reporting requirements for 23 types of entities, including financial institutions, securities brokers and insurance companies. Many exempt entities are already regulated by federal or state governments and already have BOI filing requirements.

Extensive reporting requirements

A beneficial owner is defined as someone who, directly or indirectly, exercises substantial control over a reporting company, or owns or controls at least 25% of its ownership interests. The CTA requires reporting companies to provide detailed information about their “company applicants.” A company applicant is defined as the person who is either:

• Responsible for filing the documents that created the entity (for a foreign entity, this is the person who directly files the document that first registers the foreign reporting company to conduct business in a state)
• Primarily responsible for directing or controlling filing of the relevant formation or registration document by another.

BOI reports must include the following information:

• The legal name of the entity (or any trade or doing-business-as name)
• The address of the entity
• The jurisdiction where the entity was formed
• The entity’s Taxpayer Identification Number
• The name, address, date of birth, unique identifying number information of the beneficial owners (such as a U.S. passport or state driver’s license number), and an image of the document that contains the identifying number

Reporting companies have 30 days, 90 days, or one year from the effective date (January 1, 2024) to comply with the reporting requirements. The deadline to comply depends on the entity’s date of formation. Reporting companies created or registered prior to January 1, 2024, have one year to comply by filing initial reports. Those created or registered on or after January 1, 2024, but before January 1, 2025, will have 90 days upon receipt of their creation or registration documents to file their initial reports. Those created or registered on or after January 1, 2025, will have 30 days upon receipt of their creation or registration documents to file their initial reports.

BOI reports filed with FinCEN aren’t accessible by the public. However, certain government agencies will have access to the information, including those involved in national security, intelligence and law enforcement, as well as the IRS and U.S. Treasury Department.

An omission or fraudulent BOI filing could result in civil fines of $500 a day for as long as the reports are missing or remain inaccurate. Failure to comply may also trigger criminal penalties of a $10,000 fine — or even jail time of two years.

Learning curve

The AICPA cites a recent survey by the National Federation of Independent Business that showed 90% of its members, particularly smaller companies, weren’t familiar with the BOI reporting rules. “Regardless of FinCEN’s activities to raise awareness, their efforts remain ineffective, and most businesses are unaware of this filing requirement,” said the letter. It also said that FinCEN has “woefully underestimated” the time and stress the new requirements will cause businesses.

FinCEN estimates that compliance will take over 32.8 million burden hours (about one hour per entity) with an estimated cost of more than $2,600 per entity, depending on its structure. These estimates don’t include additional resource requirements for businesses, particularly in the first year, to understand and identify who’s a “beneficial owner,” who exercises “substantial control,” who’s a “company applicant” or whether a small business even is considered a “reporting company.”

Plus, businesses will need to continuously track all beneficial owners’ information for changes that could or have happened each month. According to the AICPA, something as simple as an expired driver’s license would require an updated BOI filing. The AICPA letter concludes, “FinCEN should give all businesses a fair time frame to gain awareness and a reasonable time frame to comply with the BOI requirements.”

More to come?

Two bills (H.R. 4035 and S. 2623) are being considered in Congress that would delay implementation of the BOI reporting rules. FinCEN hasn’t yet responded directly to the request from the AICPA to further extend the deadline or expand the scope to cover more businesses.

© 2023 KraftCPAs PLLC

It’s been a rough three years for small businesses. COVID, supply chain issues, inflation – all of these may have triggered a downturn in your company’s finances. It hasn’t been easy, and a lot of businesses have had to close their doors.

QuickBooks Online is one of the tools that has gotten many businesses through these tough times. Its digital organizational tools have replaced the confusion, frustration, and wasted time caused by manual bookkeeping systems. But are you using the site as fully as you could?  It’s possible that a few changes might help you improve your bottom line.

Here are five resolutions you can make to expand your use of QuickBooks Online in 2024.

Be proactive about reconciliation

You know what bank account reconciliation is, even if you don’t practice it regularly. It’s important, and QuickBooks Online simplifies the process by allowing you to review transactions as they come in. As a result, your monthly routine isn’t as cumbersome.

Hover over Banking in the toolbar and click Banking in the menu that opens. Select the account you want to work with. Make sure For review is highlighted so only new transactions appear in the register. Edit the transaction if necessary and click Add to move it into the Categorized register.

Accept online payments

We’ve talked about this before. Setting up a merchant account through QuickBooks Payments will allow you to accept credit and debit cards and ACH transfers as customer payments. You can even take Apple Pay, PayPal, and Venmo. (There are transaction fees, but they’re competitive.) You’ll have access to tools that allow you to take payments in three ways:

Online invoices. QuickBooks Online’s invoices will contain easy instructions for paying online.

In person. You can buy the Intuit GoPayment card reader ($49) and use the companion app to connect wirelessly to your smartphone or tablet.  Customers can insert or tap cards and use digital wallets.

Over the phone. If customers are hesitant to put their payment information online, you can key in their numbers yourself.

Generate reports regularly

How often do you run reports? If you’re only taking an occasional look at the site’s preformatted reports (click Reports in the toolbar), you’re missing out on the insights that QuickBooks Online can provide. Make it a resolution to run them regularly. We recommend Accounts Receivable Aging (detail or summary), Accounts Payable Aging (detail or summary), Open Invoices, and Unpaid Bills. Keep a close eye on what’s selling and what’s stalling with Sales by product/service (detail or summary).

There are more complex reports (For My Accountant) that should also be generated on a regular basis. They don’t just deal with things like money coming in and going out. Rather, they provide a more comprehensive view of your finances that can help you understand your current financial status and help plan. They include Balance Sheet, Profit and Loss, and Statement of Cash Flows, and they should be run monthly or quarterly. QuickBooks Online can create them, but analyzing them will be difficult. We can help you go through them and find the key information.

Complete your inventory records

Are your inventory records complete? Do you go back and fill in the missing inventory information later? You won’t get the inventory tracking benefits the site offers with incomplete records. QuickBooks Online allows you to add new product records on the fly as you’re creating transactions. Go through your product records and fill in the missing information, especially Reorder point. You can always see where you stand with stock levels by clicking Products and Services in the toolbar.

Resolve to improve your customer forms

QuickBooks Online’s default sales forms are good, but you can make them better by customizing them to reinforce your company’s brand. Click the gear icon in the upper right and select Account and Settings. Click Sales in the toolbar. If you want to work with the forms’ design, click Customize Look and Feel. You can also edit the Sales form content by toggling options off and on. If you want to get even more in-depth about changing the look and content of your business forms, we can help.

© 2023 KraftCPAs PLLC

The IRS has once again postponed implementation of a new rule that would have led to an estimated 44 million taxpayers receiving tax forms from payment apps and online marketplaces such as Venmo and eBay. It’s the second year in a row that the IRS has chosen to delay the new regulation.

While the additional wait should spare taxpayers some confusion, it won’t affect their obligations to report income on their tax returns. The IRS said it expects to begin implementing the new regulations later next year.

The new reporting rule

The rule concerns IRS Form 1099-K, Payment Card and Third Party Network Transactions, an information return first introduced in 2012. The form is issued to report payments from:

• Credit, debit and stored-value cards such as gift cards
• Payment apps or online marketplaces (also known as third-party settlement organizations)

If you receive direct payments via credit, debit, or gift card, you should receive the form from your payment processors or payment settlement entity. But for years, payment apps and online marketplaces have been required to send Form 1099-K only if the payments you receive for goods and services total more than $20,000 from more than 200 transactions. They can choose to send you the form with lower amounts.

The form reports the gross amount of all reportable transactions for the year and by the month. The IRS also receives a copy.

The American Rescue Plan Act (ARPA), enacted in March 2021, significantly expanded the reach of Form 1099-K. The changes were designed to improve voluntary tax compliance for these types of payments. According to the IRS, tax compliance is higher when amounts are subject to information reporting.

Under ARPA, payment apps and online marketplaces must report payments of more than $600 for the sale of goods and services; the number of transactions is irrelevant. As a result, the form would be sent to many more taxpayers who use payment apps or online marketplaces to accept payments. The rule change could ensnare small businesses and individuals with side hustles as well as more casual sellers of used personal items like clothing, furniture, and other household items.

The change originally was scheduled to take effect for the 2022 tax year. In December 2022, the IRS announced its first implementation delay and released guidance stating that 2022 would be a transition period for the change.

The agency also acknowledged that the change must be managed carefully to help ensure that the forms are issued only to taxpayers who should receive them, and that taxpayers understand the requirements.

The updated implementation plan

In a November 2023 report, the U.S. Government Accountability Office (GAO) stated that the IRS expects to receive about 44 million Form 1099-Ks in 2024 — an increase of around 30 million. The GAO found, however, that the “IRS does not have a plan to analyze these data to inform enforcement and outreach priorities.”

Less than a week later, the IRS announced a second delay in the rule change, explaining that the previous thresholds ($20,000 / more than 200 transactions) remain in place for 2023. The agency cited strong feedback from taxpayers, tax professionals, and payment processors, as well as the possibility of taxpayer confusion.

It seemed likely confusion would ensue when the forms started hitting mailboxes in January 2024. For example, with forms sent by payment apps or online marketplaces, it’s not clear how taxpayers should transfer the reported amounts to their individual tax returns. The income shown on the form might be properly reported on any one of three items:

• Schedule C, Profit or Loss from Business (Sole Proprietorship)
• Schedule E, Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)
• Appropriate return for a partnership or corporation

In addition, the gross amount of a reported payment doesn’t include any adjustments for credits, cash equivalents, discounts, fees, refunds, or other amounts — so the full amount reported might not be the taxable amount.

Moreover, not every reportable transaction is taxable. If you sell a personal item on eBay at a loss, for example, you aren’t required to pay tax on the sale. If you met the $600 threshold, though, that sale would appear on your Form 1099-K.

The IRS clarified that it isn’t abandoning the lower threshold. In its latest announcement, the agency indicated that a transitional threshold of $5,000 will apply for tax year 2024. This phased-in approach, the IRS says, will allow it to review its operational processes to better address taxpayer and stakeholder concerns.

Advice for Form 1099-K recipients

If you receive a Form 1099-K under the existing thresholds, the IRS advises you to review the form carefully to determine whether the amounts are correct. You also should identify any related deductible expenses you may be able to claim on your return.

If the form includes personal items that you sold at a loss, the IRS says you should “zero out” the payment on your return by reporting both the payment and an offsetting adjustment on Form 1040, Schedule 1. If you sold such items at a gain, you must report the gain as taxable income.

© 2023 KraftCPAs PLLC

If you have a tax-saving flexible spending account (FSA) with your employer to help pay for health or dependent care expenses, you might be running out of time to use it.

As the end of 2023 gets closer, here are a few rules and reminders to help you make the most of your FSA.

Health FSA 

A pre-tax contribution of $3,050 to a health FSA is permitted in 2023. This amount will increase to $3,200 in 2024. You save taxes in these accounts because you use pre-tax dollars to pay for medical expenses that might not be deductible. For example, expenses won’t be deductible if you don’t itemize deductions on your tax return. Even if you itemize, medical expenses must exceed a certain percentage of your adjusted gross income to be deductible. Additionally, the amounts that you contribute to a health FSA aren’t subject to FICA taxes.

Your employer’s plan should have a list of qualifying items and any documentation from a medical provider that may be needed to get reimbursed for these expenses.

FSAs generally have a “use-it-or-lose-it” rule, which means you must incur qualifying medical expenditures by the last day of the plan year (December 31 for a calendar year plan) — unless the plan allows an optional grace period. A grace period can’t extend beyond the 15th day of the third month following the close of the plan year (March 15 for a calendar-year plan).

What if you don’t spend the money before the last day allowed? You forfeit it.

Look at your year-to-date expenditures now. It will show you what you still need to spend. So how do you use up the money? Before the year ends (or before the extended date, if permitted), schedule certain elective medical procedures, visit the dentist, or buy new eyeglasses.

Dependent care FSA 

Some employers also allow employees to set aside funds on a pre-tax basis in dependent care FSAs. A $5,000 maximum annual contribution is permitted ($2,500 for a married couple filing separately).

These FSAs are for:

• A child who qualifies as your dependent and who is under age 13, or
• A dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the tax year.

© 2023 KraftCPAs PLLC

Regulations designed to increase electronic filing will impact a variety of businesses starting January 1, 2024.

The new requirements first outlined in the Taxpayer First Act and finalized earlier in 2023 will primarily impact businesses, corporations, and partnerships that file multiple returns each year. Specifically, the rules will:

• Require businesses that file 10 or more returns in a calendar year to file them electronically, thus eliminating the 250-return threshold as well as previous e-file exceptions for certain returns and documents.
• Require filers to aggregate their returns regardless of type in applying the 10-return threshold. Previously, the 250-return threshold applied separately to each type of return filed.
• Eliminate the e-filing exception for income tax returns of corporations that report total assets under $10 million at the end of their taxable year.
• Require e-filing by partnerships with more than 100 partners, as well as partnerships required to file 10 or more returns of any type during the calendar year.

The IRS said hardship waivers and exemptions will be considered for filers unable to comply with the requirements.

More than 4 billion returns are filed each year, and the IRS said it expects almost 5 billion by 2028. In 2021, about 82% of all corporate income tax returns were filed electronically.

© 2023 KraftCPAs PLLC

Amid holiday parties and shopping for gifts, don’t forget to consider steps to cut the 2023 tax liability for your business. You still have time to take advantage of a few opportunities.

Time deductions and income

If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2023 and deferring income into 2024 (assuming you expect to be taxed at the same or a lower rate next year).

For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2023 even though you don’t pay the credit card bill until 2024. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2023.

As for deferring income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.

Buy assets

If you’re thinking about purchasing new or used equipment, machinery or office equipment in the new year, now might be the time to do it. Buy the assets and place them in service by December 31, and you can deduct 80% of the cost as bonus depreciation in 2023. This is down from 100% for 2022, and it will drop to 60% for assets placed in service in 2024. Contact us for details on the 80% bonus depreciation break and exactly what types of assets qualify.

Bonus depreciation is also available for certain building improvements.

Fortunately, the first-year Section 179 depreciation deduction will allow many small and medium-sized businesses to write off the entire cost of some or all their 2023 asset additions on this year’s federal income tax return. There may also be state tax benefits.

However, keep in mind there are limitations on the deduction. For tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million and a phaseout rule kicks in if you put more than $2.89 million of qualifying assets into service in the year.

Purchase a heavy vehicle

The 80% bonus depreciation deduction may have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.

Specifically, 100% bonus depreciation is available when the SUV, pickup, or van has a manufacturer’s gross vehicle weight rating above 6,000 pounds. You can verify a vehicle’s weight by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door. If you’re considering buying an eligible vehicle, placing one in service before year-end could deliver a significant write-off on this year’s return.

Keep in mind that some of these procedures could adversely impact other aspects of your tax liability, such as the qualified business income deduction. Reach out to a KraftCPAs advisor to discuss options and potential pitfalls.

© 2023 KraftCPAs PLLC

After a string of bank failures in early 2023, the Federal Deposit Insurance Corp. (FDIC) has proposed new enforceable guidelines to tighten corporate governance and risk management practices. The new requirements, which would affect financial institutions with assets of $10 billion or more, include measures on board member diversity in financial institutions, the establishment of appropriate committees, and the implementation of an independent risk management program. The new standards present some of the most significant additions to safety and soundness rules for banking organizations in this asset size range in recent history.

Read the full article here…

With the cost of higher education rising, families often look for scholarships to help pay the bills. If your child is awarded a scholarship, it’s important to know how it could affect your family’s taxes.

Good news: Scholarships and fellowships are generally tax-free for students at elementary, middle schools, and high schools, as well as those attending college, graduate school, or an accredited vocational school. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

Requirements for tax-free treatment

Despite this generally favorable treatment, scholarships aren’t always tax-free. Certain requirements must be met. A scholarship is tax-free only if it’s used to pay for:

• Tuition and fees required to attend the school
• Fees, books, supplies, and equipment required of all students in a particular course

For example, expenses that don’t qualify include the cost of room and board, travel, research, and clerical help.

A scholarship award is taxable to the extent it isn’t used for qualifying items. The recipient is responsible for establishing how much of an award is used to pay for tuition and eligible expenses. Therefore, you should maintain records (such as copies of bills, receipts, and cancelled checks) that reflect the use of the scholarship money.

Taxable and nontaxable amounts

Subject to limited exceptions, a scholarship isn’t tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research, or other services is taxable, even if the child uses the money for tuition or related expenses.

What if you, or a family member, are an employee of an educational institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse, or your dependents by the school at which you work isn’t included in your income and isn’t subject to tax.

Payments reported and not reported on tax returns

If a scholarship is tax-free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax. Your child should receive a Form W-2 showing the amount of these “wages” and the amount of tax withheld, and any portion of the award that’s taxable must be reported, even if no Form W-2 is received.

These are just the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled.

© 2023 KraftCPAs PLLC

As another year ends with interest rates and markets in flux, one thing remains certain: Reducing your company’s tax bill can improve your cash flow and your bottom line. Here are five strategies — including some tried-and-true and others particularly timely — that you can execute before the turn of the new year to minimize your company’s tax liability.

Take advantage of the pass-through entity (PTE) tax deduction, if available

The Tax Cuts and Jobs Act (TCJA) imposed a $10,000 limit on the federal income tax deduction for state and local taxes (SALT). In response, more than 30 states have enacted some type of “workaround” to provide relief to PTE owners who pay individual income tax on their share of their business’ income.

While PTE tax deductions vary by state, they generally allow partnerships, limited liability companies and S corporations to pay a mandatory or elective entity-level state tax on business income with an offsetting owner-level benefit. The benefit typically is a full or partial tax credit, deduction or exclusion that owners can apply to their individual state income tax. The business can claim an IRC Section 164 business expense deduction for the full amount of its payment of the tax, as the SALT limit doesn’t apply to businesses.

Establish a cash balance retirement plan

Cash balance retirement plans are regaining popularity for businesses with high earners who regularly max out their 401(k) plans. The plans combine the higher contribution limits of defined contribution plans with the higher maximum benefits and deduction limits of defined benefit plans. A business can claim much larger deductions for cash balance contributions than 401(k) contributions.

In 2023, for example, the maximum employer/employee 401(k) contribution for a 55-year-old is $73,500 (including a catch-up contribution of $7,500). Meanwhile, a business can contribute up to $265,000 to a cash balance plan (depending on the participant’s age), in addition to the 401(k) contribution. Contribution limits increase with age, creating a valuable opportunity for those nearing retirement to add to their retirement savings as well as a substantial deduction for the business.

Under the original SECURE Act, businesses have until their federal filing deadline (including extensions) to launch a cash balance plan. But it can take some time to prepare the necessary documents, calculate the contributions, and handle other administrative tasks, so you’d be wise to get the ball rolling sooner rather than later.

Act on asset purchases

Timing your asset purchases so you can place the items “in service” before year-end has long been a viable method of reducing your taxes. However, now there’s a ticking clock to consider. That’s because the TCJA reduces 100% first-year bonus depreciation by 20% each tax year, until it vanishes in 2027 (absent congressional action). The deduction has already dropped to 80% for 2023.

First-year bonus depreciation is available for computer systems, software, vehicles, machinery, equipment, office furniture, and qualified improvement property (generally, certain improvements to nonresidential property, including roofs, HVAC, fire protection and alarm systems, and security systems).

Usually, though, it’s advisable to first apply the IRC Section 179 expensing election to asset purchases. Sec. 179 allows you to deduct 100% of the purchase price of new and used eligible assets. Eligible assets include machinery, office and computer equipment, software, certain business vehicles, and qualified improvement property.

The maximum Sec. 179 “deduction” for 2023 is $1.16 million. It begins phasing out on a dollar-for-dollar basis when a business’s qualifying property purchases exceed $2.89 million. The maximum deduction is limited to the amount of your income from business activity, but you can carry forward unused amounts indefinitely or claim the excess amounts as bonus depreciation, which is subject to no limits or phaseouts. But remember: If you’re financing asset purchases, consider the impact of high interest rates in addition to the potential tax savings.

Maximize the qualified business income (QBI) deduction

One caveat regarding depreciation deductions is that they can reduce the QBI deduction for PTE owners. (Note that the QBI deduction is scheduled to expire after 2025 absent congressional action.) If the QBI deduction is allowed to expire, PTE income could be subject to rates as high as 39.6% if current rates also expire.

For now, though, PTE owners can deduct up to 20% of their QBI, subject to certain limitations based on W-2 wages paid, the unadjusted basis of qualified property and taxable income. Accelerated depreciation reduces your QBI (in addition to certain other tax breaks that depend on taxable income) and thus your deduction.

On the other hand, you can increase the deduction by increasing W-2 wages or purchasing qualified property. In addition, you can bypass income limits on the QBI deduction by timing your income and deductions.

Timing income and expenses

With the election looming next November, it’s unlikely that 2024 will see significant changes to the tax laws. As a result, the perennial tactic of timing income and expenses is worth pursuing if you use cash-basis accounting.

For example, if you don’t expect to land in a higher tax bracket next year, you can push income into 2024 and accelerate expenses into 2023. As discussed above, though, you could end up with a smaller QBI deduction.

© 2023 KraftCPAs PLLC

Factors such as turbulent markets, high interest rates, and changes to retirement planning rules have made 2023 a confounding year for tax planning.

While uncertainty lingers, the good news is that there is still time to implement year-end tax planning strategies that might reduce your income tax bill for the year. Here are a few steps to consider.

Manage your itemized deductions

The standard deduction for 2023 is $13,850 for single filers, $27,700 for married couples filing jointly, and $20,800 for heads of households. Those levels are higher than they were before the Tax Cuts and Jobs Act (TCJA), which has reduced the number of taxpayers who itemize their deductions. But “bunching” certain outlays may help you qualify for a higher number of itemized deductions.

Related: Standard deduction, other limits going up for 2024

Bunching involves timing deductible expenditures so they accumulate in a specific tax year and total more than the standard deduction. Likely candidates include:

• Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI)
• Mortgage interest
• Investment interest
• State and local taxes
• Casualty and theft losses from a federally declared disaster
• Charitable contributions

There’s been talk on the federal level of capping the value of itemized deductions (for example, at 28%). This proposal could come up again if the expiration of several TCJA provisions at the end of 2025 prompts new tax legislation, so it could be beneficial to maximize deductions while you can.

Leverage your charitable giving options

Several strategies could increase the charitable contribution component of your itemized deductions. For example, you can donate appreciated assets that you’ve held for at least one year. In addition to avoiding capital gains tax — and, if applicable, the net investment income tax — on the appreciation, you can deduct the fair market value of donated investments and the cost basis for nonstock donations. (Remember that AGI-based limits apply to charitable contribution deductions.)

Although it won’t affect your charitable contribution deduction, you also might want to make a qualified charitable distribution (QCD) from a retirement account with required minimum distributions (RMDs). You can distribute up to $100,000 per year (indexed annually for inflation) directly to a qualified charity after age 70½. The distribution doesn’t count toward your charitable deduction, but it’s removed from your taxable income and is treated as an RMD.

Pay yourself, not the IRS

If possible, you generally should maximize the annual savings contributions that can reduce your taxable income, including those to 401(k) plans, traditional IRAs, Health Savings Accounts (HSAs), and 529 plans. The 2023 limits are:

• 401(k) plans: $22,500 ($30,000 if age 50 or older)
• Traditional IRAs: $6,500 ($7,500 if age 50 or older)
• HSAs: $3,850 for self-only coverage and $7,750 for family coverage (those 55 and older can contribute an additional $1,000)
• 529 plans: $17,000 per person (or $34,000 for a married couple) per recipient without implicating gift tax (individual states set contribution limits)

Contributing to 529 plans has become more appealing now that, beginning in 2024, you can transfer unused amounts to the beneficiary’s Roth IRA (subject to certain limits and requirements).

Harvest your losses

The up-and-down financial markets this year may provide the opportunity to harvest your “loser” investments that are valued below their cost basis and use those losses to offset your gains. If the losses exceed your capital gains for the year, you can use the excess to offset up to $3,000 of ordinary income and carry forward any remaining losses.

It’s vital, however, that you comply with the wash-sale rule, which bans the deduction of a loss when you acquire substantially identical investments within 30 days before or after the sale date.

Execute a Roth conversion

Recent market declines also may make this a smart time to think about converting some or all your traditional IRA to a Roth IRA — because you can convert more shares without increasing your income tax liability. Yes, you must pay income tax in 2023 on the amount converted, but you might be able to minimize the impact by, for example, converting only to the top of your current tax bracket.

Additionally, the long-term benefits can outweigh the immediate tax effect. After conversion, the funds will grow tax-free. You generally can withdraw qualified distributions tax-free if you have held the account for at least five years; and Roth IRAs don’t come with RMD obligations. Plus, you can withdraw from a Roth IRA tax-free and penalty-free for a first-time home purchase (up to $10,000), qualified birth or adoption expenses (up to $5,000), and qualified higher education expenses (with no limit).

Bear in mind, though, that a Roth conversion may leave you with a higher AGI. That could limit how much you benefit from tax breaks that phase out based on AGI or modified adjusted gross income.

Review your estate plan

Your estate plan probably won’t affect your 2023 income taxes, but it makes sense to review it now considering the expiration of certain TCJA provisions at the end of 2025 — particularly the TCJA’s generous gift and estate tax exemption. For example, the TCJA nearly doubled the exemption back in 2018, which is currently $12.92 million ($25.84 million for married couples). A return to a pre-TCJA level of $5 million (adjusted for inflation) could have dramatic implications to your estate plan.

The lingering high interest rate environment also might make certain estate planning strategies more attractive. For example, the value of gifts to qualified personal residence trusts and charitable remainder trusts generally is lower when rates are high.

Cover your bases

Some of the tried-and-true methods for reducing your taxes — such as deferring income and accelerating expenses — are also still worth considering. Keep in mind that these methods might not be as helpful if you expect to be in a higher tax bracket in 2024.

© 2023 KraftCPAs PLLC

Adjustments to the standard deduction and individual income brackets could put more money into the pockets of millions of taxpayers in 2025.

In announcing its annual changes to the tax code, the IRS said its adjustments were based on growing concerns over “bracket creep” – or when taxpayers land in a higher tax bracket because of inflation.

The rules go into effect for the 2024 tax year, which will be reflected on returns filed in 2025.

Related: Try these tips to lower your next tax bill

One of the biggest changes will be increases to the standard deduction. Those are:

• $29,200 for married couples filing jointly (up $1,500 from 2024)
• $21,900 for heads of households (up $1,100)
• $14,600 for single individuals and married individuals filing separately (up $750)

The alternative minimum tax exemption amount will climb to $85,700 for 2025 returns (up from $81,300) and begins to phase out at $609,350 (up from $578,150). For married couples filing jointly, the new exemption is $133,300 and will phase out at $1,218,700.

Among other changes that will affect 2025 returns:

• The earned income tax credit will jump to $7,830
• Employee HSA contribution limits will increase to $3,200
• The foreign earned income exclusion climbs to $126,500
• Gift exclusion limits jump to $18,000
• Qualified adoption expenses increase to $16,810

The IRS announced additional increases for transportation and parking deductions, cafeteria plans, medical savings account limits, and exclusions for estates of decedents.

Marginal tax brackets also will undergo changes for tax year 2024. The new brackets are:

• 37% for taxable income of more than $609,350 ($731,200 for married couples filing jointly)
• 35% for taxable income of more than $243,725 ($487,450 for married couples filing jointly)
• 32% for taxable income of more than $191,950 ($383,900 for married couples filing jointly)
• 24% for taxable income of more than $100,525 ($201,050 for married couples filing jointly)
• 22% for taxable income of more than $47,150 ($94,300 for married couples filing jointly)
• 12% for taxable income of more than $11,600 ($23,200 for married couples filing jointly)
• 10% for taxable income of up to $11,600 (up to $23,200 for married couples filing jointly)

© 2023 KraftCPAs PLLC