{8.5 minutes to read} Greetings to you and yours, I hope you are staying encouraged in spite of all that’s happening around us.
With the year-end to-do list to accomplish and holiday planning, it is not uncommon for us to feel stretched on all sides.
In this opinionated world we live in, just about anyone can “chime in” on what we ought to do, when we do, with whom we do, and how we do — I am wondering if certain roles are worth the cost. Is there still a role for a leader, or better yet, is a leader now simply a spokesperson who conveys to the public the opinions of the majority?
The nation’s leaders have their hands full — only a few weeks before the year ends, not enough is in the news on the upcoming tax season, and how to plan ahead. The ongoing wars, humanitarian crisis (here in NYC and in the Middle East), election planning, governmental divisiveness, and the list goes — no rest for the weary mind.
The endless outlets for news and information are making it more challenging to step away to do something different. I hope this article is worth your time.
Before I get into the article, from a tax planning viewpoint, it is evident that the current administration is committed to clean air and clean energy — so don’t forget to take advantage of the various credits that may be available to individuals and businesses. From homeowners’ credit, developers’/builders’ credit, and the popular employee retention credit (ERC), the latter is getting the attention of scammers — as such the IRS is scrutinizing it more closely. Please check out this credit on the IRS website.
This is a two-part news article. The first article will include some tax and planning-related information geared toward individuals. The second part will be more geared towards businesses & entrepreneurs.
For Individuals:
2023 Year-End Considerations*
- Loss Deduction: Ponzi-type or not — How will the IRS allow the treatment of the loss in the case of financial fraud (most recently, Samuel Bankman-Fried was convicted)?
- Social Security Income triggers a higher tax bill for many taxpayers.
- Enrollment periods have begun — What changes to consider?
- Will the IRS come knocking on taxpayers’ doors? It depends.
* Some may impact the 2024 calendar/tax year.
Is it a capital loss or a Ponzi-type loss?
As you may already know, the IRS limits certain investment capital losses to $3,000 per year. Unused loss can be carried forward and used against capital gain for subsequent year(s).
Notwithstanding the above, the IRS may allow a more favorable tax treatment to taxpayers who are victims of losses from Ponzi-type investment schemes. One method is the safe harbor rule, under Rev. Proc. 2009-20. Under this rule, a qualified investor may be allowed a deduction of up to 95% of a qualified investment, if such investor does not pursue any potential third-party recovery. What we don’t know is whether the IRS will allow fraudulent cryptocurrency investments to get this favorable treatment. We await guidance from the IRS.
According to Reuters, on November 2, 2023, Samuel Bankman-Fried (SBF), the FTX founder, was convicted of multi-billion-dollar FTX fraud. He was found guilty of “stealing from customers of his now-bankrupt cryptocurrency exchange in one of the biggest financial frauds on record.” You can read the entire article at Reulers.com.
The Social Security Income tax threshold has risen by approximately 9%. Who will be impacted?
Under the Federal Insurance Contributions Act (FICA), taxpayers are required to make contributions by way of Social Security income tax. Many taxpayers will notice that their overall tax/contribution has increased. You may have also noticed that you dug a little deeper in your pocket to pay Social Security taxes in 2023. The cap is $160,200, and in 2024, it is $168,600. Income over the cap is not taxed for Social Security benefits (“SS”). While SS has an income threshold, Medicare tax has no limit. Please see the table below that reflects the Social Security Income threshold for the years listed. *If you are self-employed, you will pay double the taxes.
| Year | Income threshold | Maximum Tax (employee portion at 6.2%) * |
| 2022 | $147,000 (for reference only) | $9,114.00 |
| 2023 | $160,200 | $9,932.40 |
| 2024 | $168,800 | $10,453.20 |
It is that time of year — once again — Enrollment period
It is the enrollment period for various health related benefits and insurances. It may be wise to use this time to review other insurance policies, proxies and financial beneficiary designations, power of attorney(s), just to name a few. Don’t forget that relationships do evolve, as such your will, trust and/or next of kin may also need to be updated. In a past article – we share seven-year end essentials – that are still relevant – check out the list here.
Knock, knock — who is it? Could it be the IRS?
The IRS does make unannounced home or field visits to non-compliant taxpayers (individuals and businesses). However, only a few taxpayers are likely to get such a visit.
This past summer, the IRS announced it will end most (not all) unannounced visits to taxpayers by Revenue Officers (“RO”). Instead, taxpayers (individuals and businesses) with outstanding balances will be mailed letters to schedule in-office meetings with a RO. So, who will likely get a visit? According to the IRS, only “extremely limited situations where unannounced visits will occur.” What sparked this change? Read the details here on the IRS website.
Part 2 of this article will be geared towards entrepreneurs (independent contractors and small businesses)
If this is where you will get off — in the spirit of gratefulness — my hope is that we embrace a posture of gratitude in all seasons of life. In essence, gratitude is important for our overall well-being.
Gratitude
In recent months, I find myself reflecting on genuine human connections, considering our growing entitlement ways of being. I resided on this question: Is it of any value to express gratitude for that which I am entitled to?
According to the Oxford Dictionary, entitlement is “the belief that one is inherently deserving of privileges or special treatment.” On the other hand, gratitude is “the quality of being thankful; readiness to show appreciation for and to return kindness.”
In an article titled, “The Antidote to Entitlement” published by Heartofconnecting.com The article added that “research shows that gratitude is healthy for us and benefits kids and adults alike — gratitude plays a major role — protects us from entitlement, stress, and depression — gratitude is known to increase self-esteem, hope, empathy, and optimism.”
A similar article was published by growing leaders author, Tim Elmore. The author noted that, “gratitude enriches human life. It elevates, energizes, inspires and transforms.” Read the entire article here.
Let’s embrace and encourage a posture of gratitude — it’s a worthwhile contribution to our overall well-being, so choose wisely.
Be on the lookout for Part 2 of 2023 Year-end Considerations that impact our finances.
Thank you for reading.
With gratitude,
Nadine
Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com
The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.
{6 minutes to read} Let’s look – strategically and intentionally.
As we look back, consider the wise words from two individuals who share the same first name:
Warren W. Wiersbe, an American clergyman/biblical teacher wrote, “you do not move ahead by constantly looking in a rear-view mirror. The past is a rudder to guide you, not an anchor to drag you. We must learn from the past but not live in the past.”
Warren Buffet, any thoughts on when to look back? “In the business world, the rearview mirror is always clearer than the windshield.”
While we wait for the legislators to meet on common ground considering the tax implications for next year, there are some decisions we can make now that could impact our 2021 tax liabilities.
Key Takeaways:
- Pandemic relief: One that could impact us in 2021 is retirement withdrawals.
- Larger deduction on meals and cash donations.
- Pre-tax payroll deductions – update selections.
- Life-changes decisions, update beneficiaries, consider starting a “will.”
- Roth conversion – if income is low – considering the proposed increase in taxes.
First, let’s look back at the 2020 tax year and review some of the items that may impact us in the current year under the Coronavirus Aid, Relief, and Economic Security Act (CARES). The CARES Act offered numerous reliefs to taxpayers. They benefited us for the 2020 tax year, but some have expired. Nonetheless, some of these income types of relief spillover (or change) in 2021 and could create a costly tax impact. Here are a few:
- Retirement distribution allocation: Did you withdraw money from your retirement savings in 2020 – and choose to allocate your withdrawal(s) over the 3 years? If yes, there are tax implications on the amount allocated for 2021.
- Early withdrawal penalty: In 2020, the early withdrawal penalty was waived, however, if you withdraw retirement funds in 2021, you may be faced with a 10% penalty on the amount – in addition to your other tax liabilities.
- Required Minimum Distribution (RMD): This is an age-required distribution that was also waived for 2020, however in 2021 there’s a requirement to take the RMD which is a taxable event. If you feel a little charitable, you can reduce the tax impact by donating directly to an organization –see below.
- Unemployment income – If you collect unemployment income in 2021, it is taxable under the federal government and some states.
Second, let’s look at some temporary deduction benefits that are still available to us:
- The Consolidated Appropriations Act (2021), known as CAA, was passed by Congress on December 21, 2020, and signed into law on December 27, 2020. The act includes some items that can help reduce our tax liabilities, one of which is the meals deduction.
- Meals – under the CAA, food, and beverages will be 100% deductible if purchased from a restaurant in 2021 and 2022. In the past, only a 50% deduction was allowed on most meal expenses. Note: It is important to keep itemized receipts in case you are called upon to present them to any of the tax agencies.
- ‘Tis the season for giving: Under the CARES Act, individuals can deduct up to 100% of their AGI (in the past, only up to 60% was allowed) of cash donations made in 2021. Corporations can deduct up to 25% (in the past only 10% was allowed).
Third, here is a shortlist of moves you can still make in 2021 that could reduce your tax liabilities.
- Deferred tax on retirement contributions: if your employer plan allows it, consider contributing the maximum to your savings. The IRS limit is $19,500; if you are fifty and over, the max is $26,000.
- Retirement savings for self-employed: if you have not yet done so, you can set up a retirement plan in 2021 and delay contributing until 2022. Some plans allow this privilege; discuss your options with your financial advisor.
- Investment loss: Do you have a large amount in harvested (accumulated) capital losses? Consider speaking with your financial advisor about capital gains types of investment strategies.
- Savings for education: make your state-affiliated 529 Plan contributions before the end of the year.
On a related note, considering the proposed tax increases, if your income is low in 2021, consider a Roth conversion.
Lastly, don’t forget to make some of these life-changes updates:
- To employees — update your payroll-related withholdings — such as W-4, insurance, 401K, dependent care, HSA/FSA, etc.
- To all — update your beneficiary information with your financial institutions — with the fickleness of human nature — God only knows the unforeseen events that could impact us, financially.
- To all — the “will” — consider consulting an attorney to begin the preparation of a will. You may agree with me, that the current pandemic reminds us how fragile we are – and how little control we have over our own lives. You are welcome to reach out to me for a referral. Choose an attorney who is willing to walk you gently through this process.
As I close, let us choose to look back with intent. If you would like to schedule a tax planning consultation, please don’t hesitate to reach out.
Continue to stay well and safe,
Nadine
Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com
The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.
{7 minutes to read} This October the curtain came down on the 2017 tax year. Now, all eyes are focused on how the Tax Cuts and Jobs Act (TCJA) will impact the 2018 tax year, and How will I be affected? (more…)
The focus of this article is to highlight how the owners of pass-through entities are impacted under the new tax rules. Though the intent of the law is to simplify your tax reporting requirement, this has not yet been achieved for businesses with pass-through entity income. Before we get into the details, this year planning is of utmost importance for all pass-through entities.
The most notable change for these entities is the IRC § 199A’s new 20% deduction. The new Qualified Business Income Deduction (QBID) provides an additional 20% deduction off the Qualifying Business Income (QBI). The deduction has a lifespan of eight years (2018 – 2025), and is subject to limitations and adjustments. One such limitation is on a Specified Service Business (SSB), “where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” In simple terms, if most of the income in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, etc. is generated based on the skill set of the owners and employees, the business may be an SSB.
Before we continue, it may be worth your while to review the last business article from April 2018. It contains a vast amount of information on how your 2018 tax reporting will be impacted by the new tax law.
As we proceed, when a new tax rule (statute) is enacted, in theory it may be understandable, but from a practical standpoint, it may be more difficult to fathom on paper. The IRS will be meeting at the end of July to provide further direction on certain areas of the law; in the meantime, there is still a lot we know that will allow us to start planning now.
Where is the pass-through business income coming from?
- K–1 operating income from partnerships (including multi-member LLCs) and S Corporation shareholders.
- Net Income from sole proprietorships (Schedule Cs include single member LLCs, Schedule E and Schedule F filers who are individuals, estates, or trusts).
Schedule E activity must be a trade or business (including property rentals). It should be noted that some states treat certain rental income as non-business income, in which case some may not qualify for a QBID.
A word of caution to S-Corp owners.
As a reminder, S-Corp owners are required to take a salary (reasonable compensation) from the company. The principle behind this is that most other entries with pass-through income are subject to the 15.3% Self Employment tax (SE), which creates an unfair advantage. The IRS requires that the owners/officers of the S-Corp take a reasonable salary from the profit of the business before distributing it to the shareholders. The wages an S-Corp owner takes do not qualify for the QBID, only what remains. (The word among tax professionals is that reasonable compensation may be an area of increased audits from the IRS.)
An article written by Toni Nitti a few years ago (yet still relevant) depicts this well. Read it here.
Another concern is that a large number of S-Corp’s are not making much profit.
How will this new deduction affect my overall tax reporting?
Here is a list of some of the areas to which QBID does not apply:
- QBID does not reduce the 15.3% Self Employment Income tax liability.
- QBID does not reduce Net Investment Income Tax (NIIT) is investment income tax on capital gains, non-business interest, dividends, etc.
- QBID does not increase your business Net Operating Loss (NOL).
- QBID does not reduce your Adjusted Gross Income (AGI).
What are some of the limitations of the QBID?
- The income threshold for SSB(s) is simpler:
Most pass-through entity income is coming from an SSB and an income threshold limitation applies. If you file a joint return, your spouse’s income could limit or eliminate the 20% business deduction.
Additionally, your other income (such as investment income) could also affect your ability to take advantage of the QBID. As noted in the last article, personal taxable income exceeding $315,000 married/ $157,500 single may limit your ability to take the deduction. If your taxable income is $415,000 married/$207,500 single, you could basically lose the deduction altogether.
- The more complex restrictions and adjustments are to the non-SSB(s):
These are other caps that could affect those businesses that are non-SSB. These caps revolve around wages and depreciable business properties. Those will not be discussed in this article due to the complexity and its uniqueness from business to business.
Long before the law was enacted, the questions were coming in; here are three (3) of the most frequently asked questions we have received from our clients and others.
- What business is best for me? Do I give up my S-Corp status and go back to a C-Corp?
While this question is best answered on a per taxpayer basis, here’s what I want you to understand: C-Corporation income that is distributed to the owner is double taxed. (To read full answer, click here.)
- I am an independent contractor; do I form an LLC or S-Corp?
My response would be yes since I am looking beyond a tax viewpoint, however, let’s first make a correction. S-Corp is not a legal entity; it’s simply a tax election that the company makes. Before making a decision to form a company, consider the cost to form or organize a legal entity, to maintain and don’t forget the NYC publishing requirement, that is an added cost.
Please keep in mind that proper books and record should be maintained for the company. You should consider using the service of an accountant to track the financial stability of the company.
If you are interested in forming a legal entity, we can help you to form one that is right
for you and assist you with your accounting needs, so please contact us. (To read full answer, click here.)
- I get a W-2 from my employer, however my role is one like that of an independent contractor, I pay my own health insurance and take care of my own job expenses.
The response to this question is not clear-cut. Some industries require that you are classified as an employee. I would first ask that you evaluate your role with your employer and if you strongly believe you are an independent contractor, consider forming a legal entity. (To read full answer, click here.)
Here is our two cents about each tax status!
C-Corps are great if they are profitable and you are an employee of the corporation. The company can pay for your health insurance, retirement matching, profit-sharing, reimburse you for tuition, and a plethora of other benefits, if they can afford it. There is also a great death benefit. Consider the long-term impact, and if you plan to take the company public in the future, then C-Corp is the choice to make.
S-Corp election is a great way to capitalize on your expenses; however, keep in mind that your financial health is beyond tax reporting. As mentioned in the previous article, if your intent is to rent or buy a home in the future, underwriters and landlords look unkindly on low income. It may be seen as a sign of poor cash flow, thus the question is raised about your “ability to pay.” Also poor cash flow is not attractive to other types of lenders and investors.
S-Corp also has another layer of reporting, that is payroll reporting. Last, but not least, not everyone can qualify for S-Corp status.
LLC & Partnerships: Single member LLCs are viewed as sole proprietorships and are reported as a part of your personal tax returns, unless you elect S-Corp status. All your expenses are exposed and in plain view to the IRS, so proper record keeping is imperative. It is also one of the most scrutinized areas by the IRS. Don’t let this deter you, it still remains one of the more easy to “manage” legal entities; and more flexible than S-Corp.
What’s next? Planning!!
There are no two ways about it — all pass through-entities should consider a tax planning consultation. This will allow you to get a better sense of your 2018 tax liability and plan in advance, to reduce the possible negative effect of the new tax laws.
And, if your total income exceeds $315,000 married/ $157,500 single, you may need a comprehensive tax planning analysis.
Don’t Wait! It is URGENT that every client with a pass through entity or total income in excess of $315,000 married/$157,500 single, contact us by August 10th, 2018 to set up a time to meet so we can create a tax plan that will allow you to mitigate any possible adverse effects from the new tax law.
Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com
{5 minutes to read} We are already in the heat of summer; yet the atmosphere surrounding the unknown impact of the new tax law still creates a chilly feeling. While you may just want to wait to see, that is, be more reactive in nature, we don’t suggest you do that as the new tax law will impact almost everyone, some more than others. This article is geared towards providing guidance to taxpayers with withholdings, whether from a W-2 job, retirement, or Social Security.
Recap: The 2017 Tax Cuts and Jobs Act (TCJA) that overhauled the Tax Reform Act of 1986 has significantly changed the way we view taxes. For the most part, the provisions will be effective for eight years, from 2018-2025. (Please refer to our previous article Welcome to 2018 Tax Season sent in January. The article details the areas that will be impacted on your 2018 tax return.)
What has changed since the last communication?
The tax rules continue to evolve, at least from a practical tax reporting viewpoint. In the last article, we reported deductibility of home equity mortgage interest. The IRS took a stand to clarify what interest can be deducted. In IR-2018-32, Feb. 21, 2018, the IRS said that “despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled.” However, as under the prior law, if the money is/was used to pay for personal debt, it is not deductible. (Read more from the IRS here. Also, here is the 2018 Tax Brackets Flyer from Edward Jones. See which bracket will apply to you in 2018.)
What was then, is not now!
In prior years, many Americans who paid their Federal income tax through withholding taxes taken out of their paycheck, found at the end of the year that they had overpaid and received a nice Federal tax refund. The law change this year is structured so that most people will see less tax withheld every pay period resulting in increased “take-home” pay, rather than a refund check at the end of the year.
As previously mentioned, if you have deducted any of the expenses below in the past, you may be faced with an unwelcome increase in your tax bill next spring, since some of these expenses will be limited or eliminated, thus increasing your tax liability:
- Property tax on your primary or secondary home;
- State and local taxes paid from your income (most states have income tax reporting);
- Mortgage and home equity interest (new mortgages, which included refinances will be affected if the loan exceeds $750,000). Existing (before 2018) mortgages under $1M are not affected;
- Employee and job expenses – This can be a game changer for many. There may be more tax advantages for some individuals to work as independent contractors. However, there are other hoops to jump thru in order to authenticate your classification as an independent contractor. Employers may be faced with other tax issues from the Department of Labor.
People often counted on their tax refund check to help ease their financial situation in some way. With the new tax law, you may go from a history of receiving refund checks to a balance due to the government at tax time.
We are quite concerned about the unwelcome surprise you may receive at tax filing time next spring. The good news is that we still have time to change the year-end result if we act soon.
How can you mitigate any surprises next spring?
- If you are an employee with withholding (whether from a W-2, retirement, or Social Security), we very strongly suggest that you set up a Withholding consultation with us.
- If you have types of income other than the types mentioned above, we suggest you set up a tax planning consultation with us.
Don’t be reactive! It is URGENT that every client with withholding, whether from a W-2 job, retirement, or Social Security, contact us by July 31, 2018 to set up a time to meet so we can calculate your 2018 tax situation and withholding, and then make changes if needed.
Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com
{8:48 minutes to read} There’s something different about entering the month of November, in my opinion. I believe it is due to how close November is to the end of the year. It’s that penultimate month. November allows us to pause and rethink where we have been and where we would like to be before the year ends:
- Some of us will pause to focus on the things we should have done and dwell there (do nothing).
- Others will look back and choose to act and make a change that could be beneficial.
“Planning is a process of choosing among those many options.
If we do not choose to plan, then we choose to have others plan for us.”
– Richard I. Winwood
{4:42 minutes to read} Hope you are enjoying the warm sunny days of the season.
I can’t help but wonder, is it just me, or is it becoming a challenge to stay on track with what’s going in Washington with regards to federal tax reform? The uncertainties are evident. The Trump administration released a report on July 28, 2017 regarding the status of all the proposed changes. As it relates to tax reform, the most current report that we are aware of was released on September 27th, 2017. If what’s promised is implemented, individuals/families and businesses will be affected. (more…)