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January 2023 Question and Answer

QUESTION:

Is student loan debt forgiveness taxable?

ANSWER:

Thanks to the American Rescue Plan Act enacted in 2021, student loan debt forgiveness isn’t considered taxable income on your federal tax return. This exclusion from income is valid for any student loans forgiven in 2021 through 2025. Starting in 2026, the old rules will apply, making student debt forgiveness taxable.

But your state may have different tax rules for student loan forgiveness. Currently, a handful of states consider it taxable income. So, if you have questions about your situation, speak with your tax professional.

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Updating Your W-4

The start of the new year is the perfect time to review your tax withholding and make changes if necessary.

LOOK AT THE PAST

Start by looking at your 2021 tax return. Did you receive a large refund, or did you have to write a hefty check? In either case, it may indicate your paycheck withholding is out of sync with your tax reality.

LOOK TO THE FUTURE

Looking to 2023, do you expect to have any life changes? For example, do you plan to get married or have a child? Are you planning to start a side business? Will you need to begin caring for aging parents? Life changes can impact your 2023 tax liability.

MAKE CHANGES

The IRS offers a Tax Withholding Estimator that may help you determine if you need to withhold more or less from each paycheck: https://www.irs.gov/individuals/tax-withholding-estimator. If you believe you need to make changes to your tax withholding, speak with your tax professional to understand what you should change. You can request a blank Form W-4 from your payroll department or the IRS.gov website.

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Taxes in Retirement

With Social Security benefit payments increasing nearly 9% this year, you may need to rethink your retirement tax planning.

INCOME MATTERS

If you started working part-time to offset some of the recent price inflation, this increase in your Social Security payments might make some or more of it subject to federal income taxes. If you file as an individual and your combined income is between $25,000 and $34,000, up to half of your benefit may be subject to income taxes. Social Security defines combined income as your adjusted gross income, plus nontaxable interest, plus one-half of your Social Security benefit.

CONSIDER A REDUCTION

With the possibility of being in a higher tax bracket this year, due to increased Social Security benefits, consider cutting back on withdrawals from your qualified retirement plans. If you can avoid taking more than your required minimum distribution (RMD) in 2023, you might be able to limit your tax liability.

If you need more than your RMD, consider pulling funds from a taxable brokerage account where you’ll pay the lower long-term capital gains rates if you held investments for more than a year.

Also consider qualified withdrawals from a Roth IRA, a Roth 401(k), or a health savings account (HSA), which would not be subject to federal income tax and wouldn’t have an impact on how your Social Security benefit is taxed.

This year’s cost of living adjustment can help you keep up with higher prices. And in the short run, managing your withdrawals may help you smooth out the tax bumps during a period of high inflation.

Figuring out withdrawals from retirement and brokerage accounts can be complicated, so it may help to work with an advisor. But even if you do it yourself, try to withdraw from your Roth and HSA accounts last, allowing those assets to grow tax-free longer. Withdrawals from all three types of accounts in the same year can help manage combined taxable income.

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Inheriting a House

Inherited real estate generally does not trigger these taxes: estate, gift, capital gains or income. That’s because, under tax law, the starting value of the house is generally the property’s fair market value at the time of the homeowner’s death. This is known as the “step up in basis” and means that you may have a capital gain or loss if you sell the property after you inherit it.

However, if you choose to use the home as your primary residence for two of the five years preceding the sale of the home, you’ll probably qualify for the primary residence tax exclusion of up to $250,000 if single ($500,000 if married filing jointly) in capital gains.

Be sure to change the ownership records with your local government, which requires providing copies of the decedent’s will and death certificate and drafting and filing a new deed.

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Understand Your Cash Flow Statement

Managing cash is vital for running a successful business. That is why reviewing your company’s cash flow statement regularly is so important.

CASH IS KING

Your cash flow statement provides important context to information that might not appear on a different financial statement. For example, revenue from a new sale often appears on an income statement and contributes to the company’s overall profit or loss. However, if an invoice isn’t due immediately or the company extends a line of credit to the customer, the actual cash may not hit the company’s bank account for months.

BREAKING IT DOWN

A cash flow statement is broken into three sections to show the primary sources and uses of your cash.

  1. Cash flow from operations presents the cash inflow and outflow from your company’s revenue-generating activities. It starts with net income and adds or subtracts the types of cash activities many people automatically associate with running a business: revenue from customers, wages to staff, inventory purchases, and income taxes.
  2. Cash flow from investing activities includes sources and uses of cash for things like the purchase or sale of physical assets, investment in securities, or the sale of securities.
  3. The financing section outlines how cash is used in any type of financing activities, including debt, equity, or dividends.

WHAT TO WATCH FOR

Though a cash flow statement can’t tell you everything about a company’s financial viability, there are some things to watch out for that can be particularly revealing.

Is there a positive cash flow coming from your core business operations?

Also, look at the financing section. Are you bringing in most or all your cash from loans? This might be okay for a startup business, but not for a company that’s established.

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January 2023 Client Line Newsletter

Understand Your Cash Flow Statement – managing cash is vital for running a successful business.

Inheriting a House – inherited real estate does not trigger estate, gift, capital gains or income taxes

Taxes in Retirement – with social security benefit payments increasing nearly 9% this year, you may need to rethink your retirement tax planning.

Updating Your W-4 – the start of the new year is the perfect time to review your tax withholding and make changes if necessary.

January 2023 Question and Answer

Improve Online Security for Your Business – taking advantage of the latest technology can help ensure your company’s infrastructure is safe and secure.

Get Ready for Tax Time – take time in January to get organized to make tax filing smooth for you and your tax professional.

January 2023 Client Profile

Social Security Payment Increase – social security recipients will receive an 8.7% increase.

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A Popular Tax Law Scheduled to Phase Out for 2023

The temporary 100% tax deduction for qualified business meals eaten at restaurants that came into effect for 2021 and 2022 will revert to the old 50% deductibility requirements as of January 1, 2023, unless Congress acts to extend it.

Upcoming 2023 Tax Deadlines

JANUARY 16, 2023
4th quarter 2022 estimated tax payments due

JANUARY 31, 2023
Form W-2 and Form 1099 due to recipients, Social Security Administration, and IRS

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2021 Holiday Spending

Americans spent $886 billon on gifts in 2021, which was considerably more than they spent in 2020. Here’s how much more:

  • Clothing purchases: 33.1%
  • Sporting goods: 20.9%
  • General merchandise: 15.2%
  • Furniture & home furnishings: 15%
  • Electronics: 13.8%
  • Online purchases: 11.3%
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When to Switch Accounting Systems

If your business has grown during the post-pandemic recovery, you may have noticed that your old bookkeeping system needs an upgrade.

It might seem logical to change software at the end of the year so you can have a fresh start for 2023. However, at the end of the year, your accounting staff will be working in overdrive to prepare the financial records and prepare financial statements and tax returns. Also, the accountants and consultants you may need to help with a transition and implementation will be busy at year-end. So, they may have limited availability, and their fees may be higher than other times of the year.

Consider the end of a quarter (e.g., March 31, June 30, or September 30) to make the change. Your tax advisor can provide guidance so you can make the right decisions.

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December 2022 Question and Answer

QUESTION:

How does inflation impact your tax bill?

ANSWER:

Some tax provisions are indexed for inflation. Tax brackets, standard deduction amounts, and income caps on IRA contributions are adjusted yearly based on the prior year’s inflation calculations.

But two bigger tax areas that aren’t adjusted are the taxation of Social Security benefits and the home-sale exclusion. Income thresholds at which Social Security benefits are taxed have stayed static for decades despite benefits having gone up. As a result, more cumulative Social Security benefits will be taxed this year.

The home-sale exclusion has remained unchanged since 1997. Selling your home can provide a sizable tax break, but it’s never been adjusted for the appreciation in residential real estate.