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April 2023 Client Profile

Elizabeth is considering whether she should buy long-term care insurance. She’s 35 years old and healthy, so she’s not sure it’s the best use of money now. What should she consider when making a final decision?

Long-term care insurance generally covers a portion of the expenses incurred due to a chronic medical condition. Most policies will pay a percentage of the cost of care in your home, an assisted living facility, or a nursing home.

Most people think of it as coverage for old age needs. But, long-term care insurance provides aid should you develop an illness or incur an accident at any age.

Elizabeth’s annual premiums will likely be lower since she is currently healthy. However, actuaries look at your family history, including DNA ancestry sites to see if you are likely to develop a long-term disease like Alzheimer’s and Parkinson’s.

Qualified long-term care insurance premiums can be deducted if you itemize on Schedule A. However, there are deductible limits based on age.

On average, 70% of Americans
over 65 will need some form of
long-term care service in their lifetime.

Source: Longtermcare.gov

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.

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Tax Deduction vs Tax Credit

Tax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill, but in very different ways.

DEDUCTIONS

Deductions reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So, if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

CREDITS

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. For instance, a tax credit valued at $1,000 lowers your tax bill by $1,000.

Generally, tax credits are more valuable than tax deductions. However, there are times when a deduction can be more useful if it reduces your adjusted gross income (AGI) to allow you to take advantage of tax breaks you wouldn’t receive if your AGI were higher.

REFUNDS

Some tax credits are refundable or partially refundable, like the child tax credit or the American opportunity tax credit. That means if your calculated tax is $600 and you have a refundable tax credit of $1,000, you’ll receive a $400 refund. But most tax credits are non-refundable. That means you won’t receive a refund if using a tax credit reduces your tax bill below $0.

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Who Can Contribute to a 529 Plan?

You can help any child save for college expenses by contributing to a 529 college savings plan. All 529 plans accept third-party contributions, regardless of who owns the account. That means anyone, including grandparents, aunts, uncles, or even friends, can help a child save for college.

The money you invest in a child’s 529 plan grows on a tax-deferred basis, and distributions are completely tax-free when used to pay for the child’s qualified education expenses. Because of this tax-free compounding, even a small gift can potentially grow substantially over time. Every dollar a student has in college savings is one dollar less that they will have to borrow in student loans.

Beginning in 2024, beneficiaries can rollover unused 529 funds to a Roth IRA. Several rules apply, so consult your tax professional.

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Who Qualifies as a Dependent for Taxes?

Dependents can help reduce your tax bill by claiming valuable credits like the child tax credit, dependent care credit, or adoption credit. But who qualifies as a dependent?

SUPPORT

Generally, a dependent relies on another person for financial support, such as housing, food, clothing, and necessities. Typically, this includes your children or other relatives, but it can also include people not directly related to you, such as a domestic partner or stepchildren.

THREE TESTS

There are three general tests that all dependents must meet to qualify.

  1. If someone can be claimed as a dependent, that person can’t claim any dependents, even if they have a qualifying child or relative. For example, if you have a qualifying 21-year-old child who also has a one-year-old, your 21-year-old will not be able to claim their one-year-old as a dependent.
  2. You can’t claim a married person as a dependent if they file a joint tax return.
  3. Dependents must be U.S. citizens, U.S. green card holders, or residents of Canada or Mexico.

CHILDREN

A child qualifies as a dependent if they are younger than 19 or are a full-time student younger than 24 at the end of the calendar year. And the child must be younger than you. But there is no age limit if the child is permanently and totally disabled.

Also, the child must be your son, daughter, stepchild, foster child, or grandchild. Generally, a child must have lived with you for at least half of the year, and you must have provided at least half of their financial support.

OTHER RELATIVES

Your sibling, stepsibling, half-sibling, niece or nephew can also be dependents. Non-related qualifying dependents can be of any age. They will need to live with you for the entire year and must not have a gross income exceeding $4,400 for the tax year, and you must provide more than half of their support.

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April 2023 Client Line Newsletter

Who Qualifies as a Dependent for Taxes? – who qualifies as a dependent.

Who Can Contribute to a 529 Plan? – you can help any child save for college expenses by contributing to a 529 college savings plan.

Tax Deduction vs Tax Credit – both reduce your tax bill, but in very different ways.

April 2023 Client Profile

How to Deal with Unpaid Invoices – proactive processes can help your company and its cash flow.

April 2023 Question and Answer

Raising Financially Savvy Kids – it’s critical to teach your kids how to become financially independent.

Review Your Credit Report Often – review all three of your credit reports at least once a year.

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Number of 2020 Returns Processed By the IRS

INDIVIDUAL TAX RETURNS (FORM 1040) – 164,358,792

  • For married filing jointly taxpayers – 55,247,969
  • For single taxpayers – 83,652,916
  • For heads of household taxpayers – 21,463,538

How many returns claimed refunds? – 122,728,631

How many returns owed? – 32,771,171

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March 2023 Question and Answer

QUESTION:

What happens if I file my tax return late?

ANSWER:

If you don’t file for an extension using Form 4868, which pushes your filing deadline to October 15, filing your income return late comes with a 5% Failure to File Penalty if you owe tax. The penalty is calculated for each month or pro-rated for partial months that the return is late. And the IRS charges interest on penalties until you pay your balance in full.

Depending on your situation, you may apply for a penalty abatement to have your fines reduced or eliminated.

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March 2023 Client Profile

Elena sells her knitted scarves and blankets online through third-party sites like Etsy and eBay. She is considering launching her own website to sell directly to the consumer. She’s wondering if she needs to collect sales tax from her customers.

She won’t need to worry about collecting and paying sales tax on marketplaces like Etsy and eBay because these sites generally handle sales tax for all orders and will collect and pay the tax to each state on her behalf.

However, when Elena begins selling on her website, she’ll be responsible for all sales tax matters. Sales tax laws vary from state to state and city to city. She may want to become familiar with the economic nexus rules. But these rules can be confusing.

Speaking with her tax professional and using e-commerce software tools like Shopify will be necessary to help ensure she doesn’t miss anything.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.

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Tax Return Extensions

You are entitled to a six-month extension if you need more time to file your tax return by the April 18 deadline, but you must let the IRS know. You’ll need to complete Form 4868 before the April 18 due date. Otherwise, without telling the IRS you’ll be filing your return later, you could end up paying penalties and interest on unpaid taxes.

While you can extend the due date to file your tax return, there is no extension to extend the payment of any tax you owe. Remember that an extension is an extension to file, not an extension to pay.

Businesses can also file for an extension to file corporate tax returns using Form 7004.

Neither Form 4868 nor 7004 need to be signed, but you’ll want to include your payment for any tax due when you file your extension application.

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What Do Diversity and Inclusion Mean in Business

Diversity and inclusion refer to a company’s mission, strategies and policies designed to encourage an inclusive workplace that attracts a diverse pool of talent from various cultural backgrounds.

DIVERSITY

Diversity in the workplace refers to an organization’s workforce comprising people from different genders, sexual orientations, religions, races, ethnicities, and ages.

INCLUSION

Inclusion in the workplace means ensuring that every employee feels included, treated fairly and respectfully, with equal access to opportunities and resources, and can contribute fully to the organization’s success. It’s not a new concept. Essentially, it means creating a healthy work environment, which in turn benefits the company with increased employee engagement and productivity.

KNOW THE DIFFERENCE

Diversity without inclusion will not create the culture you want. It helps to consider employee’s opinions, perspectives, and experiences while making decisions and policies. Remember, your efforts can help your bottom line, too.