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June 2023 Client Profile

Gary started receiving short-term disability insurance proceeds for an injury he sustained while playing sports. Will he owe income tax on the benefit amount he receives?

Disability insurance payments may or may not be taxable. It largely depends on who paid for the plan. Any disability payments Gary receives from a plan paid for entirely by his employer are considered taxable income. But if Gary paid for 100% of the disability insurance premiums, generally, the payments he receives while disabled are not taxable to Gary.

If Gary and his employer shared the cost of the premiums, only the percentage of income he receives that’s due to his employer’s contributions is reported as income. So, if Gary paid 50% and his employer paid the other 50%, then 50% of the disability payments he receives are taxable.

Also, if he itemizes, Gary could deduct out-of-pocket medical expenses greater
than any reimbursement he received.

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

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What is Bonus Depreciation?

Bonus depreciation is a valuable tax-saving tool for businesses. It allows your business to take an immediate first-year deduction on the purchase of eligible business property.

HOW IT WORKS

Bonus depreciation is a method of accelerated depreciation that allows a business to take an additional deduction of 80% of the cost of qualifying property in the first year it is put into service. You can take the deduction for new or new-to-you equipment.

Before 2023, you could deduct 100% of the cost. Now, 80% is deductible in the first year. The remaining 20% gets deducted over the asset’s life.

This special deduction allowance is an additional deduction you can take after you take the Section 179 deduction and before you figure regular depreciation for the year.

QUALIFICATIONS AND RESTRICTIONS

To qualify, the deduction must be first used in the year you are claiming the first depreciation deduction.

Only certain types of property may be eligible for bonus depreciation. The item must be:

  • Owned by the business
  • Used in your business or income-producing activity
  • Usable for a determinable lifespan (generally less than 20 years)
  • Expected to last more than a year

Also, if you choose bonus depreciation for one of your company vehicles, you’ll need to claim it for all your vehicles. Unlike Section 179 depreciation, you cannot be selective.

WHAT IT MEANS FOR BUSINESS

Claiming bonus depreciation for your business can help lower your taxable income. You may even create a taxable loss by claiming bonus depreciation (unlike Section 179 depreciation).

Beware that bonus depreciation will phase out to zero effective January 1, 2027. (See the graphic above).

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Roll Over Excess 529 Funds to a Roth IRA

Starting in 2024, 529 educational savings plans will become even more attractive with enhanced tax benefits. If your student receives scholarships or joins the military, there is a new option for handling excess 529 plan funds.

SECURE 2.0

The SECURE Act 2.0, which became law late in 2022, enables 529 beneficiaries to place unused 529 funds into their Roth IRA – without penalty. Understand that the rollover can only be made to the 529 beneficiary’s Roth IRA – not a parent’s Roth IRA.

This new rule can have an incredible impact on the student’s ability to successfully fund a comfortable retirement, thanks to the power of compound interest.

OTHER OPTIONS

You still have the option of changing a 529 plan beneficiary to another qualifying family member. But the funds would have to be used for educational purposes. Alternatively, you could withdraw excess funds and pay a 10% penalty.

OBEY THE RULES

As with most tax laws, numerous rules govern a 529 plan to Roth IRA rollover. Keep these in mind:

  • A max of $35,000 can be rolled over from a 529 plan to a beneficiary’s Roth IRA.
  • Annual Roth IRA contribution limits apply to rollovers. (For example, if this law was already in effect, the 2023 ROTH IRA contribution limit is $6,500, which means it would take six years to convert $35,000 from a 529 plan to a Roth IRA).
  • Conversions can only be made to a beneficiary’s Roth IRA; a parent saving with a 529 plan in a child’s name cannot convert unused funds back into their own retirement account.
  • Rollovers are not allowed until a 529 account has been open for at least 15 years.
  • Funds you convert from 529 plans to Roth IRAs must have been in the account for at least five years.

Consult your tax professional to learn more.

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June 2023 Client Line Newsletter

Roll Over Excess 529 Funds to a Roth IRA – there is a new option for handling excess 529 plan funds.

What is Bonus Depreciation – a valuable tax-saving tool for business.

June 2023 Client Profile

Claiming Life Insurance Benefits – the first step is to file a claim for the benefits.

Ordinary and Necessary Business Expenses – be careful, business deductions are not black and white.

June 2023 Question and Answer

Employee Payroll Deductions

The Shrinking Dollar – inflation makes every dollar worth less.

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Amended Tax Return Tips

If you filed your 2022 tax return already but realized you missed some information, you can amend your return by filing Form 1040-X.

An amended return is necessary for things like, forgetting to claim taxable income, or claiming the wrong tax filing status.

But before filing your return, ensure the IRS has already processed your original return. This will help ensure the IRS doesn’t get your original and amended returns mixed up. Check the status of your return after three weeks at https://www.irs.gov/filing/ wheres-my-amended-return or call 866-464-2050.

Be sure to attach any documents or tax forms that support your changes. And check to see if you have to amend your state return. Contact your tax advisor for assistance.

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May 2023 Question and Answer

QUESTION:

Is my mileage for my volunteer work a tax deduction?

ANSWER:

If you don’t receive compensation or reimbursement for volunteer driving, you can deduct 14 cents per mile in 2023 or actual expenses for gas and oil. You can’t deduct general repairs and maintenance, insurance, or licensing fees.

You can also deduct any parking or tolls incurred while volunteering, whether you use the actual expenses or the standard mileage rate.

Be sure to keep contemporaneous records of all miles you drive while volunteering. If the charity reimburses you for gas and use of your personal vehicle, any amount received above 14 cents per mile is taxable income to you.

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Best Practices for Employee Reimbursements

Using new technology to report and track employee business expenses can be easier and more accurate.

MODERNIZE REPORTING

Instead of using paper to report employee’s expenses you can simplify the process with a virtual expense reporting system that lets employees photograph and submit receipts from an app. This prevents the need for your accounting staff to keep paper files or scan receipts.

ESTABLISH ACCOUNTABILITY

Inform managers and supervisors about the company’s expense policies so they can hold their teams responsible for following them. To ensure high levels of accountability in this area, give managers an easy way to access to approve submitted expenses on their employees’ expense reports.

TIME IS VITAL

No one wants to pay $1,000 in travel costs out-of-pocket for a business trip and then wait for weeks while those expenses are reviewed, approved, and reimbursed. To avoid delays, create service-level timeframes that work for both the company and employees. For example, make clear that associates must submit their expense reports by “X” day of the month, with complete required documentation, to receive reimbursement by “Y” day.

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SECURE Act 2.0 for Businesses

Building on the 2019 SECURE ACT, the 2022 Securing a Strong Retirement Act (commonly referred to as SECURE 2.0) was passed to help boost savings in workplace plans, extend support to small businesses that want to help employees prepare for retirement, and increase tax incentives for small businesses. Here are some of the corporate highlights.

TAX CREDITS RISE

SECURE 2.0 increases the startup credit to cover 100% (up from 50%) of administrative costs up to $5,000 for the first three years of plans established by employers with up to 50 employees. It also clarifies that small businesses joining a multiple employer plan (MEP) are eligible for the credit.

AUTO-ENROLLMENT EXPANDS

Beginning in 2025, 401(k) and 403(b) plans will be required to automatically enroll eligible participants, though employees may opt out of coverage. There is an exception for small businesses with ten or fewer employees and new companies less than three years old. The expansion of automatic enrollment will help more workers save for retirement, particularly younger, lower-paid workers.

STARTER PLANS AVAILABLE

Next year, employers who do not already offer retirement plans will be permitted to provide a starter 401(k) plan, or safe harbor 403(b) plan to employees who meet age and service requirements. Through the starter plans, the limit on annual deferrals would be the same as the IRA contribution limit, and employers may not make matching or nonelective contributions to starter plans.

PART-TIME WORKERS BENEFIT

Starting in 2025, employers will be required to allow part-time employees (workers with over 500 hours per year for two consecutive years) to participate in their retirement plan after two years of service. Employees with over 1,000 hours of service must be included after one year of service.

SECURE 2.0 also made numerous changes to how company retirement plans operate. You’ll need to understand how these changes will impact your business—especially if you want to include a retirement plan in your employee benefits package.

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May 2023 Client Profile

The Sunbelt Company is revising its travel policy for employees who must travel for company business. Management is considering whether to adopt a per diem policy or stick with their current one, which covers employees’ actual expenses. Why should we change to a per diem policy?

Per diem expense policies provide employees with a fixed daily rate to cover most travel expenses. These types of policies allow for easier recordkeeping and budgeting. It lets employees avoid collecting stacks of receipts and eliminates variability in trip expenses. As long as your company policy conforms to the IRS per diem rules, your traveling employees won’t have to provide a record of every meal they purchased.

Alternatively, companies can offer a hybrid approach, using a per diem rate for typical travel. Perhaps when an employee is traveling to a high-cost location or meeting with a valuable customer or supplier, you could allow employees to charge their actual expenses.

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

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Your Financial Legacy and Taxes

You may think that only other people’s estates have tax problems, but that’s often untrue. Take steps today to insulate your estate from taxes.

PROJECT AND PLAN

Start with income tax projections and planning at least twice a year. Catch tax problems early with your tax professional and find out if there are ways to minimize or even avoid taxes entirely.

Corporate executives with significant wealth in their employer’s stock can develop tax-efficient strategies for diversifying, such as stock donations and creating capital gains budgets.

UNDERSTAND HEIRS

Don’t review your own tax situation in a vacuum. Instead, consider your family’s overall position.

When you work with your tax professional, provide as much insight as possible into your multi-generational financial situation to minimize taxes—for you and your entire family.

BE EFFICIENT

Different assets have different tax characteristics. For example, a charity doesn’t pay tax on an inherited IRA, but your heirs may. So, whether it is an IRA, real estate, or cash remember the tax consequences that beneficiaries may experience.