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March 2021 Client Profile

Beth is self-employed and preparing to file her taxes, but hasn’t received some of her 1099s. She doesn’t want to file for an extension. What should she do?

Fortunately, Beth doesn’t need her 1099s to file her tax return. Unlike W-2s, 1099s don’t need to be submitted with a tax return.

Beth has a few options. She can call her customers and ask for a duplicate 1099. However, if she earned less than $600 from her customer, they aren’t required to provide a 1099, and therefore they likely didn’t prepare one.

If she uses accounting software to track her revenue and expenses, she can use a profit and loss report to calculate her income. Alternatively, she can review the bank statements from her business bank account and track the deposits she received. Hopefully, if she received cash payments, she kept a log of them since she’ll need to include her cash payments as income on her tax return. And if Beth uses electronic methods such as PayPal to receive money from her customers, she’ll need to include these payments too.

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

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Triple Tax Advantages of HSAs

Medical Tax Savings Web Header Banner – Health savings account or flexible spending account – HSA, FSA, tax-sheltered savings

If you have a high-deductible health insurance plan, you’re likely eligible to open a health savings account (HSA). Similar to flexible spending accounts, these tax-advantaged savings accounts allow you to contribute money to cover your medical expenses. But HSAs have three distinct tax advantages.

TAX-FREE CONTRIBUTIONS

Just like 401(k) contributions, you can make pre-tax payroll deductions to fund your HSA. You’ll benefit from having lower taxable income and a generous contribution limit. In 2021, a family can contribute up to $7,200 while singles enjoy a $3,600 limit.

TAX-FREE GROWTH

If your HSA funds are invested in mutual funds, stocks, or other similar vehicles the earnings are tax-free, leaving more money to cover medical expenses. Unlike a flexible spending account (FSA), where contributions don’t roll over at the end of the year, money in an HSA can be used in the future. And HSAs don’t have required minimum distributions like 401(k) or IRA plans.

TAX-FREE WITHDRAWALS

When your HSA funds are used to pay for qualified medical expenses, these withdrawals are tax-free. Qualified medical expenses include things like office visits, co-pays, dental expenses, vision care and prescription medication for you, your spouse, or your dependents. Just remember you can’t use HSA money to pay for medical expenses you incurred before establishing your HSA.

RETIREMENT PLANNING & HSAs

Using an HSA is not only a savvy way to save on taxes; it can help you in retirement. If you contribute to your HSA while not making withdrawals you could accumulate a sizeable fund to help cover your medical expenses in retirement. Medicare premiums are a qualified medical expense, so you could use your HSA funds to pay your premiums once you retire.

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Business Start-Up

Starting a business involves research, planning and making critical financial and legal decisions. Once you’ve landed on your product or service offering, consider these steps when launching your new business.

Funding

Will you fund it or will you seek outside capital from investors or businesses?

Structure

How you structure your business impacts your registration requirements and taxes.

Location

Selecting your location, whether it’s a storefront or an online store, impacts your taxes and legal requirements.

Register

Once you’ve settled on a business name, register with your state to ensure no other businesses are operating with your name.

Bookkeeping

Keep personal and business finances separate by opening a business bank account.

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Simple IRA vs. SEP IRA

Most people have heard of Roth and Traditional IRAs. But two other types of IRAs are less commonly known: the SIMPLE IRA and the SEP-IRA, which are available to small business owners. They have similarities, but also some key differences.

IT’S SIMPLE

A SIMPLE IRA operates a lot like a traditional IRA, but has higher contribution limits. For 2021, the contribution limit is $13,500, with a catch-up contribution of $3,000 for those 50 and older. And there is no Roth version of a SIMPLE IRA.

Like a 401(k) plan, both the employee and employer can make contributions. The employer must either match a portion of the employee’s contribution or make a contribution equal to 2% of an employee’s compensation.

SIMPLE IRAs are limited to businesses with 100 or fewer employees. So, if your company grows larger than that, you’ll have to transition to a different retirement plan down the road.

PENSION IN NAME ONLY

A SEP-IRA is officially called a simplified employee pension. But it isn’t a pension. Only the employer is able to make contributions, which are limited to the lesser of 25% of an employee’s salary or $58,000 each year. Employers choose how much to contribute and they don’t have to do it each year. But contributions must be proportional for each employee, which can affect how much the business owner can contribute to a personal account.

All employees must be included if they meet specific eligibility rules for age, longevity, and compensation amounts.

If you’re self-employed, utilizing one or both of these plans can help boost your retirement savings beyond that of a traditional or Roth IRA. Work with your financial professional to establish a plan that works best for you.

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March 2021 Client Line

Simple IRA vs SEP IRA – learn about two less commonly known IRAs available to small business owners.

Business Start-Up – consider these steps when launching your new business.

Triple Tax Advantages of HSAs

March 2021 Client Profile

Workers’ Compensation Insurance – provides benefits to employees who become ill or injured on the job.

Flexible Work Arrangements – consider non-financial perks like flexible work arrangements.

March 2021 Questions and Answers

March 2021 Short Bits

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February 2021 Questions and Answers

Question:

I’m working on my Master’s degree online. Can I write off any of my tuition on my tax return?

Answer:

You can deduct up to $4,000 in tuition expenses in 2020 but the deduction begins to phase out for single taxpayers with income of $65,000. This deduction is completely eliminated for 2021 and beyond.

However, you may prefer to take the Lifetime Learning Credit. It provides a credit of up to $2,000 on your tax bill and has similar phase out thresholds as the deduction. The phase out thresholds will increase in 2021, due to the elimination of the tuition expense deduction. As an extra bonus, there is no limit to the number of years you can claim the credit. The credit may be a better option because tax credits are generally more valuable than tax deductions since a tax credit directly offsets the tax you owe. Tax deductions only lower the amount of income on which you are taxed.

Question:

My business sells goods online and my customers live all over the world. Do I have to pay taxes on income earned from other countries?

Answer:

Most countries will require you to pay taxes only if you have a meaningful presence in their country. This could mean maintaining an office or warehousing inventory in their country. If your business has no connection to a foreign country other than sales to its citizens, generally you won’t have to worry about paying taxes there. But international tax is complicated. Consult with your tax professional if you have specific questions.

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Is Your Hobby a Business or Is Your Business a Hobby?

Everyone has hobbies and sometimes those hobbies provide some income. But when does your hobby become a business? Getting the right classification determines how this income is taxed.

PROFIT BASED

Generally, if you engage in your hobby with the intent to generate profit, then it’s a business, not a hobby. And if your hobby is strictly for recreation or personal entertainment, it’s not a business. But many other criteria should be considered, including whether you rely on the income for your livelihood and how much time and effort you put in.

IT’S YOUR HOBBY

You must report all your hobby income on your tax return. However, following the 2017 Tax Cuts and Jobs Act, hobby expenses were eliminated and are no longer deductible on Schedule A as a miscellaneous itemized deduction.

IT’S YOUR BUSINESS

However, unlike your hobby, if you’re operating a business, you can deduct all your business expenses even if it creates a taxable loss. And the upside is that if you generate a loss, it can usually be used to offset other income from things like wages or investment income.

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How Business Losses Affect Your Tax Return

Many businesses may have incurred a loss in 2020 due to the pandemic-induced economic slowdown. When expenses exceed revenue, a loss is generated. How these losses affect your business tax return depends on many factors.

CARRYBACK OR CARRYFORWARD

Under the CARES Act, businesses that incurred a loss for 2020 can carryback that loss five years. That means an amended tax return would need to be filed. Carrying back the loss could result in a refund of taxes paid in prior years.

However, if carrying back the loss won’t benefit you, because your business already had a loss, then you can carry the loss forward indefinitely to offset income in future years.

Note that carrying back losses will not be an option for 2021 as the rules return to pre-CARES Act standards, which do not allow carry backs. Any loss for 2021 can only be carried forward. And there are limits to the amount of the loss that can be used in future years.

EXTRAORDINARY LOSSES

Business losses are not limited to operating losses. Businesses that incur extraordinary losses can also claim these on tax returns. Losses for things like fires and natural disasters can generate a loss for your business. Any insurance proceeds received from a loss will reduce your deduction.

Tax implications for business losses can be tricky. Speak with your tax professional to ensure your loss is calculated correctly.

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February 2021 Client Profile

Elizabeth gave her brother $10,000 for a down payment on a house and is considering giving him another $10,000 to help with renovations. Will either of them owe gift tax on these amounts?

The IRS considers this a gift and the general rule is any gift is taxable. However, the IRS has carved out several exceptions that make some gifts non-taxable.

The one that applies to Elizabeth is the annual exclusion. For 2021, a taxpayer can gift $15,000 per year to an individual. If the total gift is $15,000 or less, it is non-taxable to both the donor and the recipient.

Currently, the $10,000 Elizabeth gave her brother wouldn’t be taxable since it falls below the annual exclusion amount. If she chooses to gift him another $10,000 this year, then she will have to file Form 709 to report the gift and determine if any gift tax is owed.

However, if Elizabeth has a spouse, the spouse could gift the additional $10,000 to her brother. Since both Elizabeth and her spouse have each gifted less than $15,000 to her brother, there is no gift tax.

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