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June 2021 Questions and Answers

Question:

Can I choose my tax filing status?

Answer:

Generally, your marital status on December 31 determines your filing status for that year. And choosing the proper status affects the amount of tax you’ll owe. When multiple filing statuses apply, select the one that results in the least amount of tax due. If you’re unmarried, you’ll generally file as single unless you have a dependent; then you may be able to file as head of household. And if you become a widow or widower, but don’t remarry and have a dependent, you may claim the Qualified Widow(er) status for the two tax years after your spouse passes, which gives you the same tax perks as married filing jointly. Married taxpayers can file a joint return or file separately. Married filing separately can be used when it results in less tax owed or when one spouse wants to be responsible for their own tax.

Question:

I am a sole proprietor but need to hire an employee. Are fringe benefits taxable to my employee?

Answer:

As a general rule, all fringe benefits are taxable to your employee unless the IRS has expressly excluded them. Common fringe benefits that are tax free include health insurance, life insurance, employee discounts, employer-provided cell phones, certain commuting benefits, and de minimis (minimal) benefits like small non-cash holiday gifts or office-supplied coffee and drinks.

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Understanding Patents

Have you ever considered getting a patent for an innovative idea or product? There are different types of patents, so work with a patent attorney.

INVENTIONS

Utility patents protect the creation of useful products, processes or machines. It provides legal protection for up to 20 years should anyone copy your invention without a licensing agreement with you. Initial filing fees with the U.S. Patent and Trademark Office range from $80.00 to $860.00, but that doesn’t include the preliminary search for competitors, examination and maintenance fees which can tack on thousands more. Application processing can take a long time, so start early if you have a patentable product.

PROTECTING DESIGNS

If you want to protect an item’s design or aesthetics, not how it is produced, you’ll need a design patent. These patents have a 14-year life and overall cost is less than a utility patent.

PROS & CONS

In addition to protecting your product from copycats, a patent also can increase your chance of selling your idea.

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Charitable Remainder Trusts for Inherited IRAs

With the stretch IRA now a thing of the past, how will you pass on your IRAs? Charitable remainder trusts (CRT) give you some control and options.

10-YEAR RULE

Under the SECURE Act, with limited exceptions, non-spousal beneficiaries of tax-deferred IRAs have to withdraw all funds within ten years of inheritance. No longer can withdrawals be limited to the required minimum distribution amount and stretched out over a lifetime.

GIVE IT AWAY

By naming the CRT as the beneficiary of your IRA, the trust can be a valuable tool to let certain beneficiaries enjoy the IRA funds over a longer period of time. A CRT is set up to distribute a fixed percentage of the funds to beneficiaries in either a lump sum on the date the IRA is inherited by the trust or periodically over a maximum of 20 years. The remaining IRA balance is given to charity. Under either distribution method, at least 10% of the IRA value, when it passes to the trust, must be given to charity.

MORE BENEFITS

The trust funds are protected from you and your beneficiaries’ creditors when placed in a trust. And with the transfer to the trust, the IRA funds are removed from your estate and won’t be subject to estate tax.

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Client Profile

Andrea will start a new job in Spain in a few months and she’s not sure if she will still have to file taxes in the U.S.

The United States (U.S.) is one of a few countries that tax citizens on their worldwide income. So even though she lives and works outside the states, she’ll need to file a tax return.

Andrea may qualify for the foreign earned income exclusion, if she’s a bona fide resident of Spain. This requires that she live there for an entire tax year. Otherwise, she’ll have to be out of the U.S. for 330 days during any consecutive 12-month period to qualify. This excludes the first $108,700 of her wages from U.S. tax for 2021, based on the theory that she probably paid income tax in Spain. If her wages exceed the exclusion threshold, she may be able to claim a tax deduction or tax credit for any income taxes she paid in Spain. This allows her to avoid the burden of double taxation. It’s important to consult a tax professional prior to leaving the states.

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

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Understanding Payroll Taxes

Whether you’re hiring your first employee or already have a few, understanding payroll taxes is a must.

FICA & FUTA

FICA stands for Federal Insurance Contributions Act and it funds the Social Security and Medicare programs. It’s funded equally by the employer and employee. For 2021, each pays Social Security tax of 6.2% on the first $142,800 of an employee’s wages and 1.45% on all wages. Each year, the wage base (the maximum earnings subject to Social Security tax) is adjusted for inflation. Self-employed taxpayers will pay both the employer and employee portion but they’ll receive a deduction on their tax return for the employer portion.

Federal unemployment tax (FUTA) is paid by the employer and provides benefits to workers who become unemployed through no fault of their own. In 2021, the tax rate is 6% on the first $7,000 of each employee’s salary. Credits for paying state unemployment tax on time are available and can reduce this rate significantly.

THERE’S MORE

Some employees will have to pay the Additional Medicare tax depending on their tax filing status and their taxable income. Employers need to withhold this tax from pay checks for employees who earn more than $200,000 a year. The tax rate for 2021 is 0.9% of the excess wages.

GET FIT

Federal income tax (FIT) is taken out of an employee’s pay to cover their annual tax liability. How much taken out is based on information from the employee’s Form W-4, which they should fill out when they start a new job or anytime their circumstances change that might impact how much tax they owe.

FILE & PAY

The most common payment frequencies are monthly or semi-weekly. However, quarterly or annual payments are allowed for FUTA.

Quarterly payroll tax returns are needed for FICA, FIT, and the Additional Medicare tax. FUTA returns will be filed quarterly or annually, depending on your payment frequency.

IN A STATE

Payroll taxes extend beyond the federal level to the state level. Depending on your state, you may have to withhold state income tax from employees’ paychecks. And all states have an unemployment tax that employers pay. Some cities have payroll taxes too.

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Be Prepared

Natural and human-made disasters can strike anywhere and anytime. Here are ways your business can be prepared.

  • Identify all your risks. Hurricanes, floods and wildfires may be on your list. But consider prolonged power outages and cyber threats.
  • Develop an emergency plan, communicate employees’ responsibilities and have alternate locations where you can work.
  • Design a process for how to return to normal afterwards. Consider ways to compensate for lost revenue and other damages.
  • Store computer files off site and/ or in the Cloud. Draft a detailed IT recovery plan.
  • Map out evacuation routes in your building and practice them with your staff. Train employees on what to do should a crisis occur.
  • Consider having emergency kits or supplies on hand like batteries, first aid supplies, flashlights, and extra building and office keys.
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Casualty, Disaster and Theft Losses Affect Taxes

With the hurricane and wildfire seasons upon us, coupled with the risk of tornadoes and flooding, now’s a good time to understand how casualty and disaster losses impact your taxes.

PRESIDENTIAL DISASTER

For 2018 – 2025, when parts of the country are declared federal disaster areas by the President, you can deduct losses you sustain to your home, personal belongings and vehicles. The damage to your property must be a result of the disaster.

CLAIMING YOUR LOSS

Typically, losses are deducted in the year of the disaster, but you can claim the loss for the preceding year by notifying the IRS and filing Form 4684.

Generally, casualty losses are an itemized deduction, so the amount of your loss must be more than 10% of your adjusted gross income. However, there are some exceptions.

The amount you can deduct is the lesser of the property’s adjusted basis or the decrease in the market value due to the casualty. There are different rules for an income-producing property (e.g., rental homes). But if your insurance company reimburses you for losses, you’ll have to reduce your tax loss by the proceeds you receive.

IT’S A STEAL

When you’re the victim of theft as a result of a federally declared disaster, your loss is generally tax deductible under the same rules. Only, you’ll claim the loss in the year you discover it.

PREVENTION

Although you may want to take preventative measures to protect against future disasters, like installing hurricane-impact windows, these costs won’t be tax deductible since they don’t meet the “sudden, unexpected, or unusual” requirement of a casualty loss. But these preventative measures may earn you a discount on your property insurance premiums.

TAXABLE GAINS

Keep in mind you can have casualty gains—like when your insurance company pays you more than your cost of the damaged or stolen property. In most cases, you’ll pay tax on the difference. In limited circumstances, the gain can be deferred or not realized at all. But you’ll be able to offset it with any losses you have— casualty or non-casualty. Consult your tax professional to get it right.

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May 2021 Short Bits

DEDUCTION ERRORS

According to the Treasury Inspector General for Tax Administration, the IRS allowed business owners to claim $57 million in potentially erroneous qualified business income deductions on 2019 tax returns. The way this pass-through deduction is written is very complicated, and it’s part of the reason for the deduction errors.

SLASHED CONTRIBUTIONS

The COVID-19 pandemic caused many businesses to change how they contribute to employees’ 401(k) accounts. It’s estimated that 46,000 401(k) plans were affected because companies paused discretionary funding to employees’ accounts, cutting back on matching contributions or ditching all matching contributions.

ECONOMIC EDUCATION

A new study in the Journal of Children and Poverty revealed that youths with a savings account in their name, regardless of the balance, were approximately six times more likely to attend college than those with no account. Additionally, growing up in a family that manages assets well — such as savings and equity in a home — shows that assets, not income is associated with college success.

MOM FACTS

According to a study by the Pew Research Center, the median age that a woman becomes a mother is 26, up from 24 in 1994. And highly educated women are increasingly becoming moms. Eighty percent of women with a Ph.D. or other professional degree have given birth. And a rising share of births to foreign-born mothers is increasing diversity as nearly one-third of all births in California, New York and New Jersey were to mothers who were born outside the US.

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May 2021 Questions and Answers

QUESTION:

I recently moved. How do I notify the IRS of my new address?

ANSWER:

You will need to officially notify them of your new address. Changing your address with the post office won’t cut it. You can accomplish this in a few different ways. First, you can complete Form 8822, the change of address form, or write a letter. If your address changes before filing your tax return, you can simply use your new address on your return and the IRS will make the update for you.

QUESTION:

Does providing my customers with an early payment discount make sense for my new business?

ANSWER:

Start with asking yourself do you need to have customers pay faster because you need the cash? If you’re in a pinch to make payroll or pay rent, then it might make sense. But remember that offering a discount cuts into your profit margin. So ensure your business can afford it. And just because you provide an early payment discount to speed up cash flow doesn’t mean your customers will take it. Be sure to have a backup plan to meet any short-term cash flow needs.

QUESTION:

How long should I keep my tax records?

ANSWER:

Generally, three years, but up to seven if you’re self employed or reported losses.

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Defining Company Culture

Company culture is defined as the values, goals, practices and attitudes that represent the personality of an organization. Worker satisfaction is highest when employees’ personal views are in sync with a clearly defined company culture.

WHAT DO YOU VALUE?

Start by establishing the beliefs, philosophies and principles that will drive business. Do you value individual effort or collaborative approaches? Do you stick with a traditional hierarchy or prefer something more fluid? Dialing in on these foundational views empowers your employees to make the right choices.

LET IT DEVELOP

After you’ve identified your company values, norms of behavior will naturally develop. If you value employee autonomy, you may allow employees to set their own schedules. Employees will learn that as long as they complete their work on time, it doesn’t matter when they get it done.

SUSTAIN IT

Your business success relies on maintaining your corporate culture. Openly and regularly communicate the company’s values with employees. Celebrate successes and include everyone, not just those who “sealed the deal”. Building a community reminds employees what they’re working towards.