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January 2024 Client Profile

Sean and Caelin are talented artists who recently launched a freelance creative services business to see if being self-employed full-time could be an option. Sean is keeping the books, and so far, so good. But he sought professional advice to help avoid errors.

During their initial meeting, their CPA shared some systems and processes for Sean and Caelin to implement:

  • A receipt capture, filing, and backup system, particularly for digital records
  • A checks and balances policy that requires someone other than the bookkeeper to make deposits and review bank statements and canceled checks monthly
  • Reconciliation of credit card statements each month and loan accounts at least annually
  • Use of accounting software, but avoid overreliance on the software in lieu of professional guidance.

Now, they’re also all set with a professional to do their first tax return.

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

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Stay On The Comfortable Retirement Track

There’s no better time than the beginning of a new year to review your retirement plan and, if possible, increase your contribution to the maximum allowed, if possible.

PRIORITIZE PLANS

Start by maximizing contributions to your business’s 401(k) or other company retirement savings plan.

Next up: IRA contributions, if you’re eligible. Start with traditional tax-deferred contributions. Then contribute to a Roth IRA. Mind income limits for IRA participation.

Consider a regular taxable brokerage account once you’ve exhausted tax-advantaged retirement accounts. You’ll have the flexibility to use those retirement funds whenever and however you choose.

CATCH-UP CONTRIBUTIONS

If you’re 50 or older, make catch-up contributions, if possible. An additional incentive to make maximum tax-deferred catch-up contributions to 401(k) Roth accounts in 2024 and 2025: The IRS delayed the SECURE 2.0 Act provision that prevents individuals earning over $145,000 from making pre-tax catch-up contributions to Roth 401(k) accounts until 2026.

This reprieve also gives you, as an employer, more time to implement the Roth 401(k) catch-up change and inform employees about this upcoming change.

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Safety Deposit Boxes

With digital records, safe deposit boxes are so 20th Century. Right? Not necessarily. You may have situations in which you’ll be asked to produce original documents (including those with raised seals). Not to mention valuables that can’t be digitized. Items to keep in your box:

  • Social Security cardsBirth, marriage, divorce, and death certificatesPaper stock and bond certificatesCollectibles and not-often used jewelry (make sure they’re insured, as neither the FDIC nor banks insure box items)Insurance home inventoryProperty recordsHome improvement records and receiptsCar titles

Generally, financial professionals recommend a bank safe deposit box over a home one.

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The IRS Enforcement Spotlight May Be On You

Following a top-to-bottom review of enforcement efforts, the IRS has launched a sweeping, historic effort to “restore fairness in tax compliance” by focusing more on high-income earners, partnerships, and corporations. Under the auspices of a newly created unit in the business division, the IRS will leverage Inflation Reduction Act funding to enforce compliance. These efforts are consistent with a broader commitment to use that funding to end the era of misbalancing in audit selection.

THE TARGET

Pass-through organizations, the unit’s focus, include partnerships and S-corporations. These groups are not subject to the corporate income tax; instead, income is “passed through” to the income-tax returns of the individual or corporate owners and taxed at their income-tax rates. Pass-throughs are frequently used by higher-income individuals and can be complex tax arrangements.

A COORDINATED EFFORT

The IRS will coordinate with the National Treasury Employees Union (NTEU) on this enforcement effort. The NTEU is expected to be on board later this year. Meanwhile, work involving pass-through areas will continue to intensify.

The enforcement group will eventually include employees currently in the Large Business and International Division, and large partnerships, and, eventually, the Small Business/Self Employed division focusing on smaller partnerships and self-employed.

The changes will be driven with the help of improved technology and Artificial Intelligence that will aid the IRS compliance teams in detecting tax cheating, identifying emerging compliance threats, and improving case selection tools to avoid burdening taxpayers with needless “no-change” audits.

IMPORTANCE TO YOUR BUSINESS

While this new spotlight may not affect your business directly, the IRS’s tilt toward more scrutiny on high earners may. More than ever, business owners need the guidance of professionals in tax and financial planning. Why not set an appointment with your tax professional to review any business or personal tax strategies you have in place?

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The High Cost of Daycare

According to Care.com’s 2023 Cost of Care Report, families are spending an average of 27% of their household income on childcare expenses in 2023. The chart shows how the average weekly cost of daycare per child varies by state.

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Beware of Holiday Scams

According to the FBI Internet Crime Report, Americans lost over $10.2 billion to cyber-enabled fraud, including $107 million to spoofing in 2022. Even savvy people can be caught by sophisticated schemes. Don’t be a victim; here are some common types of threats you should know about.

SPOOFING

Spoofing is when online scammers message you, posing as a trusted vendor you know. They use email, social media, texts and other messages to lure people to fake stores that steal your money, credit card details, or personal information. Don’t click on any URL that looks slightly odd.

If your business has been spoofed, warn your customers to be on the lookout. Then, ensure that they have access to your website, email and shipping information.

DELAYED DELIVERY NOTIFICATIONS

You may receive a message claiming your package has been delayed and you must pay a fee to have it delivered. Think before you click.

The post office and other delivery services usually leave a note in your mailbox or at your door, rather than send a message. So, unless you expect a package and are positive that you recognize the sender, delete the message. Generally, if you are surprised by messages, or receive one that does not seem right, it is probably a scam.

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December 2023 Question and Answer

QUESTION:

With the holidays here and the end of 2023 near, I’m uncertain how much to tip the people whose services I’ve used during the year. Any guidelines?

ANSWER:

The following chart provides suggested tipping amounts for various service providers.

  • Teachers: $25 – $100
  • Daycare Providers: $20 – $70
  • Dogsitter: 1-2 weeks pay
  • Freelancers: 1 hours pay
  • Hairdresser: 20%
  • Delivery Persons: $20 – $75
  • Valet: $10 – $20
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Roth 401(k) Contribution Reprieve

Relief is here for 401(k) plan sponsors, participants and administrators. The SECURE 2.0 Act initially stated that employees aged 50 and older who earned $145,000 or more in 2023 could only make catch-up contributions to Roth 401(k) accounts in 2024 and later. However, IRS Notice 2023-63 postpones the new catch-up contribution rule for two years until January 1, 2026.

A GLITCH FIXED

The notice also fixed a glitch in the law that inadvertently deleted part of the tax code, so it reads as if the ability for any employees to make catch-up contributions is eliminated beginning in 2024. The IRS says it will allow these catch-up contributions to be made, even though Congress did not fix this error in the law.

MORE TO COME

The IRS expects to provide future guidance saying that the mandatory Roth 401(k) catch-up provision does not apply to high-paid self-employed persons who have self-employment income instead of W-4 wages.

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December 2023 Client Profile

Scott owns a popular coffee shop. Earlier in the year, he noticed a discrepancy in stock. It turned out to be petty theft by an employee. The employee was terminated, and Scott reported the loss to his insurer, who recommended he take these steps to help prevent future losses:

  • Require criminal background checks of all new employees.
  • Separate duties so no one employee is responsible for making transactions and handling money.
  • Develop fraud prevention policies and communicate them and the disciplinary measures for violations.
  • Perform routine financial audits.
  • Check stock and equipment regularly.
  • Provide an anonymous means for employees to report suspicious activity.

Scott’s accountant also pointed out that for income tax purposes, Scott should be able to deduct any part of the loss not covered by the insurer — the deductible, for instance — if all other tax requirements are met.

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

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Understanding Capital Gains Tax on Home Sales

Are you thinking of selling your primary residence? Unless the home has decreased in value since you bought it, you’ll want to know about potential capital gains tax on your sale. You don’t want to incur a larger-thannecessary tax bill.

TAX BASICS

Gains on the sale of personal or investment property held for more than one year are taxed at favorable capital gains rates of 0%, 15%, or 20%, plus a 3.8% investment tax for people with higher incomes. Gains on these properties held for one year or less are taxed at higher ordinary income rates. Residential real estate is an exception.

TAX EXCEPTIONS FOR YOUR PRIMARY RESIDENCE

Up to $250,000 ($500,000 for joint filers) of your gain is tax-free if you’ve owned and lived in your home for at least two out of the five years before you sell. Any gain greater than this exclusion is taxed at capital gains rates. Losses from the sale are not deductible. A spouse who sells the family home within two years after the other spouse’s death gets the total $500,000 exclusion, provided the two-out-of-five-year use and ownership tests were met before death.

EARLIER SALES

If you must sell your home before two years due to job changes, illness, or unforeseen circumstances, you may still be eligible for part of the gain exclusion. The exclusion percentage that can be taken equals the portion of the two years you used the home as a residence.

NATURAL DISASTER DAMAGE

Was your home damaged or destroyed in one of this year’s federally declared natural disasters? Then your capital gain amount will equal any insurance proceeds you received that exceed your pre-disaster tax basis in the home. The gain exclusion is available for this gain amount.

Home sales are complex and can be emotional. Consult your tax and real estate professionals before selling. Your financial professional can help you budget for your new home.