Article Highlights:

  • W-4 Updates
  • W-9 Collection
  • Estimated Tax Payments
  • Charitable Contributions
  • Required Minimum Distributions
  • Gifting
  • Retirement-Plan Contributions
  • Beneficiaries
  • Reasonable Compensation
  • Business-Vehicle Mileage
  • College-Tuition Plans

Individuals and small businesses should consider various ways of starting off on the right foot for the 2023 tax year. 

W-4 Updates – If you are employed, then your employer takes the information from your Internal Revenue Service (IRS) Form W-4 and applies it to the IRS’s withholding tables to determine the amount of income tax to withhold from your wages in each payroll period. 

If your 2022 refund or balance due turns out not to be the desired amount, you may want to consider adjusting your withholding based on your projected tax for 2023. If you need assistance, please call this office.  

W-9 Collection – If you are operating a business, then you are required to issue a Form 1099-NEC to each service provider to which you have paid at least $600 during a given year. It is a good practice to collect a completed W-9 form from every service provider (even if you are paying less than $600), as you may use that provider again later in the year and may have difficulty getting a W-9 after the fact—especially from providers that do not plan to report all of their income for the year. 

Estimated Tax Payments – If you are self-employed, then you prepay each year’s taxes in quarterly estimated payments by sending 1040-ES payment vouchers or making electronic payments. For the 2023 tax year, the first three payments are due on April 18, June 15, and September 15, 2023, and the final payment is due on January 16, 2024. Generally, these payments are based on the prior year’s taxable income; if you expect any significant changes in either income or deductions relative to the previous year, please contact this office for help in adjusting your payments accordingly.

Charitable Contributions – If you marginally itemize your deductions, then you can employ the bunching strategy, which involves taking the standard deduction one year but itemizing your deductions in the next. However, you must make this decision early in the year so that you can make two years’ worth of charitable contributions in the bunching year. 

Required Minimum Distributions – Each year, if you are 73 (a recent law change increased it from 72 in 2022) or older, you must take a required minimum distribution from each of your retirement accounts or face a substantial penalty. By taking this distribution early in the year, you can ensure that you do not forget and accidentally subject yourself to penalties. 

Gifting – If you are looking to reduce your estate-tax exposure or if you just want to give some money to family members, know that each year, you can gift up to an inflation-adjusted amount, which for 2023 is $17,000, to each of an unlimited number of beneficiaries without affecting your lifetime estate-tax exclusion amount or paying a gift tax. 

Retirement-Plan Contributions – Review your retirement-plan contributions to determine whether you can afford to increase your contribution amounts and to make sure that you are taking full advantage of your employer’s contributions to the plan. 

Beneficiaries – Marriages, divorces, births, deaths, and even family clashes all affect whom you include as a beneficiary. It is good practice to periodically review not just your will or trust but also your retirement plans, insurance policies, property holdings, and other investments to be sure that your beneficiary designations are up to date. 

Reasonable Compensation – With the advent a few years ago of the 20% pass-through deduction, which is available to most businesses other than C-corporations, the issue of reasonable compensation took on new importance, particularly for shareholders of S corporations. This has been a contentious issue in the past, as it has allowed shareholders who are not just investors but who are actually working in the business to take a minimum salary (or no salary at all) so that all their income passed through the K-1 as investment income. This strategy allows such shareholders and the S corporation to avoid payroll taxes on income that should be treated as W-2 compensation. A number of issues factor into a discussion of reasonable compensation, including comparisons to others working in similar businesses and to employees within the same business, as well as the cost of living in the business’s locale. This is a subjective amount, and it generally must be determined by a firm that specializes in making such determinations. 

Business-Vehicle Mileage – Generally, vehicles with business use also have some amount of nondeductible personal use in a given year. It is always a good practice to record a vehicle’s mileage at the beginning and at the end of each year so as to determine its total mileage for that year. The total mileage figure is then used when prorating the personal- and business-use expenses related to that vehicle. 

College-Tuition Plans – Contribute to your child’s Section 529 plan as soon as possible; the funds begin accumulating earnings as soon as they are in the account, which is important because the student will likely begin using that money at age 18 or 19. 

Only a few of the tax-related actions that you take during a year will benefit yourself or others. The most important of these actions is keeping timely and accurate tax records; for businesses in particular, this is of the utmost importance. Those who have well-documented income and expense records generally come out on top when the IRS challenges them.

If you have any questions related to your taxes or if would like an appointment for tax projections or tax planning, please contact this office. 

Planning On Buying a New Electric Vehicle and Claiming a Tax Credit? Better Read This First

Article Highlights:

  • Background
  • Qualifications
    • Income Limit
    • 4-wheel vehicle
    • Street Vehicle
    • Minimum Battery Capacity
    • Acquired for Original Use
    • Final Assembly
    • MSRP
    • Critical Mineral and Battery Components
  • Seller Provided Report
  • List of Qualifying Vehicles
  • Transfer of Credit to the Dealer

Although the credit for purchasing a new electric vehicle can still be as much as $7,500, Congress has added some new stringent qualifications as to which vehicles qualify, and for the first time Congress has limited who qualifies for the credit by barring the credit to higher income taxpayers.

But first a little background. Prior to this change, a vehicle qualifying for the credit needed only to be a 4-wheel vehicle, with a minimum battery capacity of 5 kilowatt hours and a gross weight of less than 14,000 pounds. There was also a manufacturer limit of 200,000 units, after which the credit phased out over the subsequent four quarters. There were no qualification requirements for the purchaser of the vehicle.

New Qualifications – Under the new law, starting in 2023 the vehicle and the buyer must meet far more stringent requirements for a taxpayer to qualify for the clean vehicle tax credit.

Purchaser’s Income Limit – No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the buyer for the:

  • Current tax year, or
  • The preceding tax year

exceeds the threshold amount as indicated below. There is no phaseout and just one dollar over the limit means no credit will be allowed. Thus, Congress has essentially eliminated the credit for higher income taxpayers.

  • Married Filing Joint or Surviving Spouse         $300,000
  • Head of Household                                      $225,000
  • Others                                                      $150,000

MAGI is the buyer’s adjusted gross income increased by any foreign earned income and housing exclusions and excluded income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico. 

Vehicle Qualifications – To qualify, the vehicle must:

  1. Be a 4-wheel vehicle.
  2. Bea Street Vehicle that was manufactured primarily for use on public streets, roads, and highways.
  3. Have a Minimum Battery Capacity of 7 kilowatt-hours.
  4. Be acquired for Original Use by the taxpayer. Original use means that the vehicle has never been used by any taxpayer for any purpose. A vehicle is not a new clean vehicle if another person has ever purchased or leased the clean vehicle and placed it in service for any purpose. Where a vehicle is acquired for lease to another person, the lessor is the original user.
  5. Have had its Final Assembly in North America, which includes the 50 states, the District of Columbia, and Puerto Rico, Canada, and Mexico. Where the vehicle was manufactured can be determined from the 17-digit vehicle identification number (VIN). The VIN Decoder website for the National Highway Traffic Safety Administration (NHTSA) also provides final assembly location information. The website, including instructions, can be found at VIN Decoder.

The VIN is permanently attached to a vehicle in several locations, appearing on the dashboard for most passenger vehicles and on the label located on the driver’s door frame. The VIN is also located on the window sticker of new vehicles and often appears on the vehicle listing on dealers’ websites. 

  1. Meet the MSRP requirement – The manufacturer’s suggested retail price (MSRP) cannot exceed:
  • $80,000 for vans, SUVs, and pickups
  • $55,000 for other vehicles 

The MSRP will be on the vehicle information label attached to each vehicle on a dealer’s premises. The MSRP for this purpose is the base retail price suggested by the manufacturer, plus the retail price suggested by the manufacturer for each accessory or item of optional equipment physically attached to the vehicle at the time of delivery to the dealer. It does not include destination charges or optional items added by the dealer, or taxes and fees.

Even when a vehicle is purchased for less than the MSRP, the credit limitation on the price of the vehicle is based on the manufacturer’s suggested retail price (MSRP), not the actual price paid for the vehicle. 

  • Meet the Critical Mineral and Battery Components test– Congress, in an effort to bring the battery manufacturing for electric vehicles to the United States, included a requirement that a percentage of critical minerals needed to manufacture batteries be extracted or processed in the U.S. or a country with a free trade agreement with the U.S. or recycled in the U.S. It also requires a percentage of battery components be manufactured or assembled in North America. The initial percentage is 50% and 100% after 2028.

Luckily for a buyer the dealer must provide a report that certifies the vehicle meets these requirements by specifying the amount of credit the vehicle qualifies for.

Seller Provided Report – The seller of the vehicle is required to furnish a report to the buyer and the IRS that includes:

  • The name and taxpayer identification number of the buyer;
    • The vehicle identification number (VIN) of the vehicle (it will be required on the tax return to claim the credit), unless, by U.S. Department of Transportation rules, the vehicle is not assigned a VIN;
    • The battery capacity of the vehicle;
    • Verification that the original use of the vehicle commences with the taxpayer; and
    • The maximum Clean Vehicle Credit allowable to the buyer with respect to the vehicle.

List of Qualifying Vehicles – The IRS provides a list of eligible vehicles on its website.

Transfer of Credit to the Dealer – After 2023,the taxpayer purchasing the vehicle, on or before the purchase date, can elect to transfer the clean vehicle credit to the dealer from whom the vehicle is being purchased in return for a reduction in purchase price equal to the credit amount.

A buyer who has elected to transfer the credit for a new clean vehicle to the dealer and has received a payment from the dealer in return, but whose MAGI exceeds the applicable limit, is required to recapture the amount of the payment on their tax return for the year the vehicle was placed in service.   

If you have questions about these new rules on the clean vehicle credit, please give this office a call. 

Status Of The Biden Administration’s Student Loan Forgiveness

Article Highlights:

  • The Forgiveness Plan
  • Supreme Court
  • Qualifications
  • Tax Issues
  • Payment Moratorium
  • Current Applications

President Biden’s student loan debt forgiveness plan was originally authorized by an executive order and announced on August 24, 2022. It subsequently hit a snag when two court cases put a hold on the plan, which was one of Biden’s campaign promises. 

The issue has since found its way to the Supreme Court, which will hear arguments about the case in February. Thus, the plan is on hold until the Supreme Court rules, which at the earliest will be in February. 

If the case is decided in the Administration’s favor, to qualify for forgiveness the loans must have been taken out before June 30, 2022, and the individual’s AGI must have been less than $125,000 in either 2020 or 2021. For married couples their AGI must have been less than $250,000 in 2020 or 2021. For Pell grant recipients the amount of the forgiveness is capped at the amount of the loan but not exceeding $20,000. For others who qualify the maximum amount is $10,000. 

Under normal circumstances forgiven debt becomes taxable income. However, coincidentally the American Rescue Plan Act (ARPA) of 2021 included a provision making student loan forgiveness free from income tax for 2021 through 2025. In addition most states have conformed to the exclusion under ARPA.  

Of course, there remains the fairness issue for those who have already paid off their loans or never borrowed money to pay for college expenses. 

While the plan is waiting on the Supreme Court ruling, the Biden Administration announced the payment moratorium, which was begun in 2020 by the Trump Administration, would be extended once again, this time through June 30, 2023, or longer pending resolution of the legal issues.  

When and if the Supreme Court comes down with a favorable ruling, most federal student loans will qualify for forgiveness. Those are generally the ones that have qualified for payment pause. The Department of Education (DOE) is looking into adding other non-federal student loans to the forgiveness program. These are not part of the president’s forgiveness plan.

Approximately 26 million borrowers have applied for forgiveness and the DOE had already approved about 16 million before the DOE stopped taking applications after the court challenges to Biden’s authority to authorize the program began.

So, we will have to wait for the Supreme Court ruling to see if the forgiveness plan will happen.

Will the Recently Passed Pension Legislation Affect You?  

Article Highlights:

  • Required Minimum Distribution (RMD)
  • Penalty for Not Taking an RMD
  • Excess Contribution or Distribution Penalty Statute of Limitations
  • Nanny Retirement Contributions
  • Credit for Small Employer Pension Plan Start-up Costs
  • Military Spouse Retirement Plan Eligibility Credit for Small Employers
  • Firefighter Retirement Distributions
  • Penalty-Free Withdrawals for Domestic Abuse Victims
  • Qualified Charitable Distributions (QCDs) to Split Interest Entity
  • Qualifying Longevity Annuity Contracts (QLACs)
  • Tax Free Sec 529 Plan to Roth Rollovers
  • Additional Nonelective Contributions to Simple Plans
  • Indexing IRA Catch-Up Contributions
  • Employers Can Make Matching Contributions Based on Student Loan Payments
  • Withdrawals for Certain Emergency Expenses
  • Emergency Savings Accounts
  • Increased Catch-Up Contributions for Those Aged 60 Through 63
  • Automatic Enrollment in Retirement Plans Requirement
  • Long-Term Part-Time Employee 401(k) Participation
  • Enhancement and Modification of the Saver’s Credit  

The President, on December 29, 2022, signed the Consolidated Appropriations Act, 2023, which is the “omnibus spending bill” Congress needed to pass to avoid a government shutdown. That legislation also included the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, a.k.a. the SECURE 2.0 Act, that can significantly impact and augment your retirement planning strategies. The SECURE 2.0 Act incorporates provisions from proposed legislation that was passed by the House and another bill that was passed by the Senate that had not previously been reconciled.  

So What’s in the Legislation That May Affect You?  

Included are over 300 pages of provisions affecting tax-favored retirement benefits that modify many provisions of the original SECURE Act enacted back in 2019. Some apply to individuals while others benefit businesses. The provisions of the SECURE 2.0 Act become effective over several years stretching out until 2026. This article includes the most significant provisions. 

THOSE EFFECTIVE IN 2023

Here are the takeaways for those effective in 2023:

  • Required Minimum Distribution (RMD) – To prevent an individual from investing in tax-deferred retirement plans, including Traditional IRAs, but never withdrawing from the plans, the account owner is required to begin taking RMDs in the year the IRA owner reaches the mandatory age set by Congress. 

The policy behind the RMD rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.

Originally RMDs had to begin at age 70½, until the original SECURE Act increased it to 72 beginning in 2020. Now the SECURE 2.0 Act is increasing it to age 73 in 2023 and age 75 in 2033, giving folks longer to accumulate their retirement savings.

  • Penalty for Not Taking an RMD – For years, the penalty (technically an excise tax on “excess accumulation”) for an individual failing to take the required minimum amount from their traditional IRA or retirement plan has been a draconian 50% of the amount that should have been withdrawn but wasn’t for the year. The SECURE 2.0 Act decreases the penalty to 25% and further reduces it to 10% if corrected in a timely manner.
  • Excess Contribution or Distribution Penalty Statute of Limitations –Individuals often are not aware of the penalty for excess contributions or not taking a required minimum distribution leading to an indefinite accumulation of interest and penalties. To provide finality for taxpayers in the administration of these excise taxes, the SECURE 2.0 Act provides that a 3-year period of limitations begins when the taxpayer files an individual tax return (Form 1040) for the year of the violation, except in the case of excess contributions, in which case the period of limitations runs 6 years from the date Form 1040 is filed.
  • Nanny Retirement Contributions – The act permits employers of domestic employees (e.g., nannies) to provide retirement benefits for such employees under a Simplified Employee Pension (SEP)plan. The reason these plans are referred to as simplified is the contributions are maintained in an IRA account of an employee and subject to normal IRA rules. SEP-IRAs require little administration on the part of the employer and contributions immediately vest for the employee.

The employer can decide what amount to contribute each year, anywhere from $0 to the maximum SEP-IRA contribution which is, 25% of compensation or $66,000 for tax year 2023, whichever is less. 

  • Credit for Small Employer Pension Plan Start-up Costs – SECURE 2.0 Act modifies the credit by creating a second category of employer – those with 50 or fewer employees – while leaving the original credit in place for employers with more than 50 employees but not more than 100.

Thus, for employers with 50 or fewer employees the maximum credit is increased from $500 to $1,000. In addition, the credit percentage is increased from 50% to 100% for the first-year expenses for starting a pension plan and for the next three years will be as shown here:    

2nd Year…………………………………………………   75% 

3rd Year………………………………………………….   50% 

4th Year………………………………………………….   25% 

  • Military Spouse Retirement Plan Eligibility Credit for Small Employers –  Members of the military are transferred frequently and their spouses who move with them often do not remain employed long enough to become eligible for their employer’s retirement plan or to vest in employer contributions. The SECURE 2.0 Act provides small employers (no more than 100 employees earning more than $5,000 per year) a tax credit with respect to their defined contribution plans if they:

(1) Make military spouses immediately eligible for plan participation within two months of hire, 

(2) Upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at 2 years of service, and 

(3) Make the military spouse 100% immediately vested in all employer contributions.  

The tax credit equals the sum of:

(1) $200 per military spouse, and 

(2) 100% of all employer contributions (up to $300) made on behalf of the military spouse.

This results in a maximum tax credit of $500.  This credit applies for 3 years with respect to each military spouse. 

  • Firefighter Retirement Distributions – Under current law, an employee who withdraws funds from their retirement plan before age 59½ will pay a penalty (additional tax) of 10% of the taxable amount of the distribution. An exception to the penalty is if an employee terminates employment after age 55 and takes a distribution from a retirement plan.  Further, there is a special rule that allows firefighters to substitute age 50 for age 55 for purposes of this exception from the 10% tax. The SECURE 2.0 Act extends the age 50 rule to private sector firefighters.
  • Penalty-Free Withdrawals for Domestic Abuse Victims – The Act allows retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw a small amount of money and avoid the 10% early withdrawal penalty when they withdraw the lesser of:
  • $10,000, or
  • 50% of the present value of the nonforfeitable accrued benefit of the employee under the plan.

The distribution may be redeposited to the retirement plan at any time during the 3-year period beginning on the day after the date on which the distribution was received and avoid the tax on the distribution.   

  • Qualified Charitable Distributions (QCDs) to Split Interest Entity – Normally an individual at least age 70½ can annually transfer tax free up to $100,000 from their IRA to a qualified charity. That provision is expanded by the SECURE 2.0 Act to allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Caution: Where a taxpayer made IRA contributions after reaching age 70½ there may be taxable ramifications; call this office before making a transfer. 
  • Qualifying Longevity Annuity Contracts (QLACs) – QLACs are generally deferred annuities that begin payment toward the end of an individual’s life expectancy. Because payments start so late, QLACs are an inexpensive way for retirees to hedge the risk of outliving their savings in defined contribution plans and IRAs.  

Tax regulations published in 2014 imposed certain limits that have prevented QLACs from achieving their intended purpose in providing longevity protection.  

The Act addresses these limitations by:

  • Repealing the 25% of the account balance limit that applies to the amount of premiums paid for the contract, 
  • Allowing up to $200,000 (indexed) to be used from an account balance to purchase a QLAC, and  
  • Facilitating the sales of QLACs with spousal survival rights – and clarifies that free-look periods are permitted up to 90 days with respect to contracts purchased or received in an exchange on or after July 2, 2014.  

THOSE EFFECTIVE IN 2024

  • Tax Free Sec 529 Plan to Roth Rollovers – Frequently individuals express concerns about funds being left over and stuck in 529 accounts when the beneficiary’s higher-education expenses paid from the plan have turned out to be less than the account’s value, leaving them no choice for getting access to the funds except taking a non-qualified withdrawal and assume a penalty.  

The Act amends the tax code to allow for tax- and penalty-free rollovers from 529 accounts to Roth IRAs, under certain conditions.  

  • Beneficiaries of 529 college savings accounts would be permitted to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA.  
  • The 529 account must have been open for more than 15 years.
  • These rollovers are also subject to the Roth IRA annual contribution limits (for example, an inflation-adjusted $6,500 in 2023), which means the $35,000 maximum rollover can’t be done all in one year.
  • Additional Nonelective Contributions to SIMPLE Plans – Currently employers with SIMPLE plans are required to make employer contributions to employees of either 2% of compensation or 3% of employee elective deferral contributions.  

Beginning in 2024 an employer can make additional contributions to each employee of the plan in a uniform manner, provided that the contribution may not exceed the lesser of:

  • Up to 10% of compensation or 
  • $5,000 (indexed) 
  • Indexing IRA Catch-Up Contributions – Currently the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50.  Beginning in 2024 catch-up contributions will be inflation adjusted in $100 increments.
  • Employers Can Make Matching Contributions Based on Student Loan Payments – This new retirement plan twist is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student loan debt, and thus are missing out on available employer matching contributions for retirement plans.  

The Act allows employees to receive matching contributions by reason of repaying their student loans and by permitting an employer to make matching contributions under a 401(k) plan, 403(b) plan, SIMPLE IRA or 457(b) government plan with respect to qualified student loan payments.  

A qualified student loan payment is largely defined as a payment made on any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.  

  • Withdrawals for Certain Emergency Expenses – Unless an exception applies, withdrawals from a 401(k) plan or a traditional IRA before attaining the age of 59½ are generally subject a 10% early withdrawal penalty.

Effective beginning in 2024, the Actprovides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses.  

Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution to the plan within 3 years.  

No further emergency distributions are permissible during the 3-year repayment period unless repayment occurs. 

  • Emergency Savings Accounts – According to a report by the Federal Reserve, almost half of Americans would struggle to cover an unexpected $400 expense resulting in many tapping into their retirement savings.    

Congress reasoned that separating emergency savings from one’s retirement savings account will provide participants a better understanding that one account is for short-term emergency needs and the other is for long-term retirement savings, thus empowering employees to handle unexpected financial shocks without jeopardizing their long-term financial security in retirement through emergency hardship withdrawals from their retirement plans. 

Thus the Act provides employers the option to offer to their non-highly compensated employees pension-linked emergency savings accounts.  

Employers may automatically opt employees into these accounts at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer).  

The first four withdrawals from an emergency savings account each plan year may not be subject to any fees or charges. At separation from service, an employee may take their emergency savings account as a cash distribution or roll it into their Roth defined contribution plan (if they have one) or an IRA.

EFFECTIVE IN 2025

  • Increased Catch-Up Contributions for Those Aged 60 Through 63 – Employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan more than the otherwise applicable limits. The limit on catch-up contributions for 2023 is $7,500, except in the case of SIMPLE plans for which the limit is $3,500.  

Effective beginning in 2025, these limits are increased to the greater of $10,000 or 50% more than the regular catch-up amount beginning in 2025 for individuals who have attained ages 60, 61, 62 and 63.  The increased amounts are indexed for inflation after 2025.  

  • Automatic Enrollment – Many Americans reach retirement age with little, or no savings simply because they are not offered an opportunity to save for retirement through their employers. Even for those employees who are offered a retirement plan at work, many do not participate.  

The Act requires new 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (employees may opt out of coverage).  

  • The initial auto enrollment amount is a contribution by the employee of at least 3% but not more than 10% of their compensation. 
  • Each year thereafter that amount is increased by one percentage point until it reaches at least 10%, but not more than 15%.  
  • All current 401(k) and 403(b) plans are grandfathered (i.e., not required to have automatic enrollment).  

The following employers are exempt from the mandatory enrollment requirement, including:

  • Small businesses with 10 or fewer employees. 
  • Employers that have been in business for less than three years.
  • Church Plans.   
  • Government Plans.
  • Long-Term Part-Time Employee 401(k) Participation – The Act significantly lowers the bar for part-time employees to participate in 401(k) retirement plans. Employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete:
  • 1 year of service (with the 1,000-hour rule) or 
  • 2 consecutive years of service where the employee completes at least 500 hours of service per year (down from 3 consecutive years).    

EFFECTIVE IN 2027

  • Enhancement and Modification of the Saver’s Credit  

Current law provides for a nonrefundable credit for lower income individuals who make contributions to individual retirement accounts (“IRAs”), employer retirement plans (such as 401(k) plans), and ABLE accounts.  The Act repeals and replaces the credit with respect to IRA and retirement plan contributions, changing it from a credit paid in cash as part of a tax refund to a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan.  

The match is 50% of IRA or retirement plan contributions up to $2,000 per individual. Thus, the government’s contribution will be a maximum of $1,000. Since the matching contribution is for lower- and middle-income individuals, the matching contribution is phased as indicated in the table.  

SAVER’S MATCH MAGI PHASEOUT
Filing StatusPhaseout ThresholdFully Phased Out
Single, MFS20,50035,500
HH30,75053,250
MFJ, SS41,00071,000

MAGI = AGI plus add back of foreign and possession (Internal Revenue Code Sections 911,931 and 933) exclusions. 

The preceding covers only some of the provisions in the new law. As the IRS develops further guidance and tax regulations more details will emerge of which we will keep you informed. 

If you have questions or would like to schedule a retirement planning appointment, please give this office a call.

2023 Standard Mileage Rates Announced

Article Highlights: 

  • Standard Mileage Rates for 2023
  • Business, Charitable, Medical and Moving Rates
  • Important Considerations for 2023
  • Switching Between the Actual Expense and Standard Mileage Rate Methods
  • Employer Reimbursements
  • Employee Deductions Suspended
  • Special Allowances for SUVs 

As it does every year, the Internal Revenue Service recently announced the inflation-adjusted 2023 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.


Beginning on Jan. 1, 2023, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are: 

  • 65.5 cents per mile for business miles driven (including a 28-cent-per-mile allocation for depreciation). This is up from 62.5 cents for the last half of 2022;  
  • 22 cents per mile driven for medical or moving purposes unchanged from the last half of 2022; and 
  • 14 cents per mile driven in service of charitable organizations. 

The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for over 20 years.

Important Consideration: The 2023 rates are based on 2022 fuel costs. Due to the volatility of gas prices, it may be appropriate to consider switching to the actual expense method for 2023, or at least keeping track of the actual expenses, including fuel costs, repairs, maintenance, etc., so that the option is available for 2023.  

Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the volatile fuel prices, the bonus depreciation as well as increased depreciation limitations for passenger autos may make using the actual expense method worthwhile during the first year a vehicle is placed in business service. 

However, the standard mileage rates cannot be used if you have used the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.

Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel. 

The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, during these years employees may not take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks or vans.

Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation; taxpayers with these vehicles can utilize both the Section 179 expense deduction (up to a maximum of $28,900 in 2023) and the bonus depreciation (the Section 179 deduction must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to the taxpayer’s income (SE income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.

If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give this office a call.

The Implications of the R&D Tax Policy Changes on Manufacturers Everywhere

If you’ve been keeping up with the news, you’re no doubt aware of a recent policy change that will impact the way that research and development (R&D for short) is handled when it comes to income taxes in the United States. Rather than being allowed to deduct those costs immediately, companies are now being told that they must spread those costs out over a period of five years.

Unsurprisingly, those companies are none too thrilled with that change. It has the potential to hurt manufacturers in a number of different ways, all of which are worth exploring.

The R&D Tax Policy Change: An Overview

In a letter that was sent on November 4, 2022, no less than 178 CFOs – primarily those from some of the biggest names in United States manufacturing like Ford Motor Company, Lockheed Martin, Boeing, and others – outlined why they believe that these aforementioned new rules would lead to what they call a “competitive disadvantage” for American companies. This in turn would almost certainly lead to job losses, which would in turn harm their ability to innovate over the next decade.

Their point of view was simple: they were asking the current Congress to switch back to a system that allowed them to immediately deduct their costs when it came to research and development as soon as the end of the year.

It’s important to note that in a general sense, research and development investment does not spread evenly across the economy. It tends to be heavily localized in a few key spaces, with manufacturing being chief among them. In fact, the manufacturing sector alone accounts for 58% of all research and development costs according to one recent study.

To contextualize that in a different way, it means that the manufacturing sector would face a significant tax increase as per the research cited above – to the tune of $31.7 billion in 2023 alone which is directly attributed to this new approach to R&D amortization.

It’s equally important to note that, until January 1, 2022, businesses could deduct 100% of all expenses that were directly attributed to research and development in the same year that they were incurred. With January 1, 2023, on the other hand, this new law goes into effect. This essentially makes it not only more expensive to invest in advancements that will help innovate various sectors like manufacturing, but in the growth of these companies as well.

Many agree that this means that the sector won’t just get hit, it will get hit significantly. This is essentially a major new expense – the fact that the tax liabilities of these companies are about to increase exponentially – that was not anticipated up to this moment.

One company that is particularly worried about the implications of this change is Miltec UV. Right now, company leadership believes that an exciting new opportunity is within reach. They have spent years developing a new technology for lithium-ion batteries – otherwise known as the rechargeable batteries that are found in countless devices like your smartphone or tablet. This new technology could potentially be used for next-generation electric vehicles.

Miltec UV has poured no less than 11 years of development into manufacturing the electrodes that will be used in these batteries. They’ve spent countless amounts of money on prototyping. There has been various proof of concepts developed to indicate that these microbes can do what the company thinks they can. There has been testing. On top of it all, there is the cost to manufacture the batteries. Officials agree that they are very close to the point where they can commercialize the batteries and begin to sell them, but with these new rule changes that also means that they will have to pay more taxes than they previously thought they would.

In the event that these tax changes are not reversed, industry leaders fear that they will hurt profits in the short-term. This could then negatively impact essential benefits that employees at manufacturing companies have come to count on.

For the record, Miltec UV is also an organization that funds all of its research and development efforts through the profits of its various commercial businesses. It has eschewed taking on outside investment in the past and hopes to continue to do so moving forward.

Regardless of whether Congress reverses these changes, one thing is for certain – this is a development that the entirety of the manufacturing industry will be paying close attention to moving forward.

All the Signs That You May Need Some Assistance With Your Bookkeeping

Especially in the early days of a business, it can be natural to want to handle as many day-to-day tasks yourself – bookkeeping included. Sometimes, it’s in an effort to save money. Often, entrepreneurs just feel like they’re in a better position to handle everything themselves. Regardless, this situation does seem to play out regularly.

But as your business continues to grow and evolve, those day-to-day tasks become harder. Your finances become more challenging, which naturally adds complexity to the bookkeeping process. Mistakes are more likely to be made and some of them, particularly as they relate to cash flow, can cost you dearly.

Thankfully, all hope is not lost. By simply paying attention to a few key red flags, you can become immediately aware when you need help with your bookkeeping so that you can do something about it quickly.

Red Flag #1: Your Records Leave a Lot to Be Desired

By far, one of the biggest warning signs that you need a bit of additional help with your bookkeeping has to do with when you find yourself in a situation where your existing records leave a lot to be desired.

To make sound financial decisions, you need a bird’s eye view of everything – and records are a big part of it. This means not only receipts and bank statements, but also things like payroll records, invoices, and more. Not only will this help keep your business afloat, but it will also help avoid any problems when tax season rolls around again.

Even if you’re keeping everything that you should be, you may not have an ideal system in place to help make sense of it all. Suppose at the end of the year, you have to wade through 12 months’ worth of documentation just to find information on certain expenses. In that case, you’re spending a significant amount of time that could be better used by focusing on more important matters. Enlisting the help of an accounting professional can absolutely help to that end.

Red Flag #2: You’re Not Reconciling Things Fast Enough

Another critical part of the accounting process is the end-of-the-month reconciliation. This is when you take your bank statements and compare each cash account transaction with the information you have in your records. Essentially, you’re trying to make sure that the two line up. Doing so gives you a complete financial picture that you can use to make decisions in the coming month.

In no uncertain terms, this process should be done as soon as you see your bank statements posted online. If you wait too long – or worse, if you can’t find the time to do it – you’ll be making decisions based on incorrect information. Sometimes this might not be a problem, but more often than not it will – and it could be avoided by calling in a bit of additional help.

Red Flag #3: Your Goals Are Expanding

For many small businesses in particular, one of the biggest warning signs that they need bookkeeping help comes by way of the fact that their long-term goals are expanding and growing but they lack the capability to help meet those needs on the financial side of the equation.

In the early days of your business, your goals were probably simple: “keep the doors open and the lights on.” But at a certain point, you’re going to want to think about expanding. You’ll need to hire new people and you need to know how many you can reasonably afford. You’ll need to think about what other investments you’ll need to make. All of this leads to a bookkeeping process that instantly becomes more complicated and at that point, you don’t want to attempt to go at it alone.

At best, you’ll just make it harder for yourself to accomplish those goals that you’ve set for yourself. At worst, you’ll be creating a series of bigger issues that will only escalate over time if things go unchecked.

Red Flag #4: You’re Having Profitability Issues

Similarly, one precarious situation that business owners often find themselves in involves one where sales may be strong, but profits don’t line up with those expectations. You’re making a lot of money, but it’s also going somewhere and without the right approach to bookkeeping, you’ll likely have little-to-no visibility as to why that may be the case.

This is another one of those reasons why having clear, concise financial records pays off enormously. If sales are strong and profits aren’t, you can dive deep into the records to quickly find out why. You can find opportunities for cost savings to help get those two numbers closer together. At a bare minimum, you’ll have actionable information to work from in terms of what must be done to optimize profits as much as possible. As stated, there will come a day when it becomes too difficult to do this on your own and when that day comes, a financial professional is the first person you should call.

In the End

In the end, these are just a few of the many red flags that point to the fact that your bookkeeping efforts likely need a bit of additional help. While it can be a frustrating situation to find yourself in, it’s also a critical one. Acknowledging the problem early on puts you in a far better position to address it quickly – before it has a chance to become a much more volatile situation later on. Enlisting the help of a professional will also give you a rock-solid financial foundation that you can build on moving forward, which is truly the most important benefit of all.

If you’d like to find out more information about all the signs that indicate you may need some help with your bookkeeping, or if you’d just like to talk to a professional about your situation in a bit more detail, please don’t delay – contact us today.

Consequences of Filing Married Filing Separate

Article Highlights

  • Reasons to File Separate
  • Filing Threshold
  • Community Property State Income
  • Joint & Several Liability
  • Social Security Benefits Taxation Threshold
  • Capital Loss Limitation
  • Sec 179 Limitation
  • Rental Loss Limitation
  • Traditional IRA
  • Roth IRA
  • Savings Bond Interest Exclusion
  • Higher Education Interest
  • Standard Deduction
  • Standard Deduction vs Itemized Deductions
  • Medicare Premiums
  • Home Mortgage Interest
  • SALT Limitation
  • Alternative Minimum Tax (AMT)
  • Tax Rates
  • Child & Dependent Care Credit
  • Earned Income Tax Credit (EITC)
  • Adoption Tax Credit
  • Elderly & Disabled Tax Credit
  • Retirement (Saver’s) Credit
  • Tax Withholding
  • Estimated Tax Allocation
  • Estimated Tax High Income Safe Harbor
  • Premium Tax Credit
  • Automatic 2-month Extension When Out of the Country

Married taxpayers generally have the option to file a joint tax return or separate returns, a filing status commonly referred to as married filing separate (MFS). If you are married and you and your spouse are filing separate returns, or are considering doing so, you should read this article before making that decision. Depending on whether the taxpayers are residents of a separate or community property state, their separate returns may include just the income and eligible expenses of each filer or a percentage of their combined income and expenses. 

Couples choose the MFS option for a variety of reasons:

  • They want to avoid the joint and several liability for the tax from a joint tax return. Joint and several liability is a legal term for a responsibility that is shared by two or more parties to a lawsuit. A wronged party may sue any or all of them, and collect the total damages awarded by a court from any or all of them.
  • They have children from a prior marriage and want to keep finances separate.
  • They only want to keep their taxes separate.
  • The marriage is tenuous.
  • The taxpayers are separated and don’t want to cooperate in filing a joint return.
  • One spouse might get a larger refund by filing separately (the other will pay more).
  • They think they can save money by filing separate returns, and a variety of other reasons.

The fact of the matter is that tax laws are carefully written to keep married taxpayers from filing separately to manipulate the tax laws to their benefit. The following is a list of the more commonly encountered tax disadvantages – some might call them tax penalties –when filing as MFS. Unless otherwise noted the amounts shown are for 2023:  

Filing Threshold – For all filing statuses except MFS the income threshold where a return must be filed is equal to the standard deduction for that filing status.  For an MFS return the filing threshold is $5.

Community Property State Income – Unlike most states where each spouse claims their own earned income on an MFS return, in community property states the earned income is evenly split between the spouses. However, FICA payroll withholding, self-employment tax, and IRA contributions apply separately to the spouse who earned the income.

Joint & Several Liability – On a joint return both spouses can be held responsible for payment of the tax, while the spouses filing as MFS are only responsible for payment of the tax on their individual MFS returns.  

Social Security Benefits Taxation Threshold – Social Security (SS) income is not taxable until taxpayers filing married joint have modified AGI (MAGI) that exceeds a threshold of $32,000. MAGI is regular AGI (without Social Security income) plus 50% of their Social Security income plus tax-exempt interest income, and plus certain other infrequently encountered additions. However, the threshold is zero for taxpayers filing as MFS. Thus taxpayers filing as MFS are taxed on 85% of every dollar of SS income.

Capital Loss Limitation –Where married couples filing jointly can annually deduct up to $3,000 of capital losses, those filing as MFS can only deduct up to $1,500.

Sec 179 Limitation – Taxpayers can elect to expense the cost of qualifying property used in the active conduct of a trade or business. The portion of the cost not expensed under Sec 179 is depreciable. The maximum amount that can be expensed is inflation adjusted annually and is $1,160,000 for 2023 (up from 1,080,000 in 2022). For MFS taxpayers the annual maximum amount must be allocated between the spouses.

Rental Loss Limitation – Generally, most taxpayers cannot deduct rental losses.  However, there is a special rule that allows a deduction of aggregate losses from rental real estate activities up to $25,000 per year for taxpayers who are an active participant in the activity. It means that the taxpayer must participate in management decisions, and at least arrange for others to provide the necessary services such as repairs. 

However, this special allowance only applies to lower income taxpayers with an AGI, without regard to passive losses, of $150,000 or less. In addition the $25,000 loss allowance begins to phase out 50 cents for each $1 of income over $100,000. Thus the allowance is fully phased out for joint filers when the AGI exceeds $150,000.  

Phase out applies to gross income without considering passives, taxable Social Security benefits, or deductions for IRA.  

Taxpayers filing as MFS must live apart the entire year or they get no relief under this rule.  If they lived apart all year, the allowance is $12,500, and phase out begins at income of $50,000

Traditional IRA – For taxpayers filing joint returns, a Traditional IRA is tax deductible except that the deductibility is phased out for higher income taxpayers who are active participants in an employer retirement plan. Where both spouses are active participants in an employer retirement plan the deductibility of IRA contribution in 2023 phases out for AGIs between $116,000 and $136,000. Where only one spouse is an active participant the phase out is between $218,000 and $228,000.  However, for those filing MFS the phaseout is between $0 and $9,999.  

Roth IRA – The ability to contribute to a Roth IRA phases out for those couples filing jointly between $218,000 – $228,000. However, for those living together and filing MFS the phase-out is range is $0 and $9,999.  

Savings Bond Interest Exclusion – An individual who pays qualified higher education expenses with redemption proceeds from Series EE or I bonds issued after ’89 can potentially exclude from income the bond interest. No exclusion is available to a taxpayer filing married separate.

Higher Education Interest – An “above-the-line” deduction is allowed for interest payments due and paid on any “qualified student loan,” regardless of when a taxpayer first incurred the loan. The maximum deduction per year is $2,500.  However, for those filing MFS, no deduction is allowed.

Standard Deduction – The deduction for those filing as MFS is ½ of the standard deduction for married filing joint taxpayers plus the age 65 and blind add-on amounts.

Standard Deduction vs Itemized Deductions – Generally taxpayers can choose between taking the standard deduction or itemizing deductions. However, where both spouses are filing as MFS if one itemizes, then both must itemize, a tax trap often overlooked by MFS filers.

Medicare Premiums – For taxpayers who qualify for Medicare, the premiums are based upon their modified adjusted gross income (MAGI) and filing status from the tax return two years prior. The rates for individuals filing MFS are substantially higher than for other Medicare participants. 

Home Mortgage Interest – MFS spouses are treated as if they are one taxpayer and must split between them the amount of mortgage interest deduction they would be entitled to jointly. If two homes are involved, each spouse can only claim interest on one home unless they agree one can claim both.  

State and Local Taxes Deduction – When itemizing deductions, the tax code limits (referred to as the SALT limitation) the deduction for state and local taxes, such as state income or sales tax and property tax, to $10,000 for all filing statuses except MFS, which is limited to $5,000.

Alternative Minimum Tax (AMT) – For MFS taxpayers the AMT exemption amount is only half of the amount for those filing jointly and the income threshold for the 28% tax rate is half of what it is joint filers. 

Tax Rates – The marginal rates for MFS are twice that of married taxpayers filing jointly.

Child & Dependent Care Credit – MFS taxpayers cannot claim this credit unless legally separated. Where it can be claimed, the AGI credit phaseout threshold is $75,000 (half of that allowed for joint filers).    

Earned Income Tax Credit (EITC) – The EITC is a tax credit for low-income taxpayers. Where one spouse can file as head of household (HH) instead of MFS and lives in a community property state, earned income for the credit does notinclude amounts earned by the other spouse. For a spouse to claim HH instead of MFS, he or she must have lived apart from their spouse at least the last six months of the year and paid more than one-half of the cost of maintaining a household which is the principal place of abode for more than one-half the year of a child, stepchild, or eligible foster child for whom the taxpayer may claim a dependency exemption.

Adoption Tax Credit – Allowed for an MFS taxpayer only if the spouses lived apart for the last 6 months of the year and the child lived with taxpayer more than half the year and the taxpayer provided over half the cost of maintaining the home.

Elderly & Disabled Tax Credit – Not allowed for those filing as MFS.

Retirement (Saver’s) Credit – The maximum AGI to be eligible for any Saver’s Credit for those filing jointly in 2023 is $54,750 while for those filing MFS it is $36,500. Tax Withholding – MFS taxpayers only claim their own income tax withheld unless they are