Do you have questions about taking IRA withdrawals? We’ve got answers | cpa in harford county md | weyrich, cronin and sorra

Do you have questions about taking IRA withdrawals? We’ve got answers

Once you reach age 73, tax law requires you to begin taking withdrawals — called Required Minimum Distributions (RMDs) — from your traditional IRA, SIMPLE IRA and SEP IRA. Since funds can’t stay in these accounts indefinitely, it’s important to understand the rules behind RMDs, which can be pretty complex. Below, we address some common questions to help you navigate this process.

What are the tax implications if I want to withdraw money before retirement?

If you need to take money out of a traditional IRA before age 59½, distributions are taxable, and you may be subject to a 10% penalty tax. However, there are several ways that you can avoid the 10% penalty tax (but not the regular income tax). They include using the money to pay:

  • Qualified higher education expenses,
  • Up to $10,000 of expenses if you’re a first-time homebuyer,
  • Expenses after you become totally and permanently disabled,
  • Expenses of up to $5,000 per child for qualified birth or adoption expenses, and
  • Health insurance premiums while unemployed.

These are only some of the exceptions to the 10% tax allowed before age 59½. The IRS lists them all in this chart.

When am I required to take my first RMD?

For an IRA, you must take your first RMD by April 1 of the year following the year in which you turn 73, regardless of whether you’re still employed. The RMD age used to be 72 but the Secure 2.0 Act raised it to 73 starting in 2023.

How do I calculate my RMD?

The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who’s 10 or more years younger than the owner.

How should I take my RMDs if I have multiple accounts?

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You don’t have to take a separate RMD from each IRA.

Can I withdraw more than the RMD?

Yes, you can always withdraw more than the RMD. But you can’t apply excess withdrawals toward future years’ RMDs.

In planning for RMDs, you should weigh your income needs against the ability to keep the tax shelter of the IRA going for as long as possible.

Can I take more than one withdrawal in a year to meet my RMD?

You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the yearly total minimum amount by December 31 (or April 1 if it is for your first RMD).

What happens if I don’t take an RMD?

If the distributions to you in any year are less than the RMD for that year, you’ll be subject to an additional tax equal to 50% of the amount that should have been paid but wasn’t.

Plan carefully

Contact us to review your traditional IRAs and analyze other retirement planning aspects. We can also discuss who you should name as beneficiaries and whether you could benefit from a Roth IRA. Roth IRAs are retirement savings vehicles that operate under a different set of rules than traditional IRAs. Contributions aren’t deductible, but qualified distributions are generally tax-free.

© 2025

 

Maximize your 401(k) in 2025: Smart strategies for a secure retirement | tax accountant in bel air md | weyrich, cronin and sorra

Maximize your 401(k) in 2025: Smart strategies for a secure retirement

Saving for retirement is a crucial financial goal and a 401(k) plan is one of the most effective tools for achieving it. If your employer offers a 401(k) or Roth 401(k), contributing as much as possible to the plan in 2025 is a smart way to build a considerable nest egg.

If you’re not already contributing the maximum allowed, consider increasing your contribution in 2025. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a significant impact on the amount of money you’ll have in retirement.

With a 401(k), an employee elects to have a certain amount of pay deferred and contributed to the plan by an employer on his or her behalf. The amounts are indexed for inflation each year and they’re increasing a modest amount. The contribution limit in 2025 is $23,500 (up from $23,000 in 2024). Employees age 50 or older by year end are also generally permitted to make additional “catch-up” contributions of $7,500 in 2025 (unchanged from 2024). This means those 50 or older can generally save up to $31,000 in 2025 (up from $30,500 in 2024).

However, under a law change that becomes effective in 2025, 401(k) plan participants of certain ages can save more. The catch-up contribution amount for those who are age 60, 61, 62 or 63 in 2025 is $11,250.

Note: The contribution amounts for 401(k)s also apply to 403(b)s and 457 plans.

Traditional 401(k)s

A traditional 401(k) offers many benefits, including:

  • Pretax contributions, which reduce your modified adjusted gross income (MAGI) and can help you reduce or avoid exposure to the 3.8% net investment income tax.
  • Plan assets that can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • The option for your employer to match some or all of your contributions pretax.

If you already have a 401(k) plan, look at your contributions. In 2025, try to increase your contribution rate to get as close to the $23,500 limit (with any extra eligible catch-up amount) as you can afford. Of course, the taxes on your paycheck will be reduced because the contributions are pretax.

Roth 401(k)s

Your employer may also offer a Roth option in its 401(k) plans. If so, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners because they can’t contribute to a Roth IRA. That’s because the ability to make a Roth IRA contribution is reduced or eliminated if adjusted gross income (AGI) exceeds specific amounts.

Planning for the future

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies for your situation.

© 2024

 

Unlocking the mystery of taxes on employer-issued nonqualified stock options | tax accountant in baltimore county md | Weyrich, Cronin & Sorra

Unlocking the mystery of taxes on employer-issued nonqualified stock options

Employee stock options remain a potentially valuable asset for employees who receive them. For example, many Silicon Valley millionaires got rich (or semi-rich) from exercising stock options when they worked for start-up companies or fast-growing enterprises.

We’ll explain what you need to know about the federal income and employment tax rules for employer-issued nonqualified stock options (NQSOs).

Tax planning objectives

You’ll eventually sell shares you acquire by exercising an NQSO, hopefully for a healthy profit. When you do, your tax planning objectives will be to:

1. Have most or all of that profit taxed at lower long-term capital gain rates.

2. Postpone paying taxes for as long as possible.

Tax results when acquiring and selling shares

NQSOs aren’t subject to any tax-law restrictions, but they also confer no special tax advantages. That said, you can get positive tax results with advance planning.

When you exercise an NQSO, the bargain element (difference between market value and exercise price) is treated as ordinary compensation income — the same as a bonus payment. That bargain element will be reported as additional taxable compensation income on Form W-2 for the year of exercise, which you get from your employer.

Your tax basis in NQSO shares equals the market price on the exercise date. Any subsequent appreciation is capital gain taxed when you sell the shares. You have a capital loss if you sell shares for less than the market price on the exercise date.

Let’s look at an example

On December 1, 2023, you were granted an NQSO to buy 2,000 shares of company stock at $25 per share. On April 1, 2024, you exercised the option when the stock was trading at $34 per share. On May 15, 2025, the shares are trading at $52 per share, and you cash in. Assume you paid 2024 federal income tax on the $18,000 bargain element (2,000 shares × $9 bargain element) at the 24% rate for a tax of $4,320 (24% × $18,000).

Your per-share tax basis in the option stock is $34, and your holding period began on April 2, 2024. When you sell on May 15, 2025, for $52 per share, you trigger a $36,000 taxable gain (2,000 shares × $18 per-share difference between the $52 sale price and $34 basis). Assume the tax on your long-term capital gain is $5,400 (15% × $36,000).

You net an after-tax profit of $44,280 when all is said and done. Here’s the calculation: Sales proceeds of $104,000 (2,000 shares × $52) minus exercise price of $50,000 (2,000 shares × $25) minus $5,400 capital gains tax on the sale of the option shares minus $4,320 tax upon exercise.

Since the bargain element is treated as ordinary compensation income, the income is subject to federal income tax, Social Security and Medicare tax withholding.

Key point: To keep things simple, the example above assumes you don’t owe the 3.8% net investment income tax on your stock sale gain or any state income tax.

Conventional wisdom and risk-free strategies

If you had exercised earlier in 2024 when the stock was worth less than $34 per share, you could have cut your 2024 tax bill and increased the amount taxed later at the lower long-term capital gain rates. That’s the conventional wisdom strategy for NQSOs.

The risk-free strategy for NQSOs is to hold them until the earlier of 1) the date you want to sell the underlying shares for a profit or 2) the date the options will expire. If the latter date applies and the options are in-the-money on the expiration date, you can exercise and immediately sell. This won’t minimize the tax, but it eliminates any economic risk. If your options are underwater, you can simply allow them to expire with no harm done.

Maximize your profit

NQSOs can be a valuable perk, and you may be able to benefit from lower long-term capital gain tax rates on part (maybe a big part) of your profit. If you have questions or want more information about NQSOs, consult with us.

© 2024

 

When can you deduct business meals and entertainment? | business consulting services in washington dc | Weyrich, Cronin & Sorra

When can you deduct business meals and entertainment?

You’re not alone if you’re confused about the federal tax treatment of business-related meal and entertainment expenses. The rules have changed in recent years. Let’s take a look at what you can deduct in 2024.

Current law

The Tax Cuts and Jobs Act eliminated deductions for most business-related entertainment expenses. That means, for example, that you can’t deduct any part of the cost of taking clients out for a round of golf or to a football game.

You can still generally deduct 50% of the cost of food and beverages when they’re business-related or consumed during business-related entertainment.

Allowable food and beverage costs

IRS regulations clarify that food and beverages are all related items whether they’re characterized as meals, snacks, etc. Food and beverage costs include sales tax, delivery fees and tips.

To be 50% deductible, food and beverages consumed in conjunction with an entertainment activity must: be purchased separately from the entertainment or be separately stated on a bill, invoice, or receipt that reflects the usual selling price for the food and beverages. You can deduct 50% of the approximate reasonable value if they aren’t purchased separately.

Other rules

Per IRS regulations, no 50% deduction for the cost of business meals is allowed unless:

1. The meal isn’t lavish or extravagant under the circumstances.

2. You (as the taxpayer) or an employee is present at the meal.

3. The meal is provided to you or a business associate.

Who are business associates? They’re people with whom you reasonably expect to conduct business — such as established or prospective customers, clients, suppliers, employees or partners.

IRS regulations make it clear that you can deduct 50% of the cost of a business-related meal for yourself — for example, because you’re working late at night.

Traveling on business

Per IRS regulations, the general rule is that you can still deduct 50% of the cost of meals while traveling on business. The longstanding rules for substantiating meal expenses still apply. Message: keep receipts.

IRS regulations also reiterate the longstanding general rule that no deductions are allowed for meal expenses incurred for spouses, dependents, or other individuals accompanying you on business travel. (This is also true for spouses and dependents accompanying an officer or employee on a business trip.)

The exception is when the expenses would otherwise be deductible. For example, meal expenses for your spouse are deductible if he or she works at your company and accompanies you on a business trip for legitimate business reasons.

100% deductions in certain situations

IRS regulations confirm that some longstanding favorable exceptions for meal and entertainment expenses still apply. For example, your business can deduct 100% of the cost of:

  • Food, beverage, and entertainment incurred for recreational, social, or similar activities that are primarily for the benefit of all employees (for example, at a company holiday party);
  • Food, beverages, and entertainment available to the general public (for example, free food and music you provide at a promotional event open to the public);
  • Food, beverages and entertainment sold to customers for full value;
  • Amounts that are reported as taxable compensation to recipient employees; and
  • Meals and entertainment that are reported as taxable income to a non-employee recipient on a Form 1099 (for example, a customer wins a dinner cruise for ten valued at $750 at a sales presentation).

In addition, a restaurant or catering business can deduct 100% of the cost of food and beverages purchased to provide meals to paying customers and consumed at the worksite by employees who work in the restaurant or catering business.

Bottom line

Business-related meal deductions can be valuable, but the rules can be complex. Contact us if you have questions or want more information.

© 2024

 

How inflation will affect your 2024 and 2025 tax bills | tax accountants in baltimore city | weyrich, cronin and sorra

How inflation will affect your 2024 and 2025 tax bills

Inflation can have a significant impact on federal tax breaks. While recent inflation has come down since its peak in 2022, some tax amounts will still increase for 2025. The IRS recently announced next year’s inflation-adjusted amounts for several provisions.

Here are the highlights.

Standard deduction. What does an increased standard deduction mean for you? A larger standard deduction will shelter more income from federal income tax next year. For 2025, the standard deduction will increase to $15,000 for single taxpayers, $30,000 for married couples filing jointly and $22,500 for heads of household. This is up from the 2024 amounts of $14,600 for single taxpayers, $29,200 for married couples filing jointly and $21,900 for heads of household.

The highest tax rate. For 2025, the highest tax rate of 37% will affect single taxpayers and heads of households with income exceeding $626,350 ($751,600 for married taxpayers filing jointly). This is up from 2024, when the 37% rate affects single taxpayers and heads of households with income exceeding $609,350 ($731,200 for married couples filing jointly).

Retirement plans. Some retirement plan limits will increase for 2025. That means you may have an opportunity to save more for retirement if you have one of these plans and you contribute the maximum amount allowed. For example, in 2025, individuals can contribute up to $23,500 to their 401(k) plans, 403(b) plans and most 457 plans. This is up from $23,000 in 2024. The general catch-up contribution limit for employees age 50 and over who participate in these plans will be $7,500 in 2025 (unchanged from 2024).

However, under the SECURE 2.0 law, specific 401(k) participants can save more with catch-up contributions beginning in 2025. The new catch-up contribution amount for taxpayers who are age 60, 61, 62 or 63 will be $11,250.

Therefore, participants in 401(k) plans who are 50 or older can contribute up to $31,000 in 2025. Those who are age 60, 61, 62 or 63 can contribute up to $34,750.

The annual contribution limit for those with IRA accounts will remain at $7,000 for 2025. The IRA catch-up contribution for those age 50 and up also remains at $1,000 because it isn’t adjusted for inflation.

Flexible Spending Accounts (FSAs). These accounts allow owners to pay for qualified medical costs with pre-tax dollars. If you participate in an employer-sponsored FSA, you can contribute more in 2025. The annual contribution amount will rise to $3,300 (up from $3,200 in 2024). FSA funds must be used by year end unless an employer elects to allow a two-and-one-half-month carryover grace period. For 2025, the amount that can be carried over to the following year will rise to $660 (up from $640 for 2024).

Taxable gifts. You can make annual gifts up to the federal gift tax exclusion amount each year. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. For 2025, the first $19,000 of gifts to as many recipients as you’d like (other than gifts of future interests) aren’t included in the total amount of taxable gifts. (This is up from $18,000 in 2024.)

Thinking ahead

While it will be quite a while before you’ll have to file your 2025 tax return, it won’t be long until the IRS begins accepting tax returns for 2024. When it comes to taxes, it’s nice to know what’s ahead so you can take advantage of all the tax breaks to which you’re entitled.

© 2024

 

Self-employment tax: A refresher on how it works | business consulting services in cecil county md | Weyrich, Cronin & Sorra

Self-employment tax: A refresher on how it works

If you own a growing, unincorporated small business, you may be concerned about high self-employment (SE) tax bills. The SE tax is how Social Security and Medicare taxes are collected from self-employed individuals like you.

SE tax basics

The maximum 15.3% SE tax rate hits the first $168,600 of your 2024 net SE income. The 15.3% rate is comprised of the 12.4% rate for the Social Security tax component plus the 2.9% rate for the Medicare tax component. For 2025, the maximum 15.3% SE tax rate will hit the first $176,100 of your net SE income.

Above those thresholds, the SE tax’s 12.4% Social Security tax component goes away, but the 2.9% Medicare tax component continues for all income.

How high can your SE tax bill go? Maybe a lot higher than you think. The real culprit is the 12.4% Social Security tax component of the SE tax, because the Social Security tax ceiling keeps getting higher every year.

To calculate your SE tax bill, take the taxable income from your self-employed activity or activities (usually from Schedule C of Form 1040) and multiply by 0.9235. The result is your net SE income. If it’s $168,600 or less for 2024, multiply the amount by 15.3% to get your SE tax. If the total is more than $168,600 for 2024, multiply $168,600 by 12.4% and the total amount by 2.9% and add the results. This is your SE tax.

Example: For 2024, you expect your sole proprietorship to generate net SE income of $200,000. Your SE tax bill will be $26,706 (12.4% × $168,600) + (2.9% × $200,000). That’s a lot!

Projected tax ceilings for 2026–2033

The current Social Security tax on your net SE income is expensive enough, but it will only worsen in future years. That’s because your business income will likely grow, and the Social Security tax ceiling will continue to increase based on annual inflation adjustments.

The latest Social Security Administration (SSA) projections (from May 2024) for the Social Security tax ceilings for 2026–2033 are:

  • 2026 – $181,800
  • 2027 – $188,100
  • 2028 – $195,900
  • 2029 – $204,000
  • 2030 – $213,600
  • 2031 – $222,900
  • 2032 – $232,500
  • 2033 – $242,700

Could these estimated ceilings get worse? Absolutely, because the SSA projections sometimes undershoot the actual final numbers. For instance, the 2025 ceiling was projected to be $174,900 just last May, but the final number turned out to be $176,100. But let’s say the projected numbers play out. If so, the 2033 SE tax hit on $242,700 of net SE income will be a whopping $37,133 (15.3% × $242,700).

Disconnect between tax ceiling and benefit increases

Don’t think that Social Security tax ceiling increases are linked to annual Social Security benefit increases. Common sense dictates that they should be connected, but they aren’t. For example, the 2024 Social Security tax ceiling is 5.24% higher than the 2023 ceiling, but benefits for Social Security recipients went up by only 3.2% in 2024 compared to 2023. The 2025 Social Security tax ceiling is 4.45% higher than the 2024 ceiling, but benefits are going up by only 2.5% for 2025 compared to 2024.

The reason is that different inflation measures are used for the two calculations. The increase in the Social Security tax ceiling is based on the increase in average wages, while the increase in benefits is based on a measure of general inflation.

S corporation strategy

While your SE tax bills can be high and will probably get even higher in future years, there may be potential ways to cut them to more manageable levels. For instance, you could start running your business as an S corporation. Then, you can pay yourself a reasonably modest salary while distributing most or all of the remaining corporate cash flow to yourself. That way, only your salary would be subject to Social Security and Medicare taxes. Contact us if you have questions or want more information about the SE tax and ways to manage it.

© 2024

 

Your guide to Medicare premiums and taxes | tax preparation in bel air md | weyrich, cronin and sorra

Your guide to Medicare premiums and taxes

Medicare health insurance premiums can add up to big bucks — especially if you’re upper-income, married, and you and your spouse both pay premiums. Read on to understand how taxes fit in.

Premiums for Part B coverage

Medicare Part B coverage is commonly called Medicare medical insurance. Part B mainly covers doctors’ visits and outpatient services. Eligible individuals must pay monthly premiums for this benefit. Medicare is generally for people 65 or older. It’s also available earlier to some people with disabilities, and those with end-stage renal disease and ALS.

The monthly premium for the current year depends on your modified adjusted gross income (MAGI), as reported on your Form 1040 for two years earlier. MAGI is the adjusted gross income (AGI) number on your Form 1040 plus any tax-exempt interest income.

For 2025, most individuals will pay the base monthly Part B premium of $185 per covered person.

Higher-income individuals must pay a surcharge on top of the base premium. For 2025, a surcharge applies if you: 1) filed as an unmarried individual for 2023 and reported MAGI above $106,000 for that year or 2) filed jointly for 2023 and reported MAGI above $212,000 for that year.

For 2025, Part B monthly premiums, including surcharges if applicable, for each covered individual can be found on this web page.

Part B premiums, including any surcharges, are withheld from your Social Security benefit payments and are shown on the annual Form SSA-1099 sent to you by the Social Security Administration (SSA).

Premiums for Part D drug coverage

Medicare Part D is private prescription drug coverage. Base premiums vary depending on the plan. Higher-income individuals must pay a surcharge on top of the base premium.

For 2025, surcharges apply to those who: 1) filed as an unmarried individual for 2023 and reported MAGI above $106,000 for that year or 2) filed a joint return for 2023 and reported MAGI above $212,000. You can find the 2025 monthly Part D surcharges for each covered person on this web page.

You pay the base Part D premium, which depends on the private insurance company plan you select, to the insurance company. Any surcharge will be withheld from your Social Security benefit payments and reflected on the annual Form SSA-1099 sent to you by the SSA.

Deducting Medicare premiums

You may be able to combine premiums for Medicare insurance with other qualifying health care expenses to claim an itemized medical expense deduction. Your deduction equals total qualifying expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).

Your 2024 tax return and 2026 Medicare premiums

Decisions reflected on your 2024 Form 1040 can affect your 2024 MAGI and, in turn, your 2026 Medicare health insurance premiums. This issue is especially relevant if you’re self-employed or an owner of a pass-through business entity (LLC, partnership or S corporation) because you have more opportunities to micro-manage your 2024 MAGI at tax return time. For example, you may choose to make bigger or smaller deductible contributions to a self-employed retirement plan and maximize or minimize depreciation deductions for business assets.

While your 2026 Medicare health insurance premiums may seem to be an issue in the distant future, 2026 will be here before you know it.

Optimize your situation

As you can see, Medicare health insurance premiums can add up. In addition, what you do on your yet-to-be-filed 2024 tax return can impact your 2026 premiums. We can help you make the best decisions to optimize your overall situation.

© 2024

 

 

Another court ruling on BOI reporting: Requirements are halted again | tax preparation in bel air md | Weyrich, Cronin & Sorra

Another court ruling on BOI reporting: Requirements are halted again

In a surprising turn of events, a federal appeals court has issued another ruling that suspends a requirement for businesses to file reports about their beneficial ownership information (BOI). This came just days after the same court issued a ruling that resulted in the federal government announcing that millions of small businesses did have to file BOI reports by January 13, 2025.

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) immediately announced: “In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

Bottom line: If your business was concerned about the deadline, or rushing to meet it, you can relax for now. Business groups, including the National Federation of Independent Business (NFIB) applauded the latest decision. In a press release, the NFIB stated that since small businesses were told that they needed to “urgently submit” BOI reports, they “have experienced enormous chaos and confusion.”

What the requirements are intended to accomplish

The BOI requirements were imposed under the Corporate Transparency Act (CTA). They’re intended to help prevent criminals from using businesses for illicit activities, such as money laundering and fraud. The CTA mandated many small businesses to provide information about their “beneficial owners” (the individuals who ultimately own or control the businesses) to FinCEN. Failure to submit a BOI report by the applicable deadline would have resulted in civil or criminal penalties, or both.

FinCEN estimated that approximately 32.6 million companies would be affected by the reporting rules in the first year.

Timeline of the requirements

To help explain the head-spinning situation, here’s a timeline of some significant events.

January 1, 2021: The Corporate Transparency Act is enacted.

January 1, 2024: BOI reporting requirements begin to take effect. Initial BOI reports for companies formed or registered prior to 2024 have one year to file reports. Those that register on or after January 1, 2024, have 90 days to file upon receipt of their creation or registration documents and those that register on or after January 1, 2025, have 30 days to file upon receipt of their creation or registration documents.

December 3, 2024: The U.S. District Court for the Eastern District of Texas enters an order suspending nationwide enforcement of the CTA and its BOI reporting requirements. The court challenges the constitutionality of the CTA. (However, in other cases, district courts have upheld the CTA and its requirements.)

December 5, 2024: The government appeals the December 3 district court ruling.

December 6, 2024: FinCEN announces in an alert: “In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

FinCEN states that it believes the CTA is constitutional.

December 23, 2024: The U.S. Court of Appeals for the Fifth Circuit again allows the nationwide enforcement of the CTA and the BOI reporting requirements. FinCEN announces in another “alert” that reporting companies formed or registered prior to 2025 have until January 13, 2025, to file a BOI report (rather than the original January 1, 2025, deadline).

December 26, 2024: The Fifth Circuit vacates the stay and reinstates a nationwide preliminary injunction enjoining (or prohibiting) the government from enforcing the CTA.

December 27, 2024: FinCEN announces in another “alert” that reporting companies aren’t currently required to file BOI reports in January. The Fifth Circuit announces a schedule to address the “weighty substantive arguments” again, beginning in February 2025.

What the future could hold

As you can see by the latest announcement from the appeals court, the ongoing saga of the BOI reporting requirements isn’t necessarily finished. In addition to the court potentially changing the rules again, there could be legislation repealing the reporting requirements when Republicans take control of Congress in the new year. Contact us if you have questions or want to file a BOI report voluntarily.

© 2024

How your business can prepare for and respond to an IRS audit | tax preparation in harford county md | Weyrich, Cronin & Sorra

How your business can prepare for and respond to an IRS audit

The IRS has been increasing its audit efforts, focusing on large businesses and high-income individuals. By 2026, it plans to nearly triple its audit rates for large corporations with assets exceeding $250 million. Under these plans, partnerships with assets over $10 million will also see audit rates increase tenfold by 2026. This ramp-up in audits is part of the IRS’s broader strategy, funded by the Inflation Reduction Act, to target wealthier entities and high-dollar noncompliance.

The IRS doesn’t plan to increase audits for individuals making less than $400,000 annually. Small businesses are also unlikely to see a rise in audit rates in the near future, as the IRS is prioritizing more complex returns for higher-wealth entities. For example, the tax agency has announced that one focus area is taxpayers who personally use business aircraft. A business can deduct the cost of purchasing and using corporate planes, but personal trips, including vacation travel, aren’t deductible.

Preparation is key

The best way to survive an IRS audit is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all records in one place.

It also helps to know what might catch the attention of the IRS. Certain types of tax return entries are known to involve inaccuracies, so they may lead to an audit. Some examples include:

  • Significant inconsistencies between tax returns filed in the past and your most current return,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

The IRS may question specific deductions because there are strict recordkeeping requirements associated with them — for example, auto and travel expense deductions. In addition, an owner-employee’s salary that’s much higher or lower than those at similar companies in his or her location may catch the IRS’s eye, especially if the business is structured as a corporation.

How to respond to an audit

If the IRS selects you for an audit, it will notify you by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in receipts or other documentation to support certain deductions you’ve claimed. Only the strictest version, the field audit, requires a meeting with one or more IRS auditors. (Note: Ignore unsolicited emails or text messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)

The tax agency doesn’t demand an immediate response to a mailed notice. The IRS will inform you of the discrepancies in question and give you time to prepare. Collect and organize all relevant income and expense records. If anything is missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If you’re audited, our firm can help you:

  • Understand what the IRS is disputing (it’s not always clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most effective manner.

The IRS usually has three years to conduct an audit, and it probably won’t begin until a year or more after you file a return. Stay calm if the IRS contacts you. Many audits are routine. By taking a meticulous, proactive approach to tracking, documenting and filing your company’s tax-related information, you’ll make an audit more manageable. It may even decrease the chances you’ll be chosen in the first place.

© 2024

 

Unlock your child’s potential by investing in a 529 plan | tax preparation in cecil county | Weyrich, Cronin & Sorra

Unlock your child’s potential by investing in a 529 plan

If you have a child or grandchild planning to attend college, you’ve probably heard about qualified tuition programs, also known as 529 plans. These plans, named for the Internal Revenue Code section that provides for them, allow prepayment of higher education costs on a tax-favored basis.

There are two types of programs:

  1. Prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won’t be starting college for some time; and
  2. Savings plans, which depend on the performance of the fund(s) you invest your contributions in.

Earnings build up tax-free

You don’t get a federal income tax deduction for 529 plan contributions, but the account earnings aren’t taxed while the funds are in the program. (Contributors are eligible for state tax deductions in some states.) You can change the beneficiary, or roll over the funds in the program to another plan for the same or a different beneficiary, without income tax consequences.

Distributions from the program are tax-free up to the amount of the student’s “qualified higher education expenses.” These include tuition (up to $10,000 for an elementary or secondary public, private or religious school), fees, books, supplies and required equipment. Reasonable room and board are also qualified expenses if the student is enrolled at least half time.

Tax-free distributions from a 529 plan can also be used to pay the principal or interest on a loan for qualified higher education expenses of the beneficiary or a sibling of the beneficiary.

What about distributions in excess of qualified expenses? They’re taxed to the beneficiary to the extent that they represent earnings on the account. The IRS will also impose a 10% penalty tax.

Your contributions to the qualified tuition program are treated as gifts to the student, but the contributions qualify for the gift tax exclusion ($18,000 in 2024, adjusted annually for inflation). Suppose your contributions in a year exceed the exclusion amount. In that case, you can elect to take the contributions into account ratably over five years starting with the year of the contributions. Thus, assuming you make no other gifts to that beneficiary, you could contribute up to $90,000 per beneficiary in 2024 without gift tax. (In that case, any additional contributions during the next four years would be subject to gift tax, except to the extent that the exclusion amount increases.) You and your spouse together could contribute $180,000 per beneficiary for 2024, subject to any contribution limits imposed by the plan.

Not all schools qualify

Eligible schools include colleges, universities, vocational schools or other postsecondary schools eligible to participate in a student aid program of the U.S. Department of Education. This includes nearly all accredited public, nonprofit and for-profit postsecondary institutions.

However, “qualified higher education expenses” also include expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school. A school should be able to tell you whether it qualifies.

Tax-smart education

A distribution from a qualified tuition program isn’t subject to gift tax, but a change in beneficiary or rollover to the account of a new beneficiary may be. Contact us with questions about tax-saving ways to save and pay for college.

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