Tax Prep, Planning & Strategy Archives - Page 22 of 57

Make Health Care Decisions While You’re Healthy

Estate & Wealth Transfer Planning|July 21, 2021

Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it’ll be too late.

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).

Clarifying the terminology

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.

For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

Living will

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

Living wills often contain a do-not-resuscitate order (DNR), which instructs medical personnel to not perform CPR in the event of cardiac arrest.

HCPA

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

Document storage and upkeep

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Store your documents in a safe place that’s always accessible and be sure your loved ones know where to find them.

Also, keep in mind that health care providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically.

Contact us for additional information.

Are you a Nonworking Spouse? You Could Still Contribute to an IRA

Tax Prep, Planning & Strategy|July 20, 2021

Married couples may not be able to save as much as they need for retirement when one spouse doesn’t work outside the home — perhaps so that spouse can take care of children or elderly parents. In general, an IRA contribution is allowed only if a taxpayer earns compensation. However, there’s an exception involving a “spousal” IRA. It allows contributions to be made for nonworking spouses.

For 2021, the amount that an eligible married couple can contribute to an IRA for a nonworking spouse is $6,000, which is the same limit that applies for the working spouse.

IRA advantages

As you may know, IRAs offer two types of advantages for taxpayers who make contributions to them.

Contributions of up to $6,000 a year to an IRA may be tax deductible.
The earnings on funds within the IRA are not taxed until withdrawn. (Alternatively, you may make contributions to a Roth IRA. There’s no deduction for Roth IRA contributions, but, if certain requirements are met, distributions are tax-free.)

As long as the couple together has at least $12,000 of earned income, $6,000 can be contributed to an IRA for each, for a total of $12,000. (The contributions for both spouses can be made to either a regular IRA or a Roth IRA, or split between them, as long as the combined contributions don’t exceed the $12,000 limit.)

Boost contributions if 50 or older

In addition, individuals who are age 50 or older can make “catch-up” contributions to an IRA or Roth IRA in the amount of $1,000. Therefore, for 2021, for a taxpayer and his or her spouse, both of whom will have reached age 50 by the end of the year, the combined limit of the deductible contributions to an IRA for each spouse is $7,000, for a combined deductible limit of $14,000.

There’s one catch, however. If, in 2021, the working spouse is an active participant in either of several types of retirement plans, a deductible contribution of up to $6,000 (or $7,000 for a spouse who will be 50 by the end of the year) can be made to the IRA of the nonparticipant spouse only if the couple’s AGI doesn’t exceed $125,000. This limit is phased out for AGI between $198,000 and $208,000.

Contact us if you’d like more information about IRAs or you’d like to discuss retirement planning.

Tax Advantages of Hiring your Child at your Small Business

Tax Prep, Planning & Strategy|July 15, 2021

As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.

Here are some considerations.

Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

Income tax withholding

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Social Security tax savings

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

Ensure Competitive Intelligence Efforts are Helpful, not Harmful

Industries|July 13, 2021

With so many employees working remotely these days, engaging in competitive intelligence has never been easier. The Internet as a whole, and social media specifically, create a data-rich environment in which you can uncover a wide variety of information on what your competitors are up to. All you or an employee need do is open a browser tab and start looking.

But should you? Well, competitive intelligence — formally defined as the gathering and analysis of publicly available information about one or more competitors for strategic planning purposes — has been around for decades. One could say that a business owner would be imprudent not to keep tabs on his or her fiercest competition.

The key is to engage in competitive intelligence legally and ethically. Here are some best practices to keep in mind:

Know the rules and legal risks.

Naturally, the very first rule of competitive intelligence is to avoid inadvertently breaking the law or otherwise exposing yourself or your company to a legal challenge. The technicalities of intellectual property law are complex; it can be easy to run afoul of the rules unintentionally.

When accessing or studying another company’s products or services, proceed carefully and consult your attorney if you fear you’re on unsteady ground and particularly before putting any lessons learned into practice.

Vet your sources carefully.

While gathering information, you or your employees may establish sources within the industry or even with a specific competitor. Be sure you don’t encourage these sources, even accidentally, to violate any standing confidentiality or noncompete agreements.

Don’t hide behind secret identities.

As easy as it might be to create a “puppet account” on social media to follow and even comment on a competitor’s posts, the negative fallout of such an account being exposed can be devastating. Also, if you sign up to receive marketing e-mails from a competitor, use an official company address and, if asked, state “product or service evaluation” as the reason you’re subscribing.

Train employees and keep an eye on consultants.

Some business owners might assume their employees would never engage in unethical or even illegal activities when gathering information about a competitor. Yet it happens. One glaring example occurred in 2015, when the Federal Bureau of Investigations and U.S. Department of Justice investigated a Major League Baseball team because one of its employees allegedly hacked into a competing team’s computer systems. The investigation concluded in 2017 with a lengthy prison term for the perpetrator and industry fines and other penalties for his employer.

Discourage employees from doing competitive intelligence on their own. Establish a formal policy, reviewed by an attorney, that includes ethics training and strict management oversight. If you engage consultants or independent contractors, be sure they know and abide by the policy as well.

Our firm can help you identify the costs and measure the financial benefits of competitive intelligence. Contact us today!

2021 Q3 Tax Calendar: Key Deadlines

Tax Prep, Planning & Strategy|July 7, 2021

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Monday, August 2

Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941) and pay any tax due.
Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

Tuesday, August 10

Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited all associated taxes that were due in full and on time.

Wednesday, September 15

Individuals pay the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic extension:
- File a 2020 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2020 to certain employer-sponsored retirement plans.

Tax-Favored Ways to Build up a College Fund

Tax Prep, Planning & Strategy|July 6, 2021

If you’re a parent with a college-bound child, you may be concerned about being able to fund future tuition and other higher education costs. You want to take maximum advantage of tax benefits to minimize your expenses. Here are some possible options.

Savings bonds

Series EE U.S. savings bonds offer two tax-saving opportunities for eligible families when used to finance college:

You don’t have to report the interest on the bonds for federal tax purposes until the bonds are cashed in, and
Interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified education expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees and certain other expenses — not room and board. If only part of the proceeds is used for qualified expenses, only that part of the interest is exempt.

The exemption is phased out if your adjusted gross income (AGI) exceeds certain amounts.

529 plans

A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. Qualified tuition programs are established by state governments or private education institutions.

Contributions aren’t deductible. The contributions are treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($15,000 for 2021). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.

The earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses.” Distributions of earnings that aren’t used for qualified expenses will be subject to income tax plus a 10% penalty tax.

Coverdell education savings accounts (ESAs)

You can establish a Coverdell ESA and make contributions of up to $2,000 annually for each child under age 18.

The right to make contributions begins to phase out once your AGI is over a certain amount. If the income limitation is a problem, a child can contribute to his or her own account.

Although the contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if used on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when he or she turns 30, and any earnings will be subject to tax and penalty. But unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. (Some ESA requirements don’t apply to individuals with special needs.)

Plan ahead

These are just some of the tax-favored ways to build up a college fund for your children. Once your child is in college, you may qualify for tax breaks such as the American Opportunity Tax Credit or the Lifetime Learning Credit.

Contact us if you’d like to discuss any of the options.

UPDATE: Maryland Form 511

NEWS|July 1, 2021

There has been an update to our previous news brief regarding the Maryland Form 511 .

Comptroller Peter Franchot has announced Maryland Pass-Through Entities (PTEs) are now extended through September 15, 2021 for 2020 income tax returns. This additional two month extension is automatic and requires no additional action for it to be granted for a PTE. Maryland will not assess any penalties or interest if liabilities for these returns are paid by September 15^th.

Additional Details

While the extension applies to 2020 PTE returns and related payments, 2021 Q1 & Q2 estimated payments for PTE’s and individuals were not extended and remains due July 15^th. In addition 2020 individual Maryland tax returns are not impacted by this announcement and will require a formal extension and payment before the July 15^th due date. Individuals whose returns cannot be filed until a PTE files and issues them a Schedule K-1, may request a waiver of penalties and interest.

For the Comptroller’s full message please read more here.

As always, please do not hesitate to call our offices for additional information and to speak to your representative about how this could affect your situation.

Parents may receive Advance Tax Credit Payments July 15

Tax Prep, Planning & Strategy|June 23, 2021

Eligible parents will soon begin receiving payments from the federal government. The IRS announced that the 2021 advance child tax credit (CTC) payments, which were created in the American Rescue Plan Act (ARPA), will begin being made on July 15, 2021.

How have child tax credits changed?

The ARPA temporarily expanded and made CTCs refundable for 2021. The law increased the maximum CTC — for 2021 only — to $3,600 for each qualifying child under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold.

Advance payments will receive up to $300 monthly for each child under 6, and up to $250 monthly for each child 6 and older. The increased credit amount will be reduced or phased out, for households with modified adjusted gross income above the following thresholds:

$150,000 for married taxpayers filing jointly and qualifying widows and widowers;
$112,500 for heads of household; and
$75,000 for other taxpayers.

Under prior law, the maximum annual CTC for 2018 through 2025 was $2,000 per qualifying child but the income thresholds were higher and some of the qualification rules were different.

Important: If your income is too high to receive the increased advance CTC payments, you may still qualify to claim the $2,000 CTC on your tax return for 2021.

What is a qualifying child?

For 2021, a “qualifying child” with respect to a taxpayer is defined as one who is under age 18 and who the taxpayer can claim as a dependent. That means a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year. The child also must be a U.S. citizen or national or a U.S. resident.

How and when will advance payments be sent out?

Under the ARPA, the IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. The payments will begin on July 15, 2021. After that, they’ll be made on the 15th of each month unless the 15th falls on a weekend or holiday. Parents will receive the monthly payments through direct deposit, paper check or debit card.

Who will benefit from these payments and do they have to do anything to receive them?

According to the IRS, about 39 million households covering 88% of children in the U.S. “are slated to begin receiving monthly payments without any further action required.”

Contact us if you have questions about the child tax credit.

Maryland Pass-Through Entities: Impact of MD Form 511

NEWS|June 16, 2021

As a result of the Maryland Pass-Through Entity Tax legislation that was passed in 2020 (for more information please read more in our article here) the Comptroller’s Office of Maryland has been working on a new tax form to administer the new tax regime, Maryland Form 511. Senate Bill 787 was enacted on May 28, 2021 and made additional changes to the Maryland Pass-Through Entity Tax. Due to these changes the Comptroller’s Office has yet to release Form 511. While we are expecting Form 511 to be available the last week of June software vendors will require additional time to update their software and their e-file database for these changes.

As a result, while we will make every effort to prepare impacted returns by the July 15^th Maryland due date, we anticipate some returns impacted by Form 511 will need to be extended to allow our staff and our vendors to properly prepare the related tax filings.

To the extent returns that have already been filed claiming the Maryland Pass-Through Entity Tax and accepted without the Form 511 we do not anticipate any need to amend the returns at this time.

For questions on Form 511 or other tax and accounting matters do not hesitate to contact us.

Still have Questions after you File your Tax Return?

Tax Prep, Planning & Strategy|June 10, 2021

Even after your 2020 tax return has been successfully filed with the IRS, you may still have some questions about the return. Here are brief answers to three questions that we’re frequently asked at this time of year.

Are you wondering when you will receive your refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.

Which tax records can you throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2017 and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

If you overlooked claiming a tax break, can you still collect a refund for it?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

Year-round tax help

Contact us if you have questions about retaining tax records, receiving your refund or filing an amended return. We’re not just here at tax filing time. We’re available all year long.