President Biden’s proposed budget includes notable tax provisions

President Biden has released his proposed budget for the federal government for the 2024 fiscal year. The budget, which aims to cut the deficit by nearly $3 trillion over 10 years, includes numerous provisions that would affect the tax bills of both individuals and businesses. While most of these proposals stand little chance of enactment with a Republican majority in the U.S. House of Representatives, they shed light on the Democrats’ priorities as they prepare for the 2024 election season.

Individual tax provisions

The proposed budget includes tax provisions that would affect taxpayers of various income levels. In particular, it would make the following changes:

Tax rates. The proposal would reinstate the top individual tax rate of 39.6% for single filers earning more than $400,000 ($450,000 for married couples).

Net investment income tax (NIIT). The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment taxes. The budget also would increase both the additional Medicare tax rate and the NIIT rate by 1.2 percentage points. Thus, the Medicare tax rate would be 5% for earnings above $400,000, and the NIIT rate would be 5% for investment income above $400,000.

Capital gains tax. The highest capital gains rate now is 20% (or 23.8% if the NIIT applies). For individuals with taxable income of more than $1 million, the budget proposes that capital gains be taxed at ordinary rates, with 37% (or 40.8% with the NIIT) generally being the highest rate — or 39.6% (or 43.4% with the NIIT) if the top tax rate is raised.

Child tax credit (CTC). This proposal would expand the CTC and make it fully refundable and payable in advance on a monthly basis. For eligible parents, the credit would increase from $2,000 to $3,000 for children age six and older and $3,600 for children under age six.

The proposal also would establish a “presumptive eligibility” for determining when a taxpayer is eligible to claim a monthly specified child allowance or receive a monthly advance child payment. After a taxpayer establishes presumptive eligibility for a child, that child would be treated as a specified child of the taxpayer for each month during the period of the taxpayer’s presumptive eligibility.

Premium tax credits (PTCs). The American Rescue Plan Act expanded eligibility for healthcare insurance subsidies to taxpayers with household incomes above 400% of the federal poverty line for 2021 and 2022. It also reduced the applicable contribution percentage (the percentage of household income a taxpayer must contribute toward a healthcare insurance premium). The Inflation Reduction Act (IRA) extended the expansion through 2025. The proposed budget would make this expansion permanent.

Cryptocurrency taxation. The proposal would amend the “wash-sale” rule to cover digital assets. The rule prohibits the deduction of a loss when the taxpayer acquires “substantially identical” investments within 30 days before or after the sale date.

Minimum wealth tax. The proposal would impose a minimum 25% tax on total income, generally inclusive of unrealized capital gains, for all taxpayers whose assets exceed liabilities by more than $100 million. According to the White House, the tax would apply to only the top 0.01% of taxpayers.

Gift and estate taxes. The proposal would close loopholes related to certain trust arrangements. Specifically, the changes would affect grantor-retained annuity trusts and charitable lead annuity trusts.

Business tax provisions

The proposed budget’s tax provisions target numerous issues of interest to businesses, including:

Corporate tax rates. The proposal would trim back the large cut made to the corporate tax rate in the Tax Cuts and Jobs Act (TCJA). It would hike the tax rate for C corporations from 21% to 28% — still significantly less than the pre-TCJA rate of 35%. In addition, the effective global intangible low-taxed income (GILTI) rate would increase to 14%. Overall, with other proposed changes, the effective GILTI rate would rise to 21%.

Global minimum tax. The proposal would repeal Base Erosion and Anti-Abuse Tax (BEAT) liability, replacing it with an “undertaxed profits rule.” In conjunction with the GILTI regime, the rule would ensure that income earned by a multinational company, whether parented in the United States or elsewhere, is subject to a minimum rate of taxation regardless of where the income is earned.

Stock buyback excise tax. The IRA created a 1% excise tax on the fair market value when corporations buy back their stock, with the goal of reducing the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%.

Carried interest loophole. A “carried interest” is a hedge fund manager’s contractual right to a share of a partnership’s profits. Currently, it’s taxable at the capital gains rate if certain conditions are satisfied. The budget proposes to close this loophole.

Like-kind exchanges. Owners of certain appreciated real property can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million for married couples filing a joint return) each year for like-kind exchanges. Under this proposal, any like-kind gains in excess of $500,000 (or $1 million for married couples) in a year would be recognized in the year the taxpayer transfers the real property.

Low-income housing tax credit. The budget proposes to expand and enhance the largest federal incentive for affordable housing construction and rehabilitation.

The elephant in the room

The budget proposal doesn’t address many of the temporary tax provisions of the TCJA that have expired or are set to expire in the next few years. The increased standard deduction, reduced individual tax rates, qualified business income deduction for pass-through businesses, and limit on the state and local tax deduction are among the numerous provisions scheduled to expire at the end of 2025 — potentially affecting the tax liability of a wide swath of taxpayers. We’ll keep you informed if there’s significant movement on this front.

© 2023

U.S. Supreme Court rules against the IRS on critical FBAR issue

The U.S. Supreme Court recently weighed in on an issue regarding a provision of the Bank Secrecy Act (BSA) that has split two federal courts of appeal. Its 5-4 ruling in Bittner v. U.S. is welcome news for U.S. residents who “non-willfully” violate the law’s requirements for the reporting of certain foreign bank and financial accounts on what’s generally known as an FBAR. The full name of an FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.

Reporting requirement

The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The term “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust or estate.

According to related regulations, individuals with fewer than 25 accounts in a given year must provide details about each. Filers with 25 or more accounts aren’t required to list each or provide specific details; they need only provide the number of accounts and certain other basic information. FBARs generally are due on April 15, with an automatic extension to Oct. 15 if the April deadline isn’t met.

Under the BSA, a willful violation of the requirement is subject to a civil penalty up to the greater of $100,000 or 50% of the balance of the account at issue. A provision prescribes a penalty of up to $10,000 for a non-willful violation of the filing requirement (with an exception for reasonable cause). Criminal penalties also may be imposed.

Violations at issue

The case before the Supreme Court was brought by Alexandru Bittner, a dual citizen of Romania and the United States. He testified that he learned of the reporting obligations after returning to the United States in 2011. Bittner subsequently submitted the required annual reports for 2007 through 2011.

The IRS deemed his FBARs deficient because they didn’t include all of the relevant accounts. Bittner then filed corrected reports with information for each of his accounts. Although the IRS didn’t contest the accuracy of the new filings or find that his previous errors were willful, it determined the penalty was $2.72 million — $10,000 for each of 272 accounts reported in five FBARs.

Bittner went to court to contest the penalty, arguing that it applies on a per-report basis, not per account — so he owed only $50,000 in penalties for his non-willful violations. The district court agreed, but the Fifth Circuit Court of Appeals reversed the ruling, siding with the IRS. By contrast, the Ninth Circuit, in U.S. v. Boyd, found in 2021 that the BSA authorized “only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” That meant it was up to the Supreme Court to settle the issue.

High court’s ruling

The Supreme Court agreed with Bittner’s interpretation of the BSA’s penalty provision for FBAR violations. It cited multiple sources that supported this conclusion.

For example, the Court noted that Congress had explicitly authorized per-account penalties for some willful violations. When Congress includes particular language in one section of a statute but omits that language from another, it explained, the Court normally understands the difference in language as conveying a difference in meaning. In other words, Congress obviously knew how to tie penalties to account-level information if that was its intent.

The Court also highlighted various public guidance from the IRS, including instructions for earlier versions of the FBAR and an IRS fact sheet. These references, the Court said, suggested to the public that the failure to file a report represents a single violation that exposes a non-willful violator to a single $10,000 penalty. (Note: The Supreme Court emphasized that such guidance wasn’t “controlling” or decisive, but only informed its analysis.)

Implications for taxpayers

The Supreme Court’s ruling significantly reduces taxpayers’ potential financial exposure for non-willful violations of the FBAR reporting requirements. The reports typically list multiple accounts, meaning the IRS’s interpretation could have led to tens of thousands of dollars in penalties for a single violation.

As the Court also pointed out, an individual with only three accounts who made non-willful errors when providing account-specific details would face a potential penalty of $30,000, regardless of how slight the errors or the value of the accounts. But a person with 300 bank accounts would shoulder far less risk because he or she is required to disclose only the correct number of accounts, with no details. Similarly, a person with a $10 million balance in a single account who fails to report the account would be subject to a penalty of $10,000 — while someone who fails to report a dozen accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.

It’s important to note that the Supreme Court’s ruling applies only to non-willful failures to file. The penalties for violations that are knowing, intentional, reckless or due to willful blindness aren’t subject to the per-report limit and may be assessed on a per-account basis, with costly ramifications.

Questions remain

The Supreme Court’s ruling in Bittner should bring relief to taxpayers who’ve non-willfully violated the BSA’s filing requirement, but it didn’t clear all uncertainty around FBAR penalties. For example, the Court didn’t address the mens rea (level of intent) on the part of the taxpayer that the IRS must establish to impose a non-willful penalty or whether penalties for violations of the BSA’s recordkeeping requirements are determined on a per-account basis. We can help you avoid these thorny questions by ensuring you properly comply with your FBAR obligations.

© 2023

Reading the tea leaves: Potential tax legislation in the new Congress

The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.

Retirement catch-ups at risk

The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.

The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.

Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.

Expiring tax provisions

Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.

A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.

But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:

  • Lower individual tax rates,
  • Enhancements to the Child Tax Credit (CTC),
  • Health insurance premium tax credit enhancements,
  • The New Markets Tax Credit,
  • The employer credit for paid family and medical leave,
  • The Work Opportunity Tax Credit,
  • The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
  • The increase in the standard deduction,
  • The suspension of the miscellaneous itemized deduction,
  • The suspension of the limit on itemized deductions,
  • The income exclusion for employer payments of student loans,
  • The suspension of the deduction for personal exemptions,
  • The limit on the deduction for qualified residence interest,
  • The suspension of the deduction for home equity interest,
  • The limit on the deduction for state and local taxes,
  • The qualified business income deduction,
  • The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
  • Empowerment zone tax incentives, and
  • The increase in the federal gift and estate tax exemption.

At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.

Expired tax provisions

Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.

Individuals also saw the end of several tax provisions at the end of 2021, including the:

  • CTC expansions created by the American Rescue Plan for some taxpayers,
  • Expanded child and dependent care credit,
  • Increased income exclusion for employer-provided dependent care assistance,
  • Treatment of mortgage insurance premiums as deductible mortgage interest,
  • Charitable contribution deduction for non-itemizers, and
  • Increased percentage limits for charitable contributions of cash.

It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.

The FairTax Act

Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.

The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.

Ear to the ground

Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.

© 2023

Year-end spending package tackles retirement planning, conservation easements

On December 23, 2022, Congress passed the Consolidated Appropriations Act of 2023. The sprawling year-end spending “omnibus” package includes two important new laws that could affect your financial planning: the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act (also known as SECURE 2.0) and the Conservation Easement Program Integrity Act.

Bolstering retirement savings

The original SECURE Act, enacted in 2019, was a significant bipartisan law related to retirement savings. In the spring of 2022, with an eye toward building on the reforms in that law, the U.S. House of Representatives passed the Securing a Strong Retirement Act. Despite strong bipartisan support, the bill stalled. Then, the U.S. Senate introduced its own retirement legislation, dubbed the Enhancing American Retirement Now Act.

SECURE 2.0 incorporates provisions from both bills and addresses a wide array of areas that make major changes to retirement planning, including:

Required minimum distributions (RMDs). The first SECURE Act generally raised the age at which you must begin to take RMDs — and pay taxes on them — from traditional IRAs and other qualified plans, from 70½ to 72. The new law increases the age to 73, starting January 1, 2023, and boosts it to 75 on January 1, 2033. This change allows people to delay taking RMDs and paying tax on them.

The law also relaxes the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%. If the failure is corrected in a “timely” manner, the penalty would drop to 10%.

Catch-up contributions. Beginning January 1, 2025, individuals who are ages 60 to 63 can make catch-up contributions to 401(k) plans and SIMPLE plans up to the greater of $10,000 or 50% more than the regular catch-up amount. The increased amounts are indexed for inflation after 2025. (The annual dollar limit on catch-up contributions is $7,500 for 2023, up from $6,500 for 2022.)

The law also changes the taxation of catch-up contributions, though, which could reduce the upfront tax savings for those who max out their annual contributions. Catch-up contributions will be treated as post-tax Roth contributions. Previously, you could choose whether to make catch-up contributions on a pre- or post-tax basis. An exception is provided for employees whose compensation is $145,000 or less (indexed for inflation).

Qualified charitable distributions (QCDs). QCDs have gained in popularity as a way to satisfy RMD requirements while also fulfilling philanthropic goals. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity after age 70½. You can’t claim a charitable deduction, but the distribution is removed from taxable income.

Under the new law, you also can make a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). The law also indexes for inflation the annual IRA charitable distribution limit of $100,000.

Automatic enrollment. Beginning in 2025, new 401(k) plans must automatically enroll participants when they become eligible. However, the employees may opt out. The initial contribution amount is at least 3% but no more than 10%. Then, the amount is automatically increased every year until it reaches at least 10% but no more than 15%. Existing plans are exempt, and the law provides exceptions for small and new businesses.

Annuities. Annuities can help reduce retirees’ risk of depleting their savings before they die. But RMD regulations have interfered with the availability of annuities in qualified plans and IRAs. For example, the regulations prohibit annuities with guaranteed annual increases of only 1% to 2%, return of premium death benefits and period-certain guarantees. SECURE 2.0 removes these RMD barriers to annuities.

The law also makes qualified longevity annuity contracts (QLACs) — inexpensive deferred annuities that don’t begin payment until the end of the individual’s life expectancy — more appealing. Among other things, it repeals the 25% cap on the maximum annuity purchase and allows up to $200,000 (indexed for inflation) from an account balance to be used to purchase a QLAC.

Matching contributions on student loan payments. The law also aims to help employees who miss out on their employers’ matching retirement contributions because their student loan obligations prevent them from making retirement contributions. It allows them to receive matching contributions to retirement plans based on their qualified student loan repayments. Employers can make matching contributions to 401(k) plans or SIMPLE IRAs. These provisions are effective for contributions made for plan years beginning January 1, 2024.

Part-time employee eligibility. SECURE 2.0 lowers the hurdles for long-term, part-time employees to participate in 401(k) plans. They’ll still need to work at least 500 hours before becoming eligible but they’ll have to work for only two consecutive years, rather than the three years required by the first SECURE Act. The provision takes effect for plan years beginning January 1, 2025.

Small business tax credits. To incentivize small businesses to establish retirement plans, SECURE 2.0 creates or enhances some tax credits. For example, it increases the startup credit from 50% to 100% of administrative costs for employers with up to 50 employees. An additional credit is available for some non-defined benefit plans, based on a percentage of the amount the employer contributes, up to $1,000 per employee.

Tax-free rollovers from 529 plans to Roth IRAs. The new law permits a beneficiary of a 529 college savings account to make direct rollovers from a 529 account in his or her name to a Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete. The 529 account must have been open for more than 15 years and other rules apply. The provision is effective for distributions beginning in 2024.

Cracking down on certain tax shelters

The retirement provisions in the omnibus law are partially offset by the law addressing conservation easements. Current law generally allows taxpayers to claim a charitable deduction for qualified donations of real property to charity. According to the IRS, though, promoters have twisted the relevant tax provision to develop abusive “syndicated” conservation easements that use inflated appraisals and partnership arrangements to reap “grossly inflated” deductions.

Going forward, the Conservation Easement Program Integrity Act disallows charitable deductions for qualified conservation contributions if the claimed deduction exceeds 2.5 times the sum of each partner’s relevant basis in the partnership making the contribution. An exception is granted if the contribution meets a three-year holding period test, substantially all of the partnership is owned by family members or the contribution relates to the preservation of a certified historic structure.

More to come

These are only some of the provisions in the new law. The entire omnibus law is sure to generate additional questions and guidance. We’ll keep you apprised of the developments that could affect your financial health.

© 2022

Evaluating an ESOP from a succession planning perspective

If you’ve been in business for a while, you’ve probably considered many different employee benefits. One option that might have crossed your desk is an employee stock ownership plan (ESOP).

Strictly defined, an ESOP is considered a retirement plan for employees. But it can also play a role in succession planning by facilitating the transfer of a business to the owner’s children or employees over a period of years in a tax-advantaged way.

Not a buyout

Although an ESOP is a retirement plan, it invests mainly in your own company’s stock. ESOPs are considered qualified plans and, thus, subject to the same IRS and U.S. Department of Labor (DOL) rules as 401(k)s and the like. This includes minimum coverage requirements and contribution limits.

Generally, ESOP distributions to eligible employees are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put” options or an “option to sell” — at fair market value during certain time windows.

While an ESOP involves transferring ownership to employees, it’s different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control gradually. During the transfer period, owners’ shares are held in an ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders.

Mandatory valuations

One big difference between ESOPs and other qualified retirement plans is mandated valuations. The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan.

The fair market value of the sponsoring company’s stock is important, because the DOL specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP essentially provides a limited market for its shares.

Costs and entity choice

Although ESOPs can be an important part of a succession plan, they have their drawbacks. You’ll incur costs and considerable responsibilities related to plan administration and compliance. Plus, there are costs associated with annual stock valuations and the need to repurchase stock from employees who exercise put options.

Another disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to the corporate form to establish one of these plans. This raises a variety of financial and tax issues.

It’s also important to consider the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans.

A popular choice

There are about 6,500 ESOPs and equivalent plans in the United States today, with roughly 14 million participants, according to the National Center for Employee Ownership. So, if you decide to launch one, you won’t be alone. However, careful planning and expert advice is critical. We can help you evaluate whether an ESOP would be a good fit for your business and succession plan.

© 2022

5 steps to take now to cut your 2022 tax liability

It has been quite a year — high inflation, rising interest rates and a bear stock market. While there’s not a lot you can do about any of these financial factors, you may have some control over how your federal tax bill for the year turns out. Here are some strategies to consider executing before year end that may reduce your 2022 or future tax liability.

1. Convert your traditional IRA to a Roth IRA

The down stock market could make this an especially lucrative time to convert all or some of the funds in a traditional pre-tax IRA to an after-tax Roth IRA. Although you must pay income tax on the amount converted in 2022, Roth accounts hold some significant advantages over their traditional counterparts.

Unlike traditional IRAs, for example, Roths aren’t subject to required minimum distributions (RMDs). The funds in a Roth will appreciate tax-free. Qualified future distributions also will be tax-free, which will pay off if you’re subject to higher tax rates at that time, whether due to RMDs or other income.

How does the poorly performing stock market incentivize a Roth conversion? If your traditional IRA contains stocks or mutual funds that have lost significant value, you can convert more shares than you could if they were worth more, for the same amount of tax liability.

Roth conversions are also advisable if you have lower income and therefore are in a lower tax bracket this year. Perhaps you lost your job at the end of 2021 and didn’t resume working until this past summer, or you’re retired but not yet receiving Social Security payments. You may be able to save by converting before the end of the year.

Currently, you can use a Roth conversion as a workaround for the income limits on your ability to contribute to Roth IRAs — what’s known as a backdoor Roth IRA — because converted funds aren’t treated as contributions. But be aware that, if you’re under age 59½, you can’t access the transferred funds without penalty.

Further, be aware that a Roth conversion will likely increase your adjusted gross income (AGI). As such, it could affect your eligibility for tax breaks that phase out based on AGI or modified adjusted gross income (MAGI).

2. Defer or accelerate income and deductions

A common tax reduction technique is to defer income into the next year and accelerate deductions into the current year. Doing so can allow you to make the most of tax breaks that phase out based on income (such as the IRA contribution deduction, child tax credits and education tax credits). If you’re self-employed, for example, you might delay issuing invoices until late December (increasing the odds they won’t be paid until 2023) and make equipment purchases in December, rather than January (assuming you use cash-basis accounting).

On the other hand, you might want to defer deductions and accelerate income if you expect to land in a higher tax bracket in the future. You can accelerate income by, for example, realizing deferred compensation, exercising stock options, recognizing capital gains or engaging in a Roth conversion.

High-income individuals should think about income deferral from the perspective of the 3.8% net investment income tax (NIIT), too. The NIIT kicks in when MAGI is more than $200,000 for single and head of household filers, $250,000 for married filing jointly and $125,000 for married filing separately. Deferring investment income could mean escaping that potentially hefty tax bite.

3. Manage your itemized deductions wisely

Accelerating deductions generally is helpful only if you itemize your deductions, of course. If you don’t think you’ll qualify to itemize, think about “bunching” itemized deductions so that they exceed the standard deduction (in 2022, $12,950 for single filers, $25,900 for married filing jointly and $19,400 for heads of household). If you claim itemized deductions this year and the standard deduction next year, you could end up with a larger two-year total deduction than if you took the standard deduction both years.

Potential expenses ripe for bunching include medical and dental expenses (if you qualify to deduct eligible expenses that exceed 7.5% of your AGI), charitable contributions, and state and local tax (SALT). For example, you could get dental services before year end, make your 2022 and 2023 charitable donations in December of this year, and pre-pay property taxes due next year, if possible.

The deduction for SALT-like property tax generally is subject to a $10,000 cap. Check, though, to determine if you might be able to take advantage of a pass-through entity (PTE) tax. More than two dozen states and New York City have enacted these laws, which permit a PTE to pay state tax at the entity level, rather than the individual taxpayer level. PTEs aren’t subject to a federal limit on SALT deductions.

4. Give to charity

The AGI limit for deductible cash donations has returned to 60% of AGI for 2022. But the possibility for substantial savings from making a charitable donation remains. For example, if you donate appreciated assets that you’ve held at least one year, you can deduct their fair market value and avoid income tax on the amount of appreciation if you itemize.

A qualified charitable distribution (QCD) from your IRA may confer tax benefits. Taxpayers who are age 70½ years or older can make a direct transfer of up to $100,000 per year from their IRAs to a qualified charity — and exclude the transferred amount from their gross income. (Note that transfers to a donor-advised fund or supporting organization don’t qualify). If you’re age 72 or older, a QCD can count toward your RMDs, as well.

You also may want to explore establishing a donor-advised fund. You can set it up and contribute assets in 2022 to claim a deduction for this year, while delaying your selection of the recipient charity and the actual contribution until 2023.

5. Harvest your capital losses

This is another way to leverage the poor market performance in 2022 — selling off your investments that have lost value to offset any capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 ($1,500 for married filing separately) a year from your ordinary income and carry forward any remaining excess indefinitely.

You could further juice the benefit of loss harvesting by donating the proceeds from the sale to charity. You’ll offset realized gains while boosting your charitable contribution deduction (subject to AGI limitations on the charitable contribution deduction).

Take heed of the wash-rule, though. It says you can’t write-off losses if you acquire “substantially identical” securities within 30 days before or after the sale.

Act now

It’s been a rocky financial year for many people, and uncertainty about the economy will continue into next year. One thing is certain, though — everyone wants to cut their tax bills. Contact us to help you with your year-end tax planning.

© 2022

2023 limits for businesses that have HSAs — or want to establish them

No one needs to remind business owners that the cost of employee health care benefits keeps going up. One way to provide some of these benefits is through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:

  • Contributions that participants make to an HSA are deductible, within limits.
  • Contributions that employers make aren’t taxed to participants.
  • Earnings on the funds in an HSA aren’t taxed, so the money can accumulate tax-free year after year.
  • Distributions from HSAs to cover qualified medical expenses aren’t taxed.
  • Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Eligibility and 2023 contribution limits

To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2023, a “high deductible health plan” will be one with an annual deductible of at least $1,500 for self-only coverage, or at least $3,000 for family coverage. (These amounts in 2022 were $1,400 and $2,800, respectively.) For self-only coverage, the 2023 limit on deductible contributions will be $3,850 (up from $3,650 in 2022). For family coverage, the 2023 limit on deductible contributions will be $7,750 (up from $7,300 in 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 will not be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, in 2022).

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 of up to $1,000 (unchanged from the 2022 amount).

Employer contributions

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Making withdrawals

HSA withdrawals (or distributions) can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care and premiums for long-term care insurance.

If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability.

HSAs offer a flexible option for providing health care coverage and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you have questions or would like to discuss offering HSAs to your employees.

© 2022



Home sweet home: Do you qualify for office deductions?

If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions.

But not everyone who works from home gets the tax break. Employees who work remotely can’t deduct home office expenses under current federal tax law.

To qualify for a deduction, you must use at least part of your home regularly and exclusively as either:

  • Your principal place of business, or
  • A place to meet with customers, clients or patients in the normal course of business.

In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes.

Notably, “regular and exclusive” use means you must consistently use a specific identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you.

Rules for employees

What if you work remotely from home as an employee for an organization? Previously, people who itemized deductions could claim home office deductions as a miscellaneous expense, if the arrangement was for their employer’s convenience.

But the Tax Cuts and Jobs Act suspended miscellaneous expense deductions for 2018 through 2025. So, employees currently get no tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements.

Direct and indirect expenses

If you qualify, you can write off the full amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home.

Indirect expenses include:

  • Mortgage interest,
  • Property taxes,
  • Utilities (electric, gas and water),
  • Insurance,
  • Exterior repairs, maintenance, and
  • Depreciation or rent under IRS tables.

Important: If you itemize deductions, mortgage interest and property taxes may already be deductible. If you claim a portion of these expenses as home office expenses, the remainder is deductible on your personal return. But you can’t deduct the same amount twice as a personal deduction and again as a home office expense.

Calculating your deduction

Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your office, the applicable percentage is 10%. Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home.

The simplified method

Keeping track of indirect expenses is time-consuming. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction.

When you sell

Keep in mind that if you claim home office deductions, you may be in for a tax surprise when you sell your home.

If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file jointly). But you must recapture the depreciation attributable to a home office for the period after May 6, 1997.

Contact us. We can address questions related to writing off home office expenses, the best way to compute deductions and the tax implications when you sell your home.

© 2022

IRS offers penalty relief for 2019, 2020 tax years

While the recently announced student loan debt relief has captured numerous headlines, it’s estimated that another federal relief program announced on the same day will provide more than $1.2 billion in tax refunds or credits. Specifically, IRS Notice 2022-36 extends penalty relief to both individuals and businesses who missed the filing deadlines for certain 2019 and/or 2020 tax and information returns. The relief covers many of the most commonly filed forms.

Broad relief for late taxpayers

The intent behind the penalty relief is two-fold: 1) to help taxpayers negatively affected by the COVID-19 pandemic, and 2) to allow the IRS to focus on processing backlogged tax returns and taxpayer correspondence. As recently as late May 2022, the IRS had a backlog of more than 21 million unprocessed paper returns. The goal is for the IRS to return to normal operations for the 2023 filing season.

To that end, the notice provides relief from the failure-to-file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. To qualify for the relief, an income tax return must be filed on or before Sept. 30, 2022.

Banks, employers and other businesses that are required to file various information returns (for example, the Form 1099 series) also may qualify for relief. Eligible 2019 returns must have been filed by Aug. 3, 2020, and eligible 2020 returns must have been filed by Aug. 2, 2021.

Potentially eligible forms include:

  • Form 1040, “U.S. Individual Income Tax Return,” and other forms in the Form 1040 series
  • Form 1041, “U.S. Income Tax Return for Estates and Trusts,” and other forms in the Form 1041 series
  • Form 1065, “U.S. Return of Partnership Income”
  • Returns filed in the Form 1120 series including:
    • Form 1120, “U.S. Corporation Income Tax Return”
    • Form 1120-C, “U.S. Income Tax Return for Cooperative Associations”
    • Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation”
    • Form 1120-FSC, “U.S. Income Tax Return of a Foreign Sales Corporation”
    • Form 1120-H, “U.S. Income Tax Return for Homeowners Associations”
    • Form 1120-L, “U.S. Life Insurance Company Income Tax Return”
    • Form 1120-ND, “Return for Nuclear Decommissioning Funds and Certain Related Persons”
    • Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return”
    • Form 1120-POL, “U.S. Income Tax Return for Certain Political Organizations”
    • Form 1120-REIT, “U.S. Income Tax Return for Real Estate Investment Trusts”
    • Form 1120-RIC, “U.S. Income Tax Return for Regulated Investment Companies”
    • Form 1120-SF, “U.S. Income Tax Return for Settlement Funds (Under Section 468B)”
    • Form 1120-S, “U.S. Income Tax Return for an S Corporation”
  • Form 1066, “U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return”
  • Forms concerning exempt organizations
  • Certain international information returns

Notably, the relief doesn’t extend to failure-to-file penalties for Form 8938, “Statement of Specified Foreign Financial Assets,” or FinCEN Report 114, “Report of Foreign Bank and Financial Accounts.”

Exceptions to the rule

Some other exceptions apply. Penalty relief isn’t available if:

  • A fraudulent return was filed,
  • The penalty was part of an accepted offer-in-compromise or a closing agreement with the IRS, or
  • The penalty was finally determined by a court.

In addition, the IRS isn’t providing relief for the failure-to- pay penalty or other penalties. Such ineligible penalties may, however, qualify for previously existing penalty relief procedures, including the reasonable cause defense or the IRS’s First Time Abatement Program.

No action required

The penalty relief is automatic. If you qualify, you need not apply for it or reach out to the IRS in any way. Penalties that have already been assessed will be abated. If you’ve already paid a covered penalty, the IRS says, you should receive a refund or credit by Sept. 30, 2022.

© 2022

Employee Spotlight – Amanda Bartley

What year did you join Slattery & Holman? 


Tell me a little about where you attended college and the degree(s) you earned? Any special accomplishments.

IUPUI double major in Accounting and Finance

What is your favorite thing about living in Indiana?

The people – “Midwest nice”

Tell me a little about your family.

I’ve been married to Rob since 2005.  Andrew is a sophomore at Carmel High School and Bella is in 5th grade.  Our pets include Hera the Cavalier King Charles Spaniel, Petey the leopard gecko, and 2 gerbils that I refer to as “the girls” because I can’t tell them apart or remember their names.

If you didn’t have to sleep, what would you do with the extra time?

A combination of read more and cook more

What is a new skill that you would like to master?

Some kind of cool Taekwondo board-breaking kick

What do you wish you knew more about?

Gardening, plants, and flowers

What is the most impressive thing you know how to do? Break a board with my hand or parent a teenager – it’s a toss-up 😀

What was the best compliment you’ve ever received?

“You are the perfect mom for me.”

What is your favorite smell?

Some type of yummy food that I didn’t have to cook. A close second is that fabulous smell in the lobby of the Grand Floridian at Disney.

What’s the most unusual thing you’ve ever eaten?

I’m not very adventurous when it comes to food.

What was your first job?

Running the Kids Zone at corporate events (games, cotton candy machine, face painting, etc.)

If you could have any super power, what would it be?

Superhuman strength