Spitfire Accounting Group Blog

The Absolute Best Time for Tax Planning

jeff@22mediagroup.com (Jeff Lethert) — Fri, 16 Aug 2024 21:23:05 GMT

Have you ever seen a cat on the side of the road that waits until the very last second and then darts across the road in front of traffic?

Ever see one that didn’t make it and think, “Some child is going to be very sad soon.”? I always wonder what makes the cat wait until the last second, but then again that’s what most taxpayers seem to do.

They wait until February or March with a filing deadline looming and then dash out in front of a tax preparer and beg, “Is there anything we can do to lower this?”

Like the cat, perhaps the preparer has an idea that helps their client miss getting hit with the entire tax bill, but that doesn’t happen often. Most taxpayers in that situation end up as roadkill, tax burden wise.

If you could talk to the cat you’d say, “Why don’t you go sooner, or wait until the car passes and then walk across the street safely?”

That said, we the tax planners all over the US would like to invite you the taxpayers to walk calmly into our office any time between now and Thanksgiving and say, “What can we do about this year’s tax bill?” We can methodically and carefully show you many, many concepts that will get you to the other side of the road with your tail still intact.

Logical Tax Planning

jeff@22mediagroup.com (Jeff Lethert) — Fri, 16 Aug 2024 18:26:39 GMT

It’s hard to be logical all the time about everything. The most financially successful tax clients we serve at least attempt to force themselves to be logical, for their own benefit.

For instance, our parents, as well as a subset of the economy including some popular radio show based advisors like Dave Ramsey, say you should pay off your home and have a “free and clear” deed as a goal (they are wrong in most cases by the way). That kind of thinking is emotional thinking, mixed perhaps with some presumptive attitude about what the general populous is capable of. “Well, we know we can’t get people to do what would really be best for them based on pure math and logic because its complicated and would require that they educate themselves, so the next best thing we can get them to do is (insert substandard advice here).”

If advisors did not decide in advance what people are capable of, they would explain the math and the tax code and most people would be better off managing their home mortgage as an asset, and many people would also be better off never paying off a mortgage, but instead building an equal value or even more equity outside their home.

With the current tax code altering mortgage and other deductions, everyone needs a refresher.

How does this relate to wasting time and money?

People will spend countless hours talking to many banks and other lenders trying to find the best rate, but no points because they feel they understand that part, so they can help themselves without outside advice. What they should do is spend that time learning how to manage their mortgage as part of their financial plan, and decide whether to build equity in a home, or the same equity outside a home. Then, when it’s time to shop the rate, simply go to a broker they can trust and say, “find me the best rate and prove it” and then spend their time on the bigger picture instead of spending all their time on what they do know, which can be delegated.

Business owners are very often guilty of this as well. “I know tires, that’s why I opened a tire store! I don’t want to learn everything the accountant knows. I hate taxes!” This is human nature, understandable and SUCH A SHAME! They will spend countless days and nights trying to grow revenue and work their fingers to the bone, and then pay little to no attention to what they pay all their business partners: the IRS, the state, workers comp, accounting, payroll, HR and others, because they aren’t comfortable with the subject matter. We understand, but we also BEG that you change your behavior.

We can help home owners and business owners learn in small bites the things they should be paying attention to, instead of what they are currently wasting time on.

Mistakes Can Go Both Ways!

jeff@22mediagroup.com (Jeff Lethert) — Fri, 21 Jun 2024 18:53:00 GMT

Many times business owners have come into our office and with our help have found that they were doing things incorrectly regarding their bookkeeping and taxes. Occasionally, the errors add to the tax burdens that they have been under-reporting. That never feels good, but it is always better to fix those issues prior to any audit. Often, errors discovered “pre-audit” can be fixed by simply amending the return, and no IRS issues follow, and everyone just moves on. But quite often, the errors made were not in their own favor. In those case, we help them file amended returns that net them large additional refunds for up to three years back, and that always feels great!

So, how do these mistakes happen? First, let us tell you a story. A young girl was watching her mother bake a ham for a family gathering and noticed her mom cutting off the ends before placing it in the oven. “Mom, why do you cut the ends off before baking the ham?” she asked. “Hmmm…I think it helps soak up the juices while it’s baking. I’m actually not sure, though. That’s just the way your grandma always did it, so I’ve just always cut them off. Why don’t you call grandma and ask her?”

So, the little girl phoned her grandmother and asked “Grandma, mom is making a ham and she cut off the ends before placing it in the oven. She said that it’s probably to help soak up the juices but wasn’t sure. She said you’d know because she learned how to cook from you.” “That’s true. I do cut off the ends of the ham before baking. But I’m actually not sure why either. I learned how to cook from my mom. You should ask her.”

So, the inquisitive little girl called her great grandmother and asked “Great grandma, mom and grandma said they learned how to cook a ham from watching you. Do you cut off the ends of the ham to help it soak up the juices?” The great grandmother chuckled. “Oh, no sweetie. I just never had a pan big enough to hold a whole ham, so I always had to cut off the ends to make it fit.”

The allegory of the ham is not new, and has been told numerous different ways, but it is a great example of why accounting errors happen. Many businesses are purchased and the accounting system is inherited, but not reconfirmed as valid. In other situations, such as a small mom and pop business, neither owner is an accountant or even a competent bookkeeper, so they simply did their best, and as they grew and assigned the work to the bookkeepers they hired, the systems were never questioned. How it happens is not really important. It happens, A LOT!

If you’re a business owner, don’t be afraid of an examination of your books by a proactive tax planning office. The majority of the time the errors that were favoring the IRS are corrected, amended returns are filed and overpaid money is recaptured. And, NO, getting a refund for an amended return does NOT put you in harm’s way, put you on a “watch list” or in any way add new issues, so don’t be afraid to ask the IRS for overpaid money back!

How to Avoid Capital Gains Taxes

jeff@22mediagroup.com (Jeff Lethert) — Tue, 04 Jun 2024 15:17:09 GMT

Plan First! Every step you take in a sale process without planning first takes away more options.

When people are contemplating selling an asset like a house, an investment property, stock or a business asset, it’s usually to make a profit or to raise cash. Sometimes, a house is sold in order to buy bigger (or smaller), to move to a different town to take a new job. In the case of stocks, it might be for the taking of profits, stopping further loses, or again to raise cash.

One common thread among all of these decisions is that people generally think about them for some time before they act, as usually these are among the largest assets they have. What we see often in the tax planning world is that people sell the asset, and then AFTER they have cash in hand, they call their advisor or accountant and ask, “Is there some way I can avoid paying tax on the sale that’s already made?”. At that point the response is often, “The sale has happened? No, we can’t help you. You’re going to pay some extra taxes.”

The fact is that there are many tools that can be utilized to reduce, delay and in some cases completely eliminate taxes on all these kinds of sales, but the vast majority of those tools that tax planners can use to help depend on a time line.

For example, before you sign an agreement with a real estate agent and list your house for sale, you have all the planning options that the tax code allows available. After you sign that document, you lose an entire category of planning techniques. So eight planning options might be reduced to only four with that signature. Then, at the closing of the sale of the property, if a qualified Intermediary is not used to hold the funds, you may lose the ability to do 1031 exchanges in various forms.

The list of planning options gets smaller and smaller until, by the time the client calls the accountant and asks, “Can you help?”, the question becomes, “How long ago did you sell it?” If the answer is “five months ago” then there is one planning option left. If the answer is “seven months ago”, the answer is, “Unfortunately, no, there are now no planning options left.”

So, the moral of the story is, if you are thinking about selling an asset, before you take any action, sit down with a tax planner FIRST! This will allow you to consider all the options available for mitigating some or all of the tax consequences of the sale. Every step you take in a sale process without planning first takes away more options!

Getting Your Financial Records in Order for Tax Season: A Step-by-Step Guide

jeff@22mediagroup.com (Jeff Lethert) — Mon, 11 Sep 2023 14:30:00 GMT

Tax season can be a stressful time of year for many individuals and businesses. The key to making tax preparation smoother and less daunting is to keep your financial records organized throughout the year. When your financial documents, receipts, and records are in order, you'll not only save time but also potentially maximize your deductions and minimize your tax liability. In this comprehensive guide, we'll provide you with practical tips and steps to help you get your financial records in order for tax season.

Why Is Organizing Financial Records Important?

Before we dive into the how-to, let's understand why it's crucial to keep your financial records in order:

Minimize Stress: When tax season arrives, the last thing you want is to scramble to find documents and receipts. An organized system will reduce stress and ensure a smoother process.
Maximize Deductions: Properly organized records can help you identify potential deductions you might otherwise overlook, saving you money.
Avoid Penalties: Missing or inaccurate records can lead to errors on your tax return, potentially resulting in penalties or audits.
Save Time: Organized records make tax preparation more efficient, saving you time and allowing you to focus on other important aspects of your life or business.

Step-by-Step Guide to Organizing Financial Records

1. Create a Dedicated Workspace

Designate a specific area or folder for all your financial documents. This can be physical, like a filing cabinet, or digital, using cloud storage or financial software. Having a dedicated space will help prevent documents from getting lost or mixed up with personal items.

2. Set Up a Filing System

Establish a clear and logical filing system. Use categories such as "Income," "Expenses," "Deductions," and "Bank Statements." Within each category, create folders for each tax year. Label folders with the tax year (e.g., "2023 Taxes") for easy reference.

3. Save Digital Copies

Scan paper receipts and documents and save them as digital files. Digital copies are easier to search and organize, and they serve as backups in case physical copies are lost or damaged. Organize your digital files using the same categories and folders as your physical system.

4. Track Income

Keep thorough records of all sources of income. This includes pay stubs, invoices, 1099 forms, and any other income-related documents. Create a separate folder for each income source within your filing system.

5. Document Expenses

Record all expenses, both personal and business-related, throughout the year. This includes receipts for purchases, utility bills, medical expenses, and more. Be sure to note the purpose and date of each expense on the receipt.

6. Categorize Deductions

If you're eligible for tax deductions, maintain detailed records for each one. This might include charitable donation receipts, education expenses, or home office expenses if you're self-employed. Organize deduction-related documents in a separate folder within your filing system.

7. Bank and Financial Statements

Regularly review and organize your bank statements, investment account statements, and credit card statements. Make sure they match your recorded income and expenses. File these statements in a dedicated folder.

8. Quarterly Check-Ins

Set aside time each quarter to review and update your financial records. This prevents the accumulation of a massive, overwhelming task during tax season. Quarterly check-ins also help you catch errors early.

9. Use Financial Software

Consider using accounting software or apps like QuickBooks, FreshBooks, or Mint to track your finances automatically. These tools can help you categorize expenses, generate reports, and simplify the organization of financial records.

10. Consult a Professional

If you're unsure about tax laws or how to organize certain records, don't hesitate to consult a tax professional or accountant. They can provide guidance, ensure compliance, and help you make the most of available tax benefits.

Final Thoughts

Getting your financial records in order for tax season doesn't have to be an overwhelming task. By following these practical steps and maintaining a disciplined approach throughout the year, you can save time, money, and stress when it's time to file your taxes. Remember that organization is the key to success, and the benefits extend beyond tax season, providing you with a clear financial picture year-round. So, start today, and make tax season a breeze!

Remember to consult with a tax professional for specific advice tailored to your unique financial situation.

Preparing for Q4: Tax Tips for Small Business Owners

jeff@22mediagroup.com (Jeff Lethert) — Thu, 24 Aug 2023 21:40:44 GMT

As the year inches closer to its end, small business owners are not only gearing up for the holiday season but also for the annual tax season. While taxes may not be the most exciting aspect of entrepreneurship, they are a crucial part of your business's financial well-being. Fortunately, with some strategic planning, you can maximize deductions, take advantage of credits, and optimize your finances before the calendar flips to the next year. Here are some actionable tax tips to help small business owners prepare for Q4.

1. Organize Your Financial Records

Before diving into tax planning, ensure your financial records are in impeccable order. This includes all income and expense documents, invoices, receipts, and bank statements. Use accounting software or hire a professional if necessary to streamline this process. Organized records not only save time but also reduce the likelihood of errors during tax filing.

2. Review Your Business Structure

Consider your business structure (e.g., sole proprietorship, LLC, S-corp) and evaluate whether it's still the most tax-efficient choice for your situation. The structure can have a significant impact on your tax liability. Consult with a tax advisor or attorney to determine if a change is warranted.

3. Maximize Deductions

Small business owners have a plethora of deductions available to them. Some common deductions include:

Home Office Deduction: If you work from home, you may be eligible for this deduction, which allows you to deduct a portion of your rent or mortgage, utilities, and home maintenance costs.
Business Expenses: Ensure you're claiming all legitimate business expenses, such as office supplies, equipment, software subscriptions, and travel expenses.
Vehicle Expenses: If you use a vehicle for business purposes, you can deduct related expenses. Keep a mileage log to track business-related trips.
Healthcare Costs: If you're self-employed, you may be able to deduct a portion of your health insurance premiums.
Retirement Contributions: Contribute to a retirement plan, such as a SEP-IRA or a Solo 401(k), to reduce taxable income while saving for the future.

4. Take Advantage of Tax Credits

Tax credits can significantly reduce your tax liability. Some credits that may apply to small businesses include:

Small Business Health Care Tax Credit: If you provide health insurance to your employees, you may qualify for this credit.
Work Opportunity Tax Credit (WOTC): If you hire individuals from certain target groups, you may be eligible for this credit.
Research and Development (R&D) Tax Credit: If your business engages in qualifying research activities, you could benefit from this credit.

5. Consider Equipment Purchases

If your business needs new equipment or machinery, consider making these purchases before the end of the year. The Section 179 deduction allows you to deduct the full cost of qualifying equipment in the year it's placed in service, up to a specified limit.

6. Monitor Estimated Tax Payments

Stay on top of your estimated tax payments. Review your financial performance throughout the year, and adjust your payments accordingly to avoid penalties for underpayment. A tax professional can help you with this calculation.

7. Plan for Retirement

Contributing to a retirement account not only helps secure your financial future but can also reduce your taxable income. Explore options like a Simplified Employee Pension (SEP) IRA, Simple IRA, or Solo 401(k) and maximize your contributions within the legal limits.

8. Seek Professional Guidance

Navigating the complexities of tax planning and compliance can be challenging. A certified tax advisor or CPA can provide personalized guidance, ensuring you take full advantage of all tax opportunities and stay compliant with tax laws.

9. Stay Informed

Tax laws change frequently, so staying informed is crucial. Subscribe to newsletters, attend webinars, and follow reputable tax sources to keep up with the latest updates and tax-saving strategies.

While taxes can be a daunting task for small business owners, they don't have to be overwhelming. By following these tax tips and staying proactive, you can better prepare for Q4 and set your business up for a financially successful year ahead. Remember, tax planning isn't a one-size-fits-all endeavor, so seek professional guidance to tailor your strategy to your unique circumstances. With careful planning, you can reduce your tax liability and keep more of your hard-earned money in your business.

Back-to-School Tax Tips for Parents

jeff@22mediagroup.com (Jeff Lethert) — Thu, 24 Aug 2023 17:45:01 GMT

Maximize Your Savings in 2023

The back-to-school season is an exciting time for parents and students alike. However, it can also be financially daunting. As your children are heading back to school, it's essential to be aware of the tax deductions and credits available to parents for the 2023 tax year. By taking advantage of these opportunities, you can significantly reduce your tax burden and ease the financial strain of back-to-school expenses. Let’s explore some valuable tax tips that can help you maximize your savings.

1. Educator Expense Deduction

If you're a teacher or educator, you're eligible for the Educator Expense Deduction. This deduction allows you to deduct up to $250 (or $500 if married and both spouses are educators) of unreimbursed expenses for classroom supplies. This includes books, supplies, and computer equipment used in the classroom. Keep detailed records of your expenditures to ensure you claim the full deduction.

2. Child and Dependent Care Credit

Working parents can benefit from the Child and Dependent Care Credit, which helps cover the cost of daycare or after-school care for children under the age of 13. This credit can be worth up to 35% of qualifying expenses, depending on your income. Be sure to save your receipts and obtain the necessary documentation from your childcare provider to claim this credit.

3. 529 Plan Contributions

Contributions to a 529 college savings plan are not deductible on your federal tax return. Still, many states offer state income tax deductions or credits for contributions made to these plans. Research your state's specific rules to see if you can take advantage of these tax benefits while saving for your child's education.

4. American Opportunity Credit

The American Opportunity Credit provides a tax credit of up to $2,500 per eligible student for the first four years of post-secondary education. To qualify, your child must be pursuing a degree or other recognized educational credential on at least a half-time basis. This credit can help offset the costs of tuition, fees, and required course materials.

5. Lifetime Learning Credit

For parents with students beyond their first four years of college or pursuing non-degree courses, the Lifetime Learning Credit offers a tax credit of up to $2,000 per tax return. This credit can be applied to qualified education expenses, including tuition, fees, and books. Unlike the American Opportunity Credit, there's no limit on the number of years you can claim this credit.

6. Back-to-School Shopping: Sales Tax Holidays

Although we don’t have a sales tax here in Montana, all but five states in the union do have a sales tax. In those sales tax states, many offer sales tax holidays during the back-to-school season. During these periods, certain school supplies, clothing, and even computers may be exempt from state sales tax. Take advantage of these opportunities to make your back-to-school shopping more cost-effective.

7. Keep Records and Stay Informed

To ensure you're making the most of available tax deductions and credits, it's essential to keep thorough records of your expenses related to education. Store receipts, payment records, and any necessary documentation in an organized manner. Additionally, stay informed about any changes to tax laws and regulations that might impact your eligibility for these benefits.

Conclusion

As we head into the new school year, don't forget to consider these valuable tax tips for parents. By taking advantage of tax deductions and credits, you can ease the financial burden of education-related expenses and ensure that your children have the resources they need to succeed in school. Be sure to consult with a tax professional to help you navigate the complexities of tax law and maximize your savings in the 2023 tax year. Happy back-to-school season!

The top 5 things people stress over during tax season

jeff@22mediagroup.com (Jeff Lethert) — Mon, 27 Mar 2023 17:40:36 GMT

Tax season can be stressful for many people, but it doesn't need to be. Our clients rely on us to take on the things that stress them out, and we are happy to be their trusted experts.

Here are the top 5 things people stress over during tax season:

Not having all the necessary documents . This is a common stressor, as it can be difficult to keep track of all the paperwork required to file your taxes. If you don't have all the necessary documents, you may miss out on important tax credits or deductions.
Making a mistake on your return . Even if you have all the necessary documents, it's still possible to make a mistake on your tax return. This can lead to costly penalties and interest charges from the IRS.
Not understanding the tax code . The tax code is complex and can be difficult to understand, especially if you're not familiar with it. This can lead to confusion and stress, as you may not be sure what you need to do to file your taxes correctly.
Not having enough time to file . Tax season can be a busy time, and it can be difficult to find the time to file your taxes. If you don't file your taxes on time, you may be subject to late filing penalties.
Not being able to afford to pay your taxes . If you owe taxes, it can be a financial burden. If you can't afford to pay your taxes, you may be able to set up a payment plan with the IRS.

If you're stressed about taxes, there are a few things you can do to reduce your stress levels:

Organize your documents . Make sure you have all the necessary documents before you start filing your taxes. This will help you avoid making mistakes and will make the filing process easier.
Take your time . Don't rush to file your taxes. Take your time to understand the tax code and to make sure you're filing your taxes correctly.
Get help . If you're struggling to file your taxes, there are resources available to help you. You can get help from a tax professional, from a volunteer tax preparation service, or from the IRS itself.

If you are ready to ditch the paperwork and forget the stress, give us a call. We are happy to help.

Tax Planning Often Has Bonus Benefits

Fri, 24 Mar 2023 13:11:00 GMT

Have you worked toward losing weight in the past because you want to look more attractive, or fit into an expensive wardrobe you already own? When you lose weight you often also lower your blood pressure and/or cholesterol as a bonus. It might not be the primary motivation, but the extra benefit is of course welcome!

If you are a business owner, then we pose this question. Some time ago you had an idea. Over the years your turned that idea into a successful and profitable business. Have you properly protected what you worked so hard to build? An unexpected turn of events could put your biggest asset at risk.

Did you know that moving business earnings into a qualified plan could protect your assets as well as provide a current tax deduction? Money in a qualified plan is generally protected from creditors, or at least better than other ways you can store capital. That means no one can take away what you have earned. You re-positioned the money to save on taxes, but ended up also protecting things much better from a legal perspective.

There are many examples like this where proper tax planning can also provide other benefits to you, if keeping more of your own hard earned money isn’t enough of a reason! The side benefits of tax planning are like the icing on the cake. So stop putting it off. Go see a tax planner today!

Why Didn’t My Tax Preparer Tell Me That?

Thu, 16 Mar 2023 15:48:00 GMT

When you start tax planning with a new client, the first thing people often ask is why the accountant or CPA they are using doesn’t think or act the way you do in discussing the hunt for possible tax savings. After all, the current CPA is smart, trustworthy, running a successful accounting business and well respected in the community. So, why are you telling them all these wonderful new tax savings ideas that their CPA has never mentioned? There are many explanations, but the simplest is how the accountants themselves view the job that they do.

Often, accountants think that the profession of accounting in its simplest form is the job of telling the story of money that has already come in or gone out, and they are reporting “history”, which is very different than telling a story that will “change history.”

What? Can accountants “change history”? No, they cannot. But, the history of money in and out doesn’t end when the event itself happens. It ends the day the accounting is sent to a taxing authority. And, even after it is sent, it can still be changed again!

For instance, a business owner buys a $50,000 delivery truck for 100% business use, and the accountant puts the truck in a standard depreciation schedule of 5 years. Basically reducing approximately $10,000 per year of the company’s taxable income for the next 5 years. The company then has a great year and after the owner’s personal taxes are completed he ends up with the highest tax bill he has ever been faced with. The CPA recommends putting money (that the owner would rather keep in order to expand the business) into an IRA to lower the owner’s tax bill. He is told, “That`s all you can do at this point.” However, that is actually not all that can be done, since the IRS allows accelerated deprecation, which means the owner could amend the Corporate 1120S and elect to take the entire $50,000 as depreciation for the delivery truck, all in the current year. So, rather than having to fund the IRA, he can now use that cash flow to expand the business as desired.

Many CPAs are almost robotic when it comes to simple tax planning. Often, they decide FOR the business owners what’s best for them, instead of explaining more and working in tandem with them.

Accountants often see the job of accounting in a very narrow view, and looking around for additional tax savings, or even more so, changing business practices in order to lower the future tax bill is “not the job they are hired to do.” However, we think this is a very important part of any good plan. That’s why our firm states proudly that we are proactive tax planners!

What’s the catch? Why wouldn’t everyone use tax planners then?

Mainly because tax planning comes at a terrible cost that most people just do not feel they can afford…TIME!

Time answering questions, gathering documents and discussing and learning enough about the recommended changes to achieve tax savings. Time learning something new. The cost is time and everyone is already so busy!

Our question to you is what is your time worth? If we had a 30 minute meeting to review your last two years’ tax returns, then a follow up meeting with one hour of sharing plans on how to pay less tax, and then up to two and a half more hours over a few weeks or months educating your current accountant and setting up new processes, and all you saved was $4,000, would it be worth it? Well, that’s $1,000 dollars per hour for your time! What if you are a business owner? The time is often the same and the savings can be $40,000 or more. Would that time be worth $10,000 per hour?

Yes, You Can Change Your Tax Outcomes After December 31st!

Fri, 10 Mar 2023 14:32:00 GMT

At this time of year many people who were getting a refund have already filed their tax return. It leaves the remaining majority of folks who, despite having withholdings, are still going to owe additional tax. We talk a great deal about tax planning and changing behaviors to achieve better outcomes in the future, but many are faced right now with a tax bill for last year.

So, what can be done? Anything? The answer is YES! It’s actually simple and easy for most folks to substantially reduce the tax liability they are facing by opening a prior year IRA! It is one of the very few ways the IRS allows you to retroactively affect your taxes. What if you don’t have the cash for an IRA? You can turn assets you already own into a prior year IRA with some simple paperwork, with nothing needing to be bought or sold.

Let’s give you an example: Kevin and Cathy are facing a $3,900 tax bill even after having $12,000 withheld from their W-2s. They have a daughter in college, so there is no cash in the bank to put in an IRA, or to pay the $3,900 tax bill. They do, however, have a brokerage account with E*TRADE with a few stocks they have purchased over the years. They can simply do an online IRA application (make sure it’s an application for the previous year, not the current year). When they have account numbers, they can then transfer “in kind” any of the stocks from the regular brokerage account to the IRA without selling them. In a sense, they are taking them from the left pants pocket and putting them in the right pants pocket. The outcome…ta-da, a $13,000 IRA deduction, and they still own the same stocks!

One thing to consider is that they have now locked up that stock until age 59.5. Another consideration is that stocks are subject to a capital gains tax, which is lower than ordinary income. Suitability of IRAs vs non-qualified stocks is not the point of this post. Anybody making any decisions about finance should seek professional advice, which IS the point.

If your tax preparer just says ,”It’s bad news” and doesn’t offer at least some solutions, then you should go to a tax planner and work through your options. But just because there is no cash in your checkbook, it doesn’t mean you should think that nothing can be done.

Simple Tax Tips Are Sometimes the Best

Fri, 03 Mar 2023 14:29:00 GMT

People often struggle with record keeping and are typically so busy that they are simply unaware of tools or services that have been developed that could greatly improve the recording of tax deductible expenses, mileage, etc. Many topics we could cover here, but two that are universal.

If you are in business, you have a phone and a car. Cell phones are pretty typical for smaller companies. What we usually see is a personal cell phone bill of about $150-250 a month, and of course the business owner wants to deduct it all. When you start asking questions however, it’s almost always a family plan with the spouse and kids on it, so 80% of the cost and use is personal and not deductible.

What you could try and likely have it be OK with the IRS is to only deduct the one line charge from the bill and perhaps the taxes for the group, but even that might be stretching it. How do you fix that? Two things can help. One, when you open the account, do it in the name of the company and not yourself personally, and have the bill sent to the company. This way, your costs and the taxes are at least potentially defend-able. Then, hire your family. Just to deduct the phone bill? No, really hire your kids and hire your spouse. It doesn’t need to be full time, but part of justifiable benefits as a policy, noted in your company handbook, could be a phone.

As a sole proprietor, there are many other potential benefits, such as paying wages to children without FICA or FUTA taxes being deducted. Also, those same kids can earn up to the current single filer standard deduction each year and not pay federal income tax under the new code. Then, perhaps half or even more of their phone bill could be legit! You have legal deductions and you save employer taxes as a bonus, all while keeping more of the money that you work so hard for “in the family.”

As for the car, whether you buy it personally and have your business write you reimbursement checks, or own it in the business and write reimbursement checks to the company for personal use, the issue is in parity with the phone. What people can do to help though is to not estimate ! What we have seen over and over is people who haven’t kept records of the business versus personal mileage who are then forced to estimate at tax time. Since they have no proper log to help defend the deduction if they are audited, they typically estimate less business miles then they have actually driven out of fear. And at +/- 65 cents a mile, that can be a LARGE COSTLY mistake.

How do you fix that? Simply join the modern world and get one of numerous apps that track every start and stop, as long as you have your phone with you (and who doesn’t). QuickBooks has a mileage app built right into the program. If you’re not on QuickBooks, MileIQ and similar apps are available and very easy to use. Just click the app to look at all your trips and swipe left or right with your thumb for business or personal! It couldn’t be easier!

It just takes a few moments to put a process and plan in place so you can enjoy the deductions. And, more importantly, you will be able to defend them if you are audited.

What Is Tax Planning?

Fri, 24 Feb 2023 14:09:00 GMT

We use the term “tax planning” often, but we are aware that many people are not sure what it really is. Some people think “That means off shore accounts and citizenship shell games ending with jail time. No thank you!”. That’s not tax planning; that’s tax evasion, and it’s not at all what we recommend. Others think only the wealthy need a tax planner, and for regular folks it can mean paying a 30 year mortgage off 12 years early or having a college fund with enough in it to actually pay for college.

Tax planning is not just for the wealthy, though. It can be a useful tool for anyone who is aware of the opportunities. Our tax code is complex and is much like the game of chess, in that there is not one possible outcome, there are many. Your opponent is not the IRS, however. It is yourself. Like many games on your cell phone, you are playing against an imaginary opponent. Lack of desire to learn, fear of the IRS and many other factors contribute to you not achieving as high a score as you could with a little more effort.

Most tax planning steps are simple things, such as a pensioned senior in the 12% marginal bracket who, after seeing a tax planner, moves $30k from his CD to a tax free municipal bond and now only pays 10%. It’s rarely complex, but like anything, you need a coach that knows all the rules. Go seek out a tax planner and get better at your real world chess game. It’s your money; until you make the wrong move and give too much of it to Uncle Sam.

Tax Planning and Estate Planning Are a Lot Alike, and Ignored By Most!

Thu, 16 Feb 2023 19:03:00 GMT

People try, but “adulting” is hard! Kids, pets, job, relatives, friends, bills, medical problems, car problems, work problems all in the last day, so when I have time I will start tax planning. Same as….so when I have time I will start estate planning, it’s just so too far down on most peoples’ day to day list of things to do that all the other issues just cycle in some complex order that nobody understands and the last two items never seem to bubble up to the top…UNTIL THEY DO!

If you are a business owner, thoughts of tax planning might bubble to the surface a couple times a year, perhaps March 15 ^th and April 15 ^th (or later if you have filed an extension). As an employee or retiree, it might come to the surface just once a year, in April. You might get it over sooner, or go on extension and face it later, but it is just one day out of every 365, so like the reverse of Christmas morning, you unwrap the bad news and face the tax bill. For a few weeks after that, the tax planning “to do” circles around in the number two or three position, because the pain of the tax bill is still fresh, but as the pain fades and the kids, pets, job, relatives, friends, bills etc. start distracting you, it slips away. The cycle is complete and most will do nothing, then face the pain of a huge tax bill again in a year.

With estate planning there is an even a bigger problem, as the pain doesn’t cycle annually. It is sporadic and less frequent. Thoughts of estate planning might occur to you at an uncle’s funeral, at your mother’s bed side in the intensive care unit, when you see a close friend or classmate’s obituary. Or worse, the inner circle, at your husband’s bedside during a terminal illness, or at your wife’s funeral. Of course even after tragic events, estate planning can be easy to ignore, like tax planning, but often the repercussions are much more overwhelming. It makes us wonder, as a human race, why and how we can procrastinate and ignore the ONLY TWO THINGS THAT ARE GUARANTEED IN LIFE…DEATH and TAXES!

They Zig, We Zag

Fri, 10 Feb 2023 14:18:00 GMT

People who are worried about the 10 year rule, requiring beneficiaries of inherited IRAs to withdraw the entire balance within 10 years, can double that time with a CRT beneficiary in front of inheritors. What if you really have a big IRA and the 10 year rule just isn’t enough of a stretch to help your beneficiary stay out of the top tax bracket? Or any other reason you care about reducing the negative tax impact from the 10-year rule?

You could use other remaining tax rules to your benefit by setting up a charitable trust. A charitable trust allows the retirement assets to continue growing tax-deferred, even once the assets are distributed from the retirement account into the CRT. Tax is paid only when the trust distributes income to the beneficiary (often a child or other non-charitable beneficiary).

Essentially, the charitable trust creates the ability to regain the benefits of a stretch IRA. The charity is involved at the passing of the initial, non-charitable beneficiary, but it can also occur at the end of a term, for example 20 years from the account owner’s passing. Whether it is at the end of a beneficiary’s life, or a term, the charity receives the balance of the trust assets at that time. The only requirement is that the trust is designed to leave 10 percent of the initial contribution to charity.

The IRS zigs and the planners zag, and we all march on with one common truth. People who meet with tax planners are the winners and people who do not often lose out. Plan your tax outcomes!

Business Owners Often Paint Themselves Into a “Tax Corner”

Fri, 03 Feb 2023 14:16:00 GMT

As weather interrupts some parts of the country and business owners have to scramble and fill in the gaps of employees, supplies, deliveries and the like, it’s easy for them to worry about taxes later, after all, there’s “plenty of time.”

That often comes back to bite them though, sometimes hard. If they run their business as a sole proprietorship then yes, they have until mid-April to file, and until mid-October if they file an extension. However, the majority of small businesses under pay tax estimates, if the pay them at all, and the first filing date (mid-April) is when the taxes are due, even with an extension to file. The penalties and interest are based on what’s owed and not paid by the April filing deadline, so the real trap for them is do they know what they will owe so they can send that in by April. The answer is almost always NO.

If the business is an S elected Corporation or a Partnership, then they have even less time, as those filings are due March 15 ^th . That’s just a few weeks from now, and business owners know how a week can simply “melt away” trouble shooting this or that. If businesses have bookkeepers keeping good books every month then all they need now is their payroll package, 941s and such, and they are good to go, but again many business owners are behind in bookkeeping or have been in their own QuickBooks and made many errors that need to be corrected before taxes can be done.

The biggest problem of all is the lack of tax preparers with the talent to do business tax returns well, and if the majority of their clients wait until the last two weeks to dump their mess on them, then they simply don’t have the capacity to do all those returns in time. The business owners come flooding in just before the March pass-through entity filing deadline, and even though the accountants do their best, error rates increase. An even bigger problem, TAX PLANNING GOES OUT THE WINDOW!

If instead, that business owner connected with their preparer now, before the season starts really heating up, they could have a draft return in hand by mid-February. Now they can have a conversation with that preparer. Business Owner: “Why do I have such a big gain?” Accountant: “Well, let’s take a look. Ahh, last year you had less employees and spent less on salary.” Business Owner: ”Well, what can I do to reduce my taxes?” Accountant: “We could advance the deprecation on that new machine instead of using normal deprecation, or you could fund your profit sharing plan.”

Those conversations almost never happen on March 15 ^th . Instead, it’s the Accountant saying “Sign here and who’s next?”, the Business Owner saying, “Oh, wow. What can I do?” and the Accountant (who has worked over 100 hours in the last seven days) says “It’s too late to do anything…NEXT!” Get started NOW and get better results, which usually means keeping more of your own money. Tax planning time for business owners is crucial!

Changes in the Secure 2.0 Act are a Mixed Bag for Consumers

Fri, 27 Jan 2023 16:31:00 GMT

A few weeks ago a major piece of legislation was signed into law and in our qualified opinion, seniors win. Young people however, who are being told they win as well, may actually lose, due to basic human nature.

For our seniors, the rules around Required Minimum Distributions from IRAs, also known as “RMDs” were changed, moving the age at which they must begin from 72.5 to 73 years old. Tax rules that run on age changes and dates are just easier to follow for most. As people are living longer and many are working past age 65, it was time to adjust those rules, which just a few years ago had required distributions triggering at age 70.5. It is scheduled to increase again in the future, so good rule changes for seniors and two thumps up from us!

For businesses there were also some great changes to align Roth 401(k) rules with traditional 401(k) rules. Also, tax credits were increased, allowing small businesses to recoup more of the costs of starting a 401(k) plan. That allows small businesses to help their employees and themselves in the process. There is actually a great deal more in this area that is beyond the scope of this article, but again, two thumps up!

The problem we see involves the rule changes for working people who are in a crisis and need to access those 401(k) funds, which have been expanded to allow withdrawals in more situations without the penalties that normally apply. On the surface, this seems like a good idea. But when you consider the power of the long term value of money, maybe not so much. People of all ages can encounter a financial crisis that causes them to need access to emergency funds. But the long term cost to a 30 year old taking an emergency withdrawal of say $1,000 from their 401(k) to cover an urgent (and now exempt from penalty) expense, versus using a credit card, borrowing from a family member, friend or co-worker, or almost any other source, will be much higher than the same withdrawal would be for a 55 year old. The lost earning power of that $1,000 over that 25 year span will cause a significant reduction in the overall value of that account at retirement.

Between mortgages, credit cards, student loans and a variety of other topics, there has been a lot of legislation produced aimed at consumer protection and education, forcing companies to explicitly explain the true cost of borrowing money over time. Hopefully, at some point, that same approach will find its way into the rules and recommendations around these new options. But at first glance, there are none, and that’s unfortunate. A young person in crisis thinks, “All these scary notices I get from my credit card company have taught me that if I borrow the $1,000 I need on my credit card, it’ll cost me thousands if I don’t get it paid back soon, so I’ll just take it from my retirement fund.” The fund isn’t required to explain to them how much it will cost them in the long run to remove that money from the retirement account at age 30.

As a country, we lost our financial discipline a long time ago, and it’s gotten worse since the pandemic. More stimulus, more public welfare, and a national debt now over 31 trillion dollars. Giving young people easier access to their 401(k) balances doesn’t seem like a step in the right direction, when the message should be “That’s the last place on earth you would want to take money from.”

Simple or Complex, Tax Planning is Important!

Fri, 20 Jan 2023 13:59:00 GMT

Sometimes “Tax Planning” can be easy: “Open an IRA and it reduces your taxable income.” Other times it can be quite complex: “Cost segregation” on a building means hiring an engineering firm and having a structure broken down into its many components on paper, with each value separately listed; the frame, wiring, heating systems, etc., and taking write-offs, generally much faster than simply taking a standard approach. These are both ways to lower federal or state taxes.

For the people who have made large amounts of money or have larger estates, the year to year tax bill is not as much of a concern as the “Death Tax Bill.” Planning for them can be simple or complex as well, but the tax they are trying to avoid is the largest tax they will ever face and could collectively be more than all the annual federal taxes they ever paid during their entire lifetime (although technically, it will be their heirs who actually pay it, as they are deceased).

One such planning trick these people often use is to arrange legal ownership of their companies or assets so that it’s broken up into parts, then they can claim to the IRS that the parts have much less value then the whole, and gift those parts away while still living to trusts, children and other heirs.

Those steps look like this:

1.Take almost any kind of investment – a private company you own, a piece of real estate, a stock portfolio – and put it in an LLC or another legal entity.

2. Divide the LLC into pieces and spread it among your heirs, or trusts created on their behalf.

3. Claim that the combined value of the pieces is less than the value of the whole, because no one entity controls the entire investment. Some advisers insist that their client’s stake is worth 30% to 40% less than it would otherwise be, with bigger discounts for smaller stakes lacking voting power over the LLC.

4. Later – perhaps after you die – your family can get together and sell the entire asset on the open market and profit from its real, non-discounted value.

This works even for an LLC containing publicly traded shares that, if they hadn’t been locked up in the LLC, could easily have been sold off for their full value. Tax planning means different things to different people, with the goal of avoiding different kinds of taxes in different situations. But there is one constant, one thing across the board that’s true for everyone. If you haven’t hired a tax planner or a financial planner that is tax savvy, then you won’t know what’s possible and you might pay more than the folks who have engaged a planner.

The Only Constant is Change (especially with taxation)

Thu, 12 Jan 2023 14:59:00 GMT

We talk a lot about people not doing tax planning and not spending more time creating the tax outcomes they want. We urge people to understand that it’s within their own control and that tax outcomes can be legally and ethically manipulated. We go on and on about the benefits. BUT…we understand why it’s so rarely done!

It is because almost nothing in people’s lives has more constant change than taxes, and keeping up with all the changes can be an overwhelming challenge. What if every four years your banking rules changed, “Oh I’m sorry John, we no longer pay you interest, now you pay us interest to keep money here.” Or “Now you have to send in your mortgage payment daily, not monthly.”?

We all have complex and often busy lives, so when the IRS changes at least a few of the rules every year (or sometimes even more frequently) it’s easy to understand why people seem to give up and just justify inaction with, “It’s over my head” and “They’re going to get what they want from me one way or the other” type statements.

The problem is magnified because people don’t always visualize what the costs are to not paying more attention. If people have an adjustable rate mortgage then every time they get the statement they look to see what the increases or decreases are, plus the mortgage companies must by law do calculations for you and say “The interest rate change means you will pay $18,400.01 more over the life of this loan” and seeing such statements makes people react. The IRS doesn’t have such requirements so people have become disconnected. What if at work your paycheck stub said, “By not maxing out your 401(k) contribution, you will pay an additional $1,453.88 in taxes, and over the next 21 years that represents $31,890.00 retirement dollars you won’t have?”

People need to understand that not overpaying taxes is another potential form of retirement savings. It matters, and if they can’t understand the rules they can simply hire a tax planner that does. This isn’t a game. It’s the life you get and the retirement you get, and actions matter as well as INACTION!! Find a tax planner or get educated yourself; or get taken advantage of.

Tax Season Is Here Again! Choose Apples or Oranges.

Fri, 06 Jan 2023 14:44:00 GMT

There are many ways a tax return can be done that are all OK with the IRS, but only one of those ways nets the largest refund! People need to understand this across America, and we talk about tax planning constantly. We blog, tweet, post, email and on and on, yet we as an industry are not even getting 10% of the public to take on tax planning! The clients who do are often thrilled at the outcomes, and yet it’s just hard to get people to want to spend half the time that they spend planning their vacations on planning their own tax outcomes, even though larger refunds would pay for those vacations!

Tax planning offices often don’t look like a franchise such as H&R Block or Liberty Tax. Those “tax stores” often spend a great deal of time and effort on locations of convenience, fast or same day service and focus on people expecting refunds. They do all types of tax returns, as far as we know, but the focus of their services is obvious.

Planning offices, on the other hand, take a few days to do returns, have CPAs and EAs doing the work and have a second set of eyes review the process. They often do not loan tax clients the IRS refund for a fee. In fact, they are most often working with taxpayers who are not necessarily getting a refund. Complex returns for business owners, landlords and corporations can’t be done in one “walk in the door and walk out with a return” process. Even though they take more time, they also are often less expensive than an “instant service in a high traffic area” model.

If you want a same day return, fast service and are willing to take a short term loan to get some of your refund right away, then just look for a foam finger, green face paint or the other “mall header” based systems, as they are all around you! However, if you want CPAs or EAs doing your work, and then to have the work double checked by a second qualified set of eyes, and you want it cheaper than most national walk in services for a more complex type return, look off the beaten path for the tax preparation and planning services. Wait a few days or even a couple weeks for the work, but reap the benefits!!

If You Give to Charities or Have Plans to In the Future, It’s Not Too Late to Reduce Your Current Tax Bill!

Fri, 16 Dec 2022 16:20:00 GMT

Many people have the intention of doing a better job of “tax planning” in order to start having more favorable outcomes, but busy lives and life interruptions can leave them little time. If this is you, you’re not alone. Time flies even in normal times, but with the current stressful environment, everyone is scrambling even more, so you look at the calendar and think, “I can go see my accountant or financial advisor, or I can get my shopping done”, and the next thing you know its Dec 18th and the end of the year is upon us.

Most advanced tax planning requires communication about concepts, takes reams of paperwork and time to submit to custodians, so it would be easy to think “well, it’s too late.” But it’s not too late if charitable giving is part of your plans now or in the near future.

Donor-Advised Funds or “DAFs” can normally be established with a one-page simple account form, requiring minimal information and with hardly any real decisions to be made. You and your spouse are the donors, your children or siblings the contingents, and you don’t even have to choose a charity to get started. You put the money in the fund and you are eligible for 100% of the tax deduction now, even if you don’t make any charitable gifts from it this year or next. A DAF allows you to lump together tax deductions in a year where you need those deductions, without the extra work of choosing the charities, cutting those checks, etc., which can all be done later.

Example: You normally give away $5,000 a year to various charities. This year you got a surprise income from an inheritance, bonus, stock option, etc. You can put $50,000 in a DAF to neutralize the additional taxable income, but still only give $5,000 a year away from the DAF for the next ten years. You’re not giving more away than planned, just getting the deduction when you need it. Setting up a DAF is simple, easy, and almost completely time and decision free. Call your tax planner today and say, “let’s set up a DAF” and you can still easily get that done before the end of the year.

Lower Your Tax Bill More by Using a Qualified Charitable Distribution

Thu, 10 Nov 2022 18:56:00 GMT

This is the time of year when people often start taking personal inventory of how fortunate they are and start considering charitable contributions as a way to “give back” a little. For some, it’s an automatic budget item in their day to day lives, but for others it’s a new activity.

For many years the IRS has helped people give by allowing charitable contributions to be deducted on schedule A when they file their taxes. The tax deduction value of those gifts changed with the Trump tax code simplification, as many people no longer need to file a Schedule A due to the higher standard deduction.

Many people are still ingrained in their old charitable giving habits and aren’t aware that they can, and often should, do it differently to maximize their tax benefit. Not everyone can do a Qualified Charitable Distribution (QCD) from their pre-tax retirement accounts, but for those who are old enough that they have to take Required Minimum Distributions (RMDs) from those accounts, doing a QCD is a more direct and beneficial way to accomplish tax reduction. Unlike a charitable deduction, which provides no tax benefit if there is no Schedule A filed, a QCD directly lowers your Adjusted Gross Income (AGI) as well as satisfying up to $100,000 of this year’s RMD, whether a Schedule A is filed or not.

Talk to your tax planner today if you think you could benefit from this special provision in the tax code.