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Take the Pulse of Your Tax Health

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Calculating my future financesRegular financial checkups give you an opportunity to identify where you can improve your overall tax situation. They also help identify areas of concern that may require more detailed attention. In a similar fashion, regularly reviewing your tax situation with a financial professional can identify opportunities to improve your tax picture and can often shed light on areas where you may be paying too much in taxes. Simple strategies that range from adjusting your withholding to timing the sales of securities can be employed to potentially reduce your tax bill.

Adjust Your Withholding

This is a simple and basic move. If you had too little tax withheld last year, you ended up paying the IRS what you owed when you filed your return and may incur a penalty. If you had too much tax withheld, you received a tax refund. You may regard a large tax refund as a plus — but the reality is that a large tax refund is simply an interest-free loan of your money to the government. It may make more sense to have less tax withheld up front and receive more in your paycheck. That way, you can save or invest the money and potentially earn interest, dividends, or perhaps enjoy a capital gain on your investments.

Time the Sale of Securities

How long you own a profitable asset before you sell it can impact how much income tax you pay on your gain. Holding on to an appreciated asset for more than one year before you sell it results in long-term capital gain. The tax rate on long-term capital gains is 0%, 15%, or 20% depending on your taxable income and filing status. For example, if you are married and filing jointly in 2021, the long-term capital gains rate is 0% with income of up to $80,800, 15% with income between $80,801 and $501,600, and 20% with income over $501,600. In contrast, short-term capital gains are taxed at higher ordinary income tax rates.

If you have capital losses, look into selling investments in your taxable accounts to generate capital gains that can be offset by the losses. You could also potentially reduce taxes by investing in municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and might be exempt from state and local income taxes as well. Of course, credit ratings should be analyzed before purchase.

Add to Your Retirement Plan

You could potentially lower your income tax liability by increasing the amount you contribute to your tax-favored retirement plan (limits apply). If you’re age 50 or older, and your plan permits, you may be able to add to your retirement account by making catch-up contributions in addition to your regular plan contributions.

Consider a Health Savings Account

A health savings account (HSA) can also be a good tax saving option. You can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own provided you are covered by a qualified high-deductible health plan. You can invest in an HSA and have it grow in a tax-deferred manner similar to an individual retirement account. And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Small Business Retirement Plans

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People receiving services and consultations in the hall of the municipal office. Government agency for paperwork.Does your business offer a retirement plan? Whether you’ve recently started a business or have been operating one for some time, setting up a retirement plan can be beneficial to both you and your employees. Besides providing tax incentives to defer income and save for retirement, retirement plans can help you reward and retain employees. Employer contributions are tax deductible, within certain limits.

SEP Plans

A Simplified Employee Pension (SEP) plan is relatively easy and inexpensive to set up and administer. You have complete discretion in determining whether or not to make annual contributions. To set up a SEP plan, you establish SEP individual retirement accounts (IRAs) for yourself and your employees. Qualifying contributions are tax deductible and not included in the employees’ current income. Taxes are deferred until money is withdrawn from the plan.

The maximum amount of your contribution for each employee is the lesser of 25% of annual compensation or $61,000, and no more than $305,000 of compensation may be considered (for 2022). There is a special computation for figuring the maximum contribution to a self-employed individual’s own SEP account. Additionally, contributions may not discriminate in favor of highly compensated employees.

Solo 401(k) Plans

A solo 401(k) plan may be a suitable option if you work alone or employ only your spouse. The chief advantage of a solo 401(k) plan is that it allows you to save as both the employee and the employer. As an employee, you may defer the first $20,500 of your compensation (or $27,000 if you’re age 50 or older). As the employer, you may also make a profit sharing contribution (subject to tax law limits). The combination of all contributions — including deferrals, profit sharing, and any others — may not exceed the lesser of (1) 100% of your compensation or (2) $61,000 ($67,500 if you’re age 50 or older). Contribution limits are adjusted annually for inflation.

SIMPLE IRAs

Like a SEP, a SIMPLE IRA plan entails setting up IRAs for yourself and each participating employee. You and your employees can elect to defer compensation to the plan (no more than $14,000 in 2022; $17,000 if age 50 or older). Additionally, employers must make an annual contribution by either (1) matching employee contributions up to 3% of pay (a lower 1% match is allowed in certain years) or (2) contributing 2% of pay for each employee who’s eligible to contribute, even if the employee chooses not to contribute.

A SIMPLE plan generally isn’t an option if you have another retirement plan or more than 100 employees.

Defined Benefit Plans

The chief advantage of a defined benefit plan is the high deduction ceiling, which allows owners to rapidly build up their retirement benefits. For 2022, deductible contributions may allow for an annual benefit that will, when the participant reaches age 65, equal the lesser of $230,000 per year or 100% of the participant’s average compensation for his or her three highest consecutive years of active plan participation.

The disadvantages of this type of plan include the funding and administrative requirements. Complicated actuarial formulas must be used to calculate the contributions to be made each year.

Long-Term Investing 101

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African American Accountant Or Auditor With CalculatorInvesting for retirement can be intimidating for many people. Keeping these basic principles in mind can help you pursue your long-term goals.

Have Realistic Expectations

Be realistic about how well your investments will perform. If you are too optimistic, you could underestimate how much you should be contributing to your retirement account to reach your savings target. Instead of counting on big stock gains, it’s generally smarter in the long run to diversify* your investments. And always contribute an adequate amount, regardless of how the investment markets are performing.

Avoid Hot Trends

Hot investing trends can catch the attention of inexperienced investors. However, trends tend to fizzle out as quickly as they started, leaving inexperienced investors with losses. Rather than chasing trends, choose investments that are an appropriate match for your risk tolerance, the amount of time you have to invest, and your investing objectives.

Learn to Live With Volatility

The stock market rises on some days and falls on others — sometimes by a lot. When the market tumbles, you might be tempted to sell your stock funds or portfolios and buy less risky investments. However, periods of poor market performance are to be expected when you’re investing to reach long-term goals. While downturns are discouraging, the stock market historically has recovered from every downturn.** Over time, periodic setbacks may be followed by periods of strong growth. Unless you’ll need your money soon, it may be better to look beyond short-term volatility and stick with your investment strategy.

*Diversification does not ensure a profit or protect against loss in a declining market.

**Past performance does not guarantee future results.

Saving for a Child’s Future

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Smiling young 30s woman in eyewear looking at smartphone screen, feeling satisfied with fast secure online service, paying household bills taxes or insurance, managing budget, calculating expenses.Giving money to children or grandchildren is a planning strategy that benefits donors and beneficiaries. You can make annual gifts of up to $15,000 each to an unlimited number of recipients in 2021, free of gift and generation-skipping transfer tax, without using any of the lifetime gift exemption. But consider your options for holding gifted assets carefully.

Custodial Accounts

Custodial accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow you to set aside money for any activities that benefit your child. But custodial accounts may not be your best option. Your child will be able to access the funds at a young age — often 18 or 21, depending on state law — and may not have the maturity to use the funds wisely.

Crummey Trust

With a Crummey trust, you specify how the money in the trust should be used and when the beneficiary can receive the assets. If desired, the trust can continue for the beneficiary’s entire lifetime. However, to avoid forfeiting the gift tax annual exclusion, you must notify the beneficiary when you make an annual gift to the trust and give the beneficiary a limited amount of time (e.g., 30 days) to withdraw those funds. A Crummey trust allows more control over the funds, since a beneficiary may be reluctant to go against a donor’s wishes.

Retirement Savings Tips for Millennials

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Coworkers team at work. Group of young business people in trendy casual wear working together in creative office.If you’re a millennial, retirement may barely register in your consciousness. Between paying down student loans, trying to take that first step on the housing ladder, or other financial priorities, you may have little time to think much about your life 35 years from now.

However, you shouldn’t wait until later to start planning for retirement. Retirement success can depend greatly on getting an early start on saving for your future. Here are some basic tips that can help put you on the path to retirement security.

Live Within Your Means

Tip number one is to spend less than you make. That way, you will have some money left over from your paychecks for other purposes, such as saving and investing.

Be a Disciplined Saver

Save as much as you can as early as possible. Give yourself a savings target and stick to it. Decide, for example, to save 3% of your income for retirement and increase that percentage every year. It won’t be long before you are contributing the maximum allowed for an employer-provided retirement plan. Set aside some or all of any tax refunds, bonuses, and pay raises for an emergency fund and your retirement savings account.

Understand the Time Value of Money

Compounding is the magic ingredient when it comes to building your retirement nest egg. It is simply the process of earning money on your savings and then earning money on your earnings as well as your savings. The longer your money is invested, the greater the potential benefit from compounding.

Learn About Investments and Investing

Knowledge is power when it comes to investing. If you feel you lack the patience to study investing, see if your employer’s plan has a target date retirement fund you can consider.

Focus on Your Goal

Remember, saving and investing for retirement is a long-term goal. Have a plan and stick with it. Stay focused on your long-term goal of retirement security and don’t let short-term market changes knock you off course.

Tax Fraud vs. Tax Negligence: Understand the Difference

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Payment of tax, invoices, bills concept. Financial calendar, money, tax form on clipboard, magnifying glass, calculator, pen, folder. Payday icon. Vector illustration When running a small business, it is essential to understand the difference between tax fraud and tax negligence. In this article, we clarify these terms so that you can avoid unsavory business practices and stay on the right side of the law.

Let’s start with some basic definitions to understand the difference between tax fraud and negligence.

Fraud is wrongful or criminal deception that results in financial or personal gain.

Negligence is failure to take proper care in doing something.

Tax Fraud

The IRS defines tax fraud as “the willful and material submission of false statements or documents in connection with an application and/or return.” From this and the above definition, the key terms are “intended” and “willful.” Tax fraud is intentional. In other words, someone who commits tax fraud is willfully doing so.

Two primary examples of tax fraud are failing to file a tax return or filing a false return. If the IRS suspects tax fraud, they look for key factors:

  • Underreported income
  • Use of a false social security number
  • Falsified documents
  • Intentional failure to file or pay taxes

Of course, not everyone fails to pay taxes if committing intentional fraud. That’s where negligence comes into play.

Tax Negligence

The key point to focus on with negligence is that it is unintentional. For example, let’s say you’re completing your business taxes and accidentally typing in an incorrect amount by mistake. You weren’t intentionally or purposefully entering the wrong amount; you simply made a human error. While you were negligent in that act, you were not behaving fraudulently.

You can think of negligence as a careless error.

If the IRS suspects tax negligence, they will definitely let you know. A penalty will be added to the unpaid or misreported tax up to about 20% of the tax due, so you do not get off easy. In fact, tax negligence is more common than you think. The IRS estimates that about 17% of all taxpayers in the U.S. are non-compliant when filing taxes. In other words, it’s easy to make a mistake.

It’s easy to avoid tax fraud – pay your taxes promptly, honestly. Avoiding tax negligence may be more complicated since it can result from human error. To ensure that you’re not negligent when it comes to filing your small business taxes, employ the services of a qualified tax accountant or CPA. They are trained to find issues that could get you into trouble with the IRS and are up to date on the latest tax laws and regulations. A skilled accountant can save you time, stress, and money in the long run!