Author: dsauder

Preface: It’s what you learn after you know it all that counts. -John Wooden

2023 Tax Planning: Higher Education Credits

With school back in session, parents and students should look into tax credits that can help with the cost of college education. Credits reduce the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may receive a refund.

There are two credits available to help taxpayers offset the costs of college education. The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) may reduce the amount of income tax owed. Taxpayers who pay for higher education can see these tax savings when they file their tax returns next year.

 The American opportunity tax credit is:

• • • • Worth a maximum benefit up to $2,500 per eligible student.

• • • • Only for the first four years at an eligible college or vocational school.

• • • • For students pursuing a degree or other recognized education credential.

• • • • Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.

The lifetime learning credit is:

• • • • Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.

• • • • Available for all years of postsecondary education and for courses to acquire or improve job skills.

• • • • Available for an unlimited number of tax years.

To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must receive a Form 1098-T from an eligible educational institution. The credits are subject to income limits: to claim the full amount, income must be below $80,000 for single taxpayers ($160,000 married filing jointly). Taxpayers cannot claim either credit if income exceeds $90,000 ($180,000 married filing jointly).

In general, qualified tuition and related expenses for the education tax credits include tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools). The expenses paid during the tax year must be for: an academic period that begins in the same tax year or an academic period that begins in the first three months of the following tax year. For the AOTC but not the LLC, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study.

 The following expenses do not qualify for the AOTC or the LLC:

• • • • Room and board

• • • • Transportation

• • • • Insurance

• • • • Medical expenses

• • • • Student fees, unless required as a condition of enrollment or attendance

• • • • Expenses paid with tax-free educational assistance

• • • • Expenses used for any other tax deduction, credit or educational benefit

We wish you a successful school year. Please call our office if you have any questions related to education expenses and tax benefits.

Preface: “You are not buying a house, you are buying a lifestyle.”                        -Anonymous

Interest – Tax Breaks for Home Mortgage Interest

The Trump Administration Tax Cuts and Jobs Act (Tax Cuts Act) placed new restrictions on the home mortgage interest deduction, one of the most important tax breaks available for homeowners today. Because the potential for tax savings is so great, it may be useful to review the rules. As you’ll see, they are quite complex and full of nuances as well as opportunities.

Home acquisition. Like the vast majority of Americans, you generally can fully deduct the interest paid on a loan if the proceeds are used to buy or build a residence (a main home and one vacation home). This type of financing is called acquisition debt; it can’t exceed an aggregate of $1 million for all interest to be deductible, and must be secured by your home.

Under the Tax Cuts Act, a taxpayer may treat no more than $750,000 as acquisition debt ($375,000 in the case of married taxpayers filing separately) for tax years 2018 through 2025. The reduced amounts for acquisition debt do not apply to any debt incurred on or before December 15, 2017. Therefore, a taxpayer who purchased their home on or before December 15, 2017, may continue to deduct interest paid on the first $1 million of debt ($500,000 for a married taxpayer filing a separate return). The acquisition debt incurred on or before December 15, 2017, reduces the $750,000/$375,000 limit to any acquisition debt incurred after December 15, 2017.

Points. In general, any points you pay to the lender in the year you get a mortgage loan to buy your main residence are fully deductible. In order for points to be deductible, they must be paid from funds separate from loan principal at the time of closing. Points paid to refinance a mortgage on a principal residence are generally not deductible in the year paid and must be prorated over the period of the new loan. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.

Home equity loans. The Tax Cuts Act suspends the deduction for interest on home equity debt. Therefore, for tax years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity debt. However, home equity loan interest is still deductible in certain circumstances. For example, interest on a home equity loan used to build an addition to an existing home would be deductible if certain requirements are met. The suspension ends for tax years beginning after December 31, 2025.

Refinance. It may be beneficial to refinance acquisition debt for a lower rate of interest (or more favorable terms overall). The ($1million/$500,000) higher dollar limit continues to apply to any debt incurred after December 15, 2017, if it used to refinance existing acquisition debt as long as the refinancing does not exceed the amount of the refinanced debt. Therefore, the maximum dollar amount that may be treated as acquisition debt on the taxpayer’s principal residence will not decrease by reason of a refinancing. The exception for refinancing existing acquisition will not apply after:

1. 1. 1. 1. the expiration of the term of the original debt; or
         2. the earlier of the expiration of the first refinancing of the debt or 30 years after the date of the first refinancing.

Please do not hesitate to give us a call and set up an appointment to analyze your home financing situation in order to make the most of the home mortgage interest deduction.

Preface: “Those who are happiest are those who do the most for others.” – Booker T. Washington

Charitable Giving – Gifts of Appreciated Property

Tax complications, apart from questions of proof, do not ordinarily arise when you make a cash gift to a charity. However, complications can and do arise when you make a gift of appreciated property.

Appreciated property is property that has a current fair market value that is higher than your tax basis in the property. Basis is the yardstick for measuring gain or loss and usually is the original amount you paid for the property. However, special basis rules apply for inherited property, property acquired by gift, and property for which depreciation deductions are allowable, such as property used in a trade or business.

Your charitable deduction will depend on whether the appreciated property is ordinary income property or capital gain property. Ordinary income property includes business inventory and a capital asset, for example stock held for investment, that you owned for one year or less. Capital gain property includes capital assets that you owned for more than one year as well as certain real and depreciable property used in a business.

In general, your deduction for ordinary income property is limited to your basis. For example, you bought stock five months ago for $5,000. It’s now worth $8,000. An immediate contribution of the stock would give you a deduction of $5,000, not $8,000. Now suppose you bought the stock more than one year ago for $5,000 and again contribute it when it’s worth $8,000. Here, you normally would be able to deduct the full $8,000. In either case, you would not be taxed on the $3,000 in appreciation. That is a far better result than if you sold the stock, paid tax on the gain, and contributed the remaining proceeds to charity.

Unfortunately, not all contributions of appreciated capital gain property give you a deduction for the full value of the property even if held for more than one year. Your deduction is limited to basis when you contribute tangible personal property that is put to an unrelated use by the charity. For example, if you contributed a painting to a hospital and the hospital used it for display, the use of the painting would be unrelated to the hospital’s charitable purpose and your deduction would be limited to basis. On the other hand, a painting contributed to a museum and used for display by it would not be an unrelated use and your deduction would not be limited.

Special percentage limitations also come into play. If the property qualifies as capital gain property and it is real estate or stock, your deduction generally is limited to 30 percent of your adjusted gross income unless you make a special election.

As you can see, contributions of appreciated property to charities are a bit more complicated than run of the mill cash contributions. Also, the rules for contributions to private charities are somewhat different. If you have any questions about a contemplated contribution of appreciated property, please contact us so for a consultation to maximize the tax benefits of your generosity.

Preface: “It used to be that we imagined that our mobile phones would be for us to talk to each other. Now, our mobile phones are there to talk to us.” ~ Sherry Turkle

Guidance on Employee Use of Cell Phones

The Internal Revenue Service has issued guidance designed to clarify the tax treatment of employer-provided cell phones.

The guidance, issued as an IRS Notice, relates to a provision in the Small Business Jobs Act of 2010 that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

The guidance on the treatment of employer-provided cell phones as an excludible fringe benefit provides that when an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

Simultaneously with the Notice, the IRS announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for non-compensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.

Under the guidance issued, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related; as such arrangements are generally taxable.

If you have any questions regarding the use of cell phones or the tax treatment of other fringe benefits, please call our office at your  convenience.

 

 

Preface: A problem is the chance for you to do your best. – Duke Ellington

Independent Contractors v. Employees – An Update

Worker classification is a hotly contested audit issue that has caused anxiety for business owners all across the country. Whether a worker is classified as an employee or as an independent contractor can mean a substantial difference in the amount of employment taxes that the business pays. In addition, the new health care reform law imposes health care coverage requirements on an employer with more than 50 full-time employees, a fact which may tempt many employers to hire independent contractors instead. It is one thing to legitimately employ an independent contractor. However, an employer who misclassifies his employees either inadvertently or deliberately to minimize its employment tax or health care coverage responsibilities, may become subject to interest, penalties and tax liens. Such measures can bankrupt an otherwise successful business.

A business that is not currently under audit for employment taxes, but that wishes to correct its workers’ classification, may choose to enter the Voluntary Classification Settlement Program (VCSP). The IRS opened the program in 2011, and it is still in effect. Eligible businesses that enter the program are required to pay only 10 percent of the employment taxes that would have otherwise been due for the most recent tax year. In addition, there would be no interest or penalties, and the IRS would not conduct an employment tax audit of the business.

Additionally, the IRS has a voluntary settlement program to resolve worker classification issues called Classification Settlement Program (CSP).  This allows businesses and tax examiners to resolve worker classification cases as early in the administrative process as possible, thereby reducing taxpayer burden. In the CSP, examiners can offer a business under audit a worker classification settlement using a standard closing agreement developed for this purpose. The CSP procedures also ensure that the taxpayer relief provisions are properly applied. The IRS opened the program in March 1996. A taxpayer declining to accept a settlement offer retains all rights to administrative appeal that exist under the Service’s current IRS procedures and all existing rights to judicial review.

In light of the IRS’s predominantly pro-taxpayer initiatives, you may want to re-examine your worker classifications at this time. Even when potential employment tax liabilities are not overwhelming, it’s important to remember that misclassification can also cause pension plan difficulties. If you have discovered a misclassification and wish to determine whether you are eligible to participate in the VCSP, please do not hesitate to call our office for more information.

Preface: Life is really simple, but men insist on making it complicated. – Confucius

2023 Tax Planning: Benefits of Lowering Adjusted Gross Income

Effective tax planning to reduce your income can reduce your overall tax burden. Individual taxpayers may be able to reduce their taxable income through deductions if they meet the qualifications and income limitations. Saving for retirement and for future medical costs is an important way for an individual may achieve financial security and prepare to save for future expenses. This letter focuses on the background and tax benefits on reducing adjusted gross income by contributing to retirement plans, contributing to a health savings account, and opportunities for a student loan interest deduction.

 Traditional IRA. Any individual, regardless of whether or not covered under other qualified retirement plans, can establish an individual retirement account (IRA). Whether an individual is employed or self-employed, they may also take advantage of a variety of employer-sponsored retirement plans. These options not only provide security for the future, but also may provide opportunities for current tax savings. Traditional IRAs allow an individual with earned income to make tax-deductible contributions to a savings plan under which the gains and earnings are not taxed until they are distributed.

 Contributions to a traditional IRA are generally deductible on the taxpayer’s individual income tax return, to the extent that they do not exceed the lesser of the individual’s compensation for the year or the maximum contribution limit for the year and subject to income limits. In addition, nondeductible contributions from after-tax income may be made to traditional IRAs.  For 2023, total contributions to all of a taxpayer’s traditional and Roth IRAs cannot be more than the lesser of $6,500 ($7,500 if they are age 50 or older) or their taxable compensation for the year. The prior maximum age limitation of 70 ½ to contribute to an IRA ended effective for contributions after December 31, 2019.

 SEP Plan. A SEP is a type of IRA for small business owners or self-employed individuals. A SEP IRA allows the employer to make contributions to the accounts set up for employees. Self-employed individuals choosing a SEP must include all employees who satisfy the following requirements: at least 21 years of age; were employed during any three of the preceding five years; and earned at least $750 in the current year.

 Contributions to a SEP plan are tax-deductible and earnings are not taxable until withdrawal. One advantage of the SEP IRA is the higher contribution limit. For 2023, employers can contribute the lesser of up to 25% of income (limited to $330,000) or $66,000.

 SIMPLE Plan. Any employer that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. Self-employed individuals who received earned income from the taxpayer and leased employees are taken into account for purposes of the 100-employee limitation.

Employers must also make contributions whether or not an employee elects to defer a portion of their income to the plan. Contributions are tax deductible and investments grow tax deferred until the owner is ready to make withdrawals in retirement. For 2023 an employee may defer up to $15,500. If the individual age 50 or over, there is a $3,500 catch up contribution allowed, for a total of $19,000.

 Health Savings Account (HSA). Health savings accounts (HSAs) are available for individuals who have a high deductible health plan and may be funded by the individual or the individual’s employer. The benefits of an HSA include:

• • • • taxpayers can claim a tax deduction for contributions you or someone other than your employer make to your HSA,

• • • • contributions to your HSA made by your employer may be excludable from income, and

• • • • the contributions remain in your account until you use them.

 For 2023, the maximum contribution to an HSA is the lesser of: the annual deductible under the individual’s high deductible health plan; or $3,850 for an individual with self-only coverage and $7,750 for an individual with family coverage.

Student loan interest deduction. Interest paid by an individual taxpayer during the tax year on any qualified education loan is deductible from gross income in calculating adjusted gross income. The student loan must be incurred by the taxpayer solely to pay qualified higher education expenses. The maximum deductible amount of interest is $2,500, but the deduction is phased out or reduced based on the taxpayer’s modified adjusted gross income.

If you’d like to evaluate the tax advantages of retirement plans, health savings account, or education benefits could apply to your individual income tax situation – please call us at your earliest convenience to review potential tax plans for you to reduce your 2023 taxable income or tax liability.

Preface: The man who is a pessimist before 48 knows too much; if he is an optimist after it, he knows too little. — Mark Twain

Famous Twain Quotes 

Sam Clemens was never at a loss for words. Here you’ll find some of his most famous quotes‚ including the ones we inscribed on the walls of our museum center. While we continue to build our database‚ you can also check out twainquotes.com‚ a site lovingly created by Twain House friend Barbara Schmidt. Here‚ you’ll not only find quotes‚ but also hundreds of primary materials on Mark Twain‚ such as interviews and articles from newspapers and other media of the era.

Famous Twain Quotes

Preface: “You must welcome change as the rule, but not as your ruler.” – Denis Waitley

The Four Principles of Change Management

No organization can afford to stand still. There are always new challenges to meet, and better ways of doing things. However, every change you need to make should be planned and implemented with care, otherwise it could end up doing more harm than good!

That’s where change management comes in. It’s a structured approach that ensures changes are implemented thoroughly and smoothly – and have the desired impact.

In this article, we explain how you can enact positive and productive change in your organization using four core principles of successful change management.

Leadership Workshop September 27th | In Tides of Change Management, Don’t Forget Your OARS!

Sauder & Stoltzfus and Koble Systems invite you to join Steve Erb, MBA, and McKenzie Walker, Psy.D. from True Edge Performance Solutions on September 27th. Get ready to enhance your leadership skills! Learn how to reduce conflict, have more effective discussions and move your transformation initiatives forward!

• What is Change Management, and why is it so important?
• What are the pitfalls, and why is there resistance to change?
• What are techniques to be more effective in leading change and transformation in your organization?

Breakfast is included. Seating is limited.

Click here for details and to register   

Preface: The four most expensive words in the English language are, ‘This time it’s different.’ –Sir John Templeton

The Speculative Risks of the IRS Employee Retention Credit

Credit: Donald J. Sauder, CPA | CVA

The Employee Retention Credit is an IRS tax credit that gives businesses substantial relief measures for Pandemic Era financial business challenges. With the Employee Retention Credit eligibility, employers can obtain up to $26,000 of tax credit per employee. The Employee Retention Credit is also not taxable because it is a credit, making it duly appealing. Although the Employee Retention Credit applies to wages and benefits disbursed between March 2020 and December 2021, the IRS is giving businesses until April 15th, 2025 to submit their tax data for tax credit refunds. Those extra months are raising growing and valid concerns for a Pandemic Era stimulus plan that has generated a staggering amount of misleading marketing to businesses. Who qualifies? Even start-ups.

The ease of obtaining this tax credit has also resulted in some fascinating economic data. According to reports from Danielle DiMartino Booth from Quill Intelligence, who talks with clients and business owners daily, the employee retention credit data research leads to several surprising conclusions. While the Employee Retention Credit has resulted in a cottage industry of consultants marketing services to work on obtaining the $26,000 per employee credit for businesses, most companies who needed the money obtained it quickly previously.

The Employee Retention Credit is the worse kept secret in ongoing American stimulus packages. Employee Retention Credit payments were expected to peak in December of 2022 at $25.0 billion in stimulus for the month. Yet it continues. For June 2023, $29.0 billion was paid out to business owners, and for July 2023 another $33.0 billion. This is the annualized basis of more than $400.0 billion of business stimulus on an annualized basis. So, is this the reason why service spending is strong during the summer of 2023 because business owners are spreading the cheer while bilking Uncle Sam for up to 1.5% of GDP stimulus on an annualized basis?

The IRS is now pleading with the business community to not apply for the ERC unless you qualify.

Quoting Journal of Accountancy -https://www.journalofaccountancy.com/news/2023/jul/irs-commissioner-signals-new-phase-erc-compliance-work.html

The IRS and Treasury are looking at new ways to fight rampant fraud in employee retention credit (ERC) claims, including possible congressional action to move up the claim filing deadline and stricter oversight of tax preparers, IRS Commissioner Danny Werfel said Tuesday at a special roundtable session of tax professionals in Atlanta.

Werfel stated that, having cleared the backlog of valid ERC claims, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.

According to Werfel, the IRS has increased audit and criminal investigation work on these claims, looking into both promoters and businesses filing dubious claims. The IRS has trained auditors to examine the claims that pose the greatest risk of fraud, and the IRS Criminal Investigation division is identifying promoters of fraudulent claims, he said.

“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel said. Instead, the IRS is receiving more and more questionable claims, which the IRS is addressing by intensifying its compliance work, he said.

Businesses typically can file claims for the ERC until April 15, 2025. But those extra months are raising concerns for a credit that has generated a staggering amount of misleading marketing, Werfel stated.

Promoters making aggressive marketing claims are likely taking clients from tax professionals who are handling ERC claims correctly, Werfel said. The IRS advises businesses to work with a tax professional rather than rely on the word of promoters.

“Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations,” Werfel said.

Further, the chances are rising above 80% that avaricious business owners who have obtained this tax credit have an audit challenge ahead, and should be prepared to repay the entire credit. If you have obtained the employee retention credit, you may want to keep your cash reserves strong for years, because in a moment of greatest financial vulnerability, the IRS could ask for the proceeds back. []

Preface: “Make your vocation your vacation.  That is the secret to success.” – Mark Twain

How Taking a Vacation Improves Your Well-Being

Making sure your employees regularly take time off is key to creating a more sustainable workplace. Research shows that taking time off benefits employees in three ways: 1) Mentally. Taking a vacation provides greater opportunity for rest and better sleep (both quantity and quality), which can help unclutter your mind to boost creativity. 2) Body. Relaxing on vacation can reduce the levels of your stress hormones and allow your immune system to recover, making you less prone to get sick. 3) Soul. While it sounds hokey, answers to life’s big questions — like “What do I really want?” or “What’s most important to me?” — are more likely to come to us when there is some space and stillness………

…………We all know that taking vacation is good for you, but it’s less clear that both employers and employees understand exactly just how good it is for you, given that every year more than half of Americans give up paid time off. According to the U.S. Travel Association, in 2018, this amounted to 768 million days of unused vacation time, with more than 30% of it forfeited completely. Add to this, the fact that over 50% of managers feel burned out, taking vacation (and actually unplugging) has never been more important.

How Taking a Vacation Improves Your Well-Being