Author: dsauder

Preface: I believe the Bible is the best gift God has ever given to man. – Abraham Lincoln

Estate and Income Tax Planning – Gift Tax Exclusions

Maybe you’re like most people, you don’t like to think about planning your estate. But, it’s an important part of ensuring the financial security of your loved ones. One of the more common tools used in estate planning — and one to which everyone should at least give careful consideration — is a program of making gifts. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth.

The 2017 Tax Cuts and Jobs Act doubles the basic exclusion amount for purposes of federal estate and gift taxes and the exemption amount for purposes of the generation-skipping transfer (GST) tax from $5 million to $10 million, before adjustment for inflation, for the estates of decedents dying and gifts and generation-skipping transfers made after 2017 and before 2026. For the estates of decedents dying and gifts made in 2023, the basic exclusion amount is $12.92 million, with a corresponding applicable credit amount of $5,113,8004. The maximum estate and gift tax rate is 40 percent.

Absent the immediate financial needs of a gift recipient, the main motivation for making large gifts during your lifetime rather than waiting to pass on your wealth at death is to remove the future appreciation from your eventual taxable estate. There is a certain degree of risk in this strategy since your donee receives a tax basis equal to what you paid for the asset while your heirs will receive a stepped-up tax basis equal to the asset’s value at your date of death. As a result, the loss of stepped- up basis and higher future tax rates on capital gains may diminish the benefits of current gift giving. Nevertheless, the planning consensus is that getting future appreciation out of a taxable estate still trumps worries about any potential tax issues for your donees if and when they eventually sell the gifted assets.

You can give away up to an “annual exclusion amount” per recipient per year free of gift tax and free of any future offset against any exclusion amount used to lower future gift or estate taxes. For 2023, the annual exclusion amount is $17,000.

 There is a great deal of flexibility in the types of property that can be gifted. Gifts that qualify for the $17,000 annual exclusion can be made in money, property, such as stocks or bonds, or even a life insurance policy, so long as the recipient has the present right to possess or use the property. The gift may be in trust if the terms of the trust give the recipient the immediate right to the property or income from the property.

 You can give up to $34,000 per recipient per year if you are married and your spouse consents to “split” your gifts. This is useful for spouses who do not own an equal amount of property. The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away tax free. To take advantage of “gift splitting,” both spouses must be U.S. citizens or residents. The consent must be given on a gift tax return, so a return must be filed even if no gift tax is due. Don’t underestimate how an annual gift-giving plan using only the $34,000 split gift exclusion per donee can facilitate the tax-efficient transfer of family wealth.  

As noted above in discussing large gifts, but equally applicable to smaller gifts, it is important to remember that when you make a gift, the recipient must take your basis in the property. This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when he or she received it. In contrast, if property is transferred to another at your death through your estate (and whether or not estate tax is owed), the recipient can use the value of the property at that time to measure any gain on the sale of the property. Consequently, choosing the right property to achieve your goals is an important aspect of any gift-giving program.

Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses. You can pay an unlimited amount for these expenses tax free so long as the payments are made on behalf of the done and are paid directly to the medical services provider or educational institution. The person you benefit does not need to qualify as a dependent for tax purposes. Any medical expenses, however, must not be reimbursed by insurance, to either you or to the beneficiary.

If used properly, a program of gift giving can benefit everyone involved. If you have any questions about the best way of using gifts as part of your overall financial plan, please call us for a referral to an estate planning expert. 

Preface: There is nothing new in the world except the history you do not know. – Harry S. Truman

History of F.W. Woolworths Stores

The F. W. Woolworth Company (often referred to as Woolworth’s or simply Woolworth) was a retail company and one of the pioneers of the five-and-dime store. It was among the most successful American and international five-and-dime businesses, setting trends and creating the modern retail model that stores follow worldwide today.

The first Woolworth store was opened by Frank Winfield Woolworth on February 22, 1879, as “Woolworth’s Great Five Cent Store” in Utica, New York. Though it initially appeared to be successful, the store soon failed.

Starting again….

When Woolworth searched for a new location, a friend suggested Lancaster, Pennsylvania. Using the sign from the Utica store, Woolworth opened his first successful “Woolworth’s Great Five Cent Store” on June 21, 1879, in Lancaster, PA.

https://en.wikipedia.org/wiki/F._W._Woolworth_Company

Learning lessons from history — In just 41 days from normal stock trading activities on Wall Street, after 99 years and two months at the heart of the High Street, The Woolworth stores closed their doors for the last time as the Great Recession began in 2008………

Read the F.W. Woolworth Business History here.

Preface: People show what they are by what they do with what they have – Anonymous

Check 21 – Proving Tax Deductions Without Cancelled Checks

You likely have noticed the growing trend towards remote deposit of checks. Owing to the increasing sophistication of smartphones, you can now photograph a customer check written out to you and digitally send it to your bank for deposit in your bank account.

All this and more became possible after the Check Clearing for the 21st Century Act (Check 21) became effective several years ago. What it meant for most consumers then is that most banks discontinued the practice of retaining a paper version or copy of your checks. Check 21 allowed banks to truncate each of your checks, create a new electronic negotiable instrument called a substitute check, and then destroy the originals.

This industry change has important tax consequences for taxpayers who previously used checks to substantiate their expenses or charitable contributions. But the bottom line is that Check 21 allows you to use a substitute check as proof of payment because it is legally the same as the original check. The IRS, therefore, must accept your substitute check as proof of payment.

 Banking Online

Many of you may have switched to online banking. If so the IRS will accept image statements of substitute checks as proof of payment. If, however, an IRS auditor is suspicious that the image statement is not genuine, you may still be requested to order the actual substitute check from your bank. This will be a rare instance, however, and will likely occur only if you are audited.

As an additional precaution, we suggest that you download and print out your bank statements at the end of the year. That way, even if you are audited several years from now, you’ll have a record that’s easy to access.

If you still rely on paper bank statements and paper copies of your checks, keep them in good order. The IRS will still accept bank statements that contain images of cancelled checks and/or substitute checks. To be used as proof, an account statement must show check number, amount, payee’s name, and the date the check was posted.

In order to keep track of your payments more easily for tax purposes, you should also continue to or begin to maintain a careful check register. That way, you’ll know on which bank statement to look if you are ever audited.

Preface:  “Friends and neighbors complain that taxes are indeed very heavy, and if those laid on by the government were the only ones we had to pay, we might the more easily discharge them; but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.”   –Benjamin Franklin:

The Changing Scenes of Taxes

Credit: Jacob M. Dietz, CPA

Tax laws and regulations come and go. If a taxpayer earned the same income five years in a row, he might not pay the same taxes each year. What does the future hold for taxes?

Some of the changes are hard to predict. Congress and the president can change tax laws, and they can even make changes retroactive. Currently the presidency and Senate are controlled by one political party, and the House of Representatives is controlled by another political party. Since the parties often disagree, that makes it unlikely, but not impossible, for major new tax legislation to pass while the government is divided.

Even without major new legislation, however, they might pass minor legislation that changes the code. Also, there are some changes that are already scheduled to happen without requiring new legislation.

Tax Brackets and Standard Deductions

One example of a change that happens without major legislation is that the tax brackets change. The federal income tax uses different percentages for income you earn. The lowest taxable amount is taxed at 10%, then the next amount is taxed at 12%, then 22%, then some other percentages all the way up to 37%. Even a taxpayer that earns enough to pay the 37% top tax rate will still have some of his income taxed at the lower 10% amount.

Those tax brackets have increased for 2023 from 2022. Taxpayers can pay the lower tax percentages on a higher amount of earnings. For example, in 2022 a single person was taxed 10% on their first $10,275 of taxable income after deductions. For 2023, that 10% bracket extends up to $11,000. A married filing jointly couple in 2022 would encounter the 37% bracket at $647,850 or more of taxable income. For 2023, a married filing jointly couple will not pay the 37% tax until their taxable income is $693,750 or more.

The standard deduction for taxpayers that do not itemize their deductions also increased for 2023. Married filing jointly taxpayers may now shield $27,700 of their income from taxes using the standard deduction instead of $25,900. Single taxpayers may shield $13,850 instead of $12,950.
Fortunately, there is no pop quiz for you to answer at the end of this article regarding these dollar amounts. Just remember that with these bracket and standard deduction increases, a taxpayer that earned the exact same amount of money in 2023 as 2022 could end up paying less federal tax.

Ticking Tax Trap

Have you ever set a ticking alarm clock in the evening to wake you up in the morning? If so, then you may know the experience of setting in motion something that will happen in the future, then blissfully ignoring it until you get a rude awakening.

Sometimes the tax code includes ticking tax traps. One such “trap” was included in the Tax Cuts and Jobs Act, which was signed in December 2017. That bill scheduled a provision to take effect in 2022. The provision prohibits taxpayers from immediately deducting research and experimental expenses but instead requires them to capitalize and then amortize (expense) the research and experimental expenditures over 5 or 15 years, depending on the details. At the time of this writing there is still a slight possibility that Congress will pass a law to throw this alarm clock out the window and allow immediate expense, but as time goes on it is unlikely that this will happen retroactively for 2022.

Some people after waking up to an alarm try to lessen the challenge of waking up by consuming coffee. I don’t know that drinking coffee will help much with the tax bill that some taxpayers will face by capitalizing and amortizing research and experimental expenses. What may be more effective, however, for taxpayers that encounter this tax trap is a conversation with their tax accountant about the research and development credit. That credit can reduce taxes.

Sunsetting Provisions

Sometimes tax code changes have sunsetting provisions. The change is only to last for a certain amount of time, and then it expires. 2025 is a big year for sunsets, with over 40 provisions set to expire.

Although we just covered a tax increase that was listed in the Tax Cuts and Jobs Act, there were also some significant taxpayer advantages included in that act. One huge tax cut in it was the 20% Qualified Business Income Deduction (QBID). That tax cut is scheduled to sunset at the end of 2025. Congress and the president could act to keep the 20% QBID, but absent action there could be a built-in tax increase as the 20% QBID sunsets.
The complexities and full details of the 20% QBID are beyond the scope of this writing. In a nutshell, it allows business owners to protect 20% of their business income from taxes. If that provision is allowed to expire, business owners might see a significant tax increase even if they make the same amount of money.

If you are a business owner that is currently taking advantage of the 20% QBID, you may want to start having conversations with your tax accountant about how to plan for the scheduled sunset of this deduction.
Some other sunset provisions that could increase taxes at the end of 2025 are changes to the child tax credit and changes to the alternative minimum tax (AMT.)

Climbing Down the Ladder

Bonus depreciation allows taxpayers to accelerate their depreciation on certain asset purchases. For various years, including 2022, bonus depreciation was 100%. Taxpayers could completely expense through bonus depreciation certain asset purchases.

There is a ladder that taxpayers climb down each year reducing it by 20% until it hits zero. In 2023 bonus is 80%, in 2024 it drops to 60%, in 2025 it goes to 40%, in 2026 it falls to 20% and in 2027 the bottom of the ladder touches the earth and there is no more bonus.

It’s possible that the president and Congress will increase bonus in the future. Taxpayers may also still use 179 expense on qualifying items to get the immediate deduction.

State Taxes

In addition to federal taxes, most states have their own income tax. State taxes do not need to follow federal rules. I will mention two notable changes that are occurring in Pennsylvania taxes. If you are not from Pennsylvania, you can ask your accountant if there are notable changes in your state.
Starting in 2023, Pennsylvania’s personal income tax rules will follow federal rules for section 179 expense, which allows for the immediate expensing of qualified business assets. In the past, Pennsylvania allowed 179 expense but significantly limited it. Also effective in 2023, Pennsylvania now allows the like kind exchange deferral.

New Every Morning

Tax rules change. Sometimes taxes go up, sometimes they go down. Prudent accountants watch these changes and sometimes take action to try to reduce taxes based on the changes in the law. Regardless of the tax rate when the alarm goes off in the morning, the Lord is still merciful.

Lamentations 3:22-23
22 It is of the LORD’s mercies that we are not consumed, because his compassions fail not.
23 They are new every morning: great is thy faithfulness.

Preface: “Life is either a daring adventure or nothing at all.” —Helen Keller

Tax Deductions For Company-Sponsored Employee Gatherings

Retreats and company meetings are an important component of a successful business. They are opportunities for employees and managers to gather together, discuss business strategies, develop new product ideas, and plan future activities. Retreats and other off-site meetings are increasingly an annual ritual of corporate culture. They are also expensive and businesses seek to deduct as many of the costs as possible.

Traditionally, the IRS has taken a very strict approach to the deductibility of expenses from company meetings. If the meeting is deemed extravagant, the costs of holding the meeting will not be deductible as ordinary business expenses and may be treated as income to the employees. The IRS takes special interest in business meetings that are held at resorts, on cruise ships and outside the U.S. It is very good at denying these costs as excessive and taxpayers do not have a good track record of prevailing in the courts.

A few years ago, however, an encouraging tax case was handed down that continues to guide tax courts and taxpayers in determining the ability of taxpayers to effectively mix business with pleasure and deduct both. There, a federal appeals court found that a company-sponsored fishing trip to a five-star resort in a Canada province was a legitimate cost of doing business. The IRS had determined otherwise and a federal district court agreed. Undeterred, the company appealed and won.

The fishing trips were a longtime company tradition. For more than 20 years, the company brought managers, sales people and factory workers from across the country to its home office for a three-day meeting. At the end of the meeting, almost all of the participants traveled, on the company dime, to a resort in Canada for three days of fishing.

Fishing was not the only thing on the agenda. The company showed that over the three days, the participants discussed the business’ performance, its sales, activities of competitors, and brainstormed ideas for new products. Testimony also revealed that while employees were not required to attend the fishing trips, they were strongly encouraged to attend by their managers and many felt it would be disloyal to the company not to go. Some employees testified they did not like fishing.

The appeals court was convinced that the fishing trips were not corporate junkets. Even though they were all-expense paid trips to a five-star resort, employees viewed them more as mandatory company meetings than as vacations. The court allowed the company to deduct the full cost of the trips.

Of course, some of the facts were unique to the company. The appellate court even took time to note its admiration of the company’s pro-employee business philosophy. Not all employers might fit that bill. However, the decision does break with the traditional IRS approach and opens the door to challenging adverse determinations.

We can help you anticipate what expenses will be deductible and which expenses may be challenged. Careful planning also avoids the risk of having the costs of the meeting treated as income to your employees. So before you pack your bags, give us a call.

Preface: “Life is 10% what happens to us and 90% how we react to it.” —Charles R. Swindoll

Mr. Singer and his Sewing Machine

Isaac Merritt Singer (1811-1875) had a dream: to become a great actor on the stage, performing Shakespeare to accolades.  For almost the first forty years of his life, he failed to achieve any success in this pursuit.  Continually tinkering with machines, he just wanted to be rich.  He finally struck gold with a workable sewing machine in the 1850s, in large part due to the efforts of the partner he hated.  The machine, one of the most important inventions of the century, changed lives around the globe.  

For more on the business history of the Singer Company

Preface: Our rewards in life will always be in direct proportion to our contribution. — Earl Nightingale

Mapped: The Growth in House Prices by Country

Mapped: The Growth in House Prices by Country

Global housing prices rose an average of 6% annually, between Q4 2021 and Q4 2022.

In real terms that take inflation into account, prices actually fell 2% for the first decline in 12 years. Despite a surge in interest rates and mortgage costs, housing markets were noticeably stable. Real prices remain 7% above pre-pandemic levels.

In this graphic, we show the change in residential property prices with data from the Bank for International Settlements …see global visual on above link.

Preface: All who have accomplished great things have had a great aim, have fixed their gaze on a goal which was high, one which seemed sometimes impossible. — Orison Swett Marden

How to Survive a Recession and Thrive Afterward

…………..In their 2010 HBR article “Roaring Out of Recession,” Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen found that during the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they studied fared particularly badly: They went bankrupt, went private, or were acquired. But just as striking, 9% of the companies didn’t simply recover in the three years after a recession—they flourished, outperforming competitors by at least 10% in sales and profits growth. A more recent analysis by Bain using data from the Great Recession reinforced that finding. The top 10% of companies in Bain’s analysis saw their earnings climb steadily throughout the period and continue to rise afterward. A third study, by McKinsey, found similar results………….

…….Companies with high levels of debt are especially vulnerable during a recession, studies show. ……. Overall, the more housing prices declined, the more consumer demand fell, driving increased business closures and higher unemployment. But the researchers found that this effect was most pronounced among companies with the highest levels of debt. They divided up companies on the basis of whether they became more or less leveraged in the run-up to the recession, as measured by the change in their debt-to-assets ratio. The vast majority of businesses that shuttered because of falling demand were highly leveraged……https://hbr.org/2019/05/how-to-survive-a-recession-and-thrive-afterward

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Preface: Every street is paved with gold. – Kim Wo-Choong

Equipping Employees with a Company Car

Buying or leasing an auto for the use of your employees ought to be an uncomplicated transaction from the tax viewpoint, but it’s not. The plain fact is that the company auto creates more tax complications than almost any other type of business asset.

That’s why it’s imperative for you to formulate an overall strategy with tax advisor, one that yields the maximum in tax savings, while keeping your paperwork and administrative burden at a minimum. This strategy will take into account the special rules that apply to your deductions for the company auto, the tax consequences of an employee’s personal use of a company auto, and the payroll implications of such personal usage.

As a general rule, your company can claim depreciation deductions for the full cost of a purchased company auto, usually based on a five-year “life” but also limited each year by so-called “luxury auto caps.” Alternatively, if your company leases instead of buys, it can fully deduct its lease cost (again, up to certain “luxury vehicle limits”). In either case, the value of the employee’s personal use of the car is generally treated as fringe benefit compensation income.

The employee’s personal use of the company auto creates a separate category of tax complications. That’s because the value of the employee’s personal mileage must be treated as noncash fringe benefit income that is taxable to the employee, but not deductible by the company (its deductions consist of depreciation or lease deductions and operating costs).

There are four separate ways to value employee personal mileage, and each of them carries its own rules and conditions. Three of the four methods require detailed record keeping of business and personal usage.

The fringe benefit value of personal use of the company auto generally is subject to federal income tax withholding and FICA tax. However, your company can elect not to withhold federal income tax if it properly notifies affected employees of this choice.

Furthermore, the value of an employer-provided vehicle may be excludable as a working condition fringe to the extent the employee would be allowed a deduction for depreciation or as a trade or business expense if the employee paid for the use of the vehicle. In addition, a company can choose to treat the company car as having been used entirely for personal travel. This option will greatly simplify the company’s record keeping burden, but usually will create extra taxable income for your employees.

Although the rules for company autos are complex, we can show you how to minimize their impact on your bottom line, on your payroll department, and on your employees.

Preface: Don’t wish it were easier; wish you were better. Don’t wish for fewer problems; wish for more skills. Don’t wish for less challenges; wish for more wisdom. — Jim Rohn

2023 Tax Planning: Educational Savings Plans

If you are a parent with young children, you are faced with many rewards and challenges. One of which may be saving for the high cost of a college education for them. However, there are two tax-favored options that might be beneficial: a qualified tuition program and a Coverdell education savings account.

In addition, you might also want to invest in U.S. savings bonds that allow you to exclude the interest income in the year you pay the higher education expenses. Each of these options has their benefits and limitations, but the sooner you choose to make the investment in your child’s future, the greater the tax savings.

Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans, provided by colleges and groups of colleges allow taxpayers to prepay a student’s qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors. 

529 plan distributions are tax-free as long as they are used to pay qualified education expenses for a designated beneficiary. As much as $10,000 of distributions may be used for enrollment at a public, private, or religious elementary or secondary school. Qualified higher education expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense.

For any distribution made after 2018, qualified education expenses of 529 plan include certain expenses associated with registered apprenticeship programs and qualified student loans. Apprenticeship program expenses includes expenses for fees, books, supplies, and equipment required for the participation of the designated beneficiary in an apprenticeship program registered and certified with the Department of Labor. Qualified education expenses of 529 plans include up to $10,000 of principal or interest on any qualified student loan of the designated beneficiary or a sibling (brother, sister, stepbrother, or stepsister).

Under the SECURE Act 2.0 of 2022, beginning in 2024 the amounts held in a 529 plan of a designated beneficiary at least 15 years may be rolled over to a Roth IRA of the same beneficiary and excluded from gross income. The distribution cannot exceed the aggregate amount contributed to the 529 account (including earnings) made in the previous five years. Also, there is an aggregate lifetime limit of $35,000 on such rollover distributions with respect to the designated beneficiary. The rollover distribution counts toward the annual Roth IRA contribution limit ($6,500 for an individual under age 50 in 2023). 

Coverdell education savings accounts. Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals. 

Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period. 

U.S. Savings Bonds. If you redeem qualified U.S. savings bonds and pay higher education expenses during the same tax year, you may be able to exclude some of the interest from income. Qualified bonds are EE savings bonds issued after 1989, and Series I bonds (first available in 1998). The tax advantages are minimized unless the redemption of the bonds is delayed a number of years, therefore some planning is required.

The exclusion is available only for an individual who is at least 24 years of age before the issue date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased by children or bonds purchased by parents and later transferred to their children, are not eligible for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually eliminated for high-income taxpayers.

Educational assistance. Payments made by an employer after March 27, 2020 and before January 1, 2026, to either an employee or a lender to be applied toward an employee’s student loans are excludable. The payments can be of principal or interest on any qualified education loan. An employer may pay up to $5,250 each tax year toward an employee’s student loans, and that amount would be excludable from the employee’s income. The $5,250 cap applies to the new benefit for student loan repayment assistance and other educational assistance already provided, such as for tuition, fees, and books. Any excess of benefits is subject to income and employment taxes.

Of course, in planning for higher-education costs, parents may also choose to use funds from an individual retirement account or a traditional form of savings. In addition, higher education costs may be supplemented with scholarships, loans and grants. However, having a viable plan as early as possible in a child’s life will make maximum use of a family’s financial resources and may provide some tax benefit. If you would like to explore how these opportunities can work for you and have us fully evaluate your situation, please do not hesitate to call.