Is Your Business Remote-Friendly?

As ready as we are to see the end of the Covid-19 pandemic, there are some changes we’ve made as a result of it that we’ll want to keep. One of these is remote work.

During those early days of the pandemic, when everyone was sent home early and forced to work from their kitchen tables, many of us assumed it would be temporary. In a few weeks or months, we would return to our workplaces and things would go back to normal. But we soon realized that this would be our new normal. It became clear that unless your business was an essential service — health care or grocery stores, for example — it could probably be run remotely, from any place that had an internet connection.

While we’re happy to be able to leave our homes again and have some of that old normalcy returning, a great many of us have decided that working from home — or anywhere, for that matter — isn’t something we’re ready to give up. Or, at least, we’ll still want the flexibility to do it some of the time. When the genie is out of the bottle, it’s hard to put him back in again.

Remote work has definitely made my life easier, and it also has given a boost to my efforts in recent years to get my clients to transition to digital accounting operations. For years, I’ve been encouraging clients to transition their QuickBooks or other applications away from desktop computers and into the cloud. The pandemic was a boon to cloud operations.

If you’re still convinced that you need in-house, desktop accounting software, consider the following:

  • A business’ owner can log into an online application securely from anywhere, via laptop computer, tablet, or smartphone. (Think poolside, your back porch, or your favorite restaurant.)
  • With an online app, you are no longer bound by geography for hiring, which enables you to hire the best talent possible, not just the best talent in your local area. Your bookkeeper, accounts payable, accounts receivable, and other vital staff can be located anywhere.
  • An online accounting application, such as QuickBooks Online, can integrate with hundreds of other applications such as timesheets — bye-bye, time cards! Employees can log on via cell phones, providing employers with immediate information about start and stop times, locations, and work performed.
  • Having access to online information increases your chances of looking at it. Business owners often get so busy that they don’t even look at what charges are going through their accounts, and when they do, it’s often so overwhelming that they don’t question it. But when you have access at the tip of your fingers, you’re more likely to keep closer tabs on your revenues and spending, and make wiser decisions because of it.
  • Moving your operations to the cloud could actually improve your business. With all the technological tools becoming available every day, you may actually identify opportunities to blaze new trails in your work. You could discover a feature that would speed up a process or give customers more choice, for example. Once you start, you’ll find you’re constantly learning something new and staying ahead. Meanwhile, the pandemic has revealed that those without online presences are being left behind.
  • NO MORE PAPER FILING! Need I say more?

Many owners of small, local businesses still operate under the assumption that they have to continue their place-based, desk-bound operations to be successful. They’re resistant to the change, concerned with privacy and the data breaches they hear about on the news. And make no mistake, data security is a real concern. But there is no such thing as 100% secure. Even desktop applications are prone to cybersecurity threats, not to mention hardware failures or computer losses or even office fires.

Remember that legitimate, reputable apps like QuickBooks utilize strict security protocols, including password protection. As long as you take these measures to heart and make using them a habit, you’ll be as secure as you can possibly be these days — and you’ll be setting yourself up for a more rapid response if a breach were to occur, thanks to cloud security programs designed to track and guard against threats.

Yes, online accounting apps are usually more expensive. I’m not in any way paid to promote these applications, and I understand the concern about spending more money, particularly in a time when businesses of many kinds have been hard hit by the pandemic. But as I pointed out earlier, it’s an investment in convenience, not to mention a host of features you may have been missing before that could actually grow your business. Plus, by making the transition to online platforms, you could be setting yourself up to pay less on in-office operations, and maybe even the office altogether — and that can save you a great deal of money.

If you’re convinced it’s time to make the switch to an online accounting program but don’t know where to start, contact us! There are so many applications available these days that it can take some time to select the right one for your needs. We can make recommendations based on your business and the features you’ll need most. We can also run comparisons for you on the cost and effort of using certain paper-based or desktop-based features versus cloud-based ones. We can even offer guidance when it comes to taking credit cards or other internet-based processes, such as invoicing. It can also take time to upload your existing data into an online program, and it doesn’t always go smoothly, so having an accountant take charge of this process can be a big help.

Now that tax season is behind us, schedule a mid-year review with us to go over your existing accounting system and discuss methods for moving more of it online, adopting more tools, and adding more features and capabilities. Getting away from paper documents and place-based operations is something I’m very passionate about, and I’m happy to work with business owners to make this transition a smooth one.

Many entrepreneurs today have an almost secret dream to travel the world and work part time, and we’re getting closer to that reality every day. Remote work is here to stay, so there’s no time like the present to make your business remote-ready.

remote work

Making Sense of the Child Tax Credit

If you’re like me, your head is spinning from the constant changes coming out of Washington, especially as they pertain to our finances. A lot of this news is good, but it takes some time to get my head around it … and I’m a CPA. My goal is to help you wrap your head around today’s shifting tax laws and take steps to ensure you have the most positive outcomes possible.

Recently I shared some insights into the economic stimulus payments, and shortly after I shared that piece, a third stimulus payment went out as part of the American Rescue Plan of 2021(ARP).

Also part of the ARP is a major change to the Child Tax Credit, which some experts predict could have a massive impact on child poverty. But its details are somewhat complex, so I’ll try to break it down to the basics.

Here’s a basic overview of the ARP’s new Child Tax Credit:

  1. Starting with the tax year 2021, the Child Tax Credit increases from $2,000 to $3,600 for each child 5 and under, and $3,000 for each child 6 and up.
  2. The new law extends the credit to families with children who are 17. Previously, the credit only applied to children 16 or younger.
  3. This increase will NOT apply to your 2020 tax returns, which are due May 17 this year.
  4. The full credit amount is available to Americans whose adjusted gross income (AGI) is $75,000 for individuals filing singly, or $150,000 for marrieds filing jointly. Above those thresholds, the credit begins quickly phasing out.
  5. Half of the credit will be paid in direct cash installments paid directly to families (which comes to $300 per month for each child aged 0-5, or $250 per month for each child 6-17).
  6. These payments will be distributed each month over a period of six months, in the same way your stimulus payments were made, from July through December of 2021.
  7. The remaining half of the credit will be applied on your tax return for 2021.
  8. The new law makes the credit fully refundable, meaning that even if you owe no taxes, you can have this credit refunded to you as a payment from the IRS.
  9. It remains uncertain whether this will be a one-year-only credit or will remain a permanent fixture in the tax law.

Now to some of the more complicated details. Like anything pertaining to the IRS, the rules around the Child Tax Credit are not straightforward. Here are some things to keep in mind, particularly if your AGI is higher than these income thresholds or if your children are approaching ages 6 or 18.

The age cutoff goes by calendar year. This means that if your child turns 6 any time within the calendar year 2021 (even if it’s December 31!), your tax credit for that child drops from $3,600 to $3,000 for this year. This means your monthly payment from July through December will be $250. Same goes for kids who turn 18 this year — you don’t get the credit if your child turns 18 any time in 2021.

The credit phases out above the $75,000/$150,000 AGI threshold. Although the previous $2,000 credit remains a baseline credit offered to any household whose AGI falls below $400,000, the additional $1,000 that was added this year begins phasing out after your AGI exceeds the $75,000 threshold for individuals/$150,000 for marrieds filing jointly. The phaseout occurs at a rate of $50 per $1,000 above the threshold AGIs.

In other words, let’s say a married couple has one child, and their AGI is $160,000. This puts them $10,000 above the stated threshold for the credit. The credit reduction can be calculated as follows:

$160,000 AGI

-$150,000 Credit threshold

$10,000 overage

Dividing the overage by $1,000, which is the increment used in phasing out the credit, means you would multiply 10 by $50, to arrive at a credit reduction of $500. So this family would receive $3,100 for a child aged 0-5, or $2,500 for a child 6-17.

Obviously, according to this math, once you reach an AGI of $85,000 (individuals)/$170,000 (couples), you’re only eligible to receive the baseline $2,000 credit, with your direct cash payments being $167 per month and the remaining $998 being credited on your tax return.

The $2,000 baseline credit phases out once income exceeds $400,000. Once over this second threshold, the child credit starts phasing out at the rate of $50 per $1,000 of extra income. It is completely phased at incomes of $440,000 for a married couple and $240,000 for all other filing statuses).

Credits are based on your most recent tax return. Because the current deadline for filing your 2020 tax returns is now May 17, your most recent tax return on file might be 2019, or it might be 2020. That’s the income the IRS will use to arrive at your eligible payment amount.

What if your income changed significantly in 2020 or 2021? Good question. The short answer is that it’s unclear and dependent on your particular situation. At this point, I know that if your income grows to exceed the income thresholds in the second half of 2021, you may be required to repay some of your credit, but how this will be enforced remains unclear. Some may have to repay; some won’t.

If, on the other hand, your income drops significantly in 2021 from above to below the income thresholds, you should be able to receive the proper amount as a credit on next year’s return.

Finally, all this depends on the IRS meeting its deadline. That is to say that the federal government mandated the Child Tax Credit payments to begin in July, but the question remains whether the IRS actually can do it. As you might imagine, it’s a huge undertaking, and as I write this there are less than three months to make it happen. Know, however, that if any direct payments are not received, they will be applied as a credit on your tax return.

Navigating all this new information is tricky, and your unique situation may raise questions my team and I can answer for you. If you have concerns that you’re paying too little or too much during the tax year or would like to know more about how the new Child Tax Credit will affect you, schedule a mid-year tax meeting with us for this summer to make sure you’re on track.

It looks like blue skies ahead for us all — as always, I wish you the best this month!

-Ludmila

child tax credit

Working Remotely? Here’s How It Could Affect Your Taxes

A year ago this month, a great many of us were sent home from our workplaces as a result of the pandemic and told to stay there until further notice. For some of us — for example, folks living in the Lake Tahoe/Truckee area in California who would usually commute to work in Reno — this meant that last year you worked in two states … or more. In fact, one positive result of the pandemic coming to realize that we really could work from anywhere, and many of us did. But it could affect your taxes.

It doesn’t matter whether you were in your own home or a vacation rental, a friend’s guest room, a hotel, or a conference room, nor does it matter whether you sat on your couch and Zoomed in or visited a client at their place of business. If you were a remote employee in 2020 who received a W2 (or, in some cases, if you’re self-employed), this applies to you. And it likely will in 2021 as well.

Prior to the pandemic, it may have escaped your notice that every state has its own rules for how long a person can perform work in that state before you owe state taxes. In fact, 7 out of 10 workers don’t know this, according to a survey by the American Institute of CPAs.

In fact, the U.S. is comprised of a patchwork of state tax policies that can be extraordinarily difficult to navigate, and, to be frank, difficult to enforce. The federal government did make a move to address this last summer, but so far it has gone nowhere. This leaves policies up to individual states, many of whom are really hurting as a result of the pandemic shutdowns.

In some of the most tax-friendly states — Illinois and Hawaii for the win! — employers don’t need to start withholding state income taxes until employees have been in those states for more than 60 days.

Still other states have reciprocity agreements with neighboring states to avoid taxing workers’ income twice. And another group of seven states follow the “convenience of the employer” rule that only taxes telecommuters based on where their employers are based.

Meanwhile, in the least-friendly states (I’m lookin’ at you, New England and Midwestern states!), employers are expected to withhold taxes on the very first day the employee works within the state.

Fortunately, Nevada imposes no state income taxes, but where does California land on this list? Unfortunately, The Golden State is ranked as “unfriendly” to remote workers, charging income tax according to a wage-based threshold. Earn $100 or more while in the state and you’re on the hook for state taxes.

Bottom line: In the worst-case scenario, a remote worker who found themselves in a few different states last year could wind up owing state taxes in multiple states. Kinda makes the idea of driving across the country and working from an RV less appealing, doesn’t it?

My best advice is to get out in front of the issue. If you haven’t kept track of it, start now. Sit down, as soon as possible, and write out where you spent time working throughout 2020. What did you do and how long were you there? Did you move out of state during 2020? How did this affect the dates when you were employed — or did it? Then make an appointment with your CPA to figure out how to approach the issue. You should also discuss this with your employer to be clear how they have been handling it.

But here’s the good news: It’s hard to enforce. In my opinion, it’s almost too hard to be compliant with all the various state requirements, and my thinking is that even the most tax-unfriendly states will have a hard time collecting taxes from the millions of workers who went remote in 2020.

If you’re an employer with payroll, the rule has typically been that for employees who live out of state (for example, they live in Truckee and work in Reno), the employer must register as a business entity and pay payroll taxes in that state. For Nevada companies with employees in California, this involves an annual $800 tax requirement, all because you have at least one employee who lives in California. Approximately one-third of states have issued guidance providing for a temporary suspension of that requirement; this includes California, which currently has not specified an end date to this suspension, which is a big help to employers who have been hit by pandemic losses.

But while states have made an effort to ease the compliance burden on employers, they have not done so for workers, who are still expected to report wages earned in other states and file different state tax returns, even though employers have not earmarked wages as belonging to those states.

Before you panic, talk to your employer and your CPA and learn what the requirements are for any state in which you’ve worked. Here at Ludmila CPA, we’re happy to strategize with you to determine your next steps. My expectation is that states will continue to address this issue as remote work becomes more the norm than the exception, and I hope state governments will realize the futility of imposing such a broad compliance burden on workers. This area of the law is in flux, so keep an eye on regulations frequently. We’re also happy to have our clients send updated lists of employees working in various states so we can do frequent status updates on your situation.

As always, we want to help your tax season go as smoothly as possible, so let us know how we can help. Happy filing, and happy spring!

working from home and taxes

Stymied About the Stimulus?

Making sense of stimulus payments on this year’s tax return.

As we all know, there’s nothing simple about filing tax returns, even in a normal year. But 2020, as we know, was not normal. It was full of complexities that will significantly affect tax filings this year.

One of them seems simple but actually is raising a lot of questions: stimulus payments.

The federal government has sent two stimulus payments (also called economic impact payments) to taxpayers. In spring, any adult whose individual adjusted gross income (AGI) was up to $75,000 (singles/marrieds filing separately) or up to a combined $150,000 for married couples received $1,200 per person. Added to that was $500 per qualifying child under the age of 17. For people whose salaries went above these thresholds, payments were lowered according to salary, based on a formula used by the IRS. Single taxpayers with AGI over $100,000 and marrieds with AGI over $200,000 have not been eligible for this aid.

Following that, in December, every American (including children) received an additional $600.

Technically, this is “free money.” By that I mean you are not expected to pay it back, and it is not considered taxable income. But CPAs like myself are realizing that the payments are not a cut-and-dried matter, and for many there are questions regarding how much they should have received and whether they’re still owed money, among other issues.

Some people received payments, some did not. Some saw their incomes changed, affecting how much they should have received. Some even received too much, in error, and are concerned about paying it back. Let’s address these concerns and what they mean for you:

What year was used to determine income? Good question. For some, it was 2019. For some, it was 2018. For some it was 2020. The issue gets more complicated if your income went up or down in any of those years. If it was previously above the income thresholds and dropped below them, you may be owed money. If it increased to above the thresholds, you may have received more than you might think you were owed.

Bottom line, be very sure how much you received (or didn’t) and be sure you let your CPA know upon filing your return how much you did or didn’t receive. In the mail, you should receive an IRS Notice 1444 for the first payment and a Notice 1444-B for the second. Provide these forms to your tax preparer. You won’t owe taxes on payments, but it’s important to acknowledge what you received. Without that information, it’s impossible to produce an accurate return. Payments also may erroneously be recorded as taxable income, which could mistakenly add to your tax burden, so it behooves you to share this information.

What if I received a higher stimulus payment than I should have due to my 2020 income being above the threshold? You are lucky — you don’t have to pay it back. I recommend putting it in some sort of savings vehicle.

What if I didn’t receive my payment, or I didn’t receive enough of it? You can still receive your full payment by claiming a Recovery Rebate Credit when you file your tax return. This credit would be claimed on a worksheet included in your Form 1040 or 1040-SR. The credit will either be sent to you as a refund or reduce the amount you would owe for 2020.

If I didn’t receive full stimulus payments in 2020 due to a high reported income, is there any way I can still qualify for the maximum payments? It may be possible to adjust your gross income for 2020 and bring it below the threshold for full payment ($1,200 + $600 per adult). For example, let’s say your income in 2020 was $155,000 — that’s $5,000 over the threshold for the full stimulus payment. But let’s also say you purchased a new truck you’ll use for your business. On your business return, you have a choice of whether to deduct the entire amount in one year or take it in installments over five years. If you take it all at once, you would lower your adjusted gross income below the $150,000 threshold, qualifying you for a full stimulus payment. And yes, as long as your 2020 income is below the threshold level, you are owed a credit for the full stimulus payment regardless what your 2019 AGI was. You can also lower your income by making IRA or Health Savings Account contributions toward the 2020 tax year before April 15.

What if someone in my household died but received the payment(s)? The answer to that question still is unclear as I write this. The IRS wants that money back, but right now it’s unclear whether there is a mechanism in place to enforce the collection. If this situation applies to you, please consult your tax professional. The last thing you want is to be charged later on for this mistake; be up front about it to avoid run-ins with the IRS it down the road.

What if an adult was claimed as a dependent in 2019 but otherwise qualifies for the full stimulus check? This could have happened for a number of reasons. Perhaps you have a child who now lives on their own. If they filed their own tax return instead of being claimed as your dependent, the child could be eligible to receive the full $1,200 (remember that you did not get any money for dependents over 17 years old). This might also be the case if, for example, a retired senior living with you were claimed previously as a dependent but could technically file a return. In either case, an individual tax return as a nondependent might result in receiving the full $1,800 as a credit or refund.

What if my ex-spouse and I share custody of a dependent? Many divorced couples take turns claiming their children as dependents, with each benefitting every other year. In that case, one parent may have received both the $500 and $600 stimulus payments for each child in 2020. But what if you’re the other parent and missed out on stimulus for your kids in 2020? I have good news: You’ll get both payments for each child you claim on your 2020 tax return (even if the other parent has already received money for the same children based on 2019 filings). Be sure to let your tax preparer know to file the Recovery Rebate Credit for you this tax season.

What if I got divorced in 2020? How should I handle the stimulus payments on my taxes? If you previously filed jointly, your payments would have come to you in one lump sum of $2,400. Each of you will need to file separately for 2020 and claim 50% of the payment ($1,200 per adult) on your tax return. Dependent stimulus payments should be reported by the parent who is claiming the child/children on the 2020 return.

What if I’m a retiree who doesn’t usually file a tax return and didn’t make enough income in the last few years to file? How can I claim my stimulus payments? Social Security recipients should have received payments, but some slipped through the cracks. If you didn’t receive your payments and are owed them, you’ll need to file a return this year in order to claim them.

What if I have a balance with the IRS, or I’m paying on an installment agreement? Can I still get a stimulus credit or refund? If you didn’t receive some or all of your stimulus, you should still receive it, even if you have bad debt with the IRS. Make sure you talk to your tax preparer about filing a claim for it. That money should be sent to you so that you can determine how best to use it — whether that’s toward your IRS debt or something else entirely.

NOTE: The only time this doesn’t apply is when you owe back payments on child support. The federal government takes this seriously and will deduct your stimulus payments from it before sending you whatever is left (if anything).

Do you have a question about stimulus payments or any other tax concern that I haven’t addressed? Give us a call or send us an email! We’d be happy to talk to you about simplifying this year’s tax filing process.

stimulus payments

How to Translate Your IRS Notice

Goodbye holiday cards… ’tis now the season for a very different type of mail: tax documents. Most of them are merely tedious while others — particularly those from the Internal Revenue Service — may be enough to strike terror in your heart.

As a CPA, I have seen HUNDREDS of IRS notices, and even I get some anxiety whenever I see one. It’s perfectly natural. But if you take nothing else from this article, remember this: The most important thing to do when you receive a letter from the IRS is to open the envelope.

I can’t tell you how many people I’ve encountered who receive these notices, assume they portend disaster, and simply refuse to open the envelope.

Well, I’m here to tell you that ignorance is not bliss. If what’s inside truly is bad news, neglecting the letter will only compound the problem, and you’re in for months of sleepless nights. The good news is that in the majority of cases, the letter it contains is pretty harmless.

Part of the problem is that the IRS uses cold, dry, and scary-sounding language … even for good news! In some cases, you actually may need to reread it a few times to discern its meaning. The majority of notices issues are pretty innocent and will have little impact on you as a taxpayer. Others aren’t quite so lucky, but you’ll never know unless you open the envelope.

Though the IRS issues a myriad of possible notices, the following are the ones I see most often.

CP 2000: This is the notice most commonly received by my clients. It’s issued when your income or payment information doesn’t match the information on your tax return, and it doesn’t necessarily mean you owe anything. This is a fairly recent problem having to do with technology and the advent of e-filing. Over the last 10 years, the IRS has made a huge change to the way it reviews tax returns — its computers are programmed to match what has been reported to the IRS against what has been reported on your tax return.

Based on my experience, people often underreport their income not because they’re trying to hide anything but because they forget about certain receipts of money or they haven’t received a necessary form. When a mismatch happens between the IRS records and the tax return, the IRS  will generate a CP 2000 notice. For example, this could include pension distributions, Health Savings Accounts, the sale of stocks, or the sale of a home.

Unless the receipt of sales proceed is reported on  tax return, the IRS will assume that any money was taken as income and therefore taxes the entire amount.

Another issue that a CP 2000 may be pointing to could be payment information. Some people simply aren’t clear on what they’ve actually paid for what year. I recommend creating a method for reporting and tracking what exactly you’ve paid to the IRS and when. For example, a payment made around April 15 doesn’t necessarily mean you’ve paid for the current year — it could be for the previous year or for the first estimated payment of the current year.

To correct a CP 2000 error, an accountant can simply put together a letter showing that the amount is not taxable. In about one-third of cases, there is no additional payment needed. The bottom line is that if the IRS says that it knows something you don’t, don’t ignore it.

CP 14: In short, this notice states that you owe unpaid taxes. There are a couple reasons why you might receive it, especially this year. In the past, when one filed an electronic tax return but sent a paper check, the IRS was pretty quick at matching payments to electronic returns. But for obvious reasons, 2020 was unusual and drastically slowed the inner workings of the IRS. As a result, a lot of people received CP 14 notices, even though they made payments. The department processing installment plans in particular seems to be behind in this regard.

As the specter of 2020 lingers, if you receive a CP 14, you likely have a little time. Just wait a couple weeks. In fact, we’ve been advising clients to do nothing until the following month.

However, if you filed a return and didn’t pay, it’s time to decide what to do. There are payment plan options, so you’ll need to work with the IRS to come up with a payment plan. We are happy to assist clients in setting these wheels in motion.

CP 504: If you ignore a CP 14 long enough, you’ll receive a CP 504, otherwise known as a Final Notice Intent to Levy, or a Third and Final Reminder of Past Due Taxes. Most of my clients who receive these got to this point not because they were intentionally disregarding the law but because they didn’t work with the IRS, didn’t respond, didn’t open the envelope, or didn’t receive it due to a change of address. If you receive a CP 504, don’t wait; call us or email us immediately. Timing is of the utmost importance in a case like this.

CP 501/502: Ignoring the IRS won’t make it go away. If you receive this notice, a tax lien can be imposed on your assets. We’ve successfully helped many taxpayers remove these liens, but it can take a long time — even if you contact us right away. Just avoid getting to this point in the first place, and if you have, contact us right away.

CP 16: This notice indicates that a change was made to your tax return that will affect your refund. It usually means that either a miscalculation was made or you owe other tax debts and they are being applied to your refund. This could be a result of a payment not being credited to your account, so be sure you look into the reasoning. In fact, I recently helped a client who made a payment to the IRS of $45,000, and the IRS didn’t credit it to the account at all! In other cases, I’ve seen payments being credited to the wrong taxpayer. And in others, the taxpayer overpaid previously and the refund was increased. Notify your tax professional immediately if you receive this notice, so we can address the issue.

CP 49: This is a sad notice indeed. It means you will not receive your expected refund because the IRS is using some or all of it to pay off outstanding tax debt. Any overpayments are applied to remaining balances first, so if you’re expecting a refund, be sure you know whether you owe from previous years. If there is any money left after the debt is paid, you will be refunded the difference.

In general, my advice for avoiding these notices is keeping careful track of payments owed, being clear about what debts you’d like payments applied to, and making sure to carefully report changes of address to your tax professional. Contact us now to discuss how to mitigate your risk and ensure as smooth a tax-preparation experience as possible.

How Will a New President Affect Your Finances?

As the dust settles on the 2020 presidential election and the transition to a new administration starts taking hold, many of us — regardless of how we voted — are wondering what policies will change and what will remain the same.

Although Joe Biden won’t officially take office until January 20, he’s already set forth a plan calling for a number of important changes that may wind up having an impact on you as soon as 2021. Though I don’t possess a crystal ball, I’ve rounded up some of the biggest changes being proposed, to help you understand how they could affect you if passed:

Increases for the VERY Wealthy

Biden and his team have put forth a plan that show increases only for those earning $400,000 per year or more. Most of us, in other words, would not be affected by those increases. In fact, much of the plan details tax breaks for the middle class (detailed below). The highest personal income tax rate for the wealthiest Americans would go from 37% — a new rate from the Trump administration — back to its pre-2017 rate of 39.6%.

Biden has stated he wants to protect Social Security by, in part, generating more income from wealthier Americans subject to Social Security taxes. Currently, wages above $137,700 are not subject to the 12.4% payroll tax shared evenly by employer and employee. Typically, employers and employees are happy to stop paying this, which incentivizes salary increases. Biden wants to reintroduce Social Security tax for those making $400,000 or more, resulting in a doughnut — a “sweet spot” between those two salaries where there’s no Social Security tax owed.

Another measure proposed affects itemized deductions for wealthy Americans. Those would be capped, meaning some deductions (mortgage interest, certain taxes) may not be 100% deductible.

Increases in Corporate Tax

Corporations enjoyed a reduction in the corporate tax rate from 35% to 21% when Trump took office. Biden has proposed a slight increase to 28%.

Limits on Like-Kind Exchanges and Step-Up Basis for Inherited Assets

Many real-estate investors take advantage of this option to skirt capital gains on appreciation. In a like-kind exchange, someone who purchased a building years ago might now find themselves, thanks to a strong real-estate market, the owner of a building that’s now worth twice that. Taking advantage of the appreciation without paying the capital gains tax on the added value has been achieved using the Section 1031 exchanges (an appreciated old building is “exchanged” for another one using a rather strict set of procedures). As the result, the seller delays the tax burden while growing their real-estate portfolio. Using this type of exchange, an investor could foreseeably keep buying and selling property, passing it to their heirs without ever paying taxes on the appreciation.

This is thanks to the step-up basis that enables individuals to transfer property to heirs at fair market value upon death, meaning that they have no appreciation to account for on their tax return.

Biden’s tax plan would limit or even prohibit like-kind exchanges and the step-up, so for property owners, it’s an area to keep a close eye on.

Changes to Favorable Tax Rates and Capital Gains for Millionaires

Currently, favorable capital gains tax rates of 23.8% apply to everyone (there are also 0% and 15% rates available for taxpayers in lower tax brackets). Biden has proposed using ordinary tax rates (39.6%) on capital gains realized by taxpayers earning over $1 million a year. This change could have significant effects on high-income individuals reliant on favorable rates as part of their investment strategy.

Lowered Threshold for Estate Tax Exemption

As the law stands today, when an individual dies, if his or her estate is valued at $11.58 million or less, the estate pays no estate tax at all. Biden has proposed lowering that threshold to $5 million — a pre-Trump-era threshold. Estate tax has never been a huge source of revenue for the government, but the increased threshold did benefit the ultra-wealthy. A lower threshold could potentially affect a much larger swath of Americans.

Penalties for Big Pharma

It’s no surprise that Biden wants to keep and improve Obamacare, and he’s proposing one change that could benefit Americans with chronic conditions. His proposal includes tax penalties for pharmaceutical companies who increase drug costs by more than the rate of inflation, which could ensure more predictable, affordable drugs, while also removing their deductions for advertising expenses — a move that could mean we’re forced to sit through fewer of those long ads filled with disclaimers! He also looks to eliminate any tax incentives for those companies to move production overseas.

Tax Breaks for Middle-Class Americans

For low- and middle-income Americans, many of the tax increases proposed by Biden wouldn’t even be noticed. Others could find some pleasant surprises. Here’s a breakdown of the tax breaks proposed for the middle class:

  • Temporarily increasing the Child Tax Credit from its current maximum of $2,000 to $3,000 per child for children ages 6-17 and to $3,600 for children under 6.
  • Expanding Child and Dependent Care Credit — to assist with the costs of daycare — from its current $3,000 maximum to as much as $8,000 per child. This could potentially help stave off today’s exorbitant child care costs.
  • Forgiving student loan debt and excluding forgiven amount from taxation.
  • Creating a $5,000 tax credit for informal caregivers providing long-term care to the elderly, and allowing such caregivers to make catch-up contributions to retirement accounts.
  • Establishing a refundable tax credit of up to $15,000 for first-time homebuyers, which would be payable to qualified taxpayers upon purchase rather than upon filing a tax return. His plan would also enact a new renter’s tax credit to reduce costs for renters.
  • Restoring the full electric vehicle tax credit as part of climate change action. This credit originally applied to any electric vehicle purchase in or after 2010, but the law eventually changed to exclude or be reduced for certain car makes and models, including Tesla. Biden’s change would provide full credit for all electric vehicles.

Obviously, these are only predictions, and the months ahead will prove interesting as we see some or all of these new laws tweaked, passed, or rejected. In the meantime, if you’re concerned about your own standing as it pertains to potential tax law changes, contact us! We’re happy to sit down and talk you through how you could be affected and offer suggestions to help mitigate any negative impacts.

Best wishes for a happy holiday season and MUCH better new year!

7 Money Moves to Make at Year’s End

I don’t know about you, but I’m ready to see 2020 in the rearview mirror. But before you turn that calendar page and close the book on this dreadful year, take a bit of time to set yourself up for financial success in 2021. Spend these last two months reviewing what went well for you financially and what can be done better in the coming year.

Here’s my seven-item, year-end essential financial checklist:

  1. Spend an hour or two doing a review of the last year.

First, sit down with a paper and pen (or computer, if you prefer), as well as whatever financial records you have from the last 10 to 12 months. This may be your budget, an app such as Mint, or your bank’s website. You want to look at your income, your spending, your debts, and your goals. Did you meet your goals or fall short of them? Did you make progress toward paying off debt? Did your income decrease or increase? Did you notice any changes in your spending? Be honest with yourself and get a realistic picture—approach this without judgment or self-criticism, but instead with a positive attitude. This isn’t about beating yourself up—that’s not productive. Instead, it’s about making a few adjustments that can make a big difference.

  1. Set your financial goal(s) for the next year.

It’s tempting to get carried away with goal setting, but be realistic about what you can feasibly improve. Strive to set one or two goals and establish a plan to reach them. As the saying goes, a goal without a plan is just a wish. Putting systems in place will help ensure you can reach your goal rather than just wishing for it to come true.

Perhaps you want to save up for that long-awaited post-COVID trip? Pay off your car or buy a new one? Create an emergency fund? Increase your retirement savings? Or start a college savings plan for your kids? Maybe you want to pay off that credit card or student loan, or pay for home improvement? Perhaps it’s possible for you to set aside $20 a week or $100 a month—or more! Maybe by eliminating one or two expenses—a subscription or a weekly Starbucks run—you can channel that money toward your goal.

  1. Talk to a CPA about your tax standing.

Before 2020 is over, you might want to make some adjustments to your tax withholding. If your income changed significantly this year (and for many it did), whether it went up or down, you might be concerned about owing too much taxes. Schedule an appointment with a CPA for a year-end review. We can work with clients to make a few tweaks that could benefit your tax position for the coming year.

  1. Consider Health Savings Accounts (HSAs).

If you have a high-deductible health insurance plan and are not enrolled in Medicare, you may qualify for an HSA, which is a savings plan specifically designed to help people prepare for medical expenses. You may contribute up to a maximum amount per year ($3,550 for self-coverage and $7,100 for family coverage). This is an investment I recommend, if you qualify. Doing so not only lowers your taxable income for that tax year, but if the money is used on medical expenses, you will never owe any taxes on it. Plus, if you don’t use the money during that year, it can roll over to the next year. Health care costs are on everyone’s minds during the pandemic, so this could help to ease your mind, particularly if you foresee you will incur medical costs in the near future.

As a side note, I often am asked about whether Flexible Savings Accounts (FSAs) are similarly a good idea: I don’t really like them. An FSA, which is usually offered by an employer, requires you to predict at the beginning of the year how much money you will need to spend on health care in the next 12 months. If you put this money aside and don’t end up using it all, you lose access to the money. Though it’s better than no medical savings at all, in my opinion, the rules on FSAs are too inflexible to make this plan advantageous.

  1. Review your Social Security and disability benefits.

Each year, every American receives a statement from the Social Security Administration that details how much retirement savings have been put aside for you by the government. Those of us who are still far from retirement usually throw the statement in the trash with hardly a glance. But it’s a good idea to review it. If there’s income on there that isn’t yours or other erroneous information, it could be an indication of fraud.

If you’re receiving federal disability benefits, check to make sure you’re still eligible. People who don’t work for five out of the last 10 years lose these benefits. Getting back into the system takes about $5,000 of annual income, so it’s easy to maintain your benefits, but it can be very painful to lose them.

  1. Review your designated beneficiaries.

I’ve mentioned this before, and I’ve seen it happen: A married couple splits up, one of them dies before making changes to the beneficiaries on a life insurance policy, and the ex receives the entire sum. If you’ve had any major life changes—a new child, a new spouse, a divorce—it’s time to take a look at your beneficiaries on all accounts and make sure all the information is correct.

  1. Review your credit report.

Every American is entitled to a free credit report from each of the big three credit-reporting agencies (Equifax, Experian, and TransUnion) each year. Getting hold of all three of them can, admittedly, be trickier than it should be, but even getting two of them should give you a good picture of your credit rating. Review it to be sure that nothing looks amiss. Be sure that any late payments are correct or amended and nothing is a surprise. Anything that doesn’t look right is likely to be a simple reporting error, but it could also be an indication of fraud, so go over it carefully and take steps to make necessary corrections. The result could be an improved credit score, so it’s worth your time.

If you’re ready to make improvements to your financial picture but don’t know where to start, give us a call! We’re happy to make a one-hour appointment with you to go over your current financial picture and make a few recommendations that can get you started.

This November, we are grateful for you! Happy holidays!

End-of-Year Tax Planning Checklist

I know what you’re thinking: “But I JUST filed my taxes a couple months ago!”

It’s been a bizarre year, to say the least. And with the federal government having moved this year’s tax return filing deadline from April 15 to July 15, it’s true that you may just have filed your taxes a couple months ago. Nonetheless, time — and the IRS — wait for no one. We are rapidly heading to the end of 2020 (thank goodness), and the end of the year means performing a few actions and making important financial decisions.

First, although many people may be wondering if the election will affect our tax situation, it’s unlikely that any changes will have an effect on 2020. So you should proceed with your tax planning using current tax laws.

To help you keep your priorities in order and your deadlines straight, we’ve put together this list of end-of-year tax planning tips for individuals and businesses.

Plan Your Gifts

We’re not talking about Christmas shopping here — this refers to financial gifts you may give to loved ones. Currently, the tax law allows for an annual exemption of $15,000 gift per person. A financial gift can be a straight gift of cash, or it can mean college expenses being paid directly to the institution, a deposit into a 529 college savings plan, or even forgiveness on an outstanding loan. Gifts must be given in plenty of time before January, meaning that checks must clear the bank by December 31, 2020 in order to qualify for this exemption. I have indeed heard of court cases in which recipients didn’t cash their checks until January, thereby making the gift questionable — don’t let this happen to you.

The IRS also allows for gift splitting, meaning that a married couple can qualify for the annual gift exemption even if they together give up to $30,000 to the same individual. However, if you wish to do this, you MUST file a Form 709 — U.S. Gift Tax Return — next year.

Consider Charitable Giving

Recent changes to the tax law raised the standard deduction to $12,400 per individual or $24,800 for a couple. For some, this is good news, but if you’re used to itemizing deductions for charitable donations and other expenses, this may not be favorable — you would have to give more than the standard deduction to see any benefit in your tax return. This disincentivizes giving, which has had negative impacts for a lot of organizations.

There are ways to make your donations count, however. First, you can contribute to a Donor-advised Fund (DaF). This arrangement allows you to prepay for donations for several coming years, then advise the account manager when and how much to distribute to the organizations of your choice. Prepaying allows you to surpass the standard deduction, so you can write off the donation but still provide steady levels of donations for the next few years. For example, if you wish to donate $10,000 to a charity, this doesn’t exceed the standard deduction. But if you paid for two years at a time — $20,000 — into a DaF, you could request to distribute $10,000 this year and $10,000 next year, and you can write off the entire $20,000 for the 2020 tax year.

Prepay to Itemize Deductions

Along these same lines, know that the increase in the standard deduction was designed to replace itemized deductions for donations, mortgage interest, accounting fees, DMV fees, real estate tax, and more. In some ways, this streamlines the tax preparation process. However, it limits the benefits of paying certain fees. Sometimes there is a way around this, however: prepayment.

If you prepay enough to exceed the standard deduction, you can benefit from a deduction for the 2020 tax year. For example, say you are part of a married couple who files jointly, and you’ve paid $15,000 in mortgage interest this year and donated $8,000 to charitable organizations. This totals $23,000, which still falls below the standard deduction of $24,800. If you prepaid some charitable giving, real estate taxes, or another expense for 2021 before this year is over, you could feasibly exceed the standard deduction and qualify for reduced taxable income. This provides immediate savings for you and reduces your payment burden for next year — a year when the tax laws could potentially change. Our standard advice for taxpayers is to accelerate income and delay expenses, so this approach checks both boxes.

Convert to a Roth IRA

We recommend that individuals convert their traditional retirement accounts, which defer taxes until withdrawal (at a potentially higher rate than today’s), to Roth IRAs, which contain funds that have already been taxed. This means that when you withdraw funds, you pay no additional taxes — and neither would any heirs on this account. Additionally, traditional IRAs involve required minimum distributions (RMDs). This is the first year in recent memory in which no RMD was required, and the age to begin RMDs moved from 70.5 to 72. The RMD is expected to be back in 2021. However, Roth plans have no such requirement.

But this is general advice and may not suit everyone right now. Contact us, and we can sit down with you to look at your tax rate, income situation, etc. to determine whether this is a good option for you.

Remember that if you plan to make IRA contributions (Traditional or Roth) for 2020, you may do so until April 15, 2021. If you decide to make such a contribution after your tax return has been filed, your CPA can submit an amended return.

Address Retirement Contributions

Speaking of your retirement, now is the time to review your employee contribution to a 401(k) or Simplified Employee Pension (SEP) accounts. If you’re in a position to increase your contribution before the year’s end, it could lower your taxable income, thereby lowering your tax burden. The maximum contribution for 2020 is $19,500 per person up to age 50, and for those older than 50, the maximum is $26,000. Check your paystub; if you’re not close to that and can afford to contribute more, do so.

Cash-based businesses should also plan to make all their pension contributions by the end of the year in order for them to count toward this year’s deductions.

Harvest Your Losses

If you have significant stock gains from this year, this adds to your taxable income. Talk to your financial advisor about the option for loss harvesting. In this approach, you would sell any securities that are not performing well and would result in financial losses; the losses would qualify for tax deduction. This may offset any gains you’ve realized this year, thereby potentially lowering your tax burden.

Review Your Finances Now

The end of the year is the perfect time to make an appointment with a CPA to review your financial picture. If you schedule an appointment with us, we can happily meet with you via videoconference to make recommendations for improving your tax situation, increasing your financial gains, and achieving long-term goals.

As always, remember that we’re here for any of your tax and small business needs. Happy planning!

Stock Up on School Supplies… and Savings

I love this back-to-school time of year when the air feels a touch cooler and the nostalgic scents of sharpened pencils and brand-new books are in the air. Now that the kiddos are headed back to school—whether in a classroom or through a computer screen—it makes sense to start thinking ahead to college.

As I mentioned in a recent post, putting a little money aside now can make a big difference in growing your savings. If you have children, it’s a good idea to put some of that money toward their education. The cost of higher education has never been higher than it is today, and this year, Forbes reported that student loan debt in this country hit a whopping $1.56 trillion, an all-time high. The average student loan debt for the class of 2018 is $29,200.

As a Personal Financial Specialist, education savings planning is one area in which I assist clients. And the best and most important advice I can offer is to start as early as possible.

529 Plans: Facts and Misconceptions

About one-third of parents (29%) use 529 college savings plans to save for their kids’ college, according to Forbes. They get their name from Section 529 of the IRS tax code, which authorizes tax-free status for qualified tuition programs. These plans are what we call “tax-advantage” plans. So yes, there is a tax benefit involved, but a common misperception is that the advantage happens immediately. It doesn’t.

A 529 is similar to a Roth IRA in that you deposit funds that have been taxed—your net income—so that when you withdraw the money later, you owe no taxes on it. Any appreciation of that investment is also tax free. But while the Roth is a retirement account, the 529 plan is to be used only for educational purposes at accredited institutions. This can include tuition, fees, room and board, books and supplies, and even student loan repayment (some other fees, such as transportation and cell phone expenses, don’t qualify).

What if your child decides not to go to college? Unfortunately, that complicates matters. The unused money can be withdrawn with a 10% penalty (account appreciation only—the money you put in will be returned for free), and it will be subject to income tax. However, you can roll it over to another account with a different beneficiary—perhaps a younger sibling or parent who wants to attend college.

Changes implemented in 2018 mean that 529 money can now be used for K-12 education as well, such as at private schools. But just because you can doesn’t mean you should—I don’t recommend this. In my experience, the benefit of a 529 plan comes from watching an investment grow with interest. Allowing the fund to mature is the best way to maximize its benefits, so withdrawing it while your child is still young cuts short that maturation period, and it reduces the amount available for higher education, where expenses are vastly more substantial.

I’ve also seen from experience the benefits of having a 529 plan on a child’s interest in college. There’s something about knowing the money is there and that, because of it, college is a possibility—it encourages a student to consider it and eventually enroll. For this reason, I recommend starting one. It’s a great gift idea for grandparents or other relatives or friends. Families should talk about it, regularly add to it, and share the benefits with their children so they can develop an appreciation for this helpful savings plan.

Prepaid Tuition Plans

While a 529 plan is portable and can be used at any accredited college or university, a prepaid tuition plan is a state-specific tool designed to increase a state’s college-going rate, with the enticement of paying now to save money later.

At its most basic, the concept is simple: You pay today’s tuition rates now, and when your child reaches college-going age, he or she can attend college at no cost, regardless of how much tuition may have grown. That’s no small savings: In the last 10 years, the cost of college has increased by 25%. By locking in today’s rates, you save in the long run.

Currently, 18 states offer some form of prepaid tuition plan, though individual states differ. Typically you can pay either all at once, for two or four years, or through a payment plan. You lock in your tuition rate at the time of purchase, and no matter what tuition costs when your child finally attends college, it doesn’t matter. College is still entirely paid for.

What if your child wants to attend an out-of-state school? That’s okay, but the benefits are mitigated. You’ll get only the value of the investment put toward the tuition, and no more. In other words, if you paid $25,000 and your child decides to attend an Ivy League institution out of state, that $25,000 is his, but that may only cover his first year (if that). Nonetheless, having college already paid for is a huge enticement for a student to attend college, so it’s likely to be a powerful and well-used investment.

If back-to-school time has you thinking about education savings, schedule an appointment with us today. We can advise you what to do when you use multiple sources to pay for college: 529 plans, grants, and student loans—which can get tricky on tax returns—as well as help you assess whether such plan is advantageous to you.

In the meantime, I wish you a happy fall and a healthy, enjoyable back-to-school season!

Estate Planning 101

It’s not morbid or just for the rich — and the time to get started is now.

For many people, the words “estate plan” conjure up movie scenes of eager families awaiting readings of the wills of their wealthy relatives. It’s presumed to be the domain of the ultra-wealthy, and to discuss estate planning with one’s family is often dismissed as morbid, something unpleasant, and certainly not for the young.

None of this is true. In fact, having a frank conversation about estate planning is a gift, a kindness. And it’s a conversation that every family ought to have, whatever their financial situation or age might be.

Wills vs. Trusts

Many decades’ worth of films would have us believe that what we all need is a will. And this makes sense. After all, wills are contestable and often in dispute, so they make for great storytelling.

But in estate planning 101, your first step is to establish a living trust — so called because it is created while you’re alive and can be amended during your lifetime as your circumstances change.

A will is a statement of how you want your affairs handled and your assets distributed upon your death. But a will also becomes part of public record, so anything left through a will must go through probate court. In essence, a will leaves your decisions in the hands of a judge. A probate attorney will be needed by those left behind to help oversee the process, and all of this can wind up costing 2-4% of the estate in attorney and court fees.

A trust, on the other hand, offers more control over your assets than a will does — like its name implies, you can trust that your wishes will be heeded. This comes at a price, however: While you can usually make a will very cheaply, a trust must be done by an attorney, is far more thorough, and must be managed continuously. But the benefit is that it avoids probate entirely, helping to ensure that those assets are distributed immediately, without the need for further legal intervention. So while the initial expense of a trust is greater, the value it provides is priceless.

For families with minor children, this is particularly important because it ensures that whomever you wish to become the guardian of your children upon your death can do so right away, and the assets you leave behind for them are safely and rapidly disbursed to them.

If you do nothing else in the way of estate planning, at least set up a living trust.

Check Beneficiaries

Any time we start a new job, set up a new insurance policy, or establish a retirement account, we’re asked to provide names and information about our beneficiaries, the people we wish to receive our money in the event of our death. Then time passes — sometimes many years — and we forget what we wrote in that paperwork or whom we may have named as beneficiaries. For those who are divorced, remarried, have more children, or are predeceased by beneficiaries, this can become problematic.

Make it a habit to review these documents at least once a year to ensure that your beneficiary information is up to date. I’ve heard of many cases in which divorced couples didn’t update their life insurance information, and ex-spouses inherited entire policies, to the detriment of the new family. That’s a terrible mistake to make, and an easy one to correct.

Life Insurance

While we’re on the subject of life insurance, I highly recommend a term life policy, which, like its name suggests, involves paying a monthly premium for a specific term, or period of time. In the event of your death, your stated beneficiaries receive the coverage amount to subsidize the lost income you otherwise would have brought home. You can arrange for different levels of coverage. They’re also fairly inexpensive to purchase — for young people it can be as low as $25-$30 a month (or more once you reach age 40), depending on age and whether you are a smoker. The younger and healthier you are when you sign up, the cheaper it will be.

Think of a life insurance policy benefit as 20 years’ worth of income replacement. Multiple your annual salary by 20, and that’s about how much you’d need in coverage. For example, if you earn $50,000 per year, you would seek a policy with a death benefit of $1 million.

Of course, you might not be able to afford that. Many of us can’t. Don’t let that stop you from purchasing a policy — just buy something, as much coverage as you can afford. Anything will be helpful to the family members left behind. Usually, once people purchase an initial policy, they’re able to increase the coverage amount over several years as their circumstances change.

Communicate Your Plan and Information

Unfortunately, many people with detailed plans and many assets neglect a critical piece of the puzzle: communicating their financial information to those they will leave behind.

Take a bit of time right now and create a list of all your financial accounts, including institution names, account numbers, approximate balances, passwords, and access links if appropriate. Then share it with a trustee, or a trusted friend or family member. If you aren’t comfortable having it in your home or someone else’s, put it in a safety deposit box. In the event of your death, this person can act on your behalf to work with institutions and ensure that your wishes, as expressed through the trust, may be executed and money accessed without delay.

Review Your Finances

In the past, estate planning was heavily concerned with estate taxes, which historically might have eaten up a significant share of a person’s estate. These days, the estate tax exemption is quite high ($11M+ per person) — but that’s not to say the exemption won’t change. As the pandemic upends nearly every aspect of our economy, it’s possible that lawmakers will eye estate taxes as a possible source of revenue. My best advice is simply to keep an eye on the tax rate and work with a CPA to address any changes that might put you in a more advantageous tax situation — particularly if your estate is currently between $5 million and $11 million.

Regardless of what your financial picture looks like, estate planning should begin with a review of your finances with a CPA, who can identify issues to consider in terms of your assets and make recommendations about professionals to assist in your planning. Though we aren’t qualified to prepare estate documents here at Ludmila CPA, a one-hour meeting with an accountant can be life changing and a great step toward the estate-planning process.

Contact us today to see how we can help you get started. Stay well and continue enjoying your summer!estate planning