June 2024 Newsletter

No matter what season of life you find yourself in, the IRS will probably find a way to tax it. In this month’s newsletter, read through several situations where a tax planning session might make sense to help you try and cut your 2024 tax bill.

Also learn how to prepare yourself financially when purchasing a vehicle, several ideas to unplug during this year’s summer season, and why every impression matters in the world of business.

As always, feel free to pass this information on to anyone that may find it useful and call if you have any questions or concerns.

Upcoming Dates

June 15
– Due Date Quarterly Estimated Taxes

Prepare Yourself Financially When Purchasing a Vehicle

Financing a new or used car could spell big financial trouble if your vehicle is ever declared a total loss – even if the accident is 100% the other driver’s fault. Here’s what you need to know about staying safe financially if you take out a car, truck, or SUV loan in the future.

Background – The 80% Rule

Many Americans believe if their vehicle is declared a total loss following an accident, insurance companies will provide enough money to cover the cost to replace the vehicle with a similar vehicle. The truth, though, is that insurance companies never provide you with enough money to buy a true replacement vehicle.

The rule of thumb to use when planning is 80%…if the true cost to get the exact same vehicle you were driving before an accident is $30,000, your insurance will only give you 80% of this dollar amount, or $24,000. You’ll have to come up with the other 20%, or $6,000 in this example.

Why not 100%?

Unbeknownst to most of America, the valuation of vehicles deemed a total loss is determined by one company, CCC Intelligent Solutions. Per CCC, their services are used by most of the top 20 insurance companies. Instead of using a fair market valuation method to calculate the replacement cost of your vehicle, CCC uses a model that calculates a value that, when compared to valuation models found at Kelly Blue Book, Edmunds, and NADA, is systemically low.

How to Protect Yourself Financially

Here are some ideas to help you stay financially healthy when purchasing your next vehicle:

  • Put down at least 20%.An unavoidable accident, even with no medical bills, could place your financial life in chaos. So try to have at least 20% equity in the vehicles you own from the moment you make the purchase or your loan will be underwater leaving you with no room to replace your vehicle with a similar make and model.
  • Get a vehicle history report.Don’t buy a vehicle that’s been in an accident or has had other major issues such as flood damage. Buying a vehicle history report can help you identify cars, trucks, & SUVs that may create an even greater financial risk if you need to find a replacement.
  • Build a fund for vehicle repairs and maintenance.Save up for inevitable maintenance and vehicle repairs. You could even use these funds to cover your 20% portion of a vehicle’s replacement cost. Having enough money in this fund is critical. If you need to repair a car after a fender bender AND you do not have enough to cover your share of the cost, you will need to deal with the lender who has a lien on your vehicle. You can quickly find yourself in a financial trap.
  • Choose shorter repayment terms.While the average car loan length is now well over five years for both new and used vehicles, choosing a shorter repayment term can help you build equity faster. You’ll have a higher monthly payment, but you’ll be in a better financial situation sooner in the event of an accident.

You Need Tax Planning If..

Life can alter your taxes with little to no warning. Here are several situations where you may need to schedule a tax planning session:

1. Getting married or divorced.

You could get hit with a Marriage Penalty in certain situations when the total taxes you pay as a married couple is more than what you would pay if you and your partner filed as Single taxpayers. The opposite can also occur, when you benefit from a Marriage Bonus. This often occurs when only one spouse has a job or earns income in other ways such as a business. Another situation when tax planning becomes critical is if you and your future spouse both own homes before getting married.

If you’re going from Married to Single, make the process include tax planning. Alimony is no longer deductible by the spouse making payments, while the spouse receiving the alimony must report the payments as taxable income at the federal level. Child support is also not deductible by the spouse making payments, and isn’t considered taxable income for the spouse receiving payments. In addition, not all assets are taxed the same, so their true value will vary.

2. Growing a family.

Your family’s newest addition(s) also comes with potential tax breaks. You’ll need a Social Security number for your newborn child and to understand the impact this little gem will have on your full-year tax situation. These include breaks to help pay for child care or adoption-related expenses, the child tax credit, and the Earned Income Tax Credit.

3. Changing jobs or getting a raise.

Getting more money at work is a good thing. But it also means a higher tax bill. So you may need to review your tax withholding to ensure there are no surprises at the end of the year. And when leaving an employer, expect a tax hit for severance, accrued vacation, and unemployment income payments.

Another potential tax problem if you get a raise or otherwise earn more money is that you may no longer qualify for certain tax breaks, as most tax deductions and tax credits phase out as your income increases. Consider scheduling a tax planning session to discuss the phase out thresholds that may affect you in 2024.

4. Buying or selling a house.

You can exclude up to $250,000 ($500,000 if married) of capital gains when you sell your home, but only if you meet certain qualifications. A tax planning session can help determine if you meet the qualifications to take advantage of this capital gain tax break, or other home-related tax breaks such as the mortgage interest deduction or credits for installing qualified energy-efficient home improvements.

5. Saving or paying for college.

There are many tax-advantaged ways to save and pay for college, including 529 savings plans, the American Opportunity Tax Credit, and the Lifetime Learning Credit. As you plan your future, understanding how these expenses can be managed often happens long before you begin your college journey.

At the end of the day, when in doubt please reach out. There is no reason to pay more than you need to and a simple tax planning session can make all the difference.

Business Advice: Every Impression Matters

With competition knocking at your door for virtually every product or service, you need to hone every advantage available to you. One of the ways you can set your business apart is to create an awesome customer experience with every interaction. This is less of an event and more a state of mind for your entire team. Here are several steps to help you get there:

  • The three outcomes. Start by understanding that every interaction with customers AND vendors has three – and only three – possible outcomes: positive, neutral, or negative. Your goal is to make every interaction, from a label on a product to speaking with someone on a call, a positive experience. Or in a worse case scenario, neutral.
  • Make a great first impression. The first impression a potential customer creates about your business can come from many different avenues. Train your customer service reps and create an approachable tone on the phone. If you choose to use social media, keep it fresh or take it down. See your lobby as others see it. All details matter.
  • Manage the outcome. The best way to do this is to eliminate the possibility of a negative outcome with your first impression. With customer interaction, this is often accomplished with active listening and a smile.

    For example, let’s say you receive a call from a customer wanting to hear about a new service. The employee that handles the service is not available and you are limited in your knowledge. The worst thing you can say is, I’m sorry, the person responsible for the service is not here at the moment. In the customer’s mind, you immediately remove the possibility of a positive outcome! Instead, engage the customer to hear about their needs, gather as much information as possible, and commit to finding the answers for them and calling them back immediately.

  • Create slingshot experiences. No matter how well you strive to offer top-notch customer service, there will always be instances that are less than favorable. Use this as an opportunity to turn a negative experience into a positive one by thrilling the disgruntled customer with your solution. Even if the solution is costly and unreasonable, that customer will tell everyone the story about how you solved their problem.
  • Use problems to make permanent improvements. Knowing your strengths can reaffirm your approach and help set customer service performance goals. On the other hand, learning about a bad experience from a customer’s perspective will give you great insight into how you can improve. Use these problems to focus your activity. Over time, the results of this continual improvement can have a tremendous impact on your business.

Creating a culture that excels at customer service is attainable if you put in the effort to know your customer’s needs and to understand that every impression matters!

Surviving Wedding Season Without Breaking the Bank

According to this survey by TheKnot.com, the average wedding in 2023 had a price tag of $35,000. And it’s not just the lucky couple doling out serious money. Wedding guests can also face steep costs between gifts and traveling to and from the big event. If you’re planning on attending a wedding or two (or three or four?) this summer, here are several ideas to help keep your wedding costs under control.

  1. Give cash instead of buying a gift off a registry. Most people want to give a wedding gift that, on some level, reflects the relationship they have with the couple. This desire to find that perfect gift can sometimes lead to overspending. Instead of buying a gift off a registry, consider giving cash. Sticking with cash can help you stick to your wedding season budget and avoid your gift being stuck in a box or closet that never gets used.
  2. Think outside the box for lodging. If traveling to a wedding, start looking at lodging options as soon as you know the date. First, check to see if you have family or friends in the area you would be comfortable staying with. Next, consider reconnecting with friends that are attending and share a room. Perhaps the wedding couple saved a block of rooms in a local hotel at a special rate. If so, compare the cost of that hotel with nearby hotels and short-term rentals. Remember to figure out your accommodations early so you don’t get stuck with just one expensive option.
  3. Share your travel expenses. It’s possible you’ll have some friends or family attending the same wedding as you. If the wedding involves traveling, split some of the costs with them. This can include carpooling, sharing a rental car, teaming up on taxi or ride-share expenses, as well as sharing hotel accommodations.
  4. Rent your attire. Going to a bunch of weddings in a short amount time can create a wardrobe challenge. Purchasing a new outfit for each one will get really expensive really quickly. If you take the one-and-done approach with your formal wear, renting a dress or suit will only set you back a fraction of the cost of buying new clothes for every wedding.
  5. Respectfully decline. Whether it’s the cost of travel, poor timing, or something else, it’s OK to decline the invitation. The wedding couple expects some people won’t be able to make it to their big event. But it’s important to let them know you won’t be there. When sending back the RSVP, include a kind greeting and the reason for your absence without going into great detail. When the wedding day comes, remember to send a card or a gift.

Wedding season is a time of fun and celebration. Knowing that you also made the best financial decisions possible makes the occasion even better.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

This publication provides summary information regarding the subject matter at time of publishing. Please call with any questions on how this information may impact your situation. This material may not be published, rewritten or redistributed without permission, except as noted here. This publication includes, or may include, links to third party internet web sites controlled and maintained by others. When accessing these links the user leaves this newsletter. These links are included solely for the convenience of users and their presence does not constitute any endorsement of the Websites linked or referred to nor does COUTO DEFRANCO P.A. have any control over, or responsibility for, the content of any such Websites. All rights reserved.

June 2023 Newsletter

Couto DeFranco June 2023 Newsletter

Summertime offers unique tax and money saving opportunities for the whole family.

In this month’s newsletter, find out how day camps for your kids may be tax deductible, if you know the rules!

Also read about shielding your emergency fund from inflation and why you should always turn to a trusted tax professional if you receive a letter from the IRS.

Couto DeFranco June 2023 Newsletter

Upcoming Dates

June 15
– Second quarter 2023 estimated tax payments are due

Shield Your Emergency Fund From Inflation

Couto DeFranco June 2023 NewsletterMost financial experts suggest keeping three to six months worth of household expenses in savings to help in case of emergency. But with record inflation, that task just got a lot harder to accomplish as virtually every safe place to put your emergency funds will not provide interest rates that keep pace with inflation. But that does not mean you cannot increase the rate of return on these funds.

Here are some ideas to reduce the impact of inflation on your emergency funds.

Actively monitor your savings account rate.

An interest rate hike by the Federal Reserve may not instantly change the rate on your current savings account, but it could lead to a higher rate for other accounts offered by your current bank or other banks.

What you need to know: If your bank is slow to raise your savings rate, be willing to monitor and shift funds to a bank that does. Just make sure the funds are still FDIC insured and are kept at a reputable bank.

Take a look at Series I Savings Bonds.

Series I Savings bonds are issued and backed by the U.S. government and feature two interest rate components: a fixed rate and an inflation rate. The fixed rate is set when the bond is issued and never changes during the life of the bond. The inflation rate resets semi-annually based on the Consumer Price Index.

What you need to know: You must hold an I bond for at least 12 months before redeeming it. And although you can redeem it after one year, you’ll have to pay a penalty worth the interest of the previous three months if you redeem the bond within five years. And remember, you must be prepared to pay the penalty if you need the funds for an emergency.

Creative use of Roth IRA funds in an emergency.

Roth IRAs are funded with after-tax dollars. Because of this, early removal of the initial contribution is tax and penalty free. If you dip into the earnings, however, you will not only be subject to income tax, but also may be subject to a 10% early withdrawal penalty.

What you need to know: Use of a Roth IRA is often a creative way to fund your emergency account while achieving higher returns with conservative investment choices, but it is not for the faint of heart. If you get this one wrong, it could cost you in taxes, penalties and lost fund value in a bear market. Prior to removing funds from any IRA, it makes sense to conduct a tax planning session.

Higher rates are out there, you just need to be aware and willing to actively manage your emergency funds to ensure you are attacking the risk of inflation.

Make Your Child’s Summer Break a Tax Break!

Couto DeFranco June 2023 Newsletter

As a busy working parent, you may be on the lookout for activities that are available for your kids this summer. There may be a solution that’s also a tax break: Summer camp!

Using the Child and Dependent Care Credit, you can be reimbursed for part of the cost of enrolling your child in a day camp.

Am I eligible?

  1. You, and your spouse if you are married, must both be working.
  2. Your child must be under age 13, your legal dependent, and live in your residence for more than half the year.

Tip: If your spouse doesn’t work but is either a full-time student, or is disabled and incapable of self-care, you can still qualify for the credit.

How much can I save?

For 2023, you can claim a maximum credit of $1,050 on up to $3,000 in expenses for one child, or $2,100 on up to $6,000 in expenses for two or more children.

What kind of camps?

The only rule is: no overnight camps.

The credit is designed to help working people care for their kids during the work day, so summer camps where kids stay overnight aren’t eligible for this credit.

Other than that, it doesn’t matter what kind of camp: soccer camp, chess camp, summer school or even day care. All of these are eligible expenses for this credit.

Other ways to use this credit

While summer day camp costs are a common way to use this credit, any cost to provide care for your children while you are working may be eligible.

For example, you can use this credit to pay a qualified day care center, a housekeeper or a babysitter to take care of your child while you are working. You can even pay a relative to care for your child and claim the credit for that expense, as long as the relative isn’t your dependent, minor child or spouse.

This is just one of many possible tax breaks related to children and dependents. Please call if you have questions about this credit, or if you’d like to discuss any other tax savings ideas.

Never Take on the IRS Alone! Couto DeFranco June 2023 Newsletter

Sleuthing your way through a tax audit by yourself is not the same as fixing a leaky faucet or changing your oil. Here are reasons you should seek professional help as soon as you receive a letter from the IRS:

IRS auditors do this for a living — you don’t.

Seasoned IRS agents have seen your situation many times and know the rules better than you. Even worse, they are under no obligation to teach you the rules. Just like a defendant needs the help of a lawyer in court, you need someone in your corner that knows your rights and understands the correct tax code to apply in correspondence with the IRS.

Insufficient records will cost you.

When selected for an audit, the IRS will typically make a written request for specific documents they want to see. The list may include receipts, bills, legal documents, loan agreements and other records. If you are missing something from the list, things get dicey. It may be possible to reconstruct some of your records, but you might have to rely on a good explanation to avoid additional taxes plus a possible 20 percent negligence penalty.

Too much information can add audit risk.

While most audits are limited in scope, the IRS agent has the authority to increase that scope based on what they find in their original analysis. That means that if they find a document or hear something you say that sounds suspicious, they can extend the audit to additional areas. Being prepared with the proper support and concise, smart answers to their questions is the best approach to limiting further audit risk.

Missing an audit deadline can lead to trouble.

When you receive the original audit request, it will include a response deadline (typically 30 days). If you miss the deadline, the IRS will change your tax return using their interpretation of findings, not yours. This typically means assessing new taxes, interest and penalties. If you wish your point of view to be heard — get help right away to prepare a plan and manage the IRS deadlines.

Relying on an expert gives you peace of mind.

Tax audits are never fun, but they don’t have to be pull-your-hair-out stressful. Together, we can map out a plan and take it step-by-step to ensure the best possible outcome. You’ll rest easy knowing your audit situation is being handled by someone with the proper expertise that also has your best interests in mind.

Couto DeFranco June 2023 Newsletter

Get More Money for School by Understanding These Scholarship Myths

There’s plenty of money available for you to pursue a post-secondary education for either you or your child! Here are several myths that could be getting in the way of securing money to pay for school.

Common misconceptions

Scholarships are only for top scholars and athletes. Many news stories are about high-profile students who snag a fully-paid-for scholarship. There are an unbelievable number of scholarships, however, that do not take grades or athletic ability into consideration.

Scholarships are only for students attending college. Enrollment in vocational and trade schools has nearly doubled since 2000, according to the National Center for Education Statistics. And the good news for prospective students is that scholarships for vocational and trade schools are just as plentiful as scholarships for four-year colleges and universities.

You have to be a great writer. Winning scholarships is more often about what you write than how you write. And for some scholarships, following the application’s directions and answering the questions that are asked is more important than how well you write.

You have to be a high school student. Scholarships aren’t just for soon-to-be high school graduates. Many schools have degree programs – and corresponding scholarships – aimed at older adults who are looking to learn new skills or make a transition in their career. Scholarships are also available for graduate students.

Finding scholarships takes too much time. Yes, you’ll need to invest a certain amount of time to find and apply for scholarships, but finding financial aid may not require as much of a time investment as you may think with tons of available online tools.

What to do

Follow the directions! You’d be surprised how many applicants don’t read or follow the rules of the scholarships. Take the time to read through all instructions, and thoughtfully answer the questions that are asked.
Apply every year by January. For every year that you’re attending a post-secondary school, consider setting aside some time in the fall and early winter to complete scholarship applications for the upcoming school year. Many applications need to be completed by January for the following school year.
Ask your school. Nearly every college in the U.S. offers some form of merit-based financial aid. You’ll likely need to complete the Free Application for Federal Student Aid (FAFSA), as many colleges have all students apply for scholarships by completing the FAFSA. This includes students who may qualify for only merit-based scholarships.
Ask local businesses. Many local businesses, civic groups, foundations, and religious or community organizations offer scholarships. So ask around in your community about available financial aid.

The early bird often gets the worm, but the bird that does not go looking for one will never get one!

January 2023 Newsletter

Couto DeFranco January 2023 Newsletter

It’s tax time! In the next couple of weeks you will be inundated with W-2s and various informational tax forms like 1099s. By paying attention to them, ensuring their accuracy, and that you are getting them all, you will be miles ahead in getting your tax return done. Spend a minute reviewing ways to get your tax information organized. Then consider some alternatives to the traditional new year’s resolution craze.

All this plus new inflation adjustments are providing a retirement contribution opportunity for those who plan, plus ideas on resolving common financial surprises that will take the sting out of most of them.

As always, feel free to reach out with any question or comments.

January 2023 Upcoming Dates

Upcoming Dates

January 16
– Martin Luther King Jr. Day

January 17
– 4th quarter installment of 2022 estimated income tax is due for individuals, calendar-year corporations and calendar-year trusts & estates

Begin tax filing for 2022
– Organize tax documents (W-2s, 1099s, 1098s and other records)
– Plan for tax time- plan for document drop off or meeting

Begin tax planning for 2023
– Create a budget
– Adjust your withholdings
– Rebalance investment portfolios

January 2023 Tax Time Tips

It’s Tax Time! Tips to Get Organized

The beginning of a new year brings the need to recap the previous one for Uncle Sam. Here are some tips and a checklist to help get you organized.

Look for your tax forms.

Forms W-2, 1099, and 1098 will start hitting your inbox or mailbox in the next couple of weeks. If you have not already done so, review last year’s records and create a checklist of the forms to make sure you get them all.

Collect your tax documents using this checklist.

Using a tax organizer or last year’s tax return, sort your tax records to match the items on your tax return. Here is a list of the more common tax records:

  • Informational tax forms (W-2s, 1099s, 1098s, 1095-A) that disclose wages, interest income, dividends and capital gain/loss activity
  • Other forms that disclose possible income (jury duty, unemployment, IRA distributions and similar items)
  • Business K-1 forms
  • Social Security statements
  • Mortgage interest statements
  • Tuition paid statements
  • Property tax statements
  • Mileage log(s) for business, moving, medical and charitable driving
  • Medical, dental and vision expenses
  • Business expenses
  • Records of any asset purchases and sales, including cryptocurrency
  • Health insurance records (including Medicare and Medicaid)
  • Charitable receipts and documentation
  • Bank and investment statements
  • Credit card statements
  • Records of any out of state purchases that may require use tax
  • Records of any estimated tax payments
  • Home sales (or refinance) records
  • Educational expenses (including student loan interest expense)
  • Casualty and theft loss documentation (federally declared disasters only)
  • Moving expenses (military only)

If you aren’t sure whether something is important for tax purposes, retain the documentation. It is better to save unnecessary documentation than to later wish you had the document to support your deduction.

Clean up your auto log.

You should have the necessary logs to support your qualified business miles, moving miles, medical miles and charitable miles driven by you. Gather the logs and make a quick review to ensure they are up to date and totaled.

Coordinate your deductions.

If you and someone else share a dependent, confirm you are both on the same page as to who will claim the dependent. This is true for single taxpayers, divorced taxpayers, taxpayers with elderly parents/grandparents, and parents with older children.

With proper organization, your tax filing experience can be timely and uneventful.

Alternative Ideas to New Year’s Resolutions

It’s that time again when everyone has high hopes for how they are going to better themselves during the new year. The traditional way many people set goals, however, doesn’t seem to be working! According to The Economic Times, only 16 percent of people follow through with New Year’s resolutions. Here are seven alternatives to the traditional New Year’s resolutions that could help you in 2023.

Make 3, 5, and 10-year goals.

Part of the problem with resolutions is they are oftentimes open-ended, such as, I want to lose weight. Instead, write down specific goals for 3, 5, and 10 years from now. Break your goals into categories like family, career, financial, and health. Having concrete future goals is a good starting point to creating an obtainable vision.

Create better connections.

Social media makes it easy to stay in touch with what friends and family are doing, but it often lacks true personal connection. As we exit the pandemic era, consider committing to intentional development of relationships with a list of people that are important in your life. Write out the list and put it in a spot you’ll see every day. Then be consistent communicating with them and taking the time to actually reconnect in a meaningful way.

Reflect on the previous year.

Every year brings its share of happiness, challenges and things you never saw coming. Reflecting on these events is a great way to realize how much you’ve changed and grown over the past year. Whether the changes are positive or not so positive, acknowledging and analyzing will help you grow from your experiences and set you up for a better future.

Quit something.

For most of us, the days are overflowing with things to do and too many bills to pay. Why not take an inventory and quit something? Take back some of your income and time, to allow you to pursue something else or spend money on something more important to you.

Pretend like you are moving.

Walk around your house or apartment and make a list of things you’d like to improve or fix, just like you would do before moving. It can be a big thing like building a deck or a small thing like going through an old closet full of that stuff that you thought you might need someday. Donate it and keep the receipt – it might be a tax deduction!

Plan Your Retirement Savings Goals for 2023

January 2023 Retirement SavingsA big jump in cost-of-living calculations means a big jump in how much you can contribute to retirement accounts in 2023! Now is the time to plan your retirement contributions to take full advantage of this tax benefit. Here are annual contribution limits for several of the more popular retirement plans:

Plan 2023 2022 Change
SIMPLE
IRA
Annual Contribution
50 or over catch-up
$15,500
Add $3,500
$14,000
Add $3,000
+ $1,500
+ $500
401(k), 403(b),
 457 and
SARSEP
Annual Contribution
50 or over catch-up
$22,500
Add $7,500
$20,500
Add $6,500
+ $2,000
+ $1,000
Traditional
IRA
Annual Contribution
50 or over catch-up
$6,500
Add $1,000
$6,000
Add $1,000
+ $500
No Change
AGI Deduction Phaseouts: Single; Head of Household
Joint nonparticipating spouse
Joint participating spouse
Married Filing Separately
(any spouse participating)
73,000 – 83,000
218,000 – 228,000
116,000 – 136,000
0 – 10,000
68,000 – 78,000
204,000 – 214,000
109,000 – 129,000
0 – 10,000
+ $5,000
+ $14,000
+ $7,000
No Change
Roth
IRA
Annual Contribution
50 or over catch-up
$6,500
Add $1,000
$6,000
Add $1,000
+ $500
No Change
Contribution
Eligibility
Single; Head of Household
Married Filing Jointly
Married Filing Separately
138,000 – 153,000
218,000 – 228,000
0 – 10,000
129,000 – 144,000
204,000 – 206,000
0 – 10,000
+ $9,000
+ $14,000
No Change
Rollover to Roth Eligibility Joint, Single, or Head of Household
Married Filing Separately
No AGI Limit
Allowed / No AGI Limit
No AGI Limit
Allowed / No AGI Limit
No AGI Limit
Allowed / No AGI Limit

What you can do

  • Look for your retirement savings plan from the table and note the annual savings limit of the plan. If you are 50 years or older, add the catch-up amount to your potential savings total.
  • Then make adjustments to your employer-provided retirement savings plan as soon as possible in 2023 to adjust your contribution amount.
  • Double check to ensure you are taking full advantage of any employee matching contributions into your account.
  • Use this time to review and re-balance your investment choices as appropriate for your situation.
  • Set up new accounts for a spouse and/or dependents. Enable them to take advantage of the higher limits, too.
  • Consider IRAs. Many employees maintain employer-provided plans without realizing they could also establish a traditional or Roth IRA. Use this time to review your situation and see if these additional accounts might benefit you or someone else in your family.
  • Review contributions to other tax-advantaged plans, including flexible spending accounts (FSAs) and health savings accounts (HSAs).

The best way to take advantage of increases in annual contribution limits is to start early in the year. The sooner, the better.

January 2023 Correcting Common Financial Mistakes

Correcting Common Financial Mistakes

You’re working at the office, getting stuff done around the house, or hanging out with family when — wham! — a phone call, email or text alerts you that something happened with your finances. When a not-so-nice financial event hits, don’t let it take you down. Here are some common miscues and steps to remedy each situation:

An overdrawn bank account.

First, stop using the account to avoid additional overdraft fees. Next, manually balance your account by reviewing all posted transactions. Look for unexpected items and fraudulent activity. Then call your bank to explain the situation and ask that all fees be refunded. Banks are not obligated to refund fees, but sometimes they will. The next steps vary based on the reason for the overdraft, but ultimately your goal is to bring your account back to a positive balance as soon as possible.

A missed credit card payment.

Make a payment as soon as you realize you missed it. If possible, consider paying off the entire outstanding balance because interest will be assessed on old AND current charges. Then call the credit card company to get them to refund the late fee and interest charges. The customer service representative will look at your account, see the payments, and be more willing to do as you request. As long as you aren’t habitually late with payments, you can usually get the fees eliminated or reduced.

A tax return that didn’t get filed.

Gather all your tax documents as soon as possible, and file the tax return even if you can’t pay the taxes owed. This will stop your account from gathering additional penalties. You can then work with the IRS if necessary on a payment plan. The sooner you file, the sooner the money will be in your bank account if you’re due a refund. If you wait too long (three years or more), any potential refunds will be gone forever.

Losing a wallet or a purse.

Start by calling all of your bank, debit and credit card companies. Set up fraud alerts with the major credit reporting companies and get a new driver’s license. Then file a report with the police. Visit identitytheft.gov and review additional steps and procedures to protect yourself.

A missed estimated tax payment.

Estimated payments are due in April, June, September and January each year. If you are required to make estimated payments and miss a due date, don’t simply wait until the next due date. Pay it as soon as possible to avoid further penalties. If you have a legitimate reason for missing the payment, such as a casualty or disaster loss, you might be able to reduce or even eliminate your penalty.

Remember that mistakes happen. When they do, stay calm and walk through correcting the situation as soon as possible.

January 2023 Financial Tips

Tips to Get Your Finances in Tip-Top Shape

Here are some tips to get your finances in tip-top shape for 2023.

Know your net worth.

The first step to improving your finances in 2023 is to create a snapshot of your current financial situation. So note all your assets, then subtract all your liabilities (what you owe others) to calculate your net worth. When done on a regular basis, you will be able to evaluate changes to your financial status and identify steps to reach your financial goals.

Plan for hardships.

If the pandemic has taught us anything, it’s to plan for the unexpected. Now is the time to prepare by building an emergency fund that covers six or more months of expenses.

Prepare for a lower refund.

The 2021 tax year saw increases to the child tax credit and the dependent care credit, resulting in a big jump in tax refunds for many taxpayers. These changes, however, were not extended to 2022. If you plan to take advantage of either of these two credits on your 2022 tax return, be prepared for a possible decrease in your refund.

Create a debt repayment plan.

Design a plan to pay off your existing debts and try to avoid taking on any new debt. Pay special attention to credit card debt, as inflation is vastly increasing the cost of this debt every month! Also consider whether consolidating your debt is a good option for you.

Save for retirement.

Plan for your future self by building your retirement fund. In 2023 you can contribute up to $22,500 in your 401(k), plus another $7,500 if you’re 50 or older. Keep in mind your company may provide matching contributions up to a stated percentage of compensation. And you may be able to supplement this account with contributions to IRAs and/or other qualified plans.

Review and re-balance your portfolio.

Review your investments periodically and reallocate funds to reflect your main objectives, risk tolerance, and other personal preferences. This will put you in a better position to handle the ups and downs of the markets.

Set a date to review your estate.

Review your estate and legal documents at least once a year, in addition to whenever you experience a significant change in your life. Now is a good time to review your will, trust documents, beneficiary designations, powers of attorney, healthcare directives, and other estate- and legal-related documents.

2022-2023 Tax Planning Guide

Couto DeFranco 2022-2023 Tax Planning Guide

It’s that time of the year again for our Year End Tax Planning Guide. Click below for a PDF version of the guide. The guide contains very important information regarding tax strategies for individuals and families, tax planning for businesses, investment planning, and planning for the future. This is an excellent tool to use as you begin to prepare for your 2022 tax filings.

If you have any questions about the guide or its content, please call our office. We are here to help!

2022 Tax Planning Guide

December 2022 Newsletter

December 2022 Newsletter

With the hustle and bustle of the holiday season, it’s easy to overlook that tax season is right around the corner. To help you make the most of potential tax saving moves before the end of 2022, this month’s newsletter features several year-end tax cutting ideas.

Also have fun with the entire family by testing your holiday song knowledge! Plus, read about how to protect yourself from identity thieves during the upcoming tax season, and how to look at whether it is time to replace your old vehicle versus paying for another costly repair.

Please feel free to forward this newsletter to someone who may be interested in a topic and call with any questions you may have.

December 2022 Upcoming Dates

Upcoming Dates

Dec. 18 to Dec. 26
– Hanukkah

December 25
– Christmas Day

December 26
– Kwanzaa begins

January 17
– 4th Quarter Estimated Payments Due

Take final year-end actions
– Deductible gifts
– Capital gains/losses
– Itemized deductions
– Dividend income

Year-End Tax Cutting Ideas

Year-End Tax Cutting Ideas

Here are moves you can make to reduce your taxable income. But the year is quickly coming to a close, so plan accordingly.

Tax loss harvesting.

If you own stock outside a tax-deferred retirement plan, you can sell your under-performing stocks by December 31st and use these losses to reduce any taxable capital gains. If your net capital losses exceed your gains, you can net up to $3,000 against other income such as wages. Losses over $3,000 can be used in future years.

Selling appreciated assets.

Planfully sell appreciated assets in the tax year that helps you the most. While this strategy may be hard to accomplish this late in the year, it is still worthy of consideration. To do this, estimate your current year taxable income and compare it to next year’s projected income. Then sell the appreciated asset in the year that will yield the lowest tax. Remember to account for the 3.8% net investment income tax in your estimates.

Max out pre-tax retirement savings.

The deadline to contribute to a 401(k) plan for a 2022 taxable income reduction is December 31st. So if your employer’s plan allows it, consider making a last-minute lump sum contribution. For 2022, you can contribute up to $20,500 to a 401(k), plus another $6,500 if you’re age 50 or older. Even better, you have until April 18, 2023, to contribute up to $6,000 into a traditional IRA. And as long as your income does not exceed phaseout limits, you can reduce your taxable income on your 2022 tax return.

Bunch deductions so you can itemize.

If your personal deductions are near the following standard deduction amounts for 2022: $12,950 for singles, $19,400 for head of household, and $25,900 for married filing joint, consider bringing some of 2023’s spending into 2022 so you can itemize this year. For most, the easiest way is to do this is to make 2023’s planned charitable contributions before the end of 2022. You can also include gifts of appreciated stock where you get to deduct the fair market value without paying capital gains tax.

Review health spending accounts.

If you participate in a Health Savings Account (HSA), try to maximize your annual contribution to reduce your taxable income. Remember, these funds allow you to pay for qualified health expenses with pre-tax dollars. More importantly, unlike Flexible Spending Accounts (FSA), you can carry over all unused funds into future years. If you do have an FSA, you can carry forward a maximum of $570 from 2022 into 2023. The deadline for contributing to your Health Savings Account (HSA) and still getting a deduction for the 2022 tax year is April 18, 2023. The maximum contribution for 2022 is $3,650 if single and $7,300 for married couples.

While the year is quickly coming to an end, there is still time to reduce your 2022 tax liability, but only if you act now.

Shrink Your Tax Bill in 2023

Shrink Your Tax Bill in 2023

Here are several strategies to consider to shrink your tax bill in 2023.

Consider life events. Consider whether any of the following key events may take place in 2023, as they may have potential tax implications:

  • Purchasing or selling a home
  • Refinancing or adding a new mortgage
  • Getting married or divorced
  • Incurring large medical expenses
  • Changing jobs
  • Welcoming a baby

Manage your retirement. One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. Now is a good time to review your retirement account funding. Here are the contribution limits for 2023:

  • 401(k): $22,500 ($30,000, Age 50+)
  • IRA: $6,500 ($7,500, Age 50+)
  • SIMPLE IRA: $15,500 ($19,000, Age 50+)
  • Defined Benefit Plan: $66,000

Look into credits. There are a variety of tax credits available to most taxpayers. Take a look at those you currently use and determine whether you qualify for them again next year. Here are some worth reviewing:

  • Child Tax Credit
  • Earned Income Tax Credit
  • Premium Tax Credit
  • Adoption Credit
  • Elderly and Disabled Credit
  • Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)

Assess your income. Forecast how your 2023 income will compare to your 2022 income, then review your most recent tax return and find your effective tax rate by dividing your total tax by your gross income. Then apply that rate to your new income. This will give you a rough estimate of next year’s tax obligation.
To avoid getting stuck with an unexpected tax bill, consider scheduling several tax planning sessions throughout the year. Remember, some tax saving ideas may require funding on your part. It is best to identify them now so you can save the cash necessary to take advantage of them throughout 2023.

Identity Thieves Love Tax Season

Identity Thieves Love Tax Season

The vast amount of information shared online during tax season makes it a haven for identity thieves, and they’re doing everything they can to take advantage of the opportunity! Here are several ways that identity thieves are targeting you, common signs of ID theft and steps to take if you become a victim.

How Identity Thieves Target You

  • Impersonating the IRS. Thieves calling you and claiming to be the IRS will try and intimidate you into making an immediate payment using a gift card or wire service. Remember, the IRS will physically mail you a letter as a means of first contact. And the IRS will never call you to demand an immediate payment.
  • Filing a fraudulent tax return. Identity thieves often try to file a tax return using your Social Security number before you do. So consider filing your tax return as quickly as you can to beat identity thieves at their own game.
  • Phishing schemes. Be on the lookout for unsolicited emails, texts and social media posts that prompt you to share personal and financial information. These messages could also contain viruses, spyware or other malware that could infect your electronic devices.

Common signs of ID theft

Here are some of the common signs of identity theft according to the IRS:

  • In early 2023, you receive a refund before filing your 2022 tax return.
  • You receive a tax transcript you didn’t request from the IRS.
  • A notice that someone created an IRS online account without your consent.
  • You find out that more than one tax return was filed using your Social Security number. You receive tax documents from an employer you do not know.

Other signs of identity theft include:

  • Unexplained withdrawals on bank statements.
  • Mysterious credit card charges.
  • Your credit report shows accounts you didn’t open.
  • You are billed for services you didn’t use or receive calls about phantom debts.

What you can do

If you discover that you’re a victim of identity theft, consider taking the following action:

  • Notify creditors and banks. Most credit card companies offer protections to cardholders affected by ID theft. You can generally avoid liability for unauthorized charges exceeding $50. But if your ATM or debit card is stolen, report the theft immediately to avoid dire consequences.
  • Place a fraud alert on your credit report. To avoid long-lasting impact, contact any one of the three major credit reporting agencies—Equifax, Experian or TransUnion—to request a fraud alert. This alert covers all three of your credit files.
  • Report the theft to the Federal Trade Commission (FTC). Visit identitytheft.gov or call 877-438- 4338. The FTC will provide a recovery plan and offer updates if you set up an account on the website.
  • Please call if you suspect any tax-related identity theft. If any of the previously mentioned signs of tax-related identity theft have happened to you, please call to schedule an appointment to discuss next steps.

Fork in the Road: Repair or Replace Your Vehicle

Deciding whether to put more money into an aging car or to replace it with a new or used vehicle is rarely a simple decision. Plus skyrocketing vehicle prices and economic uncertainty are making the decision process even tougher.

Signs it is time to replace your car

To help you decide if it is time to replace your vehicle, look for these signs:

  • The kids would rather walk miles to their friend’s house than ride in the car.
  • Your oil bill is higher than your gas bill.
  • The mechanic names a repair bay after you.
  • Your employer politely asks you to park next door.
  • The sound of the engine causes tornado sirens to blare.

If none of these apply to you, congratulations! Your car might still be street legal, but there are other things to consider. All joking aside, making the final call can be difficult. Here’s a few helpful ideas:

Making an informed decision

  • Determine your risk threshold. No one wants to live in constant fear of being stranded or being in an accident because something in the car gave out. Reliability needs to be considered for every car, but especially if the typical route is remote, dangerous or unpredictable. It is even more important if you live in an extreme climate that is either very hot or very cold.
  • Take newer car costs into account. While the idea of a newer, shinier car sounds nice, make sure you are counting all the costs – especially if you need to add a car payment. Beyond the monthly principal and interest, keep in mind that insurance and annual registrations will likely be higher, too.

Spend some time with the numbers

While a new, shiny car is fun, all too often it can create future financial hardship. So also consider the long-term financial impact of your decision. This includes:

  • Used versus new car. Used cars typically give you the best price value, but limited supply is making used cars more expensive.
  • Financing a vehicle has pitfalls. If replacing your car will require financing, be careful. Interest rates are going up and highly-leveraged loans can quickly put you into more debt than the car is worth. This often happens if your car is damaged in an accident.

Cars are unpredictable, but taking an analytical approach and making the best decision with the facts that you have will pay off more times than not.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

November 2022 Newsletter

November 2022 Newsletter

Social Security recipients got some great news about their benefits. Check out this month’s newsletter to learn more about the cost-of-living increase for 2023.

Also read about several tax court cases and what they might mean for your situation, how to raise a financially savvy child, and how to avoid gift card fraud during the upcoming holiday season.

Please feel free to forward this newsletter to someone who may be interested in a topic and call with any questions you may have.

November 2022 Upcoming Dates

Upcoming Dates

November 11

– Veterans Day

November 24

– Thanksgiving

November 25

– Black Friday

Reminder

– Conduct year-end tax and financial planning

6 Ways to Cut Your Everyday Expenses

6 Ways to Cut Your Everyday Expenses

Many people dream of making more money, but cutting expenses can have the same effect. Identify unnecessary expenses with these six money-saving ideas and help free up some cash:

1. Eliminate late fees.

Most late fees are the result of being too busy, traveling or simply forgetting. Fortunately, late fees are almost entirely avoidable if you have a plan. A lot of people only think of credit card late fees, but they can also show up in many places including utility bills, subscriptions and registration fees. Take a look at your bills and identify the kinds of charges you’re getting. Scheduling automatic payments should help you avoid late fees going forward. And if you get one, call and try to get it canceled. It just might work!

2. Cancel unnecessary subscriptions.

Subscriptions are popping up everywhere. They include everything from weekly shaving products to video and music streaming services. With so many options, it’s easy to double up on services or forget to cancel one that you were planning to use for just a short time. Review all your monthly subscriptions and cancel the ones that are no longer providing value.

3. Minimize interest expense.

Paying for day-to-day expenses with a credit card to rack up points to use for airfare or other perks is a great cash management tool, but the interest that builds up if you don’t pay it off every month negates the perks and creates an extra expense. If you find yourself in a situation with multiple credit card balances, consider a consolidation loan with a lower interest rate.

4. Be selective with protection plans.

With virtually every purchase, the store or website offers to sell you insurance in the form of a protection plan. And for good reason — they’re profitable to them and not you! Insurance should be reserved for things you can’t live without like your health and your home. Pass on the protection plan for your toaster.

5. Review your deductibles.

A deductible is a set amount you pay before your insurance kicks in to cover the cost of a claim. The higher the deductible, the lower your monthly premium. If you have enough in savings to cover a higher deductible when disaster strikes, raising the deductible may save you some money on a month-to-month basis.

6. Try a little DIY.

If you own a house, you know it’s just a matter of time before something breaks or stops working. When this happens, don’t instantly reach for the phone to call a repairman. Repair videos are in endless supply online. An easy fix will often do the job. Simple fixes can lead to big savings, especially since repair services charge minimums and fuel surcharges.

While some ideas take a little more analysis to understand the true benefits, many are just the result of paying attention. Taking a proactive approach can provide a big boost to your budget.

‘Tis the Season for Gift Card Fraud

Gift card fraudWith supply chain snarls still plaguing parts of the U.S. economy, many consumers are turning to gift cards as the holiday present of choice this year. In fact, according to the website Research and Markets, the United States gift card industry is expected to reach $188 billion in 2022.

Why is gift card fraud such a problem?

Because of the small dollar amounts involved, gift card fraudsters face a low probability of prosecution. It’s also easy to convert gift card value to cash or merchandise. In other words, this kind of fraud is relatively risk-free and easy to pull off.

In one common scam, a crook goes to a retail establishment, grabs a handful of gift cards from an out-of-the-way stand or kiosk, and records the card numbers using a magnetic strip reader. After returning the cards, the crook heads home and repeatedly checks balances on the merchant’s website until the numbers are activated.

The thief then spends or transfers the money on the card before the legitimate buyer or gift recipient has a chance to use it. Less sophisticated scammers may simply scratch off the card’s coating and replace it with a sticker, hoping the buyer won’t notice.

You can scam-proof your gift card experience by following these tips:

  • Don’t pick the front card. Crooks are impatient. They often return compromised cards to the most accessible place on the rack. Select your gift card from the middle of the rack.
  • Buy gift cards online. Purchase cards online, directly from the business that issued them. This reduces the potential tampering risk.
  • Inspect packaging. If you purchase gift cards in person at a store, examine the cards for signs of tampering. It’s safer to buy from stores that keep gift cards behind the counter or in well-sealed packaging.
  • Register the card. If a card issuer lets you register on their website, do it. You’ll be able to check your balance regularly and identify any abuse.
  • Don’t give out card information to callers claiming to be from government agencies, tech companies, utilities or other businesses. Only scammers ask you to pay fees, back taxes or bills for services with gift cards.
  • Don’t buy gift cards from online auction sites. They could be counterfeit or stolen, according to the Federal Trade Commission.
    If you think you’ve been scammed, contact the store directly and report incidents to local law enforcement.

Social Security to See Significant Adjustment for 2023

Your 2023 Social Security Benefits

Find out how your benefits have changed

Average Retirement Benefits
Starting January 2023

Social Security to See Significant Adjustment for 2023

  • All workers in 2022: $1,681/mo
  • All workers in 2023: $1,827/mo (+$146)
  • The 2023 maximum Social Security retirement benefits for a worker retiring at full retirement age: $3,627/mo

An 8.7% cost of living increase for Social Security retirement benefits and SSI payments begins with December 2022 benefits (payable in January 2023).

Increase your Social Security retirement benefits by 5 to 8% per year when you delay applying until you’re age 70.

Social Security Revenues & Expenditures

Revenue Sources = $1.09 trillion

  • 3.5% – Taxation of benefits
  • 6.4% – Interest
  • 90.1% – Payroll taxes

Expenditures = $1.14 trillion

  • 0.6% – Administrative expenses
  • 0.4% – Railroad Retirement financial interchange
  • 99.0% – Benefit payments

SOURCE: 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Table Il.B1.

2023 Social Security & Medicare Tax Rates

If you work for someone else…

  • Your employer pays 7.65%
  • You pay 7.65%

If you’re self-employed…

  • You pay 15.3%

NOTE: The above tax rates are a combination of 6.2% for Social Security and 1.45% for Medicare. There is also a 0.9% Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures.

Item 2023 2022 Change
Maximum amount you may pay in Social Security taxes $9932.40 $9,114.00 +$818.40
Maximum earnings amount Social Security will tax at 6.2% $160,200.00 $147,000.00 +$13,200.00
  • 165+ million people work and pay Social Security taxes
  • Social Security has provided financial protection for Americans since 1935

Social Security Payments Explained

  • Social Security (SS) retirement benefits are for people who have paid into the Social Security system through taxable income.
  • Social Security Disability (SSD or SSDI) benefits are for people who have disabilities but have paid into the Social Security the system through taxable income.
  • Supplemental Security Income (SSI) benefits are for adults and children who have disabilities, plus limited income and resources.

Maximum SSI Payments

Filing Status 2023 2022 Change
Individual $914/mo $841/mo +$73
Couple $1,371/mo $1,261/mo +$110

How does Social Security work?

  • When you work, you pay taxes into Social Security.
  • The Social Security Administration uses your tax money to pay benefits to people right now.
  • Any unused money goes into Social Security trust funds and is borrowed by the government to pay for other programs.
  • Later on when you retire, you receive benefits.

Here’s how you qualify for retirement benefits

When you work and pay Social Security taxes, you earn credits toward benefits. The number of credits you need to earn retirement benefits depends on when you were born.

  • If you were born in 1929 or later, you need 40 credits (10 years of work) to receive retirement benefits
  • You receive one credit for each $1,640 of earnings in 2023
  • 4 credits maximum per year

Did you know you can check your benefits status before you retire?

  • You can check online by creating a my Social Security account on the SSA website. If you don’t have an account, you’ll be mailed a paper Social Security statement 3 months before your 61st birthday.
  • It shows your year-by-year earnings, and estimates of retirement, survivors and disability benefits you and your family may be able to receive now and in the future.
  • If it doesn’t show earnings from a state or local government employer, contact them. The work may not be covered within Social Security.

Sources: SSA.gov

Tax Court Corner

Tax Court Corner

Here’s a roundup of several recent tax court cases and what they mean for you.

Thou Shalt Not Commingle Funds

(Vorreyer, TC Memo 2022-97, 9/21/22)

Don’t let sloppy record keeping prevent you from deducting legitimate business expenses. The Tax Court agreed with the IRS that business expenses must first be deducted on that business’s tax return before flowing to the owner’s tax return.

Facts: A married couple, the sole shareholders of an S corporation, operated a family farm in Illinois. In 2012 they paid the farm’s utility bills of $21,000 and property taxes of $109,000 from their personal funds, then deducted these payments on their individual Form 1040 tax return as business expenses.

Even though the utility and property tax bills were legitimate business expenses, the deduction was disallowed because the expenses should have first been deducted on the farm’s S corporation tax return, then flowed through to the shareholder’s individual tax return.

Tax Tip: To pay an expense on behalf of your business, first make a capital contribution to your business, then have your business pay the expense. Then include this expense on your business’s tax return.

Adding Tax Insult to Injury

(Dern TC Memo 2022-90, 8/30/22)

Payments received to settle a physical injury or illness lawsuit are generally considered non-taxable income. But you better be sure that the lawsuit you file is actually to compensate for a physical injury or illness, and not something else.

Facts: Thomas Dern, a sales representative for a paint products company in California, was hospitalized for acute gastrointestinal bleeding and a subsequent heart attack. When the company fired him because he could no longer do his job, he sued for wrongful termination. The parties eventually reached a settlement.

Dern argued in Tax Court that his illness led to his firing, and therefore the settlement should be classified as non-taxable income. The payment he received, however, was to settle a discrimination lawsuit and not a physical injury. The settlement therefore did not qualify to be non-taxable income.

Tax Tip: Pay attention to the tax consequences of settlement payments so you don’t get surprised with an unexpected tax bill.

You’re Stuck With the Standard Deduction

(Salter, TC Memo 2022-49, 4/5/22)

Facts: Shawn Salter, a resident of Arizona, requested and received a distribution of $37,000 from his retirement plan after being laid off from his job in 2013. Salter failed to file a tax return for 2013, so the IRS created a substitute tax return for him using the standard deduction of $6,500 for a single taxpayer. The IRS also assessed an early withdrawal penalty of 10% on the distribution.

Salter, arguing that the distribution was to pay for medical expenses which aren’t subject to the 10% early withdrawal penalty, eventually did file a 2013 tax return with $25,000 of itemized medical expenses. The Tax Court disallowed the $25,000 of itemized deductions, stating that once a substitute return is created by the IRS using the standard deduction, the taxpayer can no longer claim itemized deductions for that year.

Tax Tip: Try to avoid a situation where the IRS files a substitute tax return on your behalf. Once this happens, you have no choice but to use the standard deduction for that tax year.

Raising a Financially Savvy Child

Raising a Financially Savvy Child

If you have children or grandchildren, you have an opportunity to give them a jump-start on their journey to becoming financially responsible adults. While teaching your child about money and finances is easier when you start early, it’s never too late to impart your wisdom. Here are some age-relevant suggestions to help develop a financially savvy young adult:

  • Preschool – Start by using dollar bills and coins to teach them what the value of each is worth. Even if you don’t get into the exact values, explain that a quarter is worth more than a dime and a dollar is worth more than a quarter. From there, explain that buying things at the store comes down to a choice based on how much money you have (you can’t buy every toy you see!). Also, get them a piggy bank to start saving coins and small bills.
  • Grade school – Consider starting an allowance and developing a simple spending plan. Teach them how to read price tags and do comparison shopping. Open a savings account to replace the piggy bank and teach them about interest and the importance of regular saving. Have them participate in family financial discussions about major purchases, vacations and other simple money decisions.
  • Middle school – Start connecting work with earning money. Start with activities such as babysitting, mowing lawns or walking dogs. Open a checking account and transition the simple spending plan into a budget to save funds for larger purchases. If you have not already done so, now is a good time to introduce the importance of donating money to a charitable organization or church.
  • High school – Introduce the concept of net worth. Help them build their own by identifying their assets and their current and potential liabilities. Work with them to get a part-time job to start building work experience, or to continue growing a business by marketing for more clients. Add additional expense responsibility by transferring direct accountability for things like gas, lunches and the cost of going out with friends. Introduce investing by explaining stocks, mutual funds, CDs and IRAs. Talk about financial mistakes and how to deal with them when they happen by using some of your real-life examples. If college is the goal after high school, include them in the financial planning decisions. Tie each of these discussions into how it impacts their net worth.
  • College – Teach them about borrowing money and all its future implications. Explain how credit cards can be a good companion to a budget, but warn them about the dangers of mismanagement or not paying the bill in full each month. Discuss the importance of their credit score and how it affects future plans like renting or buying a house. Talk about retirement savings and the importance of building their retirement account.

Knowing about money — how to earn it, use it, invest it and share it — is a valuable life skill. Simply talking with your children about its importance is often not enough. Find simple, age-specific ways to build their financial IQ. A financially savvy child will hopefully lead to a financially wise adult.

October 2022 Newsletter

Fall leaves

Watching summer transform into beautiful fall colors can be just as mesmerizing as tax planning. Similar to looking closely for gorgeous autumn scenery, with tax planning you’re meticulously on the lookout for opportunities to cut your 2022 taxes.

In this month’s newsletter, read about several planning strategies to consider as time is winding down to implement tax cutting measures for 2022.
Also read about ideas to improve your personal cash flow, the ingredients of a successful business partnership, and valuable FAFSA information.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

Still Time to Reduce any Tax Surprises!

Consider conducting a final tax planning review now to see if you can still take actions to minimize your taxes this year. Here are some ideas to get you started.

Review your income.

Begin by determining how your income this year will compare to last year. Since tax rates are the same, this is a good initial indicator of your potential tax obligation. However, if your income is rising, more of your income could be subject to a higher tax rate. This higher income could also trigger phaseouts that will prevent you from taking advantage of certain deductions or tax credits formerly available to you.

Examine life changes.

Review any key events over the past year that may have potential tax implications. Here are some common examples:

  • Purchasing or selling a home
  • Refinancing or adding a new mortgage
  • Getting married or divorced
  • Incurring large medical expenses
  • Changing jobs
  • Welcoming a baby

Identify what tax changes may impact you.

Some of the major changes this year include the lowering of the child tax credit and the lowering of dependent care credit for working couples. This year also marks the first year in the last two with no pandemic related payments. If you think this could impact your situation it may make sense to conduct a tax planning review.

Manage your retirement.

One of the best ways to reduce your taxable income is to use tax beneficial retirement programs. So now is a good time to review your retirement account funding options. If you are not taking full advantage of the accounts available to you, there is still time to make adjustments.

Look into credits.

There are a variety of tax credits available to most taxpayers. Spend some time reviewing the most common ones to ensure your tax plan takes advantage of them. Here are some worth reviewing:

  • Child Tax Credit
  • Earned Income Tax Credit
  • Premium Tax Credit
  • Adoption Credit
  • Elderly and Disabled Credit Educational Credits (Lifetime Learning Credit and American Opportunity Tax Credit)

Avoid surprises.

Your goal right now is to try and avoid any unwanted surprises when you file your tax return. It’s also better to identify the need for a review now versus at the end of the year when time is running out. And remember, you are not required to be a tax expert. Use the tips here to determine if a review of your situation is warranted.

Upcoming Dates Time for Taxes calculator

October 17

– Filing deadline for extended 2021 individual and C corporation tax returns

Maximize Your College Financial Aid With These FAFSA Tips

A brand new Free Application for Federal Student Aid (FAFSA) made its debut on October 1st, featuring 60% fewer questions and a host of other changes that aim to increase the likelihood that you can qualify for financial aid.

As you prepare to complete this year’s application, here are some tips to maximize your FAFSA eligibility for financial aid.

File the FAFSA early.

More than a dozen states award financial aid on a first-come, first-serve basis. Students who file the FAFSA in October tend to get more than twice as much grant aid on average as students who file the FAFSA later. Even better, by completing the FAFSA early you can time your financial requests to colleges with their varied due dates.

Minimize income in the base year.

2021 is the base tax year when filling out the FAFSA for the 2023-2024 school year. If you’ve already filed your 2021 tax return, consider filing an amended Form 1040 if there were deductions you may have overlooked that could reduce your income. Otherwise, file this knowledge away to best position your income for future years.

Reduce the amount of reportable assets.

While assets aren’t weighted as heavily as income on the FAFSA, they could still affect overall financial aid eligibility. To decrease the amount of reportable assets, consider using cash in your bank accounts to pay down unsecured debt such as credit cards and auto loans, or maximizing retirement plan contributions. Keep in mind that certain assets aren’t considered when determining financial aid eligibility. This includes the home you live in, the value of life insurance, and most retirement plans.

Use 529 plans wisely.

529 plan owners will impact how the funds are reported on the FAFSA. If the account owner is a grandparent or relative, the funds are not counted on the FAFSA until the money is used. So timing the use of these funds is important. And remember if the account owner is a parent or the student, the balance of 529 plans is considered an asset of the parent on the FAFSA.

Spend a student’s money first.

If a student does have cash saved or other assets, consider withdrawing money from student assets first before touching parent assets, since student assets are assessed at a higher rate than parent assets.

Plan for the American Opportunity Tax Credit (AOTC).

If your family is eligible for the AOTC, try spending up to $4,000 in tuition and textbook expenses using cash. The AOTC’s maximum tax credit of $4,000 will be worth more dollar-for-dollar rather than using a $4,000 tax-free distribution from a 529 plan.

Tax forms

Ideas to Improve Your Personal Cash Flow

One of the most common reasons businesses fail is due to lack of proper cash flow. The same is often true in many households. Here’s how this concept of cash flow applies to you along with some ideas to improve it.

Cash flow defined

Cash flow equals cash coming in (wages, interest, Social Security benefits) and cash going out in the bills you pay and money you spend. If more is coming in than going out, you have positive cash flow. If the opposite is true, you have negative cash flow. Unfortunately, calculating and forecasting cash flow can get complicated. Some bills are due weekly, others monthly. A few larger bills may need to be paid quarterly or annually.

Create your cash flow snapshot

Before improving your cash flow, you need to be able to visualize it. While there are software tools to generate a statement of cash flow, you can also take a snapshot of your cash flow by creating a simple monthly spreadsheet:

  • Type each month across the top of the spreadsheet with an annual total.
  • Note all your revenue (cash inflows), then create a list of expenses (cash outflows) in the left-hand column.
  • Enter your income and bills by month. Create a monthly subtotal of all your inflows. Do the same for your cash outflows. Then subtract the expenses from income. Positive numbers? You have positive cash flow. Negative numbers? You have negative cash flow.
  • Create a cumulative total for the year under each month to see which months will need additional funds and which months will have excess funds.

Ideas to improve your cash flow

Identify your challenges.

See if you have months where more cash is going out than is coming in to your bank account. This often happens when large bills are due. If possible, try to balance these known high- expense months throughout the course of the year. Common causes are:

  • Holidays
  • Property tax payments
  • Car and homeowners insurance
  • Income tax payments
  • Vacations

Build a reserve.

If you know there are challenging months, project how much additional cash you will need and begin to save for this in positive cash months.

Cut back on annuities.

See what monthly expense drivers are in your life. Can any of them be reduced? Can you live with fewer cell phone add- ons? How about cutting costs in your cable bill? Is it time for an insurance review?

Shop your current services.

Some of your larger bills may create an opportunity for savings. This is especially true with home and car insurance.

Create savings habits to add to cash flow.

Consider paying a bill to yourself in your cash outflows. This saved money is a simple technique to create positive cash flow each month to build an emergency reserve.

September 2022 Newsletter

September 2022 Newsletter

This month’s newsletter recaps the details of the revamped electric vehicle tax credit and other energy credits in newly passed legislation.

Also included this month are some tips to review your recurring monthly bills that seem to automatically creep up. Plus a great set of ideas to protect your Social Security Number from prying eyes!

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

New Electric Vehicle and Other Energy Credits

New Electric Vehicle and Other Energy Credits

Tax incentives for purchasing clean (electric) vehicles and installing high efficiency home improvements are some of the featured provisions in the recently-passed Inflation Reduction Act (IRA). Here’s a closer look at some of the bill’s tax provisions regarding the new incentives.

Clean Vehicle Credit (formerly Plug-In Electric Vehicle Credit)

Here is a summary of the details surrounding the new Clean Vehicle Credit:

  • The tax credit of up to $7,500 for electric vehicles (EVs) is extended for 10 years until December 2032.
  • Starting in 2023, used cars now qualify for up to a $4,000 tax credit.
  • Starting in 2024, you can take the credit as a discount at the time you purchase the vehicle instead of waiting to file your tax return.
  • In the past, if a manufacturer had produced at least 200,000 EVs, you could no longer qualify for the tax credit if purchasing a vehicle from that manufacturer. The new bill removes this 200,000 vehicle cap starting in 2023.

On the other hand, there are significantly more hurdles you’ll have to overcome to qualify for the new Clean Vehicle Credit:

MSRP hurdle

  • New clean cars must have a manufacturer’s suggested retail price (MSRP) of no more than $55,000.
  • New clean vans, pickup trucks, and SUVs must have an MSRP of no more than $80,000.
  • Used clean vehicles must cost no more than $25,000.

Income hurdle

  • For a new clean vehicle, your adjusted gross income must be less than $150,000 if single, $225,000 if head of household, or $300,000 if married.
  • For a used clean vehicle, your adjusted gross income must be less than $75,000 if single, $112,500 if head of household, or $150,000 if married.

Domestic production hurdle

  • The final assembly of a new clean vehicle must occur in North America as of August 16, 2022.
  • Starting in 2023, at least 40% of critical battery minerals and 50% of battery components must be recycled, mined, or manufactured in the U.S.
  • Many automakers are unsure whether they will be able to meet this criteria as the new law is currently written.

What you can do

  • Wait until 2023 to buy Tesla and GM vehicles. Because Tesla and General Motors have both crossed the 200,000 electronic vehicle threshold, any Tesla or GM vehicle purchased in 2022 won’t qualify for the tax credit. Starting in 2023, certain Tesla and GM vehicles will once again qualify for the credit once the 200,000 limit is removed.
  • Government to release further guidance. There are still many unanswered questions about how the new Clean Vehicle Credit will be implemented. The federal government plans to release further guidance by the end of the year that hopefully answers some of these questions.

Other Tax-Related Provisions

  • Qualifying high efficiency home improvements now qualify for an annual $1,200 credit, up from a $500 maximum lifetime credit.
  • Energy efficient heat pumps, heat pump water heaters, central air conditioners, wood stoves, and natural gas or oil furnaces or boilers qualify for a $2,000 credit.

What you can do

  • Look for the details. Prior to purchasing new high efficient home improvements, double check how the new credit will apply to your purchase.
  • Check with manufacturers. Most manufacturers are motivated to understand the new program and could be a good resource to see how they apply to your situation.

There will be more details on how to obtain these credits in the future. So stay alert and check before making any purchase decisions if you are expecting to take any of these new energy saving credits.

Upcoming Dates

Upcoming Dates

September 15

– Filing deadline for extended 2021 calendar-year S corporation and partnership tax returns
– 3rd quarter installment of 2022 estimated income tax is due for individuals, calendar-year corporations and calendar-year trusts & estates

October 17

– Filing deadline for extended 2021 individual and C corporation tax returns

Taming Monthly Bill Creep

Taming Monthly Bill CreepPaying bills is inevitable, but paying too much is not. Here are some tips to help you get a handle on your recurring monthly expenses.

  • Investigate your recurring services. Start by taking stock of every service you are currently using. Review your bank and credit card statements and highlight all the charges that look like a subscription. Some examples to look for are streaming services (video, music and games), magazines, news subscriptions, digital storage services, gym memberships and financial services. Determine if you have redundant subscriptions, such as two music-streaming services. Finally, ask yourself if each service is still providing value to you. If it’s not, cancel it.
  • Review bills for unnecessary fees. Once you trim your list down to the services you want to keep, locate the most recent bill for each. Read through all the charges and make notes of those that are questionable. You might be paying for services you aren’t using, such as a video streaming service on your cell phone bill. Or maybe you are paying replacement insurance coverage for something you don’t need. For every charge that doesn’t make sense, call and ask the provider to cancel it.
  • Bundle expenses when you can. Many suppliers provide multiple services and will offer discounts if you sign up for a few of them. Bundling your cable TV, internet and home phone is a common example of this. Other places to look for bundling opportunities are cell phone providers and insurance companies.
  • Negotiate for lower rates. Call each provider and ask for a lower rate or discount. Most companies want to keep your business, so often times they will work with you. Service providers routinely change the way they package their products, so saving money might be as simple as changing to a different level of service. It’s rare for companies to reach out and offer savings, so you need to make the call!

It’s easy for your bills to spiral out of control if you don’t keep close tabs on them. Go through a review exercise every few months to ensure you aren’t paying more than necessary.

Tips to Protect Your Social Security Number

Tips to Protect Your Social Security Number

Very few things in life can create a higher degree of stress than having your Social Security number (SSN) stolen. This is because, unlike other forms of identification, your SSN is virtually permanent. Here are some things that you can do to minimize the risk of having your number fall into the hands of the wrong people.

Never carry your card.

Place your SSN card in a safe place. That place is never your wallet or purse. Only take the card with you when you need it.

Know who needs it.

As identity theft continues to evolve, there are fewer who really need to know your SSN. Here is that list:

  • The government. The federal and state governments use this number to keep track of your earnings for retirement benefits and to ensure you pay proper taxes.
  • Your employer. The SSN is used to keep track of your wages and withholdings. It also is used to prove citizenship and to contribute to your Social Security and Medicare accounts.
  • Certain financial institutions. Your SSN is used by various financial institutions to prove citizenship, open bank accounts, provide loans, establish other forms of credit, track digital payments, report your credit history or confirm your identity. In no case should you be required to confirm more than the last four digits of your number.

Challenge all other requests.

Many other vendors may ask for your SSN, but having it may not be essential. The most common requests come from health care providers and insurance companies, but requests can also come from subscription services when setting up a new account. When asked on a form for your number, leave it blank. If your supplier really needs it, they will ask you for it. This allows you to challenge their request.

Destroy and distort documents.

Shred any documents that have your number listed. When providing copies of your tax return to anyone, distort or cover your SSN. Remember, your number is printed on the top of each page of Form 1040. If the government requests your SSN on a check payment, only place the last four digits on the check, and replace the first five digits with Xs.

Keep your scammer alert on high.

Never give out any part of the number over the phone or via email. Do not even confirm your SSN to someone who happens to read it back to you on the phone. If this happens to you, file a police report and report the theft to the IRS and Federal Trade Commission.

Proactively check for use.

Periodically check your credit reports for potential use of your SSN. If suspicious activity is found, have the credit agencies place a fraud alert on your account. Remember, everyone is entitled to a free credit report once a year. You can obtain yours on the Annual Credit Report website.

Replacing a stolen SSN is not only hard to do, it can create many problems. Your best defense is to stop the theft before it happens.

Student Loan Forgiveness Q&A

While there may be legal and Congressional challenges around the recent presidential executive order, here are some questions and answers about what is known so far about the announced student loan forgiveness program.

Can the President forgive this debt?

Who knows how this will play out, but maybe not. Only Congress has spending authority. And the forgiveness of debt is considered income in the eyes of the IRS. So to avoid any long-standing legal battle, Congress may need to authorize this estimated $1 trillion dollar program. Whether it does is up for debate.

If approved, who qualifies for the forgiveness program? Student Loan Forgiveness Q&A

Here’s a checklist of qualifications in the executive order:

  • Loan Type. You have student loans that are held by the U.S. Department of Education (DoE), including Pell Grants, Federal Family Education Loans, and Direct Loans such as Parent PLUS and Grad PLUS loans. Certain loans from the Federal Perkins Loan Program may be excluded. All private student loans are also excluded.
  • Loan Issue Date. Student loans taken out after June 30, 2022 are not eligible for forgiveness.
  • Income Threshold. Your income does not exceed $125,000 if single and $250,000 if married based on your 2020 or 2021 federal tax return.*

What are the limits?

  • $20,000. Recipients of a Pell Grant can have up to $20,000 in student loan forgiveness.
  • $10,000. For non-Pell Grant loans, the maximum student loan forgiveness is $10,000.

Is the forgiven student loan taxable?

  • Federal Level. Per the executive order, forgiven student loans will not be considered taxable income on federal tax returns. The approach the executive order takes is by using the American Rescue Plan that prevents taxation on student loans forgiven through 2025.
  • State Level. While many states follow the federal law that excludes student loan forgiveness from being considered taxable income, several states currently do not conform to federal law. Details are being worked out in these states to try and keep student loan forgiveness from being considered taxable income.

What you need to do

Stay alert to any twists and turns regarding challenges to this executive order. In the meantime:

  • Watch for the forgiveness application. An application for student loan forgiveness on the Department of Education’s website, ed.gov, will be the next step. There may be exclusions to this application requirement, with many borrowers potentially receiving automatic forgiveness if the Department of Education already has your income data.
  • Double-check your loan balance. Take a screen shot of your loan balance the day you submit your forgiveness application and compare it to your balance after the forgiveness is eventually applied to make sure the forgiveness is properly applied to your account.

There are still lots of unanswered questions about this student loan forgiveness program, including whether it is even legal. So stay tuned for future updates.

*NOTE: While the Department of Education typically uses your adjusted gross income (AGI) number when determining eligibility for other loan programs, the White House did not confirm whether AGI will be used to determine the $125,000 and $250,000 income thresholds.

August 2022 Newsletter

This month’s letter includes a review of five ways to take advantage of IRA accounts to reduce your tax burden. Plus lots of tips to improve your credit score!

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

5 Great Things to Know about IRAs

IRA’s can be a powerful tool to lower taxes all while saving for retirement or other predetermined uses. Here are five fairly unreported things to know about IRA’s.

1. A nonworking spouse can have an IRA.

If your spouse doesn’t work, you may still be able to open and contribute to an IRA for your spouse, assuming that you work and file a joint tax return. This can be a great way to help reduce your taxable income each year.

2. Even children can have IRAs.

If your child has earned income, you can open and contribute to an IRA. Just ensure you can document the earnings. While your child can contribute their own earnings, many parents will help keep track of things like babysitting money, then match those earnings in either a traditional or ROTH IRA. Often the ROTH IRA is preferred, because the future earnings could be tax free! Your child’s IRA is managed by an adult until the child is old enough for the account to be transferred to their name.

3. You may still contribute to an IRA if you have a 401(k) or similar program at work.

As long as you do not exceed the income limits, it is ok to have both an IRA as well as other forms of retirement savings plans. It’s simply important to know your options and plan accordingly.

4. Non-deductible contributions may be made.

If you exceed IRA income phaseouts, contributions to your IRA may not reduce your taxable income for the year. But you may still want to make after-tax contributions to a non-deductible IRA. Remember, while you are taxed on the contributions to a non- deductible IRA, the earnings can still grow tax-deferred.

5. It’s not just for retirement.

With traditional IRAs, if you withdraw funds before the age of 59 1/2 you may be subject to income tax AND an early withdrawal penalty. But there are exceptions to this rule. These include withdrawals for a first time home purchase, major medical bills, college costs, birth/adoption and many others. However, it is important to know the rules BEFORE you withdraw the funds.

Tax rules surrounding IRAs are vast and complex. But within the rules are numerous situations that if you know they exist, can help you plan for a more tax-efficient future.

Upcoming Dates:

September 5
– Labor Day

September 15
– Filing deadline for 2021 calendar-year S corporation and partnership tax returns on extension
– Due date for 3rd quarter installments of 2022 estimated income tax for individuals, calendar-year corporations and calendar-year trusts & estates

Tips to Improve Your Credit Score

Credit scores are used to determine interest rates on mortgages, car loans and even the amount you pay for insurance premiums. Because of this, it is a good idea to review ways to improve yours. Here are some ideas:

Look for error on your credit report.

Look for errors on your credit report. The place to start is a review of your credit reports. You are entitled to get a free copy of your credit report every 12 months from each credit reporting company: Equifax, Experian and TransUnion. So get a copy of your report and review it for accuracy. Aggressively follow up to correct any errors using the process outlined by each credit reporting company.

Pay bills on time.

The easiest way to improve your credit is to have a string of on-time payments for all bills reported to the credit agencies. This is the most important part of your credit score equation. So while reviewing your credit report, pay special attention to who is reporting your payments and note if any are delayed. Then gather all your monthly bills, identify the due dates, and take advantage of automated tools to ensure the payments are always on time.

Get credit card utilization as low as possible.

The amount of credit you’re using at any given time is called your credit utilization, and is the second-biggest factor in your credit score next to paying on time. For example, if your credit card limit is $5,000 and your balance is $3,000, your credit utilization is 60%. Try to reduce this percentage to no more than 20%. You can do this by spending less, paying off as much of your balance as possible, or increasing your credit limits.

Sign up for score-boosting programs.

A newer way to help improve your credit is to include information on your credit report that normally isn’t reported. Programs like Experian Boost and UltraFICO help you add bills such as rent, utility, and cell phone payments to your credit report, and to analyze how you use your checking, savings or money market accounts. Be aware that these program may ask for access to you bank accounts and could easily work against you if the reporting has a negative impact on your credit if there is a billing problem.

Avoid requests for new credit.

Trying to open a new credit or loan account could lower your score by as much as 10 points. The more inquiries made by creditors who are trying to assess your creditworthiness when trying to open a new account, the more impact it has on your credit score. If you notice a number of vendors are making inquiries, you can always turn off this function with credit agencies. Just remember to turn it back on if you are actively refinancing your mortgage or looking for other credit. While in the long-term your score can be maximized by having a diverse mix of different types of credit accounts, in the short-term adding new accounts will negatively affect your score.

How quickly you can raise your credit score obviously depends on your individual situation, but following these tips will lead to a higher credit score sooner rather than later.

Ideas When Reviewing Franchise Agreements

Buying a franchise may seem like an easy way to get into business, but there are many things to consider before you make a commitment. Here are some thoughts.

Background

A franchise agreement is basically a contract between you and an owner (franchisor) which allows you to use the owner’s trademark, trade name, business systems, advertising support, and business know how. In exchange for this right, you pay fees (often a portion of your business revenues) to the franchisor. As with any business relationship, specific obligations and benefits can vary dramatically.

Some franchisors offer a full range of services to help you get started, including training, site selection, marketing plans, and products. Others give you little more than the legal right to use their name or symbol, after which you are on your own.

Where to begin

Initial and ongoing expenses vary widely among franchises, so determine all your costs before you invest. For example, some franchisors require franchisees to pay for licensing fees, building renovations, equipment purchases, operations manuals, real estate leases, and other start-up costs. Other franchisors may require you to pick up such costs as training, insurance, and advertising. So review the agreement to fully understand your obligation.

Doing your due diligence

Understand any restrictions on competing with other franchisees or selling your business. While the agreement will lay out your legal obligations, talk to other franchisees of the franchisor that you are considering. Do they get the training and ongoing support outlined in the agreement? Is the promised advertising actually delivered and is it very effective? If you hear extensive complaints, you should probably keep looking.

Remember the Document is a Required Disclosure

The franchise disclosure document is a legal document the Federal Trade Commission requires franchisors to provide to prospective franchisees before selling a franchise. There are 23 different sections that a franchisor is required to disclose, from potential litigation or bankruptcy issues, to initial fees, other fees and financial statements. Don’t get overwhelmed, as the entire document can run several dozen pages. This document can contain a treasure trove of information. And any omission is a potential legal liability to the franchisor, so it is worth your time to be thorough in your review.

As always, it’s a good idea to seek professional advice before investing in a new business.

Exciting Couto DeFranco News:

The team at Couto DeFranco is very proud to be marking our 30th Anniversary – a significant milestone.

Reflecting over our journey so far, it is with tremendous gratitude that we express our many thanks to all of our clients. We are honored to have your trust and will work tirelessly to continue to deserve it.

We would not have been able to do it without you!

July 2022 Newsletter

The recent run of inflation is causing many people to rethink how to save and where to spend. In this month’s newsletter, there is a recap of the traditional role of how your bank accounts work together to provide a valued resource to handle your funds. Plus there are a couple of timely tax articles including a review of common tax surprises and suggestions on making sure you get the most out of the recently increase standard mileage rates recently announced by the IRS.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

Watch for These Tax Surprises

Our tax code contains plenty of opportunities to cut your taxes. There are also plenty of places in the tax code that could create a surprising tax bill. Here are some of the more common traps.

Home office tax surprise.

If you deduct home office expenses on your tax return, you could end up with a tax bill when you sell your home in the future. When you sell a home you’ve been living in for at least 2 of the past 5 years, you may qualify to exclude from your taxable income up to $250,000 of profit from the sale of your home if you’re single or $500,000 if you’re married. But if you have a home office, you may be required to pay taxes on a proportionate share of the gain.

For example, let’s say you have a 100-square-foot home office located in a garage, cottage or guest house that’s on your property. Your main house is 2,000 square feet, making the size of your office 5% of your house’s overall area. When you sell your home, you may have to pay taxes on 5% of the gain. (TIP: If you move your office out of the detached structure and into your home the year you sell your home, you may not have to pay taxes on the gain associated with the home office.)

Even worse, if you claim depreciation on your home office, this could add even more to your tax surprise. This depreciation surprise could happen to either a home office located in a separate structure on your property or in a home office located within your primary home. This added tax hit courtesy of depreciation surprises many unwary users of home offices.

Kids getting older tax surprise.

Your children are a wonderful tax deduction if they meet certain qualifications. But as they get older, many child-related deductions fall off and create an unexpected tax bill. And it does not happen all at once.

As an example, one of the largest tax deductions your children can provide you is via the child tax credit. If they are under age 17 on December 31st and meet several other qualifications, you could get up to $2,000 for that child on the following year’s tax return. But you’ll lose this deduction the year they turn 17. If their 17th birthday occurs in 2022, you can’t claim them for the child tax credit when you file your 2022 tax return in 2023, resulting in $2,000 more in taxes you’ll need to pay.

Limited losses tax surprise.

If you sell stock, cryptocurrency or any other asset at a loss of $5,000, for example, you can match this up with another asset you sell at a $5,000 gain and – presto! You won’t have to pay taxes on that $5,000 gain because the $5,000 loss cancels it out. But what if you don’t have another asset that you sold at a gain? In this example, the most you can deduct on your tax return is $3,000 (the remaining loss can be carried forward to subsequent years).

Herein lies the tax trap. If you have more than $3,000 in losses from selling assets, and you don’t have a corresponding amount of gains from selling assets, you’re limited to the $3,000 loss.

So if you have a big loss from selling an asset in 2022, and no large gains from selling other assets to use as an offset, you can only deduct $3,000 of your loss on your 2022 tax return.

Planning next year’s tax obligation tax surprise.

It’s always smart to start your tax planning for next year by looking at your prior year tax return. But you should then take into consideration any changes that have occurred in the current. Solely relying on last year’s tax return to plan next year’s tax obligation could lead to a tax surprise.

The IRS Announces Tax Scams

Compiled annually, the IRS lists a variety of common scams that taxpayers can encounter. This year’s list includes the following four categories.

Pandemic-related scams.

Criminals are still using the COVID-19 pandemic to steal people’s money and identity with phishing emails, social media posts, phone calls, and text messages.

All these efforts can lead to sensitive personal information being stolen, and scammers using this to try filing fraudulent tax returns. Some of the scams people should continue to be on the lookout for include Economic Impact Payment and tax refund scams, unemployment fraud leading to inaccurate taxpayer 1099-Gs, fake employment offers on social media, and fake charities that steal taxpayers’ money.

Offer-in-compromise mills.

Offer-in-compromise (OIC) mills make outlandish claims about how they can settle a person’s tax debt for pennies on the dollar. Often, the reality is that taxpayers are required to pay a large fee up front to get the same deal they could have gotten on their own by working directly with the IRS. These services tend to be more visible right after the filing season ends while taxpayers are trying to pay their recent bill.

Suspicious communication.

Every form of suspicious communication is designed to trick, surprise, or scare someone into responding before thinking. Criminals use a variety of communications to lure potential victims. The IRS warns taxpayers to be on the lookout for suspicious activity across four common forms of communication: email, social media, telephone, and text messages. Victims are tricked into providing sensitive personal financial information, money, or other information. This information can be used to file false tax returns and tap into financial accounts, among other schemes.

Spear phishing attacks.

Criminals try to steal client data and tax preparers’ identities to file fraudulent tax returns for refunds. Spear phishing can be tailored to attack any type of business or organization, so everyone needs to be skeptical of emails requesting financial or personal information.

What you can do

If you discover that you’re a victim of identity theft, consider taking the following action:

Notify creditors and banks.

Most credit card companies offer protections to cardholders affected by ID theft. Generally, you can avoid liability for unauthorized charges exceeding $50. But if your ATM or debit card is stolen, report the theft immediately to avoid dire consequences.

Place a fraud alert on your credit report.

To avoid long- lasting impact, contact any one of the three major credit reporting agencies—Equifax, Experian or TransUnion—to request a fraud alert. This covers all three of your credit files.

Report the theft to the Federal Trade Commission (FTC).

Visit identitytheft.gov or call 877-438-4338. The FTC will provide a recovery plan and offer updates if you set up an account on the website.

Please call if you suspect any tax-related identity theft.

If any of the previously mentioned signs of tax-related identity theft have happened to you, please call to schedule an appointment to discuss next steps.

Understanding Tax Credits Versus Deductions

Tax credits are some of the most valuable tools around to help cut your tax bill. But figuring out how to use these credits on your tax return can get complicated very quickly. Here’s what you need to know.

Understanding the difference

To help illustrate the difference between a credit and a deduction, here is an example of a single taxpayer making $50,000 in 2022.

  • Tax Deduction Example: Gee I. Johe earns $50,000 and owes $5,000 in taxes. If you add a $1,000 tax deduction, he’ll decrease his $50,000 income to $49,000, and owe about $4,800 in taxes.
    Result: A $1,000 tax deduction decreases Gee’s tax bill by $200, from $5,000 to $4,800.
  • Tax Credit Example: Now let’s assume G.I. Johe has a $1,000 tax credit versus a deduction. Mr. Johe’s tax bill decreases from $5,000 to $4,000, while his $50,000 income stays the same.
    Result: A $1,000 tax credit decreases your tax bill from $5,000 to $4,000.

In this example, your tax credit is five times as valuable as a tax deduction.

Too good to be true?

Credits are generally worth much more than deductions. However there are several hurdles you have to clear before being able to take advantage of a credit.

To illustrate, consider the popular child tax credit.

Hurdle #1: Meet basic qualifications

You can claim a $2,000 tax credit for each qualifying child you have on your 2022 tax return. The good news is that the IRS’s definition of qualifying child is fairly broad, but there are enough nuances to the definition that Hurdle #1 could get complicated. And then to make matters more complicated…

Hurdle #2: Meet income qualifications

If you make too much money, you can’t claim the credit. If you’re single, head of household or married filing separately, the child tax credit completely goes away if you exceed $240,000 of taxable income. If you’re married filing jointly, the credit disappears above $440,000 of income. And then to make matters more complicated…

Hurdle #3: Meet income tax qualifications

To claim the entire $2,000 child tax credit, you must owe at least $2,000 of income tax. For example, if you owe $3,000 in taxes and have one child that qualifies for the credit, you can claim the entire $2,000 credit. But if you only owe $1,000 in taxes, the maximum amount of the child tax credit you could claim is $1,400.

Take the tax credit…but get help!

The bottom line is that tax credits are usually more valuable than tax deductions. But tax credits also come with lots of rules that can be confusing. Please call to schedule a tax planning session to make sure you make the most of the available tax credits for your situation.

Layering Your Bank Accounts

Time for the classic banking approach to make a comeback?

For years, savings and checking accounts provided very little in the way of interest income. In our current inflationary times, however, interest rates are on the rise. What is also on the rise is the comeback of traditional banking products. Here is a review of how your bank accounts traditionally work together as a team to provide you the best security and value for your money.

The checking account: 30 days of funds

Primary Purpose: Checking accounts enable financial transactions. So store enough money here to pay immediate expenses. With checking accounts, you’re allowed numerous withdrawals and unlimited deposits. The tradeoff for having an account where cash is available at a moment’s notice is usually a much lower (or practically non-existent) interest rate.

Action Item: Determine what your 30-day cash needs are and limit the available cash in your checking account to this amount. Also consider setting up a link to another account. Most banks allow this so you do not have overdraft fees. Consider looking for a checking account that also allows an automatic sweep function of excess funds into a higher-interest savings account.

Basic savings account: 2 to 6 months of funds

Primary Purpose: To store your money in a secure location so you can use it to pay periodic expenses that are expected over the next 2 to 6 months. This is also where many store their emergency fund. While these accounts typically pay only a modest amount of interest, their safety and reliability make savings accounts a great choice for stashing cash you want available sometime within the next 12 months. This is often also your overdraft buffer in case your checking account gets overdrawn.

Action Item: Calculate your anticipated periodic expenses over the next 6 months, and limit the cash in your savings account to this amount. You don’t want the balances too high, as you can typically get better interest in other bank products AND if a thief gets access to your debit card, you can limit the damage they do if this savings account is linked to your checking account.

Higher-interest bank accounts: Lots of choices

Primary Purpose: There are several types of bank accounts for storing your money beyond what you need for short-term expenses. High-yield savings accounts, money market accounts, and certificates of deposit (CD’s) all provide at least 10x the interest return compared to a regular savings account. But in return for a higher interest rate, there are rules that govern how long you need to leave your money untouched in these accounts.

Action Item: Review your bank’s alternatives for longer-term savings. Pay attention to interest rates and how often they adjust with the market. If CD’s are your bank’s strength, consider building a ladder of expiration dates to make your money more available. On high-yield accounts, the interest rate often increases with higher balances, so know what products these are. It’s also a good idea to talk to your banker to review your options.

When you’re trying to decide where to keep your money, there are also tax ramifications to consider. So keep this in mind as you review how your bank accounts work together as a team.

Your Business Mileage Deduction Just Became More Valuable

Your business mileage tax deduction just became more valuable for the rest of 2022 after a recent announcement by the IRS.

Starting July 1st, the IRS’s business mileage rate is increasing by 4 cents, to 62.5 cents per mile, while the medical and moving mileage is also increasing by 4 cents, to 22 cents per mile. The previous mileage rates still apply through June 30th.

Here are some tips to make the most of your business’s vehicle expense deduction.

  • Don’t slack on recordkeeping. You won’t be able to take advantage of the increased mileage rates without proper documentation. The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.
  • Keep track of both mileage and actual expenses. The IRS generally lets you use one of two different methods to track vehicle expenses – the standard mileage rate method or the actual expense method. But even if you use the standard mileage method you can still deduct other expenses like parking and toll fees. So keep good records.
  • Consider using standard mileage the first year a vehicle is in service. If you use standard mileage the first year your car is placed in service, you can then choose which expense tracking method to use in subsequent years. If you initially use the actual expense method the first year your car is placed in service, you’re locked in to using actual expenses for the duration of using that car in your business. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate the first year.
  • Don’t forget about depreciation! Depreciation can significantly increase your deduction if you use the actual expense method. For heavy SUVs, trucks, and vans with a manufacturer’s gross vehicle weight rating above 6,000 pounds, 100% bonus depreciation is available through the end of the 2022 tax year if the vehicle is used more than 50% for business purposes. Regular depreciation is available for vehicles under 6,000 pounds with annual limits applied.

Please call if you have any questions about maximizing your business’s vehicle expense deduction.