Learning Center for Tax and Financial Insights

Article Highlights:Income DeferralEarnings DeferralIndividual Retirement AccountsRetirement AccountsBank SavingsShort- and Long-Term Capital GainsEducation Savings AccountsHealth Savings AccountsInstallment SalesTax Deferred Exchanges Qualified Opportunity FundsWhen you are attempting to defer the taxability of a capital gain, save money for your children’s future education or plan your retirement finances, you may do so in several ways, including investing in the stock market, buying real estate for income and appreciation, or simply putting money away in education savings accounts or retirement plans. Knowing how these various tax savings vehicles and income deferral opportunities function is important for choosing the ones best suited to your circumstances. Let’s begin by examining the tax nuances of IRA accounts. Individual Retirement Account (IRA) – There are two types of IRA accounts—the traditional and the Roth—and even though they are both IRAs, there is a huge difference in their tax treatment. Traditional IRA – Contributions to a traditional IRA are generally tax-deductible unless you have a retirement plan at work, and then the IRA contribution may not be deductible if you are a higher-income taxpayer. All the earnings from a traditional IRA are tax-deferred, meaning they are not taxable currently but will be when funds from the account are withdrawn. And since the contributions were tax-deductible, everything you withdraw from the traditional IRA will be taxable. An exception to that last statement is when you didn’t claim a deduction for money that you contributed to the IRA, either by choice or when the law didn’t allow a deduction. In this case, withdrawals from a traditional IRA would be prorated as partly taxable and partly tax-free.Roth IRA – Roth IRA contributions are never tax-deductible, but the earnings are never taxable if the account meets a 5-year aging rule and the distributions begin after you reach age 59.5. So, which is best? Well, that depends upon your circumstances. If you need the tax deduction to fund the IRA, then by all means use the traditional IRA. However, if you can afford to the contribute without the deduction, then the Roth IRA will be the best because everything is tax-free when withdrawn, usually at retirement. Retirement Plans – The tax code provides for a variety of retirement plans, both for employees and for self-employed individuals. These include: 401(k) deferred compensation plans, Keogh self-employed retirement plans, simplified employee plans (SEP), tax-sheltered annuity (403(b)) plans – most commonly for teachers and employees of nonprofits), and government employee plans (457) plans.For the most part, the consequences of these arrangements are the same as for a traditional IRA, allowing the amount contributed to be excluded from income (deferred), and then the distributions are fully taxable when they are taken. However, 401(k) and 457 plans may have a Roth option, under which there is no income exclusion for the contributions but the distributions at retirement are tax-free. If individuals have used both methods, the non-Roth contributions are deferred, and the earnings are fully taxable.Bank Savings – When money is put away into a bank savings account or CD, the earnings are fully taxable in the year earned. However, after the tax on the annual earnings is paid, the full balance in the account is available, without any further tax. Short- and Long-Term Capital Gains – Capital gains refers to the gain from the sale of capital assets – typically stocks, bonds, and real estate. Short-term capital gains are taxed at ordinary tax rates, while long-term capital gains enjoy special lower rates. For lower-income taxpayers, there is actually no tax on capital gains; for very high-income taxpayers, the capital gains rate maxes out at 20%, whereas the top regular tax rate for high-income taxpayers is 37%. However, for the average taxpayer, the capital gains rate is 15%, which provides a significant savings over the regular tax rates. To qualify for long-term treatment, the capital asset must be held for at least a year and a day. Education Savings Accounts – The tax code provides two tax-advantaged plans that allow taxpayers to save for the cost of college for each eligible student: the Coverdell Education Savings Account and the Qualified Tuition Plan (frequently referred to as a Sec. 529 Plan). Neither provides tax-deductible contributions, but both plans’ earnings are tax-deferred and are tax-free if used for allowable expenses, such as tuition. Therefore, with either plan, the greatest benefit is derived by making contributions to the plan as soon as possible—even the day after a child is born—to accumulate years of investment earnings and maximize the benefits. However, there are different limitations for the two plans, in that only $2,000 per year per student can be contributed to a Coverdell account, while huge amounts can be contributed to Sec. 529 plans, limited only by the estate-planning issues of each contributor and each state’s cap on account contributions, which goes into six figures. Health Savings Accounts – A health savings account (HSA) can generally be established by taxpayers only if they have high-deductible health plans. The contributions are tax-deductible, the earnings accumulate tax-free, and the distributions are tax-free if used for qualified medical expenses. When part of an employer-sponsored plan, HSA contributions are excluded from the employee’s wages rather than being a deduction on the tax return. Once the account owner reaches age 65, taxable but penalty-free distributions can be taken, even if they are not used to pay for medical expenses or to reimburse the taxpayer for medical expenses previously paid for out-of-pocket. Thus, these plans can serve as a combination tax-free medical reimbursement plan and taxable retirement savings arrangement. The maximum annual contribution is inflation adjusted; for 2023, it is $3,850 for self-only coverage and $7,750 for family coverage. Like other tax-advantaged plans, the key is to allow the account to grow through income-excluded or tax-deductible contributions and the accumulated earnings.

Put 2022 behind you by wrapping up those unfinished accounting tasks in QuickBooks.You meant to clean up your accounting data by the end of 2022, but December is so busy. It was hard to do much beyond managing each day’s high-priority QuickBooks work. You’d catch up in January, you told yourself in December.Now that it’s January, it’s time for a fresh start in a lot of ways, including your bookkeeping. But you can’t look ahead very effectively if you’re not sure where you are now. We recommend you take stock of the state of your QuickBooks company file. Are you caught up on bills? Do customers need to be invoiced? Are any of them past due on their payments to you?QuickBooks is great at customer and vendor management, transaction processing, and reports. It can also serve as a barometer of your overall financial health. Let’s take a look at what you can do to update your company file and get ready for the challenges coming in 2023.Who Do You Owe?It’s easy to let some bills slip at the end of the year. Extra expenses in December may have caused you to run short on funds. Maybe you simply forgot, or you didn’t have a chance to deal with your payables. Whatever the reason, you can easily find out what bills you need to pay using QuickBooks.The first thing you should do is run an A/P Aging Detail report. Open the Report Center (Reports | Report Center) and click Vendors & Payables. Locate the report and click the green arrow button. When the report opens, click Customize Report in the upper if you want to change the Dates. Then look to see if any bills are past due. Double-click on any row to see the original bill and pay it. You can also run the Unpaid Bills Detail report. The Unpaid Bills Detail reportYou’ve probably heard this before, but it’s important: If you’re past due on any bills, contact the vendors and let them know when they might expect payment. It makes a difference.Who Owes You?Just as you may have missed some bills in December, your customers might have let invoice payments slip. You need to find out who is in arrears. There are two reports that can help you here. Open the Report Center again and click Customers & Receivables. Run the A/R Aging Detail report and look at the Aging column to see if any customers have gone past due on payments. Open Invoices, too, can alert you to those customers.How Should You Approach Past-Due Customers?This is a problem for every small business. You don’t want to come on too strong and threaten the goodwill you’ve built up with your customers, but you have your own cash flow to consider. Here are some approaches:Set up payment reminders so you’ll remember to send follow-up emails. Go to Edit | Preferences | Payments | Company Preferences. Answer the questions under Payment Reminders.Automate reminders. Open the Customers menu and select Payment Reminders | Schedule Payment Reminders. This is a little complicated, so you may want our help with it. You’ll be creating schedules to automate the sending of invoices or statements at intervals you define. So you might dispatch an invoice to All customers when their payments are 15 days after the due date, for example. Click Add reminder to see the default text for the email accompanying the invoice and edit it.

Experts agree that a recession in both the United States and Europe is likely just on the horizon. Recessions can be stressful and uncertain times for even the strongest businesses out there - to say nothing of how difficult they can make things for younger and smaller startups.Thankfully, the situation is likely not as dire as you might be fearing. One of the best ways to remain stable and move forward for any business is to carefully track cashflow. Therefore, it's doubly important to do so with a recession potentially right around the corner. Doing so isn't necessarily difficult, but it does require you to keep a number of important things in mind along the way.Startup Cashflow Tips for a Recession: Breaking Things DownBy far, the most important cashflow tip that you can use to stay afloat during a recession involves keeping a watchful eye on any and all spending. This means not just understanding where money is going, but also what you're getting in return.Any seasoned entrepreneur can tell you that the early days of any business are costly. You have to invest in equipment and other assets. You'll be onboarding team members to help move your vision forward. You'll likely be investing in marketing campaigns to help raise brand awareness. The list goes on and on.But you also need to make sure that you're getting an actual return for that spending. Take marketing, for example - do your research and identify those activities that historically have yielded the highest ROI. You can always ramp up and explore other opportunities later, but at least initially you want to focus on getting something for every dollar you spend.Another tip you can put to good use involves making sure that you're tracking the right key performance indicators over time. Don't just let your cashflow statement be your "be all, end all" source of truth for your funds. You also need to look at metrics like operating cash flow, for example, which is the total money that your company is generating through its regular activities.

Article HighlightsFamily Member TransactionsRenting to a Relative Below-Market LoansTransferring Home TitlesGiftsBasisLife EstateIncorrect WithholdingChild Files Incorrect ReturnWhen it comes to transactions between family members, the tax laws are frequently overlooked, if not outright trampled upon. The following are some commonly encountered situations and the tax ramifications associated with each.Renting to a Relative – When a taxpayer rents a home to a relative for long-term use as a principal residence, the rental’s tax treatment depends upon whether the property is rented at fair rental value (the rental value of comparable properties in the area) or at less than the fair rental value.Rented at Fair Rental Value – If the home is rented to the relative at a fair rental value, it is treated as an ordinary rental reported on Schedule E, and losses are allowed, subject to the normal passive loss limitations.Rented at Less Than Fair Rental Value – When a home is rented at less than the fair rental value, which often happens when the tenant is a relative of the homeowner, it is treated as being used personally by the owner; the expenses associated with the home are not deductible, and no depreciation is allowed. The result is that all of the rental income is fully taxable and reported as “other income” on the 1040. If the taxpayer were able to itemize their deductions, the property taxes on the home would be deductible, subject to the current $10,000 cap on state and local taxes. The taxpayer might also be able to deduct the interest on the rental home by treating the home as their second home, up to the debt limits on a first and second home.Possible Gift Tax Issue – There also could be a gift tax issue, depending if the difference between the fair rental value and the rent actually charged to the tenant-relative exceeds the annual gift tax exemption, which is $17,000 for 2023. If the home has more than one occupant, the amount of the difference would be prorated to each occupant, so unless there was a large difference ($17,000 per occupant, in 2023) between the fair rental value and actual rent, or other gifting was also involved, a gift tax return probably wouldn’t be needed in most cases. Below-Market Loans – It is not uncommon to encounter situations where there are loans between family members, with no interest being charged or the interest rate being below market rates. A below-market loan is generally a gift or demand loan where the interest rate is less than the applicable federal rate (AFR). The tax code defines the term “gift loan” as any below-market loan where the forgoing of interest is in the nature of a gift, while a “demand loan” is any loan that is payable in full at any time, at the lender’s demand. The AFR is established by the Treasury Department and posted monthly. As an example, the AFR rates for November 2022 were: TermAFR (Annual) Nov. 20223 years or less3.10%Over 3 years but not over 9 years3.00%Over 9 years2.97%Generally, for income tax purposes:Borrower – Is treated as paying interest at the AFR rate in effect when the loan was made. The interest is deductible for tax purposes if it otherwise qualifies. However, if the loan amount is $100,000 or less, the amount of the forgone interest deduction cannot exceed the borrower’s net investment income for the year.Lender – Is treated as gifting to the borrower the amount of the interest between the interest actually paid, if any, and the AFR rate. Both the interest actually paid and the forgone interest are treated as investment interest income.Exception – The below-market loan rules do not apply to gift loans directly between individuals if the loan amount is $10,000 or less. This exception does not apply to any gift loan directly attributable to the purchase or carrying of income-producing property. Parent Transferring a Home’s Title to a Child – When an individual passes away, the fair market value (FMV) of all their assets is tallied up. If the value exceeds the lifetime estate tax exemption ($12,920,000 in 2023), then an estate tax return must be filed, which is rarely the case, given the generous amount of the exclusion. Because the FMV is used in determining the estate’s value, that same FMV, rather than the decedent’s basis, is the basis assigned to the decedent’s property that is inherited by the beneficiaries. The basis is the value from which gain or loss is measured, and if the date-of-death value is higher than the decedent’s basis was, this is often referred to as a step-up in basis.

FTX Group, also officially referred to as FTX Trading Ltd., is a cryptocurrency company that is currently in the process of bankruptcy proceedings. In addition to previously operating as a cryptocurrency exchange, it was also a crypto hedge fund.It was originally founded in 2019 and hit its stride just a few years later in 2021. At one point, it had over a million users and was considered to be the third-largest exchange of its type in existence.My, what a difference a few years can make.Over the course of a relatively short period of time, FTX Group went from being worth an estimated $32 billion to filing for bankruptcy. The founder, Sam Bankman-Fried, became one of the wealthiest people on the planet by the age of 30 during this period. Having said that, things have gotten so bad that there has been a negative ripple effect across the entire crypto space.Not only are more people than ever doubting the validity of crypto, but Congress and the Securities and Exchange Commission (SEC) are currently investigating exactly what happened.Now, as new information is revealed on a regular basis, we're getting a better picture of how everything reached this point - and the details certainly aren't pretty.FTX Group: The Story So FarWhile this isn't the only reason that FTX Group finds itself in its current position, a major contributing factor seems to be the fact that the organization didn't have an in-house accounting department of any kind.Not only is that bad in an over-arching sense, but it makes things particularly tricky once bankruptcy proceedings have begun. Presently, FTX Group is now struggling to obtain accurate financial statements to be used moving forward. Most of what they already have "cannot be trusted," according to experts.All of this makes it particularly more distressing that Sam Bankman-Fried and FTX Group misused customer funds. The fact that they lack trustworthy financial statements of any kind makes the mess difficult, if not impossible, to truly untangle.One professional overseeing the bankruptcy proceedings is a man named John Ray III. He's been an insolvency professional for decades and he actually oversaw the liquidation of Enron earlier in his career. In a filing with the court, he indicated that the current status of FTX Group is "the worst case of corporate failure" that he had seen in the more than four decades that he had been on the job.The proverbial "straw that broke the camel's back" in terms of the FTX Fund collapse happened when Sam Bankman-Fried used in excess of $10 billion of client funds to support his own hedge fund, Alameda Research. That fund had recently suffered losses after making a series of bets on cryptocurrency-related ventures that never ended up paying off. When that occurred, FTX no longer had the funds it needed to cover withdrawals. One of the currencies that it was trading, FTT, triggered a bank run. At that point, the writing was on the wall.

When it comes to income tax planning, one of the most important things to understand is that not all professions are created equally.Yes, it's true that are certain rules that we all have to follow when it comes to the Internal Revenue Service. But at the same time, there are best practices that may work splendidly for one job that may be woefully inadequate for the next given how they generate revenue, considerations when it comes to their income and payment structures, etc.Case in point: attorneys and lawyers. Those in the legal profession can potentially enjoy a significant amount of savings when April rolls around again in 2023 by keeping a number of important things in mind along the way.It's All About TimingBy far, one of the most important things to understand about this process is that timing is everything for saving money on your taxes as an attorney or other legal professional.Not every job has the option to defer revenue to the upcoming tax year as opposed to the current one, for example. In most jobs, when you get paid is set in stone and that dictates when you pay taxes on that money. Things work a bit differently in the legal world. You can always defer revenue at this point of the year into the next tax year, all while accelerating expenses at the same time to the current year.Essentially, if you're a cash basis taxpayer and in a position to do so, try to delay any last-minute income until after January 1, 2023. Then, try to increase your last-minute yearly expenses to sometime in December. One great way to do this includes making your January 2023 estimated tax payments to the state early. However, there is a $10,000 limit on deductible taxes, so watch out for that limitation.Another way to accomplish this for a law firm would be to delay collecting unpaid invoices from clients until after the first of the year. Then, you would make sure that all end-of-the-year bonuses get paid out in December. It's essentially the same basic concept, just executed in two different ways. Some firms may even want to experiment with both strategies at the same time.Note that while this particular technique is ideal if your revenue remains relatively stable from year to year, there are several important considerations that you would want to make if you think you might have a far better 2023 than you did in 2022. If you think that next year will be significantly more profitable for your firm, you would want to reverse this strategy - meaning you should accelerate revenue and defer expenses as much as you can.This would take some of the burden off of 2023, reducing the amount you owe in taxes down to a more manageable and consistent level as opposed to allowing yourself to get hit with a massive tax liability in one fell swoop.