by Jean Miller | Accounting News, News, Tax, Tax Planning, Tax Planning - Individual
Americans are no strangers to seeking out ways to legally minimize their tax burdens. Fortunately, there are several financial tools available that can help taxpayers slash their tax liability. In this article, we explore how these tools help you optimize your tax planning and maximize tax savings.
Pre-Tax Contributions to Retirement Plans
One of the most effective ways to reduce taxable income while securing your financial future at the same time is through pre-tax contributions to retirement plans. Traditional Individual Retirement Accounts (IRAs) and employer-sponsored 401(k)s allow taxpayers to contribute a portion of their income before it’s adjusted for taxes. Subsequently, your taxable income decreases, which lowers your immediate tax liability. Furthermore, you can defer taxes on these contributions until you withdraw the funds during retirement, allowing your investments to grow tax-deferred over the years.
Roth IRAs for Tax-Free Growth
Roth IRA contributions are made with after-tax dollars, meaning they do not reduce your taxable income in the year they are made. However, the growth and withdrawals from a Roth IRA are generally tax-free during retirement. This is different from a traditional IRA, which offers upfront tax benefits. Choosing between the two depends on individual circumstances and your current and projected future tax brackets.
Health Savings Accounts (HSAs)
HSAs are a tax-advantaged savings option for individuals with high-deductible health insurance plans. Contributions to HSAs are tax-deductible, and qualified medical expenses can be withdrawn tax-free. They also have no “use-it-or-lose-it” rule, meaning the funds can roll over from year to year. This makes an HSA an excellent long-term savings and tax-reduction tool. Additionally, after age 65, if the funds are used for non-medical expenses, they can be treated similarly to a traditional IRA, subject to regular income tax but without any penalty.
Tax Credits
Tax credits provide a dollar-for-dollar minimization in tax liability, making them a highly valuable tool for taxpayers. Some common tax credits include the Earned Income Tax Credit (EITC), Child Tax Credit, and education-related credits like the Lifetime Learning Credit and the American Opportunity Credit. Qualification and the amount of tax credits differ based on aspects such as income, family size, and educational expenses. Taking advantage of these credits can substantially shrink your tax bill or even result in a refund.
Charitable Contributions
Contributions to eligible charities can be itemized deductions, reducing taxable income. In order to claim the deduction, make sure the charity qualifies under the IRS guidelines, and keep detailed records of your donations. You can also donate appreciated assets, such as stocks or real estate to avoid capital gains and reap additional tax advantages.
Flexible Spending Accounts
Through an employer-sponsored FSA, employees can set aside pre-tax dollars for qualified medical expenses and dependent care expenses. This reduces taxable income and therefor reduces tax liability. Note that it’s important to plan FSA contributions thoughtfully. Unlike an HSA account, any unused funds remaining in an FSA by the end of the year may be forfeited.
by Jean Miller | Accounting News, News, Retirement, Retirement Savings
Retirement planning involves careful consideration of various financial strategies, and while traditional retirement accounts such as 401(k)s and IRAs are still go-to options, the Health Savings Account (HSA) is becoming a valuable retirement tool. Here’s why.
What is an HSA?
A Health Savings Account (HSA) is a tax-advantaged savings account that allows individuals to set aside funds especially for medical expenses. It is intended to work jointly with a high-deductible health plan (HDHP), which is a type of health insurance plan with lower premiums but higher deductibles compared to traditional health insurance plans. Though it was originally designed to help individuals cover medical expenses, the HSAs has evolved to offer unique advantages that make it an increasingly attractive option for saving for retirement.
An Increase in Maximum Contributions
The IRS recently announced the largest-ever increase in maximum contributions to HSA accounts. In 2024, the maximum HSA contribution will be $4,150 for an individual (up from $3,850) and $8,300 for a family (up from $7,750). Add to this the bonus $1,000 individuals over 55 can contribute, and the maximum contributions are $5,150 for individuals and $10,300 for couples.
Triple-Tax Advantage
Contributions made to HSAs are tax-deductible, meaning that individuals can lower their taxable income by the amount contributed. Additionally, earnings on the funds within the account grow tax-free. Finally, withdraws from an HSA for qualified medical expenses are also tax-free.
Long-Term Savings Potential
Unlike flexible spending accounts (FSAs), which typically must be used by the end of the year, HSAs offer an opportunity for long-term growth as they are not subject to an annual deadline for spending. HSA funds can be invested in stocks and other securities, potentially allowing for higher returns over time. Because of this, individuals can accumulate substantial savings in HSAs to supplement their retirement income.
Medicare Premium Payments
HSA funds can be used to pay for Medicare premiums, including Medicare Part B, Part D, and Medicare Advantage premiums, deductibles, copays, and coinsurance. By utilizing HSA funds for these expenses, individuals can free up their retirement savings in other accounts, such as 401(k)s or IRAs, for other essential expenses or investments.
Healthcare Costs in Retirement
HSAs can serve as a dedicated savings tool for healthcare costs in retirement. Savers can build up a substantial nest egg dedicated specifically to healthcare expenses – including premiums, deductibles, and other out-of-pocket costs – by maximizing contributions to their HSAs during their years in the workforce.
Flexibility and Portability
Unlike traditional retirement accounts that have required minimum distributions (RMDs) starting at age 72, HSAs do not have RMDs. This allows individuals to retain control over their funds and decide when and how they want to use them. Additionally, HSAs are portable, meaning they move with the account holder from job to job, in between employment, or even into retirement. This provides individuals with consistent access to savings.
As healthcare costs continue to rise, individuals who incorporate HSAs into their retirement planning strategy can bolster their financial security and ensure they are well-prepared for any healthcare expenses in their golden years.
by Jean Miller | Accounting News, IRS, News
The IRS has released a plan for the nearly $80 billion in funding enacted through the Inflation Reduction Act. The plan includes improvements to customer service, technology, and enforcement. In this article we will explore how the funding plan will affect taxpayers.
Boost Technology
The plan aims to help the IRS develop new technologies to make the tax filing process easier for taxpayers, such as tools to help identify errors before filing returns. These improvements could make it easier for taxpayers to comply with tax laws and reduce the likelihood of mistakes in filing their returns. Additionally, the IRS seeks to phase out its paper backlog within five years by moving to a fully digital correspondence process.
Focus on Customer Service
The IRS intends to hire more than 7,000 service representatives and 1,500 auditors with the aim of reducing wait times and being more accessible to taxpayers, leading to a more efficient and responsive system. Within the next five years, taxpayers should be able to file documents and respond to notices online as well as download their account information.
Lean In to Enforcement Efforts
The agency wants to crack down on tax evasion, and plans to utilize a portion of the funding to do so. This could mean an increase in audits. Taxpayers who may have cut corners in the past could face stricter penalties for non-compliance. However, increased enforcement could also lead to more compliance with tax laws, if there is a clearer standard of behavior and more deterrents for those who attempt to cheat the system.
Close the Tax Gap
The IRS plans to reduce the budget deficit by closing the tax gap, initially focusing on tax returns for large corporations, complex partnerships, and wealthy families. The boost in staffing will help to address these more complicated audits. The agency has been quick to point out that households making less than $400,000 will not be affected by an increase in audit rates.
by Jean Miller | Accounting News, Credit Card Debt, Debt, Financial goals, News, Retirement Savings
Saving for retirement should be a critical component of any financial plan, but it can be challenging if you’re also working toward debt repayment. The good news is that it’s possible to do both at the same time. The key is to be consistent and disciplined, and in time you’ll see the benefits of your efforts. Read on for strategies you can use to save for retirement while tackling debt.
Prioritize High-Interest Debt
High-interest debt, such as credit card debt, can quickly accumulate interest and make paying it off even more challenging. By addressing this debt first, you can reduce the amount of interest you’ll pay over time. The amount of money you’ll rescue from credit card interest can be applied to remaining debt payments. Once your highest interest debt is paid off, move onto the debt with the next highest interest rate. This is known as the avalanche method of paying off debt.
Build an Emergency Fund
Establishing an emergency fund will help you cover unexpected expenses without having to rely on credit cards and thereby adding to your debt. Aim to save at least three months’ worth of living expenses in your emergency fund before you start allocating more funds toward retirement savings.
Increase Your Cash Flow
Increasing your monthly cash flow will provide you with more cushion in your budget to save for your emergency fund, meet your debt repayment plan, and save for retirement. In order to increase your cash reserves, think about requesting a raise, making a career change, or taking on a side hustle.
Consider a Balanced Approach
A balanced approach involves allotting a portion of your income toward paying off debt and a portion toward saving for retirement. You’ll need to decide what percentage of your income should go toward each goal, but this approach can help make progress toward both debt repayment and retirement savings without neglecting one for the other.
Cut Expenses and Establish a Budget
If you’re struggling with debt and saving for retirement, it’s probably time to take a closer examination at your income and expenses. Where is your money going each month? What can you do to build better financial habits? Look for areas where you can cut back, such as dining out, shopping, and entertainment. Even small slashes in costs can have an impact on your finances. When you begin to pay attention to where your money is actually going, you can make informed decisions that will help you redirect more funds toward your savings goals.
Automate Savings
Automating savings is an ideal way to ensure that you’re on track to meet your retirement goals. If your employer offers a retirement plan that allows you to contribute a percentage of your paycheck toward retirement savings, be sure you’re taking advantage of it. You can also set up automatic transfers from your checking account to a retirement savings account like an IRA. Automating savings is a set-it-and-forget-it approach that provides consistent progress in saving for retirement.
by Jean Miller | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual, Uncategorized
The IRS wants American taxpayers to be prepared for a potentially smaller tax refund in 2023. There are a few contributing factors that prompted the warning from the IRS in a recent statement, and we go over those below.
Economic Impact Payments
In a recent statement, the IRS cited the lack of Economic Impact Payments in 2022 as the main factor in lower tax refunds for next year. In 2020 and 2021, many taxpayers received additional refunds due to Economic Impact Payments (also known as stimulus payments), which were issued in response the financial impact Americans experienced during the COVID-19 pandemic. The final stimulus payment was distributed in March 2021. With no stimulus payment issued in 2022, taxpayers won’t see the additional money in their refunds.
Charitable Contribution Deductions
Additionally, in 2020 and 2021, taxpayers who take the standard deduction could claim a tax deduction of up to $300 for cash donations to charity. This pandemic-era exception hasn’t been extended for 2022. In order to write off gifts to charity, taxpayers must once again itemize. Almost 90% of taxpayers use the standard deduction, which means most Americans won’t be able to deduct charitable contributions.
An Additional Hurdle for Side Hustles and Small Gigs
The American Rescue Plan enacted a new rule that will affect those who rely on side hustles using third-party payment services like PayPal or Venmo – or sell on sites like eBay, Etsy, and Facebook Marketplace. Taxpayers who used these platforms to sell more than $600 worth of goods or services will be receiving a 1099-K form from whichever platform they used. Prior to the American Rescue Plan, the threshold that would trigger the need for a 1099-K form was either 200 transactions or $20,000. With this new requirement, many Americans will be filing taxes on their side hustles for the first time in 2023, which could also contribute to a lower tax refund for some filers. Note that money received from friends or family via a third-party app as a gift or reimbursement for personal expenses is not taxable.
NOTE: On Dec. 23, 2022, the IRS announced that calendar year 2022 will be treated as a transition year for the reduced reporting threshold of $600. For calendar year 2022, third-party settlement organizations who issue Forms 1099-K are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions.
