Business Tax

If you’re one of the millions of American households who owns either a traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to start an IRA if you don’t already have one. The IRS allows you to contribute to an IRA up to April 15, 2021, for the 2020 tax year.

This checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy.

Which Account: Roth IRA or Traditional IRA?

There are two types of IRAs available: the traditional IRA and the Roth IRA. The primary difference between them is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax free.¹

In choosing between a traditional and a Roth IRA, you should weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement.

If you need the immediate deduction this year — and if you qualify for it — then you may wish to opt for a traditional IRA. If you don’t qualify for the deduction, then it’s almost certainly a better idea to fund a Roth IRA.

Case in point: Your ability to deduct traditional IRA contributions may be limited not only by income, but by your participation in an employer-sponsored retirement plan. (See callout box below.) If that’s the case, a Roth IRA is likely to be the better solution.

On the other hand, if you expect your tax bracket to drop significantly after retirement, you may be better off with a traditional IRA if you qualify for the deduction. You could claim an immediate deduction now and pay taxes at the lower rate later. Nonetheless, if your anticipated holding period is long, a Roth IRA might still make more sense. That’s because a prolonged period of tax-free compounded earnings could more than make up for the lack of a deduction.

Traditional IRA Deductible Contribution Phase-Outs

Your ability to deduct contributions to a traditional IRA is affected by whether you are covered by a workplace retirement plan.

If you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (MAGI) is:

• Between $104,000 and $124,000 for a married couple filing a joint return for the 2020 tax year.
• Between $65,000 and $75,000 for a single individual or head of household for the 2020 tax year.

If you are not covered by a retirement plan at work but your spouse is covered, your 2020 deduction for contributions to a traditional IRA will be reduced if your MAGI is between $196,000 and $206,000.

If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot claim the deduction.

Roth IRA Contribution Phase-Outs

Your ability to contribute to a Roth IRA is affected by your MAGI. Contributions to a Roth IRA will be phased out if your MAGI is:

• Between $196,000 and $206,000 for a married couple filing a joint return for the 2020 tax year.
• Between $124,000 and $139,000 for a single individual or head of household for the 2020 tax year.

If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot make a contribution.

Should You Convert to Roth?

The IRS allows you to convert — or change the designation of — a traditional IRA to a Roth IRA, regardless of your income level. As part of the conversion, you must pay taxes on any investment growth in — and on the amount of any deductible contributions previously made to — the traditional IRA. The withdrawal from your traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% additional federal tax normally imposed on early withdrawals.

The decision to convert or not ultimately depends on your timing and tax status. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your income is unusually low and you still have many years to retirement, you may want to convert.

Maximize Contributions

If possible, try to contribute the maximum amount allowed by the IRS: $6,000 per individual, plus an additional $1,000 annually for those age 50 and older for the 2020 tax year. Those limits are per individual, not per IRA.

Of course, not everyone can afford to contribute the maximum to an IRA, especially if they’re also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer’s matching contribution, that additional money may be more valuable than the amount of your deduction. As a result, it might make sense to maximize plan contributions first and then try to maximize IRA contributions.

Review Distribution Strategies

If you’re ready to start making withdrawals from an IRA, you’ll need to choose the distribution strategy to use: a lump-sum distribution or periodic distributions. If you are at least age 72 and own a traditional IRA, you may need to take required minimum distributions every year, according to IRS rules. This age was increased from 70½, effective January 1, 2020. Account holders who turned 70½ before that date are subject to the old rules.

Don’t forget that your distribution strategy may have significant tax-time implications if you own a traditional IRA, because taxes will be due at the time of withdrawal. As a result, taking a lump-sum distribution will result in a much heftier tax bill this year than taking a minimum distribution.

The April filing deadline is never that far away, so don’t hesitate to use the remaining time to shore up the IRA strategies you’ll rely on to live comfortably in retirement.

¹Early withdrawals (before age 59½) from a traditional IRA may be subject to a 10% additional federal tax. Nonqualified withdrawals from a Roth IRA may be subject to ordinary income tax as well as the 10% additional tax.v

Find out how we can decrease your Federal and State taxes. Call us today at 480-945-6158 to learn more or request a consultation through our website now and we’ll contact you.

Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

• An officer or an employee of a corporation
• A member or employee of a partnership
• A corporate director or shareholder
• Another person with authority and control over funds to direct their disbursement
• Another corporation or third-party payer
• Payroll service providers

The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax advisor if you need to know more about the requirements.

When you partner with us, we’ll constantly seek innovative ways to streamline the accounting and bookkeeping processes of your small business and save you money on taxes. Call us at 480-945-6158 today to tell us about your business needs. We offer a free initial consultation for new clients to find out how they can benefit from our accounting, bookkeeping and tax services for small businesses.

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

Call us at 480-945-6158 today to tell us about your business needs. We offer a free initial consultation for new clients to find out how they can benefit from our accounting, bookkeeping and tax services for small businesses.

The Social Security Administration has released new numbers for those paying Social Security and those collecting it. Check out the new maximum taxable earnings amount as well as COLA and other key adjustments.

Every year, the Social Security Administration takes a fresh look at its numbers and typically makes adjustments. Here are the basics for 2020 — what has changed, and what hasn’t.

First, the basic percentages have not changed:

• Employees and employers continue to pay 7.65% each, with the self-employed paying both halves.
• The Medicare portion remains 1.45% on all earnings, with high earners continuing to pay an additional 0.9% in Medicare taxes.
• The Social Security portion (OASDI) remains 6.20% on earnings up to the applicable taxable maximum amount — and that’s what’s changing:

Starting in 2020, the maximum taxable amount is $137,700, up from the 2019 maximum of $132,900. This actually affects relatively few workers; the Society for Human Resource Management notes in an article that only about 6% of employees earn more than the current taxable maximum.

Also changing is the retirement earnings test exempt amount. Those who have not yet reached normal retirement age but are collecting benefits will find the SSA withholding $1 in benefits for every $2 in earnings above a certain limit. That limit is $17,640 per year for 2019 and will be $18,240 for 2020. (See the SSA for additional information on how this works.)

Cost-of-living adjustments

Those collecting Social Security will see a slight increase in their checks: Social Security and Supplemental Security Income beneficiaries will receive a 1.6% COLA for 2020. This is based on the increase in the consumer price index from the third quarter of 2018 through the third quarter of 2019, according to the SSA.

A detailed fact sheet about the changes is available on the SSA site.

The Work Opportunity Tax Credit gives employers tax benefits for hiring people who fall within certain qualifying categories. This can be a big boon to companies and employers! Click through to learn the ins and outs.

In December 2015, an extension to the Work Opportunity Tax Credit was signed in law. It helps match employers with qualifying candidates, such as veterans, and provides a tax incentive for continued employment. What do you need to know about WOTC and how it can affect you and your business? Here are some basics.

• Qualifying veterans. To qualify for WOTC, the new employee must be a veteran who received SNAP (food stamp) benefits for a designated period of time, or a disabled or unemployed vet. For more details about these categories, the length of time to qualify for eligibility and more, review the WOTC page at the Department of Labor Employment and Training Administration website.
• Nonveteran qualifying candidates. There are also WOTC programs available for individuals who have not served in the United States military. To qualify, an individual must be a Temporary Assistance for Needy Families (TANF) recipient, a SNAP recipient, a resident of a qualifying community such as Rural Renewal Counties, an ex-felon or a Supplemental Security Income recipient. The official website can provide more on these target groups.
• Nonqualifying candidates. Besides individuals not listed among the target groups, there are certain individuals who are specifically disqualified from the WOTC programs. These include relatives or dependents, majority owners of the business and former employees of the company.
• Tax credit extension period. The WOTC program was renewed as part of the vote that avoided a government shutdown at the end of 2015. This included retroactively renewing the program from Jan. 1, 2015; a five-year extension through December 2019; and a new target group of long-term unemployed individuals.

Do you want to know whether your company can qualify for the WOTC program?

Find out how we can decrease your Federal and State taxes. Call us today at 480-945-6158 to learn more or request a consultation through our website now and we’ll contact you.

You’ve opened the mail and your heart sinks. Your business just received an audit notification from the IRS. Click through to learn how to keep your cool and prepare for what happens next.

You may be surprised to learn that not every audit notification you receive will be legitimate. So, first, make sure you received an official audit notification. The Internal Revenue Service (IRS) will notify you either by letter or by a phone call followed by a letter. The IRS does not notify taxpayers about audits through email, so if you do get an email saying you’ve been selected for an audit, it’s probably fraudulent. If you’ve determined that you’re definitely getting audited, your next step is to learn what’s involved.

What Exactly Is an Audit?

According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.”

That’s it. It’s an audit — not an arrest and not a trial — so don’t panic. Contrary to popular belief, an audit doesn’t automatically mean you made a mistake. Yes, an inconsistency can trigger an audit if there’s a discrepancy between what’s on a tax form and what you actually reported. But the IRS may choose to audit a taxpayer based on random selection or a statistical formula. Also, an audit may be less intrusive than you feared. For example, it may be entirely through the mail, although in some cases, it may be at an office or the taxpayer’s home or place of business. And not all audits result in your owing money. In fact, your audit may lead to no changes at all.

Both businesses and individuals may be audited (even sole proprietorships), and there may be some differences in how they are handled. One thing that virtually all audits have in common, however, is access to records. The IRS is going to want to check some of your records, and maybe a lot of them. Did you deduct business expenses? Make some substantial charitable contributions? You’ll need to show the IRS some receipts. The good news is that in many cases the IRS accepts electronic records.

What Happens Next?

There is no typical length of time for an IRS audit, but if you have your records handy and cooperate fully and quickly, you increase your chances that it will be as brief and painless as possible. Ultimately, the IRS may determine that you owe more money. At this point, you can pay it or you can appeal. The audit doesn’t have to be the end of the road. There is a substantial appeal process and a long and expensive court trial may not even be necessary.

The important thing to remember is that you don’t have to go it alone! Your accountant can work with you throughout the audit process, including any appeals. The key factor is to call us as soon as you receive the notification about your audit. We’re ready to work through the details and help you gather any records you may need.

Find out why small businesses and individuals in the Scottsdale area trust Scott H. Miller Company, PC for tax services. Request a consultation online now or call us at 480-945-6158 to learn more.