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Archives for November 2023

Six Tax-planning Strategies for High-Income Earners

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Whether you’ve successfully started a business or paid your dues to climb the corporate ladder, you’ve put in the hours and made sacrifices to find yourself among the ranks of high-income earners.

But with great success comes great responsibility, particularly when it comes to managing your taxes. As a high-income earner, you have unique opportunities and challenges when it comes to tax planning — ensuring you settle up with Uncle Sam while continuing to grow your wealth.

Here are some tax-planning strategies that may be effective in helping a high-earning taxpayer save more cash:

Utilize retirement accounts. Contributions to retirement accounts such as a 401(k) or an Individual Retirement Account (IRA) can provide immediate tax benefits as you save for the future. By maxing out your contributions to these accounts, you can reduce your taxable income, potentially moving you into a lower tax bracket.

Additionally, any earnings within the account grow tax-deferred, meaning you don’t owe taxes on them until you withdraw the money in retirement — when you might find yourself in a lower tax bracket. Keep in mind, the SECURE Act lets high-income earners age 50 and over save $27,000 a year in a 401(k), so your earnings are sheltered from tax until you take a distribution from the account at age 59 ½ or later.

Take advantage of a Roth conversion. Some high-income earners may be eligible for a Roth IRA conversion — a strategy that converts a traditional IRA to a Roth IRA, allowing for tax-free withdrawals in retirement. While the conversion is taxable in the year it occurs, it can be a savvy move for high-income earners who expect to eventually be in a higher tax bracket.

Establish a family trust. Family trusts are common in estate planning, ensuring certain beneficiaries receive assets when the grantor dies. And when properly structured, a family trust, for example, can help reduce your state income tax liability by moving your investment earnings to a relative with lower marginal tax rates.

Make charitable donations. By donating to qualified charitable organizations, you can support causes you care about, while providing valuable tax benefits. However, it’s important to note that the tax benefits vary depending on the type of donation and your overall income level. You may consider establishing donor-advised funds (DAFs) to manage and distribute charitable donations over time. By contributing appreciated assets — like stocks or real estate — to a DAF, you can potentially avoid capital gains taxes, while still benefiting from the charitable donation.

Consider cash-value life insurance. Also referred to as whole life insurance, cash-value life insurance is one of the most popular tax deferral strategies for high-income earners, especially if you’ve maxed out other retirement accounts. Contributions are made with after-tax dollars, and you can borrow against or withdraw up to the amount of premiums paid without having to pay taxes on it.

Invest in opportunity zones. Created by the Tax Cut and Jobs Act of 2017, the Opportunity Zones tax incentive is an economic development tool, allowing people to invest in distressed areas to help the community and receive a tax benefit. You’ll be granted a tax deferral on the capital gain of the investment until December 31, 2025, or until it is sold prior to this date — whichever comes first.

Keep more of your hard-earned money

As a high-income earner, taking steps to optimize your tax situation is a critical aspect of your financial planning. The professionals at Magone & Company help, offering the guidance and expertise to plan your wealth-preserving tax strategy. Reach out to learn more.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

6 Financial Faux Pas for Small Business Owners

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Fifty percent of small businesses fail within five years. Now, that’s a troubling statistic. What goes wrong? Are you making missteps that could lead to financial failure?

Find out the top financial mistakes that are all too common for small businesses — so you can ensure that you’re not caught in the same painful cycle.

Mistake #1: Not sticking to a budget. When you’re caught up in your business, it’s easy to overlook the importance of budgeting, which can lead to disastrous and costly consequences.

A budget provides a roadmap for your business’s financial journey, allowing you to set realistic goals, allocate resources effectively and make informed financial decisions. It also can help you identify potential financial pitfalls before they become major issues.

Mistake #2: Failing to differentiate personal and business expenses. By keeping personal and business finances separate, you not only maintain accurate records, but also protect your personal assets.

In the unfortunate event that your business faces legal issues or bankruptcy, having separate accounts can shield your personal savings, home and other assets from being seized to cover business liabilities. In addition, keeping separate accounts helps simplify your tax reporting, ensuring that you stay compliant and avoid unnecessary penalties.

Mistake #3: Using credit cards to cover business costs. While a credit card can increase your company’s purchasing power, business credit issuers can lower your credit limit and raise your interest rates at any time.

By putting major expenses on a card, you may pay significantly more in the long-run. Instead, business loans may be a smarter option due to lower rates.

Mistake #4: Expanding your headcount too quickly. During an upswing, it may be tempting to quickly to add to your team. But hiring, training and maintaining new staff is a hefty expense that might not be sustainable. And if you have to let them go, creating severance packages and extending insurance benefits also carry a price tag. Unless absolutely necessary, hold off on hiring to see if the growth persists.

Mistake #5: Neglecting to build an emergency fund. Failing to plan for unforeseen circumstances can leave your business vulnerable to financial shocks. Building an emergency fund is essential, providing a safety net to help you weather unexpected expenses, such as equipment breakdowns, legal disputes or economic downturns. Without an emergency fund, you may be forced to rely on credit cards, which can cripple your business’s financial health in the long-run.

Mistake #6: Doing your own taxes. Did you know that 77% of percent of small business owners feel the burden of business taxes? Unless you’re a tax professional, tackling your own business tax return can lead to trouble.

For example, if you claim too many deductions, you may find yourself getting audited. If you don’t claim enough, you could end up owing the government money that you haven’t budgeted for.  There are many variables that can impact your company’s tax circumstances, so it’s your best bet to consult with a trusted business or tax advisor.

Take charge of your finances now — before it’s too late

The professionals at Magone & Company can help you navigate debt traps, business taxes and smarter financial management practices to help keep your business afloat. Call us today at (973) 301-2300 for a specific evaluation of your situation.

Year-end Tax Planning for Individuals

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The year-end is approaching and that means holidays, New Year’s resolutions and tying up loose ends before kicking off 2024. While it’s a busy time of year, it’s also a good time to take action to help lower your tax bill.

We’ve compiled a list of strategic moves based on current tax rules that may help you save tax dollars by implementing some changes before year-end.

  • Higher-income earners could be subject to a 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of either net investment income or the excess of Modified Adjusted Gross Income(MAGI) over a certain threshold amount — $125,000 for a married individual filing separately; $250,000 for joint filers or surviving spouses; and $200,000 in all other cases. You may consider ways to eliminate or minimize the surtax, depending on your estimated MAGI and Net Interest Income (NII) for the year. Not sure how to estimate these numbers? Get in touch with us.
  • The 0.9% additional Medicare tax impact higher-income earners, prompting workers — whose employment wages and self-employment income total more than the amount equal to the Net Investment Income Tax (NIIT) thresholds — to take action. If you’re self-employed, consider your estimated tax liability. If you’re an employee, employers will be required to withhold the additional Medicare tax from your wages in excess of $200,000 regardless of filing status.
  • For taxpayers who hold long-term assets that have appreciated in value, consider selling a portion to generate long-term capital gains that can be sheltered by the 0% rate. Depending on your taxable income, long-term capital gain from asset sales that were held for over one year is taxed at 0%, 15% or 20%.
  • Medical expenses may be itemized if they exceed 7.5% of your adjusted gross income, as well as state and local taxes up to $10,000, charitable contributions and interest deductions on a restricted amount of qualifying residence debt. Note that payments of those items won’t save taxes if they don’t cumulatively exceed the standard deduction according to your filing status. To work around these restrictions, you may move discretionary medical expenses and charitable contributions into a year where they will have a greater tax benefit.
  • If you’re 70½ or older by the end of 2023, have a traditional IRA and are unable to itemize deductions, you may consider making 2023 charitable donations via qualified charitable distributions from your IRA. The contribution amount is not included as part of your gross income, nor is it deductible on Schedule A, Form 1040.
  • If you’re facing a penalty for underpayment of estimated tax, you may take an eligible rollover distribution from a qualified retirement plan before the year-end. The income tax withheld will be applied toward taxes owed for 2023. While no part of the distribution will be includible in income for 2023, the withheld tax will be applied pro rata over the full 2024 tax year to reduce previous estimated underpayments.
  • Year-end is a good time to consider increasing the amount set aside for next year’s flexible spending account (FSA), especially if you put aside too little for the past year and you’re anticipating similar medical costs going forward.
  • For workers who become eligible by December 2023 to make health savings account (HSA) contributions, you may make a full year’s worth of deductible HSA contributions for 2023.
  • To save on gift and estate taxes, you may shelter gifts from the annual gift tax exclusion before year-end. Unused exclusions may not be carried over from one year to the next.
  • If you live in a federally declared disaster area — and have suffered uninsured or unreimbursed disaster-related losses — you can claim them either on the return for the year the loss occurred or on the prior year’s return to generate a faster refund. You also may want to settle an insurance or damage claim in 2023 in order to maximize this year’s casualty loss deduction.

At Magone & Company, our goal is to get you thinking about potential moves that can minimize your personal tax liability now and in the future. For tax planning guidance or assistance, give us a call today at (973) 301-2300. We look forward to working together to create a plan based on your unique tax situation.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Year-end Tax Planning for Small Businesses

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The year-end is a busy time for small businesses — from finalizing your books to forecasting for the year ahead. But it’s also a key time to take action to help lower your taxes. Read on for tax-saving strategies that may help your business save this year and next:

  • Did you know that taxpayers (excluding corporations) may receive a deduction of up to 20% of their qualified business income? If your taxable income exceeds $340,100 for a married couple filing jointly, the deduction may be limited based on paid W-2 wages, the unadjusted basis of qualified property (e.g. machinery and equipment) and whether you’re engaged in a service-type business or trade (e.g. accounting, law, health or consulting). Note that the limitations are phased in for those with taxable income up to $50,000 above their threshold, as well as for joint filers with taxable income up to $100,000  above the threshold. You may be able to claim a portion or all of this deduction by accelerating deductions or deferring income. You may also boost your deduction by increasing W-2 wages before year-end.
  • Compared to earlier years, more small businesses can use the cash method of accounting, rather than the accrual method. Your business may prefer this method as it’s easier to shift income to other years. To qualify, you must satisfy a gross receipts test, ensuring that your average annual gross receipts don’t exceed $27 million.
  • Excluding large corporations, a corporation that expects a small net operating loss (NOL) for 2023, and substantial net income in 2024, may accelerate a portion of its 2024 income or defer a portion of its 2023 deductions to create a small amount of net income for 2023.
  • The liberalized business property expensing option may give you an opportunity to save if your business possesses property and off-the-shelf computer software that’s depreciated. It covers interior improvements to a building, such as elevators, HVAC, security systems and more. For tax years beginning in 2022, the expensing limit is $1,080,000, while the investment ceiling limit caps at $2,700,000.
  • Your business may also can claim a 100% bonus first-year depreciation deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service. It applies to machinery and equipment purchased used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described in the expensing deduction.
  • To expense the costs of certain lower-cost assets, materials and supplies, you may take advantage of the de minimis safe harbor election, also known as the book tax conformity election). To qualify, the cost of a unit of property can’t exceed $5,000 if you have an applicable financial statement (AFS). The cost of a unit must not exceed $2,500 if there’s no AFS.
  • For optimal tax affect, you may choose to strategically time employees’ year-end bonuses. Cash-basis employers may deduct bonuses in the year paid, while accrual-basis employers may deduct bonuses in the accrual year, as long as the bonus is paid within two months following the end of the employer’s tax year. If you’re an accrual employer looking to defer deductions to a higher-taxed year in the future, you may change your bonus plan before year-end to establish the payment date after the 2.5-month window.

At Magone & Company, our goal is to get you thinking about potential moves that can minimize your small business’s tax liability now and in the future. For tax planning guidance or assistance, give us a call today at (973) 301-2300.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.