How Qualified Charitable Distributions can Fulfill RMD Obligations

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When saving for retirement, tax advantages play a significant role. Traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans such as 401(k)s offer tax-deferred growth, so you don’t pay taxes on the investment gains — as long as the money stays in your account.

However, the IRS doesn’t want you to avoid paying taxes on these funds indefinitely.

If you’re approaching age of 70½, required minimum distributions (RMDs) will help ensure that you start withdrawing money from your tax-deferred retirement accounts and pay the appropriate taxes on those distributions. But did you know that a qualified charitable distribution (QCD) can fulfill your RMD obligations while avoiding taxes on the distribution?

The ABCs of a QCD

A QCD refers to a taxable distribution that is paid directly from an IRA to a qualified charity. According to the IRS, this includes nonprofit groups that have a charitable, educational, religious, literary or scientific purpose, or that work to prevent child or animal cruelty.

When a QCD is directly paid from your retirement account to an eligible charity, it’s not included in your taxable income, meaning the distribution is tax-free. The giver must be at least 70½ at the time the QCD is made.

Because it’s tax-free, you cannot deduct the QCD on your Schedule A as an itemized deduction. In order to claim that charitable contribution deduction, your total itemized deductions must exceed the standard deduction. Keep in mind, the increased income resulting from the distribution could impact your eligibility for certain tax credits and push you into a higher tax bracket.

Questions regarding qualified charitable distributions? Let us help you with tax planning to minimize your tax burden and make the most of charitable giving. Reach out to the tax experts at Magone & Company or call us today at (973) 301-2300 for an evaluation of your 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 unique circumstances.

CPA vs. Tax Preparer: What’s the Difference?

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Once the calendar flips to a new year (and you’ve barely had a chance to recover from the busy holiday season), Uncle Sam will come knocking at your door to get his share of your taxable income.

Tax season will be here before you know it. But unless you’re a mathematical savant who revels in the joy of crunching numbers and interpreting tax laws, chances are you lean on the sturdy shoulders of a tax professional.

While both Certified Public Accountants (CPAs) and tax preparers are professionals authorized to prepare and file tax returns, their training, certifications, expertise and scope of services vary greatly. So who’s the right candidate?

Here’s a quick rundown to help you hire the ideal tax professional:

Tax preparer

Tax preparers have no college degree requirement, and many lack tax-specific training. In fact, the only pre-requisite for obtaining the required (PTIN) to file taxes on your behalf is the completion of a simple form — one that takes about 15 minutes to fill out.

Why choose a tax preparer? If you or your small business only need assistance filing simple tax returns, they’ll typically apply the most common deductions and tax credits to your return — things like deductions for educational expenses and health care costs, as well as earned income or retirement tax credits. But what they may not do is research more unusual tax credits and deductions.

You can count on them to:

  • Collect relevant financial records and input applicable tax data
  • Determine basic deductions, refunds and payments using federal state and local tax laws
  • File documents with the IRS
  • Offer best steps to take to reduce your tax liability for the coming year

CPA

CPAs, on the other hand, must undergo extensive education and ongoing training to obtain their certification and ensure they’re responsible fiduciaries:

  • Completion of bachelor’s degree program, including 150 credit hours with a concentration on accounting, business and general ed
  • Passing of the AICPA (American Institution of Certified Public Accountants) exam, covering business concepts; accounting and reporting; auditing and attestation and regulations, within 18 months of completing their undergrad degree
  • Licensure by their individual state(s)
  • Annual completion of 40 hours of continued education

Because they have advanced training, CPAs are authorized to represent their clients before the IRS. They also tend to have greater insight into complex tax positions and are well-equipped to assist clients well beyond the tax return, with investments, audits and financial planning.

In addition, CPAs can provide the following services:

For individuals:

  • Estate planning expertise
  • Wealth preservation
  • Budget management and analyses
  • Investment strategy and asset allocation
  • Charitable giving strategies

For businesses:

  • Bookkeeping duties
  • Forensic accounting
  • Cost segregation analyses
  • Financial reporting
  • Audit and assurance services

The choice between a CPA and a tax preparer depends on your unique financial circumstances. Whether you’re a self-employed individual seeking comprehensive financial guidance, a growing business that could benefit from tax planning, or a salaried executive with stock options, there is a professional who can meet your needs.

If you’re looking for a trusted CPA, the professionals at Magone & Company will consider every deduction, break and incentive in preparing your return. Call us today at (973) 301-2300 to schedule a confidential consultation.

Minimize Your Company’s Tax Liabilities: 7 Tips for CFOs

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Today’s CFOs have a lot on their plates. Ensuring that your company remains financially healthy and compliant with tax regulations is a complex and time-consuming process — and that’s just a small part of the role.

So how do you keep up, while minimizing your company’s tax burden?

  1. Brush up on current laws. One thing is for certain each and every tax year — change. To avoid penalties and minimize liabilities, stay informed on tax law updates and regulations that may impact your business, maintain a broad understanding of the tax code and know how to apply applicable provisions.
  2. Take advantage of available tax credits and deductions. Identify and claim any appropriate tax credits to help offset your tax liability and reduce your overall tax liabilities. From the R&D tax credit to the work opportunity tax credit, look for avenues to save. Be the expert on tax deductions, including those for business-related expenses and depreciation. And make sure your business is structured in a way to minimize its tax burden. For example, does it make more sense to run as an S corp, C corp or an LLC?
  3. Review current practices. Are your bookkeeping and accounting practices an accurate reflection of your company’s finances? Are you keeping detailed records of income, expenses, investments, while reconciling your accounts regularly? Even small errors can have a huge impact when it’s time to file your company’s tax returns.
  4. Implement added measures. Consider adding new processes that offer increased visibility into your company’s’ financial performance. From enhanced budgeting and forecasting to strategic cash management practices, these tax optimization strategies can help limit your liability and allow for smarter tax planning.
  5. Simplify payroll tax reporting. You don’t have to do it all. To save time and remain compliant, you may utilize a reliable payroll system to handle tax filings, payroll calculations and deductions on your behalf.
  6. Leverage technology. CFO are increasingly being asked to step up in tech and automation, and for good reason. Thanks to automation, you can free up time and resources from often mundane tax-related tasks. Many accounting software solutions offer features specifically designed for tax reporting to help optimize the tax preparation process.
  7. Foster a cohesive team. Communication should extend beyond the C-suite. Tax considerations and challenges can be handled more proactively when your finance team, tax advisors and other stakeholders work together and maintain open lines of communication and collaboration. And when every employee understands how their role plays into the bigger picture, they’ll be more committed to helping the company be successful.

Make the most of your CPA relationship

Magone & Co can help organizations like yours operate more efficiently — navigating complicated tax laws, identifying potential deductions and ensuring ongoing compliance. Get in touch to see how we can help.

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.