You can reduce taxes and save for retirement by contributing to a tax-advantaged retirement plan. If your employer offers a 401(k) or Roth 401(k) plan, contributing to it is a taxwise way to build a nest egg.

If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.

With a 401(k), an employee elects to have a certain amount of pay deferred and contributed by an employer on his or her behalf to the plan. The contribution limit for 2019 is $19,000. Employees age 50 or older by year end are also permitted to make additional “catch-up” contributions of $6,000, for a total limit of $25,000 in 2019.

The IRS just announced that the 401(k) contribution limit for 2020 will increase to $19,500 (plus the $6,500 catch-up contribution).

A traditional 401(k)

A traditional 401(k) offers many benefits, including these:

• Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
• Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
• Your employer may match some or all of your contributions pretax.

Take a look at your contributions for this year. If your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pretax — so, income tax isn’t withheld.

Roth 401(k)

Employers may also include a Roth option in their 401(k) plans. If your employer offers this, you can designate some or all of your contributions as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. Your ability to make a Roth IRA contribution in 2019 will be reduced if your adjusted gross income (AGI) in 2019 exceeds:

• $193,000 and your filing status in 2019 is married-filing jointly, or
• $122,000, and your filing status in 2019 is that of a single taxpayer.

Your ability to contribute to a Roth IRA in 2019 will be eliminated entirely if you’re a married-filing-jointly filer and your 2019 AGI equals or exceeds $203,000. The cutoff for single filers is $137,000 or more.

How much and which type

Do you have questions about how much to contribute or the best mix between regular and Roth 401(k) contributions? Contact us. We can discuss the tax and retirement-saving considerations in your situation.

One of the most laborious tasks for small businesses is managing payroll. But it’s critical that you not only withhold the right amount of taxes from employees’ paychecks but also that you pay them over to the federal government on time.

If you willfully fail to do so, you could personally be hit with the Trust Fund Recovery Penalty, also known as the 100% penalty. The penalty applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages. Since the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over.

The reason the penalty is sometimes called the “100% penalty” is because the person liable for the taxes (called the “responsible person”) can be personally penalized 100% of the taxes due. Accordingly, the amounts the IRS seeks when the penalty is applied are usually substantial, and the IRS is aggressive in enforcing it.

Responsible persons

The penalty can be imposed on any person “responsible” for the collection and payment of the taxes. This has been broadly defined to include a corporation’s officers, directors, and shareholders under a duty to collect and pay the tax, as well as a partnership’s partners or any employee of the business under such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under certain circumstances. Responsibility has even been extended in some cases to professional advisors.

According to the IRS, being a responsible person is a matter of status, duty and authority. Anyone with the power to see that the taxes are paid may be responsible. There is often more than one responsible person in a business, but each is at risk for the entire penalty. Although taxpayers held liable may sue other responsible persons for their contributions, this is an action they must take entirely on their own after they pay the penalty. It isn’t part of the IRS collection process.

The net can be broadly cast. You may not be directly involved with the withholding process in your business. But let’s say you learn of a failure to pay over withheld taxes and you have the power to have them paid. Instead, you make payments to creditors and others. You have now become a responsible person.

How the IRS defines “willfulness”

For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bowing to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes due to the government is willful behavior for these purposes. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook.

In addition, the corporate veil won’t shield corporate owners from the 100% penalty. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.

If the IRS assesses the penalty, it can file a lien or take levy or seizure action against the personal assets of a responsible person.

Avoiding the penalty

You should never allow any failure to withhold taxes from employees, and no “borrowing” from withheld amounts should ever be allowed in your business — regardless of the circumstances. All funds withheld must be paid over on time.

If you aren’t already using a payroll service, consider hiring one. This can relieve you of the burden of withholding and paying the proper amounts, as well as handling the recordkeeping. Contact us for more information.

Are you charitably minded and have a significant amount of money in an IRA? If you’re age 70½ or older, and don’t need the money from required minimum distributions, you may benefit by giving these amounts to charity.

IRA distribution basics

A popular way to transfer IRA assets to charity is through a tax provision that allows IRA owners who are 70½ or older to give up to $100,000 per year of their IRA distributions to charity. These distributions are called qualified charitable distributions, or QCDs. The money given to charity counts toward the donor’s required minimum distributions (RMDs), but doesn’t increase the donor’s adjusted gross income or generate a tax bill.

So while QCDs are exempt from federal income taxes, other traditional IRA distributions are taxable (either wholly or partially depending on whether you’ve made any nondeductible contributions over the years).

Unlike regular charitable donations, QCDs can’t be claimed as itemized deductions.

Keeping the donation out of your AGI may be important because doing so can:

1. Help the donor qualify for other tax breaks (for example, a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10% of AGI);
2. Reduce taxes on your Social Security benefits; and
3. Help you avoid a high-income surcharge for Medicare Part B and Part D premiums, (which kicks in if AGI hits certain levels).

In addition, keep in mind that charitable contributions don’t yield a tax benefit for those individuals who no longer itemize their deductions (because of the larger standard deduction under the Tax Cuts and Jobs Act). So those who are age 70½ or older and are receiving RMDs from IRAs may gain a tax advantage by making annual charitable contributions via a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.

Annual limit

There’s a $100,000 limit on total QCDs for any one year. But if you and your spouse both have IRAs set up in your respective names, each of you is entitled to a separate $100,000 annual QCD limit, for a combined total of $200,000.

Plan ahead

The QCD strategy can be a smart tax move for high-net-worth individuals over 70½ years old. If you’re interested in this opportunity, don’t wait until year end to act. Contact us for more information.

If you’re planning to sell assets at a loss to offset gains that have been realized during the year, it’s important to be aware of the “wash sale” rule.

How the rule works

Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, the wash sale rules may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).

Here’s an example

Let’s say you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 5 for $3,000. On November 29, you buy 500 shares of XYZ again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you would be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that is disallowed under the wash sale rule would be added to your cost of the 300 shares.

If you’ve cashed in some big gains in 2019, you may be looking for unrealized losses in your portfolio so you can sell those investments before year end. By doing so, you can offset your gains with your losses and reduce your 2019 tax liability. But don’t run afoul of the wash sale rule. Contact us if you have any questions.

There are several ways to save for your child’s or grandchild’s education, including with a Coverdell Education Savings Account (ESA). Although for federal tax purposes there’s no upfront deduction for contributions made to an ESA, the earnings on the contributions grow tax-free. In addition, no tax is due when the funds in the account are distributed, to the extent the amounts withdrawn don’t exceed the child’s qualified education expenses.

Qualified expenses include higher education tuition, fees, books and room, as well as elementary and secondary school expenses.

Contribution limits

The annual limit that can be contributed to a child’s ESA is $2,000 per year — from all contributors for all ESAs for the same child. The maximum dollar amount that any individual can contribute is phased out if the contributor’s adjusted gross income (with certain modifications) exceeds $95,000 ($190,000 for married joint filers).

However, this phaseout is easily avoided. A child can contribute to his or her own ESA, so a parent or other person whose contribution may be limited by the phaseout rule can give the money to an ESA as custodian for the child. Under those circumstances, the child is considered to be the contributor and, if the child’s adjusted gross income is below $95,000, the phaseout won’t apply.

Contributions that exceed $2,000 in total for a child for a year are subject to a 6% penalty tax until the excess (plus earnings) are withdrawn.

How long can you make ESA contributions? They can be made until a child reaches age 18 (but this age limit doesn’t apply to a beneficiary with special needs who requires additional time to complete his or her education). A beneficiary doesn’t have to be your own child.

Taking money out

Withdrawals from an ESA during a year that exceed the child’s qualified education expenses for that year are included in the child’s income (to the extent of the earnings portion of the distribution) and are also subject to an additional 10% tax.

Tax-free transfers or rollovers of account balances from an ESA benefiting one beneficiary to another account benefiting another person are allowed, if the new beneficiary hasn’t reached 30, and is a member of the family of the old beneficiary. (The age limit doesn’t apply to a beneficiary with special needs.)

If you’re interested in discussing a Coverdell ESA, or other education planning options, please contact us.

As an employer, you must pay federal unemployment (FUTA) tax on amounts up to $7,000 paid to each employee as wages during the calendar year. The rate of tax imposed is 6% but can be reduced by a credit (described below). Most employers end up paying an effective FUTA tax rate of 0.6%. An employer taxed at a 6% rate would pay FUTA tax of $420 for each employee who earned at least $7,000 per year, while an employer taxed at 0.6% pays $42.

Tax credit

Unlike FICA taxes, only employers — and not employees — are liable for FUTA tax. Most employers pay both federal and a state unemployment tax. Unemployment tax rates for employers vary from state to state. The FUTA tax may be offset by a credit for contributions paid into state unemployment funds, effectively reducing (but not eliminating) the net FUTA tax rate.

However, the amount of the credit can be reduced — increasing the effective FUTA tax rate — for employers in states that borrowed funds from the federal government to pay unemployment benefits and defaulted on repaying the loan.

Some services performed by an employee aren’t considered employment for FUTA purposes. Even if an employee’s services are considered employment for FUTA purposes, some compensation received for those services — for example, most fringe benefits — aren’t subject to FUTA tax.

Recognizing the insurance principle of taxing according to “risk,” states have adopted laws permitting some employers to pay less. Your unemployment tax bill may be influenced by the number of former employees who’ve filed unemployment claims with the state, the current number of employees you have and the age of your business. Typically, the more claims made against a business, the higher the unemployment tax bill.

Here are four ways to help control your unemployment tax costs:

1. If your state permits it, “buy down” your unemployment tax rate. Some states allow employers to annually buy down their rate. If you’re eligible, this could save you substantial unemployment tax dollars.

2. Hire conservatively and assess candidates. Your unemployment payments are based partly on the number of employees who file unemployment claims. You don’t want to hire employees to fill a need now, only to have to lay them off if business slows. A temporary staffing agency can help you meet short-term needs without permanently adding staff, so you can avoid layoffs.

It’s often worth having job candidates undergo assessments before they’re hired to see if they’re the right match for your business and the position available. Hiring carefully can increase the likelihood that new employees will work out.

3. Train for success. Many unemployment insurance claimants are awarded benefits despite employer assertions that the employees failed to perform adequately. This may occur because the hearing officer concludes the employer didn’t provide the employee with enough training to succeed in the job.

4. Handle terminations carefully. If you must terminate an employee, consider giving him or her severance as well as outplacement benefits. Severance pay may reduce or delay the start of unemployment insurance benefits. Effective outplacement services may hasten the end of unemployment insurance benefits, because a claimant finds a new job.

If you have questions about unemployment taxes and how you can reduce them, contact us. We’d be pleased to help.

As we head toward the gift-giving season, you may be considering giving gifts of cash or securities to your loved ones. Taxpayers can transfer substantial amounts free of gift taxes to their children and others each year through the use of the annual federal gift tax exclusion. The amount is adjusted for inflation annually. For 2019, the exclusion is $15,000.

The exclusion covers gifts that you make to each person each year. Therefore, if you have three children, you can transfer a total of $45,000 to them this year (and next year) free of federal gift taxes. If the only gifts made during the year are excluded in this way, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: this discussion isn’t relevant to gifts made from one spouse to the other spouse, because these gifts are gift tax-free under separate marital deduction rules.

Gifts by married taxpayers

If you’re married, gifts to individuals made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given to an individual by only one of you. By “gift-splitting,” up to $30,000 a year can be transferred to each person by a married couple, because two annual exclusions are available. For example, if you’re married with three children, you and your spouse can transfer a total of $90,000 each year to your children ($30,000 × 3). If your children are married, you can transfer $180,000 to your children and their spouses ($30,000 × 6).

If gift-splitting is involved, both spouses must consent to it. We can assist you with preparing a gift tax return (or returns) to indicate consent.

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and that are therefore taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11,400,000 (for 2019). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Giving gifts of appreciated assets

Let’s say you own stocks and other marketable securities (outside of your retirement accounts) that have skyrocketed in value since they were acquired. A 15% or 20% tax rate generally applies to long-term capital gains. But there’s a 0% long-term capital gains rate for those in lower tax brackets. Even if your income is high, your family members in lower tax brackets may be able to benefit from the 0% long-term capital gains rate. Giving them appreciated stock instead of cash might allow you to eliminate federal tax liability on the appreciation, or at least significantly reduce it. The recipients can sell the assets at no or a low federal tax cost. Before acting, make sure the recipients won’t be subject to the “kiddie tax,” and consider any gift and generation-skipping transfer (GST) tax consequences.

Plan ahead

Annual gifts are only one way to transfer wealth to your loved ones. There may be other effective tax and estate planning tools. Contact us before year end to discuss your options.

You may have Series EE savings bonds that were bought many years ago. Perhaps you store them in a file cabinet or safe deposit box and rarely think about them. You may wonder how the interest you earn on EE bonds is taxed. And if they reach final maturity, you may need to take action to ensure there’s no loss of interest or unanticipated tax consequences.

Interest deferral

Series EE Bonds dated May 2005 and after earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it has matured. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

How they’re taxed

Series EE bonds don’t pay interest currently. Instead, the accrued interest is reflected in the redemption value of the bond. The U.S. Treasury issues tables showing the redemption values.

The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. If an election is made, all previously accrued but untaxed interest is also reported in the election year. In most cases, this election isn’t made so bond holders receive the benefits of tax deferral.

If the election to report the interest annually is made, it will apply to all bonds and for all future years. That is, the election cannot be made on a bond-by-bond or year-by-year basis. However, there’s a procedure under which the election can be canceled.

If the election isn’t made, all of the accrued interest is finally taxed when the bond is redeemed or otherwise disposed of (unless it was exchanged for a Series HH bond). The bond continues to accrue interest even after reaching its face value, but at “final maturity” (after 30 years) interest stops accruing and must be reported.

Note: Interest on EE bonds isn’t subject to state income tax. And using the money for higher education may keep you from paying federal income tax on your interest.

Deferral won’t last forever

One of the principal reasons for buying EE bonds is the fact that interest can build up without having to currently report or pay tax on it. Unfortunately, the law doesn’t allow for this tax-free buildup to continue indefinitely. When the bonds reach final maturity, they stop earning interest.

Series EE bonds issued in January 1989 reached final maturity after 30 years, in January 2019. That means that not only have they stopped earning interest, but all of the accrued and as yet untaxed interest is taxable in 2019.

If you own EE bonds (paper or electronic), check the issue dates on your bonds. If they’re no longer earning interest, you probably want to redeem them and put the money into something more lucrative. Contact us if you have any questions about the taxability of savings bonds, including Series HH and Series I bonds.

We all know the cost of college is expensive. The latest figures from the College Board show that the average annual cost of tuition and fees was $10,230 for in-state students at public four-year universities — and $35,830 for students at private not-for-profit four-year institutions. These amounts don’t include room and board, books, supplies, transportation and other expenses that a student may incur.

Two tax credits

Fortunately, the federal government offers two sizable tax credits for higher education costs that you may be able to claim:

1. The American Opportunity credit.This tax break generally provides the biggest benefit to most taxpayers. The American Opportunity credit provides a maximum benefit of $2,500. That is, you may qualify for a credit equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. It applies only to the first four years of postsecondary education and is available only to students who attend at least half time.

Basically, tuition, course materials and fees qualify for this credit. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:

• Between $80,000 and $90,000 for unmarried individuals, and
• Between $160,000 and $180,000 for married joint filers.

2. The Lifetime Learning credit.This credit equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.

The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than half time. The student doesn’t even need to be part of a degree program. So, the credit works well for graduate studies and part-time students who take a qualifying course at a local college to improve job skills. It applies to tuition, fees and materials.

It’s also subject to phaseouts based on MAGI, however. For 2019, the MAGI phaseout ranges are:

• Between $58,000 and $68,000 for unmarried individuals, and
• Between $116,000 and $136,000 for married joint filers.

Note: You can’t claim either the American Opportunity Credit or the Lifetime Learning Credit for the same student or for the same expense in the same year.

Credit for what you’ve paid

So which higher education tax credit is right for you? A number of factors need to be reviewed before determining the answer to that question. Contact us for more information about how to take advantage of tax-favored ways to save or pay for college.

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

October 15

• If a calendar-year C corporation that filed an automatic six-month extension:
  • File a 2018 income tax return (Form 1120) and pay any tax, interest and penalties due.
  • Make contributions for 2018 to certain employer-sponsored retirement plans.

October 31

• Report income tax withholding and FICA taxes for third quarter 2019 (Form 941) and pay any tax due. (See exception below under “November 12.”)

November 12

• Report income tax withholding and FICA taxes for third quarter 2019 (Form 941), if you deposited on time (and in full) all of the associated taxes due.

December 16

• If a calendar-year C corporation, pay the fourth installment of 2019 estimated income taxes.