Financial Planning

4 Essential Estate Planning Documents College-Aged Children Need
4 Essential Estate Planning Documents College-Aged Children Need 1600 941 smolinlupinco

If your child is off to college this year, have you already set up a basic estate plan for them? If not, you’re part of the majority that answers “no” to this question. Fortunately, with summer break already here, you can take this time to sit down with an estate planning attorney to create a plan.

With your child free from school obligations, you can bring them along to learn about the importance of this process and sign off on the necessary documentation before returning to campus this fall. 

Four essential estate planning documents your child should have before next semester

If your child is college-bound, the following four estate planning documents are crucial for them to have:

  1. Last Will and Testament: Even though your son or daughter is only in their late teens or early twenties, having a will drawn up is important. This document handles how their assets should be distributed and can take care of other situations, like guardianship of your grandchild. 
  2. Financial Power of Attorney: This is another essential document that legally empowers you or your spouse to handle your child’s finances on their behalf. You can create a form with “durable” powers should your child become incapacitated. 
  3. Health Care Power of Attorney: If your child cannot make health care decisions on their own due to incapacitation, a health care power of attorney allows your child to appoint someone to do so on their behalf. 
  4. HIPAA Authorization: The Health Insurance Portability and Accountability Act (HIPAA) authorization is essential in making crucial healthcare decisions for your child. This power of attorney option authorizes physicians and other healthcare providers to share information regarding your child’s medical conditions and diagnoses. Without this document, informed decisions about your son or daughter’s condition are difficult.

Contact us right away if you and your child would like to create an estate plan that covers the essentials. We welcome the opportunity to help your family gain peace of mind knowing that your child’s best interests are protected.

© 2022

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Getting to the Bottom of Hidden Details in Financial Statement Footnotes
Getting to the Bottom of Hidden Details in Financial Statement Footnotes 1600 941 smolinlupinco

You only get part of the big picture if you only look at the numbers. Reading comprehensive footnote disclosures gives valuable insight into your company’s operations. These disclosures are located at the bottom of financial statements that have been reviewed and audited.

Key details often get overlooked because most individuals just scan these notes instead of thoroughly reading them. Curious about what risk factors you may find within these disclosures? Below are just a few examples to look out for in your statements.  

Transactions between related parties

There are occasions when companies give or receive preferential treatment to or from related parties. This arrangement should be disclosed in the footnotes because of the potential risk associated with these relationships. 

A great example is if a bookstore rents retail space from the owner’s brother at a rate well below market pricing. This price break saves the store approximately $95,000 in rent annually. However, the bookstore isn’t disclosing the existence of this favorable party-related deal, which inflates its appearance as a profitable shop on its financial statements. 

One day, the brother sells his share of the building to a commercial investor, who then increases the rent to a more reasonable market rate. This sudden increase could put the bookstore into financial uncertainty. Its stakeholders, who had no idea of the previous party-related arrangement, are now blindsided and could face substantial losses.  

Changes in accounting rules and procedures

Financial statement footnotes also disclose changes to accounting principles and justification for these modifications. You will also find out what effect these adjustments had on the statements above. Keep in mind that a manager may be dishonest and use these changes to manipulate the reported results. This could occur when reporting depreciation, for example. However, there are legitimate reasons for changing accounting methods, such as when regulators impose modifications. 

Liabilities that are contingent and unreported

Disclosure footnotes often share details regarding specific risks that could impact a company’s finances but are not reflected on a balance sheet. Examples of such liabilities include:

  • IRS audits
  • Lawsuits
  • Environmental claims

You can also learn about a company’s loan agreement details, leases, contingent liabilities, and warranties within a financial statement’s footnotes.

Events with long-term impacts

Stakeholders want to be fully informed of any business struggles ahead, such as new regulatory requirements taking effect in the coming year or a company losing a major client. Disclosure footnotes share these significant event details when there’s a likely material impact on business value or future earnings. 

Always strive for transparency

Today’s marketplace is filled with uncertainty, causing stakeholders like investors and lenders to demand more supporting documentation and disclosures to answer their questions. They want to make informed decisions, so it’s vital to work with experienced accountants to draft clear and concise footnotes and answer stakeholders’ concerns. 

You can also work with our team to review your concerns regarding disclosures made by possible merger and acquisition targets or your publicly-traded competitors. 

© 2022

are-social-security-benefits-taxable

Are Social Security Benefits Taxable?
Are Social Security Benefits Taxable? 1600 941 smolinlupinco

For some new Social Security recipients, it comes as a shock when they see their benefits taxed by the federal government. Will this be the same for you? Maybe, maybe not. 

Whether you have to pay taxes on your benefits depends on your other income. In situations where your income is high, you can expect the feds to tax anywhere between 50-85% of your monthly payment. Don’t worry, though. This doesn’t mean you’ll lose that much of your benefits, just that that percentage would be subject to taxation. 

Understanding your income

Understanding how much you can expect to pay in tax for your Social Security benefit requires assessing how much other income you have. This could include certain items that are usually tax-free, like tax-exempt interest. Combine that income with your spouse’s income on your joint tax return.

Next, half of your and your spouse’s benefits are added to the sum. The final figure you calculate should be your total combined income plus half of the social security payments received. This total should have the following rules applied to it:

  1. Your benefits remain untaxed when your income and half benefit amount don’t exceed $32,000 for married couples or $25,000 for single taxpayers.
  2. When your income and half benefit total exceeds the $32,000 threshold but is less than $44,000, half of the excess amount over $32,000 gets taxed, or half your benefit amount, whichever is less. 

An illustrative example

Let’s say you and your spouse have $20,000 in taxable dividends, $2,400 of tax-exempt interest, and combined Social Security benefits of $21,000. So, your income plus half your benefits is $32,900 ($20,000 + $2,400 +½ of $21,000). You must include $450 of the benefits in gross income (½ ($32,900 − $32,000)). If your combined Social Security benefits were $5,000, and your income plus half your benefits were $40,000, you would include $2,500 of the benefits in income: ½ ($40,000 − $32,000) equals $4,000, but half the $5,000 of benefits ($2,500) is lower, and the lower figure is used.

Important Note: If you’re currently paying taxes on your Social Security benefits since your income is under the threshold, or if you’re only liable for 50% taxes on your benefits, you risk triple taxation if your income increases. This means an increased tax liability on your Social Security (or an increase), paying taxes on your additional income, and potentially ending up in a higher marginal tax bracket.  

This can sometimes occur when taking a large IRA distribution or having significant capital gains. Planning ahead to avoid these negative tax implications is always wise. You may have ways to spread out this new income over several years or liquidate non-IRA accounts, including items like a stock that only makes small gains or those with gains or a capital loss on shares to offset. 

Consider filing a Form W-4V to have tax withheld from your payments if you know your benefits will get taxed. If not, then you can always make estimated quarterly tax payments. You should remember that while most states don’t tax your Social Security payments, there are a dozen that do. Contact us for assistance or more information.

© 2022

how-owning-a-family-business-complicates-estate-and-business-succession-planning

How Owning a Family Business Complicates Estate and Business Succession Planning
How Owning a Family Business Complicates Estate and Business Succession Planning 1600 941 smolinlupinco

For small business owners, planning their estates and their companies’ succession often overlap. If your venture is family owned and operated, a significant portion of your assets is invested in your business. 

Comprehensive estate planning is essential to ensure your organization continues after your passing. Failing to take the proper steps in preparing your company for this eventuality could mean additional financial and legal risks to sort out later.  

Management succession for separate ownership 

One of the challenging aspects of transferring your family business is distinguishing between a succession of ownership and management. Compared to third-party business sales, where ownership and management succession coincides, family-run companies may need to approach these processes separately. 

When considered through the lens of estate planning, it may be wiser to transfer your assets to the next generation sooner. This can further minimize any estate tax liability for your family and business because you’ve reduced future appreciation. Of course, you may not be willing to change leadership just yet if they aren’t ready for the responsibility. 

Fortunately, there are several approaches you might consider that can enable you to transfer ownership of your family business while still retaining control: 

  • Consider using a family limited partnership, trust, or another ownership alternative to transfer most of the ownership interests to your future stakeholders without giving up managerial control 
  • Use nonvoting stock to transfer ownership
  • Create a stock ownership plan for your employees

Separating ownership and succession planning would be beneficial if you have family members who aren’t part of your business. You can still share the wealth of your company’s earnings by giving your beneficiaries nonvoting stock or forms of equity interests that don’t give them any control over managing your business. This effectively prioritizes the rights of those who work for your organization. 

Resolving disputes

When planning your business succession, you may run into conflicts regarding the financial needs of the older and younger generations involved. This doesn’t have to end in a tragic family rift since there are methods to create cash flow for owners while minimizing the burden on future company leadership and employees.  

Suppose you plan to sell your business to your beneficiaries through an installment sale. This creates liquidity and eases the financial burden placed on your children or other heirs. It’s also possible that these generated cash flows can fund the purchase. You should be able to avoid gift and estate tax liabilities so long as transactions are much like arm’s-length transactions between parties who aren’t related. 

Start sooner than later

No matter what strategy you choose, planning works best when you begin early. By taking the time to transition your family business over several years or more, you get more time to share your succession philosophy and educate your family about it. 

Additionally, this makes it possible to give up control over time and create a business structure and process that are tax savvy. Contact our offices today to learn more about succession strategies that will support the unique goals you have for your family business. 

© 2022

is-the-time-right-for-a-roth-conversion

Is the Time Right for a Roth Conversion?
Is the Time Right for a Roth Conversion? 1600 941 smolinlupinco

A downturn in the stock market may cause the value of your retirement account to decrease. However, if you have a traditional IRA, this decline may provide a valuable opportunity: It may allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Roth vs. traditional IRAs

Roth IRAs differ from traditional IRAs in a few key ways: 

Roth IRA

Contributions to Roth IRAs are never deductible. However, withdrawals and their earnings are nontaxable if you’re over 59 ½ years of age and your account is at least five years old. Additionally, contribution withdrawals are always allowable and are tax and penalty-free. RMDs are also not mandatory until you reach age 72.

There are, however, contribution limitations to a Roth IRA based on your modified adjusted gross income (MAGI). You can always convert your traditional option to a ROTH so long as you pay any income tax owed. 

Traditional IRA

Traditional IRA contributions may be deductible based on your MAGI and if you or a spouse participate in a qualified retirement plan, like a 401(k). The funds in this account can grow tax-deferred. 

One disadvantage to this is that withdrawals are usually taxed as income. If you make any withdrawals before the age of 59 ½, there are also penalties that may be imposed, unless you qualify for certain exceptions. You still have a required minimum distribution requirement starting after age 72.

Reducing your tax bill

When the stock market takes a downturn, you may see a benefit. For example, suppose your traditional IRA loses some of its value. You could save on your taxes by converting to a Roth sooner than later. You’ll also sidestep appreciative taxes when the market rebounds. 

Before you decide to convert, take the following considerations into account: 

Do you have enough funds to cover the tax bill? Those without much cash on hand for conversion taxation costs may need to withdraw this expense from their retirement savings, which is detrimental to your goals. Remember, tax brackets increase according to how much money you convert, which means a hefty tax obligation later. 

What retirement plans do you have? Whether you should convert or not might hinge on what stage in life you’re at. If you’re close to retiring, going from a traditional to Roth IRA option doesn’t make sense since you’ll draw on those accounts immediately. Typically, you choose a conversion if you still have time for funding growth and to let them compound over time.

Converting from a traditional IRA to a Roth doesn’t require you to commit all your money at once. This is a flexible process where you can use whatever percentage you wish, allowing you to slowly change over and take years to absorb the tax hit instead. 

Keep in mind that before going through with a Roth IRA conversion, there are additional steps and considerations to account for. If you think converting to a Roth is ideal for your financial goals, reach out today to learn more.  

© 2022

clts-leading-charitable-trust-philanthropists

CLTs: The Leading Charitable Trust Option for Philanthropists
CLTs: The Leading Charitable Trust Option for Philanthropists 1600 941 smolinlupinco

If you are interested in donating assets to a charity you support but don’t want to permanently give up this property, consider a charitable lead trust (CLT). This trust functions as an alternative to charitable remainder trusts (CRTs). 

CLTs revert your donated assets to your family instead of the charity after a specified amount of time has passed. However, your chosen charitable organization will enjoy a steady source of revenue for the period you gave them temporary ownership. 

How CLTs work

Although a CLT trust is irrevocable, you can continue to fund it throughout your lifetime or create a testamentary trust in your estate plan or will. This is an ideal approach to incorporating your philanthropic goals into your estate plan. 

The basic idea of how a CLT works can get complicated, but typically you would contribute assets to a trust for a specified term. The charity you designate as the beneficiary would receive payouts from the trust during this period. You can also select multiple charities as beneficiaries if you wish and what portion of earnings they should receive. 

How these payments get made depends on your CLT’s structure. Usually, these are made as a percentage of the trust or as fixed annuity payments. 

Tax implications for charitable deductions 

One of the primary motivators for creating a CRT is the tax deduction you receive for the remaining interest value. However, this deduction may be limited, or you might not receive one, depending on whether your CLT is a grantor or non-grantor trust type.  

Grantor CLTs allow you to deduct the current value of any future payments to your chosen charity, though this is subject to imposed deduction limits. The downside to this situation is that the investment income the trust generates is taxable for that term and is the grantor’s responsibility to pay. 

However, if you use a non-grantor CLT, the trust is now the owner of the assets and liable for any taxes owed on undistributed income. This allows your trust to claim the deductions for charitable contributions that are distributed to charitable organizations. Despite the uniqueness of each trust situation, it’s not uncommon for grantor tax liabilities to take precedence over current tax deduction benefits. 

Still, CLTs that are structured correctly create gift or estate deductions based on the portion designated for the charity involved. This is how the transference of remaining interest to family members is possible at a lower tax rate. 

Additional responsibilities for CLTs 

Every year until the term expires or during the life of your beneficiaries, your CLT must make at least one payment to one of your chosen charities. There is no mandatory 20-year timeframe imposed (as is the case with CRTs), and the trust doesn’t need to set a minimum or maximum requirement every year either. Once a CLT’s term expires, the heirs you originally named will have the remainder passed to them. 

© 2022

ira-charitable-donations-required-taxable-distributions

Using IRA Charitable Donations as an Alternative to Required Taxable Distributions
Using IRA Charitable Donations as an Alternative to Required Taxable Distributions 1600 941 smolinlupinco

If you’re a philanthropist that receives traditional IRA distributions, there’s a charitable tax advantage you should know about involving cash donations to a charity approved by the IRS. 

What are qualified charitable distributions?

The most relied upon method of transferring your IRA assets to your preferred charity is through an age-restricted tax provision. If you’re an IRA owner over the age of 70 and a half, you can send up to $100,000 annually of your distributions to your qualifying charitable organization. Qualified charitable distributions (QCDs) still count toward your required minimum distribution (RMD) amount but won’t trigger taxes or raise your adjusted gross income (AGI). 

Since your donation doesn’t increase your AGI, it will allow you to: 

  1. Qualify you for additional tax breaks such as threshold reductions for medical expenses, which have a cap of 7.5% of your AGI. 
  2. Circumvent Social Security’s 3.5% investment income tax taxation triggered by your investment income.
  3. Potentially avoid Medicare Part B and D high-income surcharges on your premiums when your AGI exceeds certain levels.
  4. Prevent the charity receiving your QCD from needing to pay federal estate taxes and avoid state death tax liability in most cases. 

Key considerations

You can’t claim deductions for any  QCD that isn’t included in your income. Also, remember that at 72 years of age, you must start taking your RMDs, although you can make QCDs starting at age 70 and a half. 

In 2022, you have to set up direct charitable payments to your qualified charity by December 31st to benefit from a QCD. You’re also allowed to use these QCDs to meet the RMD requirements for your IRA. For example, if you must take $15,000 in RMDs for 2022 and pay a QCD of $10,000, you would need to withdraw $5,000 to fulfill the remaining distribution requirement for this year. 

Other rules and limits may apply. Want more information? Contact us to see whether this strategy would be beneficial in your situation.

© 2022

corporate-estimated-tax-how-to-calculate-it

Corporate Estimated Tax: How to Calculate It
Corporate Estimated Tax: How to Calculate It 1600 941 smolinlupinco

June 15th is the next deadline to make quarterly tax payments. If you’re a business or individual who must pay, now is an excellent time to review the way corporate federal estimated payment calculations work. Your goal is to minimize your business’s estimated tax liability without getting dinged with an underpayment penalty. 

Four ways to calculate

To avoid an estimated tax penalty, corporations must pay an installment based on the lowest amount calculated by one of the below four methods: 

Preceding year method

Corporations can circumvent underpayment penalties on owed estimated tax by paying 25% of their preceding year’s tax according to the four payment due dates on their return. In 2022, some corporations are limited to only using this method for calculating their first payments if their taxable income was $1 million or more in any of the previous tax years. Also, if your corporation’s previous tax return covered less than twelve months or you filed a return that didn’t have any tax liability, you won’t be eligible to use this method. 

Current year method

Your corporation can pay 25% of the current year’s tax to avoid an estimated tax underpayment penalty. Just make sure to make these payments according to the installment schedule on your return. For example, if you didn’t file a return at all, you’ll pay 25% of this year’s tax. The installment due dates typically fall on the 15th of April, June, and September of the current year and January 15th of the next. 

Seasonal income method

Corporations with taxable income that follows recurring seasonal patterns can annualize their income by assuming earnings for the current year will follow the same pattern as previous years. A mathematical formulation is used to test a corporation’s eligibility for this method by establishing their seasonally patterned income. If you believe your company qualifies to use this method, you’ll want to ask for qualified assistance to ensure that it does.

Annualized income method

When using the annualized tax method, quarterly installments are made based on the computation of taxable income for the months in the tax year ending before the installment is due. This is achieved by assuming that any earnings received will be at the same rate throughout the year. 

Additionally, corporations aren’t limited to one method for the entire tax year and can switch among the four as needed. 

If you have questions about how your estimated tax bill can be reduced, contact us to set up a review of your corporate tax situation. 

© 2022

effects-of-inflation-on-financial-statements

The Effects of Inflation on Your Financial Statements
The Effects of Inflation on Your Financial Statements 1600 941 smolinlupinco

The continuing trend of rising inflation has investors and business owners on high alert. The U.S. The Bureau of Labor Statistics has also tracked the steady rise in consumer pricing, which has seen an 8.3% increase over the last year. Its findings are based on the Consumer Price Index (CPI), which measures changes in cost for items the public relies on for daily living needs, such as fuels, clothing, food, medical services, home costs, and more. This latest calculation is just slightly less than the previous 12-month increase of 8.5%, a number that topped the highest increase ever recorded back in December of 1981.

The producer price index (PPI) has also risen 11% over the past 12 months, furthering anxiety for consumers and financial experts. This is still a lower figure than the previous 11.2% increase for the last measured period in March, another record-breaking rise for wholesale inflation. PPI measures inflation rates before consumers feel the pinch in their wallets. 

Primary impacts

If you’re a business owner, inflation could directly affect costs and hurt consumer demand for goods and services deemed discretionary. You might experience decreases in profits unless you can pass these losses to your customers through strategic pricing models. Still, it’s not just your gross margins you need to worry about. Below are seven additional areas of concern from today’s inflationary trends that could impact your financial statements.  

1. Goodwill. Companies using GAAP to estimate the fair value of acquired goodwill should use valuation techniques that remain consistent from period to period. However, one should also recognize that as inflation increases, revisions to these assumptions may be necessary to maintain accurate estimations. For example, it’s common practice during inflationary periods for market participants to use higher discount rates. They might also anticipate revised cash flows due to rising costs, modifications to product pricing, and changing consumer behaviors in this market climate. 

2. Debts. As the Federal Reserve attempts to control inflation by raising interest rates, companies with variable-rate loans could see their interest costs rise as well. As of May, the Fed imposed a 0.5% increase in its target federal funds rate and might increase this rate again throughout the remainder of 2022.

If you’re one of the businesses affected by this increase, it might be wise to convert your variable-rate loans to fixed loans or seek approval for additional credit to secure a fixed-rate loan before any future increases by the Fed. Companies in this predicament could also explore restructuring their debt. Depending on the approach used, you may be able to report it as one of the following under the U.S. Generally Accepted Accounting Principles (GAAP):

  • Extinguishment of debt 
  • Modification
  • Troubled debt restructuring

3. Inventory. GAAP measures inventory at the lower of either net realizable value or cost and market value. There are several methods businesses rely on to determine their inventory cost:

  • Average cost
  • First-in, First-out (FIFO)
  • Last-in, First-out (LIFO)

Your profits and ending inventory valuation are directly impacted by your chosen method. Additionally, you might also experience a trickle-down effect on your tax liability.  

4. Investments. It’s well known that one source of volatility in public markets is inflation. Realized or unrealized gains and losses can occur when your company’s investments undergo market value changes–directly affecting any liabilities and deferred tax assets under GAAP. 

Companies may opt to modify their investment strategy out of concern for this inflationary impact, though doing so could potentially demand disclosures of the changes in financial statement footnotes. New accounting methods may even be necessary when taking this approach. 

5. Overhead costs. Escalation clauses related to CPI or other measures for addressing inflation could be in your long-term lease, thus increasing rent overheads. The same is possible for vendor contracts and contracts with other service providers.

6. Foreign currency. Foreign exchange rates aren’t impervious to inflation. When exchange rates fluctuate, businesses that accept, bank, and/or convert these currencies will adapt to ensure the rates used are appropriate for that point in time. 

7. Going concern disclosures. Business management must determine if there is substantial doubt about their company continuing as a going concern. Every reporting period, evaluations take place to review a company’s ability to meet its obligations within the 12-month period after its financial statement issuance. 

Skyrocketing inflation frequently devastates unprepared businesses. Without adequate countermeasures to inflationary effects, doubt arises about the company’s long-term viability.

We’re here to help

Inflation can have widespread impacts on a company’s financial statements. Reach out to us for assistance in anticipating the possible effects on your business’s financials and developing lasting solutions to mitigate these risks. 

© 2022

important-2022-q2-tax-deadlines-for-businesses-and-employers

Important 2022 Q2 Tax Deadlines for Businesses and Employers
Important 2022 Q2 Tax Deadlines for Businesses and Employers 1600 941 smolinlupinco

Businesses and other employers should take note of these key tax-related deadlines for the second quarter of 2022. 

April 18

  • Calendar-year corporations must use Form 1120 file a 2021 income tax return or use Form 7004 to file for an automatic six-month extension. Any tax due must be paid.
  • Corporations must pay the first installment of their estimated 2022 income taxes.
  • Individuals must use Form 1040 or Form 1040-SR to file their 2021 income tax return or use Form 4868 to file for an automatic six-month extension.
  • Individuals who don’t pay income tax through withholding must use Form 1040-ES to calculate and pay the first installment of their 2022 estimated taxes.

May 2

  • Employers must use Form 941 to report income tax withholding and FICA taxes for the first quarter of 2022. Any tax due must be paid.

May 10

  • If you deposited on time and fully paid all of the associated taxes due, employers must use Form 941 to report income tax withholding and FICA taxes for the first quarter of 2022.

June 15 

  • Corporations must pay the second installment of their 2022 estimated income taxes.

This list isn’t all-inclusive, and it’s worth keeping in mind that there may be other additional deadlines that apply to you. To learn more about filing requirements and ensure that you’re meeting all applicable tax deadlines, contact us.

© 2022

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