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Retirement comes with changes in lifestyle and income sources and may have several important tax implications.

The following is a quick explanation of four tax and financial issues many people deal with as they retire.

Withdrawing your required minimum distributions

Your required minimum distribution is the minimum amount you’re required to withdraw from your retirement accounts. Generally speaking, when you reach age 72 (70½ before January 1, 2020), you must begin taking withdrawals from your IRA, SIMPLE, SEP, and other retirement plan accounts. Roth IRAs, however, won’t require withdrawals until after the plan owner’s death.

You are free to withdraw more than the minimum amount required, and your withdrawals will be included in your taxable income—with the exception of any part that can be received tax-free, including qualified distributions from Roth accounts, and any part that was taxed before.

Downsizing your residence

Many retirees choose to sell their principal home in order to downsize. If you choose to do this and receive a gain from the sale of your principal residence, it may be possible to exclude up to $250,000 (or $500,000, if you file a joint return) of that gain from your income.

You must meet certain requirements in order to claim this exclusion: you must have owned and lived in the home as your primary residence for at least two years during a five-year period ending on the date of the sale.

If you’re considering selling your home, you should also make sure that you’ve identified any items that should be included in its basis, as this can save you tax.

Considering tax implications of new work

Many people choose to continue to work as consultants or start new businesses after retirement. If you’re one of them, you’ll want to consider these tax-related questions:

• How should you finance the business?
• Should the business be a sole proprietorship, partnership, limited liability company (LLC), S corporation, or C corporation?
• What expenses are deductible? Can you claim home office deductions?
• Are you familiar with how to make payroll tax deposits and select to amortize start-up expenditures?

Impacts on Social Security

Continuing to work may impact your Social Security benefits. You’re required to give back $1 of Social Security benefits for each $2 of excess earnings if:

• The sum of your wages plus self-employment income is over the Social Security annual exempt amount ($18,960 for 2021) 
• You retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959)

If you reach full retirement age this year, your benefits will be reduced until the month you reach full retirement age by $1 for every $3 you earn over a different annual limit ($50,520 in 2021). After that date, your earnings won’t affect the amount of your monthly benefits, regardless of much you earn.

You may also need to pay federal (and state) tax on your benefits. You may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax, depending on how much income you have from other sources.

Contact us for help

Tax planning remains important after retirement. If you need assistance in maximizing the tax breaks you’re entitled to, we can help. Contact us today.

Predicting the metrics that underlie your company’s accounting estimates can be a challenge, especially in today’s unprecedented market conditions. There are several important “unknowns,” including how much longer certain issues involving the COVID-19 pandemic will continue, how the economy will be affected by federal stimulus spending over the long term, and to what extent tax laws and environmental regulations will change under the Biden administration.

Inaccurate predictions on these issues may have a serious impact on your company’s financial statements, and in future periods it could lead to restatements or write-offs.

Common accounting estimates

Both subjective and objective data (or a mix of both) may be used to arrive at accounting estimates, and there is always some level of measurement uncertainty involved. And while some estimates are easily determinable, many others are inherently complex or subjective. Allowances for doubtful accounts, uncertain tax positions, and work-in-progress inventory are a few good examples of accounting estimates.

Another important type of accounting estimate is the fair value measurement. A fair value measurement estimates “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” under U.S. Generally Accepted Accounting Principles (GAAP).  In business combinations, fair value is used as the basis for recording assets and liabilities. Fair value is also used to measure impairment of goodwill, long-lived assets, and other intangible assets.

Testing estimates through auditing

Because they require a high degree of subjectivity and judgment, accounting estimates can be susceptible to misstatement and require more focus from auditors.

Generally speaking, auditing standards provide three basic methods for substantively testing accounting and fair value measurements. Auditors will typically select one of these approaches (or a combination of them) during fieldwork.

Method one: testing the process used by management

In this approach, the reasonableness and consistency of management’s assumptions is evaluated and auditors test to see if the underlying data is complete, relevant, and accurate.

Method two: creating an independent estimate 

When this method is chosen, auditors use management’s assumptions or a set of alternative assumptions to arrive at their own estimates, then compare these estimates to what’s reported on internally prepared financial statements.

Method three: evaluating subsequent events and transactions

Finally, auditors may guage the reasonableness of estimates by examining events or transactions that happen before the date of the auditor’s report but after the balance sheet date.

Contact us for help

With all of the uncertainty this year, it’s likely that your auditors will pay extra attention to your accounting estimates. They may perform additional testing procedures or ask more detailed questions, for example. In addition, different measurement techniques may need to be used for some items. If you need help in making estimates that will withstand scrutiny and are based on market research and the use of specialists, we can help. Contact us before audit season begins.

In the past, estate planning has tended to focus on objectives like protecting assets against creditors’ claims or lawsuits and minimizing gift and estate taxes. While these are still important goals, many affluent families are now turning their focus to less technical but equally important considerations, such as ensuring the younger generation’s education, preparing them to responsibly manage wealth, encouraging charitable giving, and promoting shared family values. A family advancement sustainability trust (FAST) is one tool families are using to accomplish these goals.

FAST use and composition

FASTs are typically utilized in states that:

• Allow perpetual, or “dynasty,” trusts, which can benefit multiple generations into the future
• Have directed trust statutes
  • A directed trust statute allows the creator of a trust to appoint an advisor or committee to direct the trustee on certain matters 
  • Directed trust statutes allow for family members and trusted, skilled advisors to participate in a trust’s governance and management

FASTs are commonly organized using a governance structure that includes four decision-making entities:

1. An administrative trustee: The administrative trustee is often a corporate trustee, and handles administrative matters but not investment or distribution decisions.
2. An investment committee: The investment committee typically consists of family members and a professional, independent investment advisor, who handles the investment of trust assets.
3. A distribution committee: The distribution committee typically consists of family members and an outside advisor who works to ensure that trust funds are used in a way that promotes the trust’s objectives and benefits the family.
4. A trust protector committee: The trust protector committee is usually composed of one or more trusted advisors. The trust protector committee serves in place of the grantor after their death. It makes decisions about the amendment of the trust document for tax planning or other purposes and the appointment or removal of trustees and committee members.

How to establish and fund a FAST

Establishing a FAST during your lifetime helps to ensure that the trust will achieve your goals and enables you to educate advisors and family members on the trust’s guiding principles and purpose.

Since the bulk of the funding for a FAST is provided upon the death of the older generation, FASTs typically require little funding when created. It’s usually better to fund a FAST using life insurance or a well-structured irrevocable life insurance trust (ILIT), rather than using funding from the estate, since funding the trust through life insurance allows you to achieve your objectives for the trust without depleting any assets your family might otherwise benefit from.

Contact us for more information

FASTs are flexible and can be used to accomplish a variety of goals, depending on how you structure them to meet your family’s specific needs. When well-designed and implemented, they can help educate your heirs about important family values, prepare them to receive wealth, and maximize the chances that they’ll accomplish their financial goals. For more information on setting up a family advancement sustainability trust, contact us.

Here are a few important tax-related deadlines for the third quarter of 2021 that will affect businesses and other employers. This isn’t an all-inclusive list, so keep in mind that other additional deadlines may apply to you. If you want to make sure you’re meeting all applicable deadlines or have questions about the filing requirements, contact us.

Deadlines for Monday, August 2:

• Income tax withholding and FICA taxes must be reported for the second quarter of 2021 using Form 941 and any taxes due must be paid
• The 2020 calendar-year retirement plan report must be filed by employers using Form 5500 or Form 5500-EZ, or an extension must be requested

Deadlines for Tuesday, August 10:

• Income tax withholding and FICA taxes must be reported for the second quarter of 2021 using Form 941 if all associated taxes that were due were deposited in full and on time

Deadlines for Wednesday, September 15:

• Individuals who are not not paying income tax through withholding using Form 1040-ES must pay the third installment of 2021 estimated taxes
• Calendar-year corporations must pay the third installment of their estimated income taxes for 2021
• If they filed an automatic extension, calendar-year S corporations or partnerships must use Form 1120S, Form 1065, or Form 1065-B to file a 2020 income tax return and any tax, interest, and penalties due must be paid 
  • In addition, 2020 contributions to certain employer-sponsored retirement plans must be made

Feel free to contact us with any questions or concerns!

An organization’s working capital is the difference between its current assets and current liabilities. Although the optimal amount of working capital varies depending on the industry and the nature of operations, organizations need a certain amount of working capital to run their operations smoothly. And if working capital management is inefficient, it can hinder performance and growth.

Measuring liquidity

An item’s “liquidity” is the measure of how quickly the item can be converted to cash. Generally speaking, receivables are considered to be more liquid than inventory. The following liquidity metrics are commonly used to evaluate working capital:

Current ratio: To calculate the current ratio, current assets are divided by current liabilities. A current ratio of 1.0 or higher indicates that the company has enough available current assets to cover any liabilities due within 12 months.

Quick (or acid-test) ratio: This more conservative liquidity benchmark usually excludes inventory and prepaid assets from the calculation.

You can also evaluate working capital by comparing it to an organization’s total assets and annual revenues—viewed from this perspective, working capital can be used to measure operating efficiency. If an excessive amount of cash is tied up in working capital, it can prevent an organization from pursuing other spending options, such as buying equipment, paying down debt, and expanding into new markets.

Improving working capital efficiency

Having high liquidity usually indicates low financial risk. However, if your working capital is consistently increasing year after year or is significantly higher than competitors’ working capital, you may have too much of a good thing. If your liquidity is higher than needed, you may want to consider taking certain steps to speed up cash inflows and slow down cash outflows.

In order to realize more efficient operations, each component of working capital should be analyzed and these best practices should be implemented:

1. Cash should be put to good use. Having too much cash on hand can cause management to grow complacent about working capital. If your organization has cash to spare, you might have less incentive to collect receivables and stay disciplined about ordering inventory.
2. Speed up collections. Selling on credit effectively finances customers’ operations. Stale receivables—such as any balance over 45 or 60 days outstanding, depending on the industry—are a sign that your working capital management could be more efficient.

To better handle receivables, you should start by taking stock of which items can be written off as bad debts. Viable balances then need to be “talked in the door” as quickly as possible. You may also want to use electronic invoices, early bird discounts,and collections-based sales compensation programs to enhance collections efforts.

3. Keep less inventory on hand. Inventory is a huge investment for manufacturers, retailers, distributors, and contractors, and it can be difficult to value and track. Using enhanced forecasting and data sharing with suppliers can make it less necessary to keep a safety stock and allow you to implement smarter ordering practices. You can also improve your inventory tracking and ordering practices by using computerized technology like barcodes, enterprise resource planning tools, and radio frequency identification.
4. Extend credit terms. Payments should be postponed as long as possible—as long as you aren’t losing out on early bird discounts. Extending your organization’s average days in payables (for example, from 45 to 60 days) trains suppliers and vendors to accept the new terms, especially if you’re a reliable, predictable payor.

Contact us for help

When organizations become too focused on their income statement, they can lose sight of the strategic value of their balance sheet—especially when it comes to working capital accounts. We can help you measure your organization’s liquidity and asset efficiency over time and in comparison to your competitors. If needed, we also can help you implement strategies to improve performance while avoiding any unnecessary risk.

Tax breaks and other nontax benefits are available for business owners who hire their children this summer. By hiring your child, you may be able to:

• Realize payroll tax savings, depending on how your business is organized and your child’s age
• Convert high-taxed income into income that is low-taxed or tax-free
• Enable retirement plan contributions to be made for or by your children

In addition, your children will be able to spend time with you, save for college, gain job experience, and learn money-management skills.

Tax advantages to hiring your child

Business owners that hire their child receive a business tax deduction for employee wage expenses. This deduction also reduces the business owner’s federal income tax bill, state income tax bill (if applicable), and self-employment tax bill (if applicable). However, the child’s salary must be reasonable and any work performed by the child must be legitimate in order for the business to be able to deduct their wages as a business expense.

For example, say a sole proprietor in the 37% tax bracket were to hire their 17-year-old daughter on a full-time basis during the summer and part-time in the fall to help with office work. 

If the daughter earns $10,000 during 2021 and doesn’t earn any other income, the owner will save 37% of $10,000 ($3,700) in income taxes at no tax cost to their daughter. In addition, their daughter can completely shelter her earnings using her 2021 $12,550 standard deduction.

And even if a child’s earnings exceed their standard deduction, the family’s taxes are still reduced, because any unsheltered earnings will be taxed to the child beginning at a rate of 10%, rather than being taxed at the parent’s higher rate.

Additional savings in payroll taxes

If an owner’s business is unincorporated and certain conditions are met, their child’s wages are exempt from Social Security, Medicare, and FUTA taxes. For this to apply, however, the child must be under the age of eighteen (or, in the case of the FUTA tax exemption, under the age of 21). For more information on these exemptions, contact us.

It’s worth noting that if a business is incorporated or structured as a partnership that includes nonparent partners, it won’t receive a FICA or FUTA exemption for employing a business owner’s child. And no matter what type of entity you operate, payments for the services of a child are subject to income tax withholding regardless of the child’s age. 

Retirement savings

Business owners may also be able to provide employed children with retirement benefits depending on the type of retirement plan their business offers and how it defines qualifying employees. Since they’re receiving earnings from the job, the child can also begin to build a nest egg by contributing to a traditional IRA or Roth IRA. For earnings in 2021, a working child is allowed to contribute the lesser of $6,000 or their earned income to an IRA or a Roth.

Make sure to keep records

As you can see, there are many potential tax and nontax benefits to hiring your child. However, you’ll want to make sure to keep the same records for them as you would for other employees, including timesheets and job descriptions, so that you can substantiate the hours they worked and the duties they performed. Your child should also be issued a Form W-2. If you have any questions about how these rules might work in your situation, contact us.

Although President Biden has suggested that he wants to roll back current federal gift and estate tax exemption amounts (reducing the estate tax exemption to $3.5 million, imposing a top estate tax rate of 45%, and reducing the gift tax exemption to $1 million), any proposals would have to be passed in Congress. In the meantime, one benefit of the current federal gift and estate tax exemption of $11.7 million in 2021 is that when it comes to estate planning, most people are free to focus on asset protection and wealth preservation, rather than tax minimization. 

If you’re more concerned about personal liability at the moment, an asset protection trust is worth considering, as it can shield hard-earned wealth against claims and lawsuits from frivolous creditors. Although foreign asset protection trusts offer the best protection, they can be complex and expensive, and it may be worth considering a domestic asset protection trust (DAPT) as another option.

Standard and hybrid DAPTs

Standard DAPTs come with both benefits and potential risks. On one hand, a standard DAPT offers you creditor protection even if you’re one of the trust’s beneficiaries. On the other hand, DAPTs haven’t been the subject of a great deal of litigation, which means there’s some uncertainty over their ability to repel creditors’ claims. Although many experts believe they’ll hold up in court, there’s still some risk involved.

“Hybrid” DAPTs offer the best of both worlds. Since you aren’t initially named as a beneficiary of the trust, the risk described above is virtually eliminated. However, the trustee or trust protector can add you as a beneficiary if you need access to the funds in the future, converting the trust into a DAPT.

It’s worth determining whether you even need such a trust before you consider a hybrid DAPT. Transferring assets to your spouse, children, or other family members—either outright or in a trust— without retaining any control will place assets beyond the grasp of creditors and is generally the most effective asset protection strategy. In this case, your creditors won’t be able to reach the assets  so long as the transfer isn’t designed to defraud known creditors. In addition, you’ll still have indirect access to the assets through your spouse or children even though you’ve given up control, as long as your relationship with them remains strong.

A standard DAPT may be a better option, however, if you want to retain access to the assets without relying on your spouse or children.

Establishing a hybrid DAPT

Initially, hybrid DAPTs are created as third-party trusts, meaning that they benefit your spouse, children, or other family members, but not you. The trust isn’t a self-settled trust since you aren’t named as a beneficiary, and it thus avoids the uncertainty associated with standard DAPTs.

A properly structured third-party trust will certainly allow you to avoid creditors’ claims—and the trustee or trust protector has the authority to add additional beneficiaries, including you, in the event that you need access to the trust assets in the future. If that happens, however, the hybrid account is converted into a regular DAPT and is vulnerable to the same risks discussed previously.

Contact us today if you have additional questions regarding DAPTs, hybrid DAPTs, or other asset protection strategies.

You may find that you have questions about your 2020 tax return, even after you’ve successfully filed with the IRS. Here are three quick answers to some of the most frequently asked questions at this time of year.

When will I receive my refund?

You can check the status of your refund using the IRS’ online tool. You’ll need to have your Social Security number, your filing status, and the exact refund amount. Once you have the necessary info. at the ready, you can visit irs.gov and click on “Get Your Refund Status.” 

Which records can I throw away, and when?

Tax records related to your return should be kept for at least as long as the IRS can audit your return or assess additional taxes—generally speaking, the statute of limitations is three years after your return is filed. As such, you can typically get rid of most records for tax returns from 2017 or earlier (if you filed an extension for your return in 2017 or an earlier year, you should hold on to your records from that year until at least three years from the date you filed the extended return).

For taxpayers who understate their gross income by more than 25%, however, the statute of limitations extends to six years.

Certain tax-related records should also be kept for longer. Actual tax returns, for instance, should be kept indefinitely, as they allow you to prove that you filed legitimate returns to the IRS. (If you didn’t file a return or you filed a fraudulent one, there’s no statute of limitations for an audit.)

Records associated with retirement accounts should also be kept until three (or six) years after the account is depleted and the last withdrawal is reported on your tax return. In addition, records related to real estate or investments should be retained as long as you own the asset and for at least three (or six) years after you sell the asset and report the sale on your tax return.

Can I still collect a refund if I overlooked claiming a tax break?

Generally speaking, it’s possible to file an amended tax return and claim a refund. However, this must be done within three years after the date you filed your original return or within two years after the date you paid the tax, depending on which is later.

There are also some instances when you’ll have longer to file an amended return. When it comes to bad debts, for example, the statute of limitations is longer than the usual limit of three years. Tax returns can usually be amended to claim a bad debt for seven years from the due date of your tax return in the year that the debt became worthless.

Contact us today

If you have questions about receiving your refund, retaining tax records, or filing an amended return, contact us. We’re happy to help at tax filing time—and throughout the rest of the year.

The number of workers engaged in the “gig” or sharing economy had already been growing before the COVID-19 pandemic hit, according to several reports. During the pandemic, reductions in working hours have resulted in even more people turning to gig work to make up lost income. People who perform these jobs—which include delivering food, providing car rides, walking dogs, and providing other services—should be aware that there are also tax consequences.

Income received from freelancing or from online platforms offering goods and services is generally taxable—and that remains true if the income comes from a side job or if you don’t receive an income statement reporting the amount you earned for the work.

Gig worker classification

Workers who are independent contractors and conduct their jobs through online platforms—such as Uber, Lyft, Airbnb, and DoorDash—are classified by the IRS as gig workers. 

Independent contractors don’t receive employer-sponsored health insurance or benefits associated with employment. In addition, they aren’t a part of states’ unemployment insurance systems and aren’t covered by the minimum wage or other protections provided by federal laws. In addition, they’re solely responsible for retirement savings and taxes.

Considerations for gig workers

If you work as a gig worker, you should be aware of the following tax considerations:

• You should receive an income statement—such as a Form 1099-NEC, Nonemployee Compensation, or Form 1099-K—from the online platform you work for.
• Since your income isn’t subject to withholding, you may need to make quarterly estimated tax payments. Estimated tax payments for a given tax year are typically due on April 15, June 15, September 15, and January 15 of the following year. Due dates that fall on a Saturday or Sunday are moved to the next business day.
• Your business expenses may be tax-deductible, though this is subject to the normal tax rules and limitations. If, for example, you provide rides with your own car, it may be possible to deduct depreciation for wear and tear on the vehicle. However, if you rent a room in your main or vacation home, you should be aware that there are complex rules for deducting expenses.

Recordkeeping and further questions

You should strive to keep thorough records of income and expenses in case the IRS or state tax authorities choose to audit you. If you have questions about filing taxes as a gig worker or claiming deductions, contact us. We can help you avoid unwanted surprises when you file your tax return.

If you’re one of the many businesses that use independent contractors to help keep down costs, you’ll want to ensure that these workers are classified properly for federal tax purposes. It can be a costly mistake if the IRS reclassifies them as employees.

Determining whether a worker is an employee or an independent contractor for the purposes of federal income and employment tax can be complex. If a worker is an independent contractor, businesses must simply send the contractor a Form 1099-NEC for the year showing the amount paid if the amount is $600 or more.

However, if the worker is an employee, the company must withhold federal income and payroll taxes as well as pay the employer’s share of FICA taxes on the wages—in addition to FUTA tax. There may also be state tax obligations, and the business may provide the worker with fringe benefits that it makes available to other employees. 

Factors considered by the IRS

Unfortunately, there isn’t a uniform definition for the term “employee”. 

Generally speaking, if the organization an individual works for has the right to direct and control them in the jobs they’re performing, the IRS and courts have typically ruled that the individual is an employee. Otherwise, an individual is generally classified as an independent contractor. However, other factors—such as who pays expenses and who provides tools—are also taken into account.

Under Section 530, employers may get some relief from employment tax liabilities if they’ve misclassified workers as independent contractors. However, the employer must also meet certain requirements, such as treating all similarly situated workers as contractors and filing all federal returns in a way that’s consistent with its treatment of a worker as a contractor.

It’s also worth noting that section 530 doesn’t apply to certain types of workers.

Form SS-8 and allowing the IRS to decide

It’s possible to ask the IRS to rule on whether a worker is an employee or independent contractor by filing Form SS-8. However, the IRS historically has tended to classify workers as employees rather than independent contractors.

Before you file Form SS-8, you should first consult with us. Filing Form SS-8 could unintentionally trigger an employment tax audit by signalling to the IRS that your business has worker classification issues.

It’s often better to focus on properly treating workers as independent contractors so that their employment status complies with the tax rules.

Form SS-8 can also be filed by workers who want the IRS to officially determine their status. Independent contractors who are disgruntled because they feel entitled to employee benefits or who want to avoid self-employment tax liabilities may file a Form SS-8.

If a worker does so, the IRS notifies the business by mail in a letter. This letter will identify the worker and include a blank Form SS-8. The IRS will request that the business complete and return the form, and it will then render a classification decision.

Although this covers the basic tax rules, there are always new developments. The U.S. Labor Department recently withdrew a non-tax rule that was introduced under the Trump administration and made classifying workers as independent contractors easier. If you have questions about how to classify workers at your business, contact us. We can help you ensure that your workers are classified properly.