December Client Update Newsletter

Here are moves you can make to reduce your taxable income. But the year is quickly coming to a close, so plan accordingly.

• Max out pre-tax retirement savings. The deadline to contribute to a 401(k) plan to get a 2023 taxable income reduction is December 31st. So if your employer’s plan allows it, consider making a last-minute lump sum contribution. For 2023, you can contribute up to $22,500 to a 401(k), plus another $7,500 if you’re age 50 or older. Even better, you have until April 15, 2024, to contribute up to $6,500 into a traditional IRA. And as long as your income does not exceed phaseout limits, you can reduce your taxable income on your 2023 tax return.
• Convert to a Roth IRA. Consider converting some or all of your traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. Although you pay income tax on the amount of the Roth conversion the year it is made, subsequent growth is tax-free in a Roth IRA, and withdrawals from the account are 100% tax-free after five years from the date of the conversion.
• Tax loss harvesting. If you own stock outside a tax-deferred retirement plan, you can sell your under-performing stocks by December 31st and use these losses to reduce any taxable capital gains. If your net capital losses exceed your gains, you can net up to $3,000 against other income such as wages. Losses over $3,000 can be used in future years.
• Selling appreciated assets. Consider selling appreciated assets in the tax year that helps you the most. While this strategy may be hard to accomplish this late in the year, it is still worthy of consideration. To do this, estimate your current year’s taxable income and compare it to next year’s projected income. Then sell the appreciated asset in the year that will yield the lowest tax. Remember to account for the 3.8% net investment income tax in your estimates.
• Review health spending accounts. If you participate in a Health Savings Account (HSA), try to maximize your annual contribution to reduce your taxable income. Remember, these funds allow you to pay for qualified health expenses with pre-tax dollars. More importantly, unlike Flexible Spending Accounts (FSA), you can carry over all unused funds into future years. If you do have an FSA, you can carry forward a maximum of $610 from 2023 into 2024 if your plan allows this. The deadline for contributing to your Health Savings Account (HSA) and still getting a deduction for the 2023 tax year is April 15, 2024. The maximum contribution for 2023 is $3,850 if single and $7,750 for married couples. If you’re age 55 or older, you can add $1,000 to your HSA contribution.

While the year is quickly coming to an end, there is still time to reduce your 2023 tax liability, but only if you act now.

Back by popular demand is this season’s holiday movie and TV trivia quiz! So while you’re waiting for your holiday dinner or just resting after a wonderful feast, break out this quiz to share with family and friends. Enjoy!

May you and yours enjoy the holiday season with peace and joy.

Results:

11 to 12 points: Deck the Halls! You are awesome.

8 to 10 points: You are dashing through the snow…no walking for you!

4 to 7 points: Ho! Ho! Ho! You are having fun besides watching holiday movies.

0 to 3 points: Holidays? What Holidays? Pass me a cookie, would you please?

No one likes surprises from the IRS, but they do occasionally happen. Here are some examples of tax situations you could find yourself in and what to do about them.

• Kids getting older tax surprise. Your children are a wonderful tax deduction if they meet certain qualifications. But as they get older, many child-related deductions fall off and create an unexpected tax bill. And it doesn’t happen all at once.As an example, one of the largest tax deductions your children can provide you is via the child tax credit. If they are under age 17 on December 31st and meet several other qualifications, you could get up to $2,000 for that child on that year’s tax return. But you’ll lose this deduction the year they turn 17. If their 17th birthday occurs in 2023, you can’t claim them for the child tax credit when you file your 2023 tax return in 2024, resulting in $2,000 more in taxes you’ll need to pay.
• Limited losses tax surprise. If you sell stock, cryptocurrency or any other asset at a loss of $5,000, for example, you can match this up with another asset you sell at a $5,000 gain and – presto! You won’t have to pay taxes on that $5,000 gain because the $5,000 loss cancels it out. But what if you don’t have another asset that you sold at a gain? In this example, the most you can deduct on your tax return is $3,000 (the remaining loss can be carried forward to subsequent years).Herein lies the tax surprise. If you have more than $3,000 in losses from selling assets, and you don’t have a corresponding amount of gains from selling assets, you’re limited to the $3,000 loss. So if you have a big loss from selling an asset in 2023, and no large gains from selling other assets to use as an offset, you can only deduct $3,000 of your loss on your 2023 tax return.
• Getting a letter from the IRS surprise. Official tax forms such as W-2s and 1099s are mailed to both you and the IRS. If the figures on your income tax return do not match those in the hands of the IRS, you will get a letter from the IRS saying that you’re being audited. These audits are now done by mail and are commonly known as correspondence audits.Assuming you already know you received all your 1099s and W-2s and confirmed their accuracy, verify the information in the IRS letter with your records. Believe it or not, the IRS sometimes makes mistakes! It is always best to ask for help in how to correspond and make your payments in a timely fashion, if they are justified.

Please call to schedule a tax planning session so you can be prepared to navigate around any potential tax surprises you may encounter on your 2023 tax return.

Like a bundle of sticks, good business partners support each other and are less likely to crack under strain together than on their own. In fact, companies with multiple owners have a stronger chance of surviving their first five years than sole proprietorships, according to U.S. Small Business Administration data.

Yet sole proprietorships are more common than partnerships, making up more than 70 percent of all businesses. That’s because while good partnerships are strong, they can be a challenge to successfully get off the ground. Here are some of the ingredients that good business partnerships require:

• A shared vision. Business partnerships need a shared vision. If there are differences in vision, make an honest effort to find common ground. If you want to start a restaurant, and your partner envisions a fine dining experience with French cuisine while you want an American bistro, you’re going to be disagreeing over everything from pricing and marketing to hiring and décor.
• Compatible strengths. Different people bring different skills and personalities to a business. There is no stronger glue to hold a business partnership together than when partners need and rely on each other’s abilities. Suppose one person is great at accounting and inventory management, and another is a natural at sales and marketing. Each is free to focus on what they are good at and can appreciate that their partner will pick up the slack in the areas where they are weak.
• Defined roles and limitations. Before going into business, outline who will have what responsibilities. Agree on which things need consensus and which do not. Having this understanding up front will help resolve future disagreements. Outlining the limits of each person’s role not only avoids conflict, it also identifies where you need to hire outside expertise to fill a skill gap in your partnership.
• A conflict resolution strategy. Conflict is bound to arise even if the fundamentals of your partnership are strong. Set up a routine for resolving conflicts. Start with a schedule for frequent communication between partners. Allow each person to discuss issues without judgment. If compromise is still difficult after a discussion, it helps to have someone who can be a neutral arbiter, such as a trusted employee or consultant.
• A goal-setting system. Create a system to set individual goals as well as business goals. Regularly meet together and set your goals, the steps needed to achieve them, who needs to take the next action step, and the expected date of completion.
• An exit strategy. It’s often easier to get into business with a partner than to exit when it isn’t working out. Create a buy-sell agreement at the start of your business relationship that outlines how you’ll exit the business and create a fair valuation system to pay the exiting owner. Neither the selling partner nor the buying partner want to feel taken advantage of during an ownership transition.