Volume 9

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What Employers Need to Know: The Earned Sick Time Act (ESTA) Takes Effect February 21, 2025

On February 21, 2025, Michigan’s Earned Sick Time Act (ESTA) will go into effect, bringing significant changes to the way businesses handle sick time for their employees. This law applies to all employers with one or more employees, excluding the U.S. Government, and it mandates that employees begin accruing earned sick time. Let’s take …

On February 21, 2025, Michigan’s Earned Sick Time Act (ESTA) will go into effect, bringing significant changes to the way businesses handle sick time for their employees. This law applies to all employers with one or more employees, excluding the U.S. Government, and it mandates that employees begin accruing earned sick time. Let’s take a closer look at what employers need to know to prepare.

Accrual and Limits

  • Accrual Rate: Employees will accrue 1 hour of sick time for every 30 hours worked, which breaks down to roughly 0.0334 hours per 1 hour worked.
  • Caps: Employers can choose to cap accrual at 72 hours of sick time per year. However, any unused time must roll over year to year, with no cap on the amount that can accumulate. Keep in mind that while rollover is unlimited, employees can be restricted to 72 hours per year unless the employer opts for a higher limit.

 

Tracking and Usage

  • Smallest Increments: Employers must allow employees to use sick time in the smallest increment used by the payroll system. For example, if employees are paid per minute, sick time can be taken minute-by-minute.
  • Non-Disciplinary Absences: ESTA time is exempt from disciplinary policies. Absences taken under this leave cannot be counted against an employee in terms of any absence policy.

 

Documentation and Restrictions

  • Reasonable Documentation: After three consecutive days of leave, employers can request reasonable documentation for sick time. However, employers cannot require employees to search for a replacement worker.
  • No Payout at Termination: Employers are not required to pay out unused sick time upon termination. However, if an employee is rehired within 6 months, they are entitled to keep their accrued sick time.

 

Family Members

  • Who’s Covered? ESTA defines family members broadly, including children, parents, grandparents, and even siblings, as well as individuals with whom the employee shares a close relationship. Employees can use sick time for their own or a family member’s illness, medical appointments, or issues related to domestic violence and sexual assault.

 

Key Considerations for Employers

  • Tracking Records: Employers must maintain records of earned sick time for at least one year. However, most recommend keeping these records for seven years by integrating them into payroll systems.
  • Discipline Policies: Be mindful of your discipline policies, especially if you plan to avoid tracking reasons for ESTA absences. This could complicate any progressive discipline process related to attendance.

 

Does ESTA Affect Collective Bargaining Agreements?

Yes, if employees are part of a collective bargaining agreement (CBA), the terms of the CBA may affect how ESTA applies. The law does not override sick leave benefits negotiated in an existing CBA unless that agreement is silent on the issue.

 

Action Items for Employers:

  1. Review and Adjust Policies: Ensure that your sick leave policies comply with ESTA, including accrual rates, limits, and rollover rules.
  2. Update Payroll Systems: Verify that your payroll system can track sick leave accruals accurately and in the smallest increments.
  3. Plan for Documentation: Review your documentation process for sick time, especially regarding medical leave requests after three consecutive days.
  4. Prepare for Compliance: Since ESTA applies to all employees, regardless of work location (as long as they are in Michigan), ensure that your records reflect the correct status for any employees working out-of-state.

 

With ESTA taking effect in just over a month, it’s crucial to start preparing now. Employers who don’t comply with the new law could face penalties. If you need assistance in adjusting your policies or ensuring compliance, we’re here to help.

Stay informed, and make sure your business is ready for the upcoming changes.

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Navigating the Tax Complexities of Hiring Household Employees

Household employees play a crucial role in many homes, providing essential services such as childcare, eldercare, housekeeping, and gardening. However, employing household help comes with a set of responsibilities, particularly in terms of payroll, withholding, and tax reporting. This article delves into the intricacies of household employment, including the classification of workers, payroll requirements, …

Household employees play a crucial role in many homes, providing essential services such as childcare, eldercare, housekeeping, and gardening. However, employing household help comes with a set of responsibilities, particularly in terms of payroll, withholding, and tax reporting. This article delves into the intricacies of household employment, including the classification of workers, payroll requirements, tax implications, and the penalties for non-compliance.

Who is a Household Employee? – A household employee is someone who performs domestic services in a private home. This includes nannies, caregivers, housekeepers, gardeners, and other similar roles. The key factor that distinguishes a household employee from an independent contractor is the degree of control the employer has over the work performed. If the employer dictates what work is to be done and how it is to be done, the worker is typically considered an employee.   

A worker who performs childcare services in their home generally is not an employee of the parents whose children are cared for. If an agency provides the worker and controls what work is done and how it is done, then the worker is not considered a household employee.

Examples of Household Employees:

  • Nannies and babysitters
  • Caregivers for elderly or disabled individuals
  • Housekeepers and maids
  • Gardeners and landscapers (if they work under the homeowner’s direction)

Independent Contractors: Independent contractors, on the other hand, operate their own businesses and provide services to the public. They typically supply their own tools, set their own hours, and determine how the work will be completed. They are not treated as household employees and there are no reporting requirements when they work for you in your private home.  Examples include:

  • Plumbers
  • Gardeners and landscapers (if they don’t work under the homeowner’s direction)
  • Electricians
  • Pool maintenance workers
  • Freelance landscapers

Payroll and Withholding Requirements – When you hire a household employee, you become an employer and must adhere to specific payroll and withholding requirements. Here are the key steps involved:

  • Obtain Employer Identification Numbers (EINs): You need to obtain a federal EIN from the IRS and, in some cases, a state EIN.
  • Form I-9: Both the employer and the employee must complete Form I-9 to verify the employee’s eligibility to work in the U.S.
  • Schedule H: Household Employment Taxes – Employers report household employment taxes on Schedule H, which is filed with their federal income tax return (Form 1040). Schedule H covers Social Security and Medicare taxes, FUTA, and any withheld federal income tax.  
    • Social Security and Medicare Taxes: You must withhold Social Security and Medicare taxes from your employee’s wages and pay the employer’s share of these taxes. For 2024, the Social Security tax rate is 6.2% for both the employer and the employee, and the Medicare tax rate is 1.45% each.
    • Federal Unemployment Tax (FUTA): You may also need to pay FUTA tax if you pay your household employee $1,000 or more in any calendar quarter. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee.
    • Income Tax Withholding: Federal income tax withholding is not required for household employees unless both the employer and the employee agree to it. However, it is advisable to withhold federal income tax to help the employee avoid a large tax bill at the end of the year.
  • State Employment Taxes: State requirements vary, but you may need to pay state unemployment insurance and disability insurance taxes. Contact this office for state reporting requirements.  
  • W-2 and W-3 Forms: At the end of the year, you must provide your household employee with a Form W-2, Wage and Tax Statement, and file a copy with the Social Security Administration along with Form W-3, Transmittal of Wage and Tax Statements. These forms are generally due by January 31 following the year you paid the employee.

“Nanny” SEPs – A recent tax law change allows employers of domestic employees to establish a Simplified Employee Pension (SEP) plan to provide retirement benefits for their domestic employees, such as nannies. These plans have come to be termed “Nanny” SEPs, but can be made available to other types of domestic employees.

  • Tax Treatment: Contributions made to a SEP are generally tax-deferred for the employee, meaning the employee does not pay taxes on the contributions until they withdraw the funds, typically during retirement.
  • Distribution Rules: Distributions from SEPs are taxed similarly to IRA distributions. Early withdrawal penalties may apply if funds are withdrawn before the employee reaches age 59½.
  • Required Minimum Distributions (RMDs): Employees must start taking required minimum distributions from the SEP once they reach the age of 73 (or 70½ if they reached that age before 2020, or if they attained age 72 during 2020 through 2022).
  • No Loans: Loans are not permitted from SEP plans, as they are considered IRA-based plans.

This provision allows domestic employees to benefit from retirement savings plans like those available to employees in other sectors, promoting financial security for these workers. This is not a requirement but can be a valuable benefit to attract and retain quality household employees.

Deductibility of Household Employee Payments – Payments to household employees, and the employer’s associated payroll tax payments, are generally considered personal expenses and are not deductible. However, there are exceptions:

  • Medical Expenses: Wages and other amounts paid for nursing services can be included as medical expenses if the services are necessary for medical care. This includes services such as administering medication, bathing, and grooming the patient.
  • Child and Dependent Care Credit: Expenses for household services or care of a qualifying individual that allow the taxpayer to work may qualify for the child and dependent care credit. However, the same expense cannot be used both as a medical expense and for the child and dependent care credit.

Penalties for Non-Compliance – Failing to comply with household employment tax requirements can result in significant penalties:

  • Failure to Withhold and Pay Taxes: If you do not withhold and pay Social Security, Medicare, and FUTA taxes, you may be liable for the unpaid taxes, plus interest and penalties.
  • Failure to File Forms: Not filing required forms, such as Form W-2, can result in penalties. For example, the penalty for failing to file a correct Form W-2 by the due date can range from $60 to $330 per form, depending on how late the form is filed.
  • Misclassification of Employees: Misclassifying an employee as an independent contractor to avoid payroll taxes can lead to back taxes, interest, and penalties. The IRS has strict guidelines for determining worker classification, and misclassification can result in significant financial consequences. Some states have different guidelines, often more restrictive than the federal rules. 

Other Tax Issues:

  • Overtime Pay: Under the Fair Labor Standards Act (FLSA), domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in each week. However, live-in employees are an exception to this rule in most states.
  • Hourly Pay vs. Salary: It is illegal to treat nonexempt employees as if they are salaried. Household employees must be paid on an hourly basis, and any overtime must be compensated accordingly.
  • Separate Payrolls: Business owners must maintain separate payrolls for household employees. Personal funds, not business funds, must be used to pay household workers. Including household employees on a business payroll is not allowable as a business deduction.

Employing household help comes with a set of responsibilities that go beyond simply paying wages. Understanding the classification of workers, adhering to payroll and withholding requirements, and complying with tax reporting obligations are crucial to avoid penalties and ensure legal compliance. Additionally, offering benefits such as Nanny SEPs can help attract and retain quality household employees.

Please contact our office for questions and help meeting federal and state reporting requirements. 

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Don’t Leave Money on the Table: Essential Tax Credits You Might Be Missing

Tax preparers often encounter clients who are confused about the various tax credits available to them. Understanding these credits can significantly impact your tax liability and, in some cases, result in a refund. This article aims to demystify individual tax credits, explain the difference between refundable and non-refundable credits, and discuss credit carryovers. By …

Tax preparers often encounter clients who are confused about the various tax credits available to them. Understanding these credits can significantly impact your tax liability and, in some cases, result in a refund. This article aims to demystify individual tax credits, explain the difference between refundable and non-refundable credits, and discuss credit carryovers. By the end, you should have a clearer understanding of how to leverage these credits to your advantage.

What Are Tax Credits? Tax credits are amounts that reduce the tax you owe on a dollar-for-dollar basis. Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe. There are two main types of tax credits: refundable and non-refundable.

Refundable vs. Non-Refundable Tax Credits

  • Refundable Tax Credits: These credits can reduce your tax liability to zero and result in a refund if the credit amount exceeds your tax liability. In other words, if your tax liability is $400 and you have a refundable credit of $1,000, you will receive a $600 refund. This is where many individuals who are not required to file a tax return miss out on substantial refundable tax credits intended for those with low incomes.
  • Non-Refundable Tax Credits: These credits can reduce your tax liability to zero but cannot result in a refund. If your tax liability is $400 and you have a non-refundable credit of $1,000, your tax liability will be reduced to zero, but you will not receive a refund for the remaining $600.

Credit Carryovers – Some non-refundable credits come with carryover provisions, allowing you to apply any unused portion of the credit to future tax years. This can be particularly beneficial if you have a low tax liability in the current year but expect higher liabilities in future years.

Common Individual Tax Credits – Let’s delve into some of the most common individual tax credits, indicating whether they are refundable or non-refundable and if they include carryover provisions.

  • Earned Income Tax Credit (EITC) – The Earned Income Tax Credit (EITC) is designed to benefit low to moderate-income working individuals and families. The credit amount varies based on your income and the number of qualifying children you have. For the 2024 tax year, the maximum credit is $7,830.

Type: Refundable

  • Child Tax Credit (CTC) – The Child Tax Credit (CTC) provides up to $2,000 per qualifying child under the age of 17. Up to $1,400 of this credit is refundable, meaning you can receive a refund even if you do not owe any tax. The refundable portion is known as the Additional Child Tax Credit (ACTC).

Type: Partially Refundable

  • American Opportunity Tax Credit (AOTC) – The American Opportunity Tax Credit (AOTC) is available for the first four years of post-secondary education. The maximum credit is $2,500 per eligible student, with 40% of the credit (up to $1,000) being refundable. The credit covers tuition, fees, and course materials.

Type: Partially Refundable

  • Lifetime Learning Credit (LLC) – The Lifetime Learning Credit (LLC) provides up to $2,000 per tax return for qualified higher-education expenses. Unlike the AOTC, the LLC is non-refundable, meaning it can reduce your tax liability to zero but will not result in a refund. There is no limit on the number of years you can claim this credit.

Type: Non-Refundable

  • Saver’s Credit – The Saver’s Credit is designed to encourage low to moderate-income individuals to save for retirement. The credit is worth up to $1,000 ($2,000 for married couples filing jointly) and is non-refundable. It can be claimed for contributions to retirement accounts such as IRAs and 401(k)s.

Type: Non-Refundable

  • Child and Dependent Care Credit – The Child and Dependent Care Credit helps offset the cost of childcare or care for a dependent while you work or look for work. The credit is worth up to 35% of qualifying expenses, with a maximum of $3,000 for one qualifying individual or $6,000 for two or more. This credit is non-refundable.

Type: Non-Refundable

  • Adoption Credit – The Adoption Credit provides financial assistance for qualified adoption expenses. For the 2024 tax year, the maximum credit is $16,810 per child. This credit is non-refundable but can be carried forward for up to five years if the credit exceeds your tax liability.

Type: Non-Refundable with Carryover

  • Residential Clean Energy Credit – The Residential Clean Energy Credit is available for the installation of qualified energy-efficient improvements, such as solar panels and solar water heaters. The credit is worth 30% of the cost of the improvements and is non-refundable. Unused portions of the credit can be carried forward to future tax years.

Type: Non-Refundable with Carryover

  • Premium Tax Credit (PTC) – The PTC helps eligible individuals and families cover the cost of premiums for health insurance purchased through a government Health Insurance Marketplace. The credit amount is based on your family income and the cost of the premiums. This credit is refundable, meaning you can receive a refund if the credit exceeds your tax liability.

Type: Refundable

  • New Clean Vehicle Credit – Commonly referred to as the Electric Vehicle (EV) Credit, the New Clean Vehicle Credit is available for the purchase of qualifying all electric, plug-in hybrid, and fuel cell vehicles. Limits apply based your income and the manufacturer’s suggested retail price of the vehicle. The credit amount varies based on the vehicle’s battery capacity but can be up to $7,500. In lieu of claiming the credit on your tax return, you may be able to transfer the credit to the dealer at the time of purchase, which could reduce the vehicle’s cost or your downpayment.

Type: Non-Refundable with no carryover

  • Previously Owned Clean Vehicle (EV) Credit – The Previously Owned Clean Vehicle Credit is designed to incentivize the purchase of used electric vehicles. The credit is up to $4,000 or 30% of the vehicle’s price, whichever is less. As with the New Clean Vehicle credit, there are caps on the income of the purchaser and the cost of the vehicle, but the amounts are different. This credit is non-refundable with no carryover.

Type: Non-Refundable with no carryover

  • Credit for the Elderly or Disabled – The Credit for the Elderly or Disabled is available to low income individuals who are 65 or older or who are retired on permanent and total disability. The maximum credit is $7,500, but it is non-refundable, meaning it can only reduce your tax liability to zero.

Type: Non-Refundable

  • Foreign Tax Credit – The Foreign Tax Credit is available to individuals who pay taxes to a foreign government on income that is also subject to U.S. tax. This credit is non-refundable but can be carried back one year and forward up to ten years if it exceeds your tax liability.

Type: Non-Refundable with Carryover 

  • General Business Credit – The General Business Credit is a collection of various credits available to businesses, including sole proprietorships, that are passed through to the individual. These credits are non-refundable but can be carried back one year and forward up to twenty years.

Type: Non-Refundable with Carryover

Our firm’s goal is to help you navigate the complexities of the tax code and maximize your tax benefits. If you have any questions or need assistance with your tax return, please do not hesitate to contact our office. Together, we can ensure you take full advantage of the tax credits available to you.

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Maximize Your Tax Savings by Understanding the Hobby Loss Rules

When engaging in activities that generate income, it’s essential to understand how the IRS classifies these activities for tax purposes. The distinction between a hobby and a business can significantly impact your tax obligations. This article will delve into the hobby loss rules, the impact of the Tax Cuts and Jobs Act (TCJA) on …

When engaging in activities that generate income, it’s essential to understand how the IRS classifies these activities for tax purposes. The distinction between a hobby and a business can significantly impact your tax obligations. This article will delve into the hobby loss rules, the impact of the Tax Cuts and Jobs Act (TCJA) on deductions, the nine factors the IRS uses to determine if an activity is engaged in for profit and provides examples of court cases involving profit motive.

Hobby Loss Rules Overview – The IRS uses hobby loss rules to determine whether an activity is a hobby or a business. If an activity is classified as a hobby, the income generated is taxable, but for years 2018 through 2025 the expenses incurred are not deductible. This means you cannot use hobby expenses to offset other income.

Impact of the Tax Cuts and Jobs Act (TCJA) on Deductions – The TCJA, enacted in 2017, brought significant changes to the tax code, including the suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor for tax years 2018 through 2025. This suspension means that hobby expenses are not deductible during these years, making the entire income from a hobby taxable.

Nine Factors to Determine Profit Motive – The IRS considers nine factors to determine whether an activity is engaged in for profit. No single factor is decisive; instead, all factors must be considered together:

  1. Businesslike Manner: Is the activity carried out in a businesslike manner? This includes maintaining complete and accurate books and records.
  2. Expertise: Does the taxpayer have the necessary expertise or consult with experts to carry out the activity successfully?
  3. Time and Effort: How much time and effort does the taxpayer put into the activity? Significant time and effort may indicate a profit motive.
  4. Expectation of Asset Appreciation: Does the taxpayer expect the assets used in the activity to appreciate in value?
  5. Success in Similar Activities: Has the taxpayer succeeded in similar activities in the past?
  6. History of Income or Losses: What is the history of income or losses from the activity? Consistent losses may indicate a lack of profit motive.
  7. Amount of Occasional Profits: Are there occasional profits, and if so, how substantial are they?
  8. Financial Status: Does the taxpayer have substantial income from other sources? If so, the activity may be more likely to be considered a hobby.
  9. Elements of Personal Pleasure: Does the activity involve elements of personal pleasure or recreation?

Presumptions of Profit Motive – The IRS provides a presumption of profit motive if an activity generates a profit in at least three of the last five consecutive years, including the current year. For activities involving breeding, training, showing, or racing horses, the presumption applies if there is a profit in at least two of the last seven consecutive years.

Election to Delay Determination of Profit Intent – Taxpayers can elect to delay the determination of whether an activity is engaged in for profit by filing Form 5213, “Election to Postpone Determination as to Whether the Presumption Applies That an Activity Is Engaged in for Profit.” This election allows taxpayers to defer the determination until the end of the fourth tax year (or sixth tax year for horse-related activities) after the activity begins. This election (1) should not be made unless the taxpayer is being audited by the IRS and the IRS is disallowing their deductions under the hobby loss rules, and (2) cannot be made if the taxpayer has been engaged in the activity for more than five years (seven years for horse-related activities).

Sequence of Deductions to the Extent of Income for years before 2018 and after 2025 (providing Congress allows the TCJA rules to expire) – If an activity is classified as a hobby, deductions are allowed only to the extent of the income generated by the activity. The sequence in which deductions are allowed is as follows:

  • Home Mortgage Interest, Taxes, and Casualty Losses: These deductions are allowed first.
  • Deductions That Do Not Reduce Basis: These include expenses such as advertising, insurance, and wages.
  • Deductions That Reduce Basis: These include depreciation and amortization.

Hobby Income and Self-Employment Tax – If income is determined to be hobby income rather than trade or business income after applying the nine factors to determine whether an activity is engaged in for profit, the income is subject to income tax but not self-employment tax. This distinction is crucial because self-employment tax can significantly increase the tax liability for individuals engaged in a trade or business activities.

Court Cases Involving Profit Motive – Several court cases have addressed the issue of profit motive, providing valuable insights into how the IRS and courts determine whether an activity is a hobby or a business. 

  • Groetzinger v. Commissioner (1987): The Supreme Court held that a full-time gambler who bet solely on his own account was engaged in a trade or business of gambling. This prevented his gambling losses from being tax preference items for the purpose of computing minimum tax.
  • Gajewski v. Commissioner (1983): The court held that a taxpayer who did not hold himself out to others as offering goods or services was not in a trade or business. The taxpayer was a professional gambler who bet solely for his own account, and the denial of his business deductions turned the expenses into Schedule A deductions.
  • Ditunno v. Commissioner (1983): The court ruled that the proper test of whether an individual was carrying on a trade or business required examination of all facts involved. In this case, a full-time gambler was determined to be in a trade or business of gambling, and his gambling losses were business expenses, even though they were not related to offering goods and services.

Examples of Hobby vs. Business – To illustrate the distinction between a hobby and a business, consider the following examples:

  • Example 1: The Amateur Photographer – Jane enjoys photography and occasionally sells her photos online. She does not maintain detailed records, consult with experts, or spend significant time on her photography. Jane’s activity is likely to be classified as a hobby, and her expenses will not be deductible.
  • Example 2: The Professional Photographer – John is a professional photographer who maintains detailed records, consults with experts, and spends significant time on his photography business. He has a history of generating profits and expects his photography equipment to appreciate in value. John’s activity is likely to be classified as a business, and his expenses will be deductible.
  • Example 3: The Horse Breeder – Sarah breeds and trains horses. She has generated profits in two of the last seven years and maintains detailed records. Sarah’s activity is likely to be classified as a business, and her expenses will be deductible.

Understanding the hobby loss rules and the impact of the TCJA on deductions is crucial for taxpayers engaged in income-generating activities. By considering the nine factors used by the IRS to determine profit motive, taxpayers can better assess whether their activities are likely to be classified as hobbies or businesses. Additionally, being aware of the sequence in which deductions are allowed, or whether deductions are allowed at all, and the implications for self-employment tax can help taxpayers make informed decisions about their activities. Finally, reviewing court cases involving profit motive provides valuable insights into how the IRS and courts approach these determinations.

If you have any questions, please contact our office. 

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Maximizing Your Retirement Savings: Strategies for Late Starters

As a baby boomer, you may find yourself approaching retirement with less savings than you’d hoped. Whether due to economic fluctuations, personal circumstances, or simply the demands of life, many late starters face this challenge. However, it’s never too late to take action. Here are effective strategies to maximize your retirement savings and catch …

As a baby boomer, you may find yourself approaching retirement with less savings than you’d hoped. Whether due to economic fluctuations, personal circumstances, or simply the demands of life, many late starters face this challenge. However, it’s never too late to take action. Here are effective strategies to maximize your retirement savings and catch up on your financial goals.

1. Assess Your Current Financial Situation

Start by taking a comprehensive look at your finances. Calculate your net worth by subtracting your liabilities from your assets. Understand where you stand regarding retirement savings, debts, and other financial obligations. This assessment will provide a clear picture of your financial health and help you set realistic goals.

2. Create a Realistic Budget

Budgeting is crucial for anyone looking to save more, especially late starters. Track your income and expenses to identify areas where you can cut back. Consider the 50/30/20 rule: allocate 50% of your income to necessities, 30% to discretionary spending, and 20% to savings. This will help you redirect funds towards your retirement savings without drastically altering your lifestyle.

3. Maximize Contributions to Retirement Accounts

Take full advantage of retirement accounts like 401(k)s and IRAs. If your employer offers a matching contribution, aim to contribute at least enough to receive the full match—it’s essentially free money. For 2024, you can contribute up to $23,000 to a 401(k) or $7,000 to an IRA. Maxing out these contributions can significantly boost your savings over time.

4. Explore Catch-Up Contributions

If you’re age 50 or older, you’re eligible for catch-up contributions, which allow you to contribute extra amounts to your retirement accounts. For 401(k)s, you can add an additional $7,500, while IRAs allow for an extra $1,000. This is a powerful way to increase your savings as you near retirement.

5. Diversify Your Investments

Investment diversification is essential for managing risk and optimizing growth. As you age, consider adjusting your asset allocation to include a mix of stocks, bonds, and other investments. While you may want to lean towards more conservative investments as retirement approaches, having a portion of your portfolio in growth-oriented assets can help offset inflation and increase your savings over time.

6. Consider Part-Time Work or Side Gigs

If your current income isn’t sufficient to boost your retirement savings, consider part-time work or side gigs. This can provide extra cash flow that you can funnel directly into your retirement accounts. Freelancing, consulting, or even seasonal work can be excellent ways to earn additional income while allowing you to maintain flexibility.

7. Reduce Debt

Reducing or eliminating debt should be a priority, especially high-interest debt like credit cards. The more you can reduce your liabilities, the more you can allocate towards savings. Consider strategies such as the snowball or avalanche method to pay down debt systematically, freeing up more cash for your retirement.

8. Leverage Home Equity

If you own a home, consider leveraging your home equity to boost your retirement savings. Options like a home equity line of credit (HELOC) or a reverse mortgage can provide funds that you can invest in your retirement. However, proceed with caution and consult a financial advisor to ensure you understand the implications.

9. Stay Informed About Social Security Benefits

Understanding Social Security benefits is crucial for retirement planning. If you’re behind on savings, your Social Security income may play a larger role in your retirement strategy. Consider factors such as the optimal age to begin receiving benefits and how working longer can affect your benefits. Delaying benefits can lead to higher monthly payouts, which can significantly impact your overall retirement income.

10. Consult a Financial Advisor

Navigating retirement planning can be complex, especially if you’re a late starter. A financial advisor can help you create a personalized retirement strategy, considering your unique circumstances, risk tolerance, and goals. They can provide valuable insights on investment options, tax strategies, and how to maximize your retirement income.

It’s Never Too Late to Start Saving

While starting late may feel daunting, there are numerous strategies available to help you catch up on your retirement savings. By assessing your financial situation, maximizing contributions, and making informed decisions, you can build a more secure financial future. Remember, the sooner you start taking action, the more time your savings have to grow.

Ready to Boost Your Retirement Savings?

Contact our office today to speak with an advisor who can help you create a personalized tax-optimized retirement strategy. Let us guide you toward maximizing your retirement savings and achieving your financial goals.

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Meet the Team Behind DB&C Advisors: More Than Just Financial Professionals

At DB&C Advisors, exceptional service is not just about delivering tailored wealth management solutions; it’s about the heart of our practice—the people behind it. Our advisors don’t just bring financial expertise to the table; they bring their personalities, passions, and life experiences, making every client relationship personal and meaningful. In this blog, we’re excited …

At DB&C Advisors, exceptional service is not just about delivering tailored wealth management solutions; it’s about the heart of our practice—the people behind it. Our advisors don’t just bring financial expertise to the table; they bring their personalities, passions, and life experiences, making every client relationship personal and meaningful. In this blog, we’re excited to highlight three key team members who embody the spirit of DB&C: Deanna Sears, Shannon Simon, and Dan O’Mealey.

Deanna Sears – Client Services Associate

Family as a Driving Force

Deanna’s close-knit family has always inspired her, instilling in her the importance of love and connection, no matter the distance. This personal value translates directly into her work at DB&C Advisors, where helping clients plan for their families’ futures is a cornerstone of her role. Deanna sees financial planning as a way of protecting and nurturing relationships, much like she does with her own family.

Finding Balance Through Nature and Connection

Outside of the office, Deanna recharges through a variety of activities that connect her to both nature and community. She enjoys walking her dogs in the woods, gardening, and relaxing on the beach. When the weather isn’t cooperating, you’ll find her reading, sewing, or catching up with friends and family. Deanna’s philosophy is centered around balance—whether through quiet reflection, exercise, or shared laughter—helping her bring a positive, grounded energy into her work each day.

A Philosophy Rooted in Positivity

For Deanna, a smile goes a long way. Even when clients can’t see her, she believes they can sense the positivity in her voice. Her service philosophy is simple: stay upbeat and always approach life with kindness. This attitude resonates in her interactions with clients and colleagues alike, creating an environment where people feel supported, valued, and genuinely cared for.

The DB&C Family Atmosphere

One of Deanna’s favorite aspects of working at DB&C Advisors is the sense of family she feels with her team. Every day, she connects with clients and colleagues, forming relationships that go beyond transactions. For Deanna, it’s these connections that make her work so fulfilling.

Shannon Simon, BFA ®, CWS ® – Wealth Advisor

Client-Centered Relationships and a Family-First Philosophy

Shannon’s family plays a significant role in both his personal and professional life. His daughter is a teacher in Louisiana, and his son works for an airline in Michigan. Shannon’s focus on family mirrors his approach to working with clients, ensuring that every financial plan is deeply personal and rooted in each client’s life goals. He emphasizes, “It’s important to meet people where they are in their life’s journey—retirement, mid-career, or just starting out—and understand their goals and the steps they’ve taken toward achieving them.”

Enjoying Michigan Summers and Southern Cooking

Outside the office, Shannon enjoys spending quality time with his family, golfing (although not as much as he’d like), and fishing. As a native of Louisiana, he also loves cooking, particularly the foods he grew up eating, like gumbo, jambalaya, and barbeque. His time outdoors and in the kitchen helps him stay balanced and energized, allowing him to bring that same level of energy to his work.

Fostering Client Relationships as Family

For Shannon, DB&C Advisors feels like more than just a workplace—it’s a family. He notes that, “No matter what team or division you’re with, it feels like you are part of the family. Our goal is to extend that feeling to our clients, so we become an important part of their family as well.” He believes in creating strong, trust-based relationships with clients, helping them navigate challenges, and offering guidance through life’s significant events.

Dan O’Mealey, CFP ® – Chief Compliance Officer & Director of Financial Services

A Commitment to Setting a Good Example

Dan’s dedication to his family is mirrored in his professional life. As a father, he strives to set a strong example for his children, both in his career and in the way he approaches life. This commitment is reflected in how he engages with his clients, ensuring their needs are always the top priority.

Staying Energized Through Fitness and Fun

Dan’s life outside of the office is filled with a variety of activities that keep him balanced and energized. Whether it’s CrossFit, yoga, or spending time outdoors with family, Dan believes that staying active helps him maintain the focus and stamina necessary to serve his clients well. Summertime cookouts and travel are also significant parts of Dan’s life, providing the perfect way to unwind and recharge.

A Philosophy of Client-First Service

Dan’s personal service philosophy is straightforward: always put the client first. He believes that by focusing on the needs of his clients, everything else will naturally fall into place. This client-first mindset is at the core of how he approaches financial planning and is a key reason why he enjoys helping clients navigate both expected and unexpected challenges.

From Southeast Alaska to Wealth Management

One surprising fact about Dan is his unique background—he grew up in a fishing village on an island in Southeast Alaska. Before entering the world of financial planning, he spent ten years as a tool and die maker. This hands-on experience gives him a practical approach to problem-solving, which he applies to his financial planning strategies today.

Building Strong Client Relationships

For Dan, the best part of his job is getting to know the clients he serves. Whether it’s solving a small challenge or helping them navigate life’s big surprises, he values the trust his clients place in him and feels fortunate to be part of their journey.

DB&C Advisors is more than just a team of financial planners; we are a family of professionals who genuinely care about the people we work with. Deanna, Shannon, and Dan – along with the rest of the team, bring their full selves into their roles—combining technical expertise with authentic, human connections. When you work with DB&C Advisors, you’re not just getting a service; you’re gaining a partnership rooted in trust, integrity, and shared values.

Protecting Our Seniors: Understanding and Preventing Scams

As our population ages, seniors increasingly become targets for a variety of scams. These fraudulent schemes can have devastating financial and emotional impacts on older adults, who may be more vulnerable due to factors such as isolation, cognitive decline, or simply a trusting nature. The Internal Revenue Service (IRS) has been proactive in issuing …

As our population ages, seniors increasingly become targets for a variety of scams. These fraudulent schemes can have devastating financial and emotional impacts on older adults, who may be more vulnerable due to factors such as isolation, cognitive decline, or simply a trusting nature. The Internal Revenue Service (IRS) has been proactive in issuing warnings and providing guidance to help protect seniors from these threats. This article will delve into the nature of scams targeting seniors, what to be on guard for, awareness and protection strategies, IRS advice, and steps to take if one falls victim to a scam.

Understanding the Threats – Scammers employ a range of tactics to deceive seniors, often posing as representatives from government agencies, familiar businesses, or charities. The IRS, in its news release IR-2024-164, highlights the rising threat of impersonation scams targeting older adults. These fraudsters use fear and deceit to exploit their victims, often pressuring them into making immediate payments through unconventional methods such as gift cards or wire transfers.

Common Scams Targeting Seniors

  • Impersonation of Known Entities: Fraudsters often pose as representatives from government agencies like the IRS, Social Security Administration, or Medicare. By spoofing caller IDs, they can deceive victims into believing they are receiving legitimate communications. These scammers may claim that the victim owes money, is due a refund, or needs to verify personal information.
  • Claims of Problems or Prizes: Scammers frequently fabricate urgent scenarios, such as outstanding debts or promises of significant prize winnings. Victims may be falsely informed that they owe the IRS money, are owed a tax refund, need to verify accounts, or must pay fees to claim non-existent lottery winnings.
  • Pressure for Immediate Action: These deceitful actors create a sense of urgency, demanding that victims take immediate action without allowing time for reflection. Common tactics include threats of arrest, deportation, license suspension, or computer viruses to coerce quick compliance.
  • Specified Payment Methods: To complicate traceability, scammers insist on unconventional payment methods, including cryptocurrency, wire transfers, payment apps, or gift cards. They often require victims to provide sensitive information like gift card numbers.

Awareness and Protection Strategies

Awareness is the first line of defense against scams. Seniors and their caregivers should be educated about the common tactics used by scammers and the red flags to watch for. Tips for Seniors:

  • Verify the Source: Always verify the identity of the person or organization contacting you. If you receive a call, email, or text message claiming to be from the IRS or another government agency, do not provide any personal information. Instead, contact the agency directly using a verified phone number or website.
  • Be Skeptical of Unsolicited Communications: Be cautious of unsolicited communications, especially those that request personal information or immediate payment. Legitimate organizations will not ask for sensitive information through unsecured channels.
  • Do Not Rush: Scammers often create a sense of urgency to pressure victims into making hasty decisions. Take your time to verify the legitimacy of the request and consult with a trusted family member or friend before taking any action.
  • Use Secure Payment Methods: Avoid making payments through unconventional methods like gift cards, wire transfers, or cryptocurrency. Legitimate organizations will not request payment using these procedures.
  • Monitor Financial Accounts: Regularly monitor your bank and credit card statements for any unauthorized transactions. Report any suspicious activity to your financial institution immediately.

Tips for Caregivers

  • Educate and Communicate: Regularly discuss potential scams with the seniors in your care. Ensure they understand the common tactics used by scammers and encourage them to reach out to you if they receive any suspicious communications.
  • Set Up Protections: Help seniors set up protections such as fraud alerts on their credit reports and two-factor authentication on their online accounts.
  • Monitor Communications: If possible, monitor the mail, phone calls, and emails that the senior receives. This can help identify potential scams before any damage is done.
  • Encourage Reporting: Encourage seniors to report any suspicious activity to the appropriate authorities. Reporting scams can help prevent others from falling victim to the same schemes.

IRS Advice and Resources – The IRS has been actively engaged in efforts to protect taxpayers, including seniors, from scams and identity theft. The Security Summit partnership between the IRS, state tax agencies, and the nation’s tax professional community has been working since 2015 to combat these threats. Remember that:

  • The IRS will never demand immediate payment via prepaid debit cards, gift cards or wire transfers. Typically, if taxes are owed, the IRS will send a bill by mail first.
  • The IRS will never threaten to involve local police or other law enforcement agencies.
  • The IRS will never demand payment without allowing opportunities to dispute or appeal.
  • The IRS will never request credit, debit or gift card numbers over the phone.

Key IRS Recommendations

  • Know the IRS Communication Methods: The IRS will never initiate contact with taxpayers by email, text message, or social media to request personal or financial information. Initial contact is typically made through a mailed letter.
  • Questions or Concerns About Your Taxes: Contact your tax professional.
  • Report Scams: If you receive a suspicious communication claiming to be from the IRS, report it to the IRS at phishing@irs.gov. You can also report scams to the Federal Trade Commission (FTC) at www.ftc.gov/complaint.
  • Protect Personal Information: Be cautious about sharing personal information. The IRS advises taxpayers to use strong passwords, secure their devices, and be wary of phishing attempts.
  • Seek Professional Help: If you believe your identity has been compromised, contact this office immediately. The IRS has special provisions for victims of identity theft to protect their tax filings.

What to Do if Scammed – Despite all precautions, scams can still happen. If you or a loved one falls victim to a scam, it’s important to act quickly to minimize the damage. Immediate steps to take:

  • Stop Communication: Cease all communication with the scammer immediately. Do not provide any further personal information or make any additional payments.
  • Report the Scam: Report the scam to the appropriate authorities. This includes the IRS, the FTC, and your local law enforcement. Reporting the scam can help authorities track down the perpetrators and prevent others from being victimized.
  • Contact Financial Institutions: Notify your bank, credit card companies, and any other financial institutions involved. They can help you monitor your accounts for fraudulent activity and take steps to protect your assets.
  • Place Fraud Alerts: Place a fraud alert on your credit reports with the major credit bureaus (Equifax, Experian, and TransUnion). This can help prevent further identity theft.
  • Review Credit Reports: Obtain and review your credit reports for any unauthorized accounts or activities. You are entitled to a free credit report from each of the major credit bureaus once a year through www.annualcreditreport.com. You may even want to put a freeze on your credit, which will help prevent fraudsters from opening credit accounts in your name or accessing your credit reports. To do so you’ll need to contact the three major consumer credit bureaus. The drawback to doing so is the inconvenience of contacting the credit bureaus again if you need to lift the freeze on your credit card(s).
  • Secure Personal Information: Change passwords and security questions on your online accounts. Consider using a password manager to create and store strong, unique passwords.

Long-Term Steps

  • Monitor Accounts: Continue to monitor your financial accounts and credit reports regularly for any signs of fraudulent activity.
  • Educate Yourself: Stay informed about the latest scams and fraud prevention strategies. The IRS and other organizations regularly update their websites with new information and resources.
  • Seek Support: Falling victim to a scam can be emotionally distressing. Seek support from family, friends, or professional counselors if needed.
  • Legal Assistance: In some cases, it may be necessary to seek legal assistance to resolve issues related to identity theft or financial fraud.

Scams targeting seniors are a growing concern, but with awareness and proactive measures, older adults can be protected from these threats. By staying informed, verifying communications, and taking swift action, when necessary, seniors and their caregivers can safeguard against fraud and ensure financial security.

Remember, if you or a loved one is ever in doubt about a communication or request, it’s always better to be safe than sorry. Reach out to trusted family members, friends, or professionals for advice and support. Together, we can create a safer environment for our seniors and help them enjoy their golden years without the fear of falling victim to scams.

Self-Employment Tax: Who Really Needs to Pay and Why You Can’t Afford to Ignore It

In the realm of taxes, understanding who is required to pay self-employment tax and who is exempt is crucial for individuals navigating their financial responsibilities. Whereas employees have Social Security and Medicare taxes withheld from wages–often referred to as FICA taxes– individuals who work for themselves are subject to self-employment (SE) tax, which they …

In the realm of taxes, understanding who is required to pay self-employment tax and who is exempt is crucial for individuals navigating their financial responsibilities. Whereas employees have Social Security and Medicare taxes withheld from wages–often referred to as FICA taxes– individuals who work for themselves are subject to self-employment (SE) tax, which they pay in lieu of the Social Security and Medicare taxes employees pay via payroll withholding. Employees and employers share the employee’s liability, while self-employed individuals pay both the employer and employee liability.

 

Understanding Self-Employment Tax – Before diving into the specifics of who must pay self-employment tax, it’s essential to understand what it entails. Self-employment tax is governed by the Self-Employment Contributions Act (SECA), under which individuals who earn income directly from their business activities, rather than as employees, are required to contribute to Social Security and Medicare. This tax is calculated as a percentage of net earnings from self-employment.

 

For 2024, the self-employment tax rate is 15.3%, comprised of 12.4% for Social Security contributions on the first $168,600 of net earnings and 2.9% for Medicare contributions on all net earnings. Unlike employees, who share these tax responsibilities with their employers, self-employed individuals bear the full burden. An additional Medicare tax of 0.9% of net self-employment income applies for those with SE income above the following thresholds: $250,000 married joint, $125,000 married separate and $200,000 all others 

 

Who is Required to Pay Self-Employment Tax? – Generally the following are subject to self-employment tax:

  • Sole Proprietors and Independent Contractors – Individuals operating their businesses or offering services as sole proprietors or independent contractors are required to pay self-employment tax on their net earnings if they exceed $400 in a tax year.
  • Partners in a Partnership – Members of a partnership that conducts a trade or business are subject to self-employment tax on their share of the partnership’s income.
  • Members of a Limited Liability Company (LLC) – Depending on the election made by the LLC, members may be treated as sole proprietors or partners for tax purposes and thus be required to pay self-employment tax on their share of the LLC’s profits.
  • Clerics – A cleric is required to pay self-employment tax on income from services as a minister unless the individual has taken a vow of poverty. The following are examples of common situations related to the self-employment income of clerics:
    • W-2 Income – from the Church is subject to income tax, and self-employment tax. It’s important to note that the church does not withhold FICA taxes for this income.
    • Self-employment Income – Clerics who do not work for a specific church or who receive income for presiding over weddings, funerals, etc., have non-employee income that is taxable and subject to self-employment tax, based on the net profit from the self-employment activity.
    • Schedule C – This is the IRS form on which clerics report their SE income, which can be offset by associated expenses, resulting in the net profit that’s subject to SE taxes.
    • Most clerics receive a Housing (Parsonage) Allowance from the church they work for. To the extent allowed by law, this income is not subject to income tax but is subject to self-employment tax.

 

Who is Exempt from Paying Self-Employment Tax? – While the scope of self-employment tax is broad, there are specific exemptions and special cases:

  • Employees: Individuals who work as employees and receive a W-2 form are not subject to self-employment tax on their wages, as their employers withhold Social Security and Medicare taxes throughout the year that the employer pays over to the government.
  • Rental Income: Generally, income derived from renting out property is not subject to self-employment tax unless the individual is engaged in a rental business that provides services for the convenience of tenants.  This generally includes rents paid in crop shares.
  • Limited Partners: Limited partners in a partnership may be exempt from self-employment tax on certain income distributions, as their involvement in the business is typically passive, i.e., more in the nature of an investment.
  • Certain Business Owners: Owners of corporations, including S corporations, may not be subject to self-employment tax on their share of the corporation’s profits, though they must pay themselves reasonable compensation subject to the FICA employment taxes.
  • Commissions Allowed by the Probate Court – Commissions (fees) allowed to nonprofessional fiduciaries (such as an estate executor or trustee) by a probate court under local law generally aren’t considered self-employment earnings. However, if the fees relate to active participation in the operation of the estate’s business, or the management of an estate that required extensive management activities over a long period of time, the fees would be SE income to the extent they represents a special payment for operating the business. 
  • Termination Payments of Former Insurance Salespeople – The law provides that net earnings from self-employment don’t include any amounts received from an insurance company for services performed by an individual as an insurance salesperson for the company if certain conditions are met.
  • Religious Exemptions – Ministers, Christian Science practitioners, and members of religious orders who have taken a vow of poverty may get an exemption from self-employment tax on their earnings if certain requirements are met.  To get the exemption, Form 4361 must be filed with the IRS.

Retired clergy receiving parsonage or rental allowances are not subject to self-employment tax. 

  • Notary Public – The fees for the services of a notary public are exempt from the self-employment tax.
  • Nonresident Aliens – Nonresident aliens engaged in a trade or business within the United States may be subject to self-employment tax, with specific exemptions based on tax treaties.
  • Miscellaneous Income from an Occasional Act or Transaction – Income from an occasional act or transaction, absent proof of efforts to continue those acts or transactions on a regular basis, isn’t income from self-employment subject to the SE tax.  An example is a nonprofessional fiduciary who manages the estate of a relative or friend.  However, professional fiduciaries are subject to self-employment tax

 

Special Situations

  • Self-employment Tax Deduction – Self-employed individuals can deduct half of their self-employment tax when calculating their adjusted gross income, providing some relief. The purpose of this deduction is to make up for the self-employed person having to pay both sides of the Social Security and Medicare taxes. However, this is not a deduction on the individual’s business form, such as Schedule C. It is deductible whether the individual itemizes their deductions or claims the standard deduction.
  • Optional Methods – There are two methods – one for farmers and another for nonfarmers – that can be used when net self-employment earnings are less than $400 and paying SE tax isn’t required.  Use of these methods allows a taxpayer to continue accruing credit toward their Social Security coverage in years when profits are small (or even when there is a loss). Using the optional method may also allow the individual to qualify for the earned income credit and certain other credits, or to receive a larger credit. These individuals are subject to special rules for self-employment tax, with different thresholds and rates applying to their net earnings.

 

Understanding the intricacies of self-employment tax is vital for anyone earning income outside of traditional employment. While the responsibility to pay rests on many self-employed individuals, exemptions and special cases exist. 

 

Contact our office with questions regarding self-employment tax and how it may apply in your specific circumstances.

September Individual and Business Due Dates

September 2024 Individual Due Dates September 1 – 2024 Fall and 2025 Tax Planning Tax Planning Contact this office to schedule a consultation appointment.September 10 – Report Tips to EmployerIf you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer …

September 2024 Individual Due Dates

September 1 – 2024 Fall and 2025 Tax Planning 

Tax Planning Contact this office to schedule a consultation appointment.

September 10 – Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

September 16 – Estimated Tax Payment Due

The third installment of 2024 individual estimated taxes is due. Our tax system is a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include:

  • Payroll withholding for employees;
  • Pension withholding for retirees; and 
  • Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

  • The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.

  • The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

Weekends & Holidays:

If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday. 

Disaster Area Extensions:

Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:

FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

 

September 2024 Business Due Dates

September 16 – S Corporations

File a 2023 calendar year income tax return (Form 1120-S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. Provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) or a substitute Schedule K-1 and, if applicable, Schedule K-3 (Form 1120-S) or substitute Schedule K-3 (Form 1120-S).

September 16 – Corporations 

Deposit the third installment of estimated income tax for 2023 calendar year

September 16 – Social Security, Medicare and withheld income tax

If the monthly deposit rule applies, deposit the tax for payments in August.

September 16 – Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in August.

September 16 – Partnerships

File a 2023 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.

September 30 – Fiduciaries of Estates and Trusts

File a 2023 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 1/2 months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.

Weekends & Holidays:

If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday. 

Disaster Area Extensions:

Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:

FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations 

Think Twice Before Tossing:  The Critical Timing for Disposing of Your Tax Records Safely 

Now that your taxes are complete and filed for last year, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records …

Now that your taxes are complete and filed for last year, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records needed to be kept in the first place. Generally, we keep “tax” records for several reasons: 

Audit Defense: In the event of an IRS audit, taxpayers are required to present documentation supporting the claims made on their tax returns. Without proper records, defending against audit adjustments becomes significantly challenging.

Amending Returns: If taxpayers need to amend a return due to discovered errors or overlooked deductions, having detailed records makes the process smoother and ensures that all adjustments are accurate.

Claiming Refunds: For claiming refunds, especially those related to overpaid taxes, detailed records are necessary to substantiate the claim.

Tax Basis: When capital assets, such as stock, business assets, rentals and other investments are disposed of it is necessary to determine for tax purposes if there was a gain or loss from the transaction. The tax basis is what the asset cost plus or minus adjustments such as the cost of improvements which increase the tax basis, depreciation (reduces basis), casualty losses, or tax credits which decrease the tax basis. 

Duration for Keeping Tax Records – The general rule of thumb is to keep tax records until the statute of limitations for the tax return in question expires. The statute of limitations is the period during which the taxpayer can amend their tax return to claim a credit or refund, or the IRS can assess additional tax. 

Federal Statute of Limitations on Tax Refunds: The statute of limitations on tax refunds is a set of rules defined by the Internal Revenue Code that determines the time frame within which a taxpayer can claim a credit or refund for overpaid taxes. This statute serves two main purposes:

  • It specifies how long an individual has to file a claim for a refund or an amended return after the original return was filed or the tax was paid.
  • It sets limits on the amount of refund or credit that can be claimed, based on certain conditions.

    Some states have longer statutes, typically 4 years, so they have more time to piggyback on any federal audits and adjustments.

    Example: Sue filed her 2023 tax return before the due date of April 15, 2024. She will be able to safely dispose of most of her records after April 15, 2027. On the other hand, Don files his 2023 return on June 2, 2024. He needs to keep his records at least until June 2, 2027. In both cases, the taxpayers should keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

Tax Return Omissions: In certain situations, such as when a taxpayer does not report income that they should report, and it is more than 25% of the gross income shown on the return, the IRS suggests keeping records for six years.

Of course, the statute doesn’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return to evade tax.

Indefinite Retention: For records related to property, the IRS recommends keeping them for as long as the property is owned and for at least three years after filing the return reporting the sale or other disposition of the property. This is crucial for calculating depreciation, amortization, or gains or losses on the property.

Financially Disabled – Additionally, the time periods for claiming a refund are suspended for taxpayers who are “financially disabled”. A taxpayer is financially disabled if they are unable to manage their financial affairs because of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. For a joint income tax return, only one spouse need be financially disabled for the time to be suspended. However, a taxpayer is not treated as financially disabled during any period their spouse, or any other person, is authorized to act on their behalf in financial matters. 

The Big Problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets such as stocks, bonds, and real estate. These documents need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category: 

Stock Acquisition Data — If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale. And if the result of those sales, and sales of other capital assets, is a loss that you’ll be carrying forward to future tax returns – loss exceeds $3,000 ($1,500 if filing as married separate) – keep the purchase and sale records for four years after filing the return on which the last of the loss is used up.

Stock and Mutual Fund Statements — Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements for at least four years after the final sale.

Tangible Property Purchase and Improvement Records — Keep records of home, investment, rental property or business property acquisitions, AND related capital improvements for at least four years after the underlying property is sold.

In addition, if you own a business that has a loss that creates a net operating loss (NOL) that you’ll be carrying forward to deduct in future years, you should keep all the business’s records that substantiate income and expenses from the loss year for at least four years after filing the return on which the NOL deduction is used up. 

The 10-Year Statute of Limitations on Collections – Although this has nothing to do with the theme of his article, “how long does the IRS have to collect unpaid tax?” is an often-asked question. The tax code puts a 10-year limit on the time period the IRS can pursue the collection of a tax debt. This statute of limitations begins from the date the tax was assessed and not from the tax year for which the debt was incurred. Understanding this limitation is crucial for taxpayers for several reasons: 

Collection Activities: The IRS has various collection activities at its disposal, including tax liens, levies, and wage garnishments. However, these activities are bound by the 10-year statute of limitations.

Installment Agreements: When a taxpayer owes federal tax and can’t immediately pay it, they may enter into an installment payment agreement with the IRS. In this case the clock on the 10-year statute does not stop. This means the IRS must collect the full amount owed within the original 10-year period unless specific conditions extend this period.

Have questions about whether to retain certain records? Give one of our offices a call before tossing out those documents. It is better to be sure before discarding something that might be needed down the road.

About us

De Boer, Baumann & Company provides professional accounting, tax, and business advisory services to individuals and businesses in West Michigan and the surrounding areas. With expertise in a variety of industries, DBC specializes in comprehensive and innovative solutions to help clients achieve their financial goals.