August 2022

 August 2022

 

Upcoming dates:

September 5

 - Labor Day

September 15

 - Filing deadline for 2021 calendar-year S corporation and partnership tax returns on extension

 - Due date for 3rd quarter installment of 2022 estimated income tax for individuals, calendar-year corporations and calendar-year trusts & estates

 

Welcome to the last month of traditional summer vacation!

This month's letter includes a review of five ways to take advantage of IRA accounts to reduce your tax burden. All done with plenty of time to implement the ideas before the end of the year.

There is also an article to help avoid the tax penalties built into the hobby tax code that excludes the ability to deduct your expenses.

Please feel free to forward the information to someone who may be interested in a topic and call with any questions you may have.

 

5 Great Things to Know about IRAs

IRA's can be a powerful tool to lower taxes all while saving for retirement or other predetermined uses. Here are five fairly unreported things to know about IRA's.

1. A nonworking spouse can have an IRA. If your spouse doesn't work, you may still be able to open and contribute to an IRA for your spouse, assuming that you work and file a joint tax return. This can be a great way to help reduce your taxable income each year.

2. Even children can have IRAs. If your child has earned income, you can open and contribute to an IRA. Just ensure you can document the earnings. While your child can contribute their own earnings, many parents will help keep track of things like babysitting money, then match those earnings in either a traditional or ROTH IRA. Often the ROTH IRA is preferred, because the future earnings could be tax free! Your child's IRA is managed by an adult until the child is old enough for the account to be transferred to their name.

3. You may still contribute to an IRA if you have a 401(k) or similar program at work. As long as you do not exceed the income limits, it is ok to have both an IRA as well as other forms of retirement savings plans. It's simply important to know your options and plan accordingly.

4. Non-deductible contributions may be made. If you exceed IRA income phaseouts, contributions to your IRA may not reduce your taxable income for the year. But you may still want to make after-tax contributions to a non-deductible IRA. Remember, while you are taxed on the contributions to a non-deductible IRA, the earnings can still grow tax-deferred.

5. It's not just for retirement. With traditional IRAs, if you withdraw funds before the age of 59 1/2 you may be subject to income tax AND an early withdrawal penalty. But there are exceptions to this rule. These include withdrawals for a first time home purchase, major medical bills, college costs, birth/adoption and many others. However, it is important to know the rules BEFORE you withdraw the funds.

Tax rules surrounding IRAs are vast and complex. But within the rules are numerous situations that if you know they exist, can help you plan for a more tax-efficient future.

 

 

Turning Your Hobby Into a Business

You’ve loved dogs all your life so you decide to start a dog breeding and training business. Turning your hobby into a business can provide tax benefits if you do it right. But it can create a big tax headache if you do it wrong.

One of the main benefits of turning your hobby into a business is deducting all your qualified business expenses, even if it results in a loss. However, if you don’t properly transition your hobby into a business in the eyes of the IRS, you could be waving a red flag that reads, Audit Me! The agency uses several criteria to distinguish whether an activity is a hobby or a business. So why not make your business activity bullet proof! Here is what you need to know:

The business-versus-hobby test

 

Honest assessment

As you can see, there is a degree of interpretation involved in reviewing any activity. So, if your dog breeding business (or any other activity) falls under any of the hobby categories on the right side of the chart, consider what you can do to meet the business-like criteria on the left side. The more your activity resembles the left side, the less likely you are to be challenged by the IRS. And to remove any doubt, your best defense is making some money!

 

 

 

As always, should you have any questions or concerns regarding your tax situation please feel free to call.

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