Month: April 2023

The $75 rule applies to certain business expenses where you do not need a receipt. But I emphasize that this rule does not apply to all tax deductions.

Many taxpayers mistakenly apply the $75 rule to all their tax deductions, which can result in a significant loss of deductions and penalties. I encourage you to know the $75 rule and its limitations to avoid potential negative consequences.

IRS Reg. Section 1.274-5(c)(2)(iii) contains the $75 rule, and Notice 95-50 provides a clear explanation of what it applies to. The rule applies to business travel expenses, vehicle expenses, and gifts that cost less than $75. But remember that the $25 limit on deductions for business gifts applies, meaning the practical limit is $25.

It’s worth noting that your bank and credit card statements do not provide sufficient proof of expenses for tax purposes. You need to have both the receipt (proof of what you purchased) and the canceled check or credit card statement (proof of payment) to substantiate the expenditure.

While the $75 rule may allow you to avoid having a receipt for some expenses, it is crucial to document all your expenses properly. To document a $60 meal consumed during deductible business travel with or without a receipt, for example, you need to prove the amount spent, the date of the meal, and the name and location of the restaurant.

While you don’t need a receipt for the $60 travel meal, your documentation life is easy with a receipt.

We encourage you to keep all your receipts for tax purposes, as they often take less time to keep track of and are better evidence in the event of an IRS audit.

If you want to discuss the $75 rule, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 12, 2023

I hope this letter finds you well. As your tax advisor, I want to provide you with the latest updates on the business meal deduction for the year 2023 and beyond.

As you may already know, there have been some significant changes to the business meal deduction for 2023 and beyond. The deduction for business meals has been reduced to 50 percent, a significant change from the previous 100 percent deduction for business meals in and from restaurants, which was applicable only for the years 2021 and 2022.

To help you better understand the current situation, see the table below:

The table above provides a valuable summary resource for you. Please take some time to review it periodically. If you have any questions or concerns, please do not hesitate to contact me on my direct line at 408-778-9651.

• By Leon Clinton
• April 9, 2023

In late 2022, Congress passed the SECURE 2.0 Act, which made several changes to tax-advantaged retirement plans. Many of the changes create new exceptions to the 10 percent penalty on early withdrawals from IRAs and other retirement accounts before age 59 1/2.

Starting in 2024, you will have more options than ever before to withdraw money from a retirement account without penalty. Unfortunately, most exceptions require experiencing something negative, such as a financial emergency, domestic abuse, a terminal illness, or a disaster.

It’s important to note that while these withdrawals will not be subject to the 10 percent early withdrawal penalty, you must pay regular income tax on withdrawals from tax-deferred accounts such as traditional IRAs and 401(k)s. Withdrawals from Roth IRAs held for five years are not subject to income tax.

In 2024, a new emergency personal expense withdrawal exception to the 10 percent penalty will allow you to withdraw up to $1,000 from your retirement accounts in case of almost any type of financial emergency. But you can only do so once every three years unless you pay back the money first.

Starting in 2024, taxpayers who suffer abuse from a spouse or domestic partner may withdraw up to $10,000 penalty-free. Domestic abuse is broadly defined to include physical, psychological, sexual, emotional, or economic abuse.

If you expect to die from a terminal illness within seven years, you can withdraw any amount from your retirement accounts penalty-free—immediately. A doctor must certify your terminal illness.

Starting in 2026, retirement account owners may take penalty-free annual distributions of up to $2,500 to help pay for long-term care insurance for themselves or their spouses.

You can withdraw up to $22,000 from your retirement accounts penalty-free if a federally declared disaster damages your primary residence. This provision is retroactive to January 26, 2021, and applies to all federally declared disasters.

Some of these exceptions can be combined. For example, you could take a penalty-free emergency personal expense distribution and domestic abuse distribution in the same year for a maximum of $11,000. If a federally declared disaster damages your home, you could add up to $22,000. But let’s hope you never experience any of these adverse situations.

If you want to discuss any of the new provisions mentioned above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 4, 2023