Month: March 2024

As we navigate the complexities of financial planning, one opportunity stands out for young adults: individual retirement accounts (IRAs). With the 2023 tax-year contributions deadline fast approaching, on April 15, 2024, now is the perfect time to consider how you can leverage an IRA.

Traditional and Roth IRAs: A Brief Overview

Both traditional and Roth IRAs offer unique benefits, so the choice between them largely depends on your current financial situation and future expectations. For the 2023 tax year, you can contribute up to $6,500 or your earned income for the year, whichever is less. This cap increases to $7,000 for the 2024 tax year.

Traditional IRAs provide the potential for tax-deductible contributions, which can be particularly advantageous if you’re looking for immediate tax relief. The deductibility of your contributions may phase out based on your income and whether you’re covered by a workplace retirement plan. It’s also important to note that withdrawals from traditional IRAs are taxable, and early withdrawals may incur penalties.

On the other hand, Roth IRAs offer tax-free growth and tax-free withdrawals in retirement. Although contributions are not tax-deductible, the tax-free withdrawal benefit in retirement can be significant, especially if you expect to be in a higher tax bracket then. Additionally, Roth IRAs do not require minimum distributions during your lifetime, offering more flexibility in retirement planning.

Key Considerations for Young Adults

Income limits and phaseouts. Be mindful of the income-based phaseout ranges that may affect your ability to contribute to Roth IRAs or deduct traditional IRA contributions.

Tax bracket considerations. Your current and expected future tax brackets are critical in deciding between traditional and Roth IRAs. If you anticipate being in a higher tax bracket in retirement, Roth IRAs may offer greater benefits.

Flexibility and future planning. Roth IRAs provide significant flexibility, allowing for tax-free and penalty-free withdrawals of contributions and offering benefits to your heirs.

The Power of Early Contributions

If you can start your IRA contributions while young, you can significantly impact your retirement savings. Even modest annual contributions can grow substantially over time, thanks to the power of compounding.

If you want to discuss retirement plan strategies, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 29, 2024

What’s your worst tax nightmare? Identity theft? Not having enough money to pay all the taxes you owe? How about this: your CPA, enrolled agent, or other tax preparer has not filed your taxes for three years.

Dr. Lee, a Florida surgeon who earned over $1 million annually, had this sad experience. His CPA completed his tax returns and had Dr. Lee review and approve them for electronic filing, but the CPA never e-filed them with the IRS.

By the time Dr. Lee found out about it and filed his returns late, he had lost a $288,409 estimated tax payment to the statute of limitations and ended up owing the IRS over $70,000 in failure-to-file and failure-to-pay penalties.

Dr. Lee sued the IRS in court, arguing that he shouldn’t have to pay the penalties because he had “reasonable cause” for failing to file: he had authorized and relied on his CPA to electronically file them.

The court rejected Dr. Lee’s argument, stating that all taxpayers are legally obligated to see that their tax returns are filed on time. A taxpayer’s duty to file a return is not excused because he or she relied on a CPA or an attorney to file the return.

This rule has no exceptions—not even for e-filed returns, which taxpayers can’t file themselves. when using a paid preparer.

The lesson of this case is clear: Never take your CPA’s or other tax professional’s word that your return was e-filed. Check with the IRS to make sure that your return was e-filed.

You do this by establishing an online account at irs.gov and requesting a tax account transcript. It takes two to three weeks after your return was supposed to be filed for a transcript to become available. If no transcript is on record, check with your tax preparer.

Alternatively, you can always file your tax return yourself by mail or private delivery service. Taxpayers can’t electronically file their returns themselves—they must rely on a tax preparer (or tax software provider) to do so for them.

To file your return by mail or private delivery service, you must give your tax preparer a hand-signed and dated statement that you choose to file in paper format and that you, not the preparer, will submit the paper income tax return to the IRS. Then, your tax preparer must attach IRS Form 8948 to the tax return you will paper file.

Filing a paper return will significantly slow the IRS processing of your return, which may prove a hardship if the IRS owes you a refund.

If you want to discuss the filing of your tax return, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 26, 2024

When your corporation reimburses you for the business use of your vehicle, you have tax consequences when you sell or trade in that vehicle.

Example 1. You purchased a vehicle for $40,000 and had the corporation reimburse you $40,000 for bonus depreciation. You now trade in the vehicle for a $45,000 vehicle. The dealer gives you $20,000 for the trade-in.

You have a $20,000 gain on the trade-in ($20,000 – zero basis). You report the $20,000 gain on your personal IRS Form 1040 using IRS Form 4797.

Example 2. Same facts as in Example 1, but your C corporation reimbursed you using IRS mileage rates. For the miles that you were reimbursed, the mileage rate depreciation totaled $12,000. At the time of the trade-in, your basis is $28,000 ($40,000 – $12,000).

The dealer gives you a trade-in allowance of $20,000. You have an $8,000 loss that you deduct on your IRS Form 1040 using IRS Form 4797 ($20,000 – $28,000).

Two things to note here.

• To keep the examples straightforward, we assumed 100 percent business use.
• Note that the corporation does nothing—the trade-in is totally on you and your personal vehicle.

If you want to discuss the corporate reimbursements to you for the use of your personal vehicle, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 22, 2024