Month: October 2024

If your tax return shows a refund, you probably expect the IRS will pay that total amount when it processes your tax return. Unfortunately, this is not always the case. 

The Treasury Department can and does deduct from your tax refund certain debts owed to various government agencies. Such a deduction is called a “tax refund offset.” 

The Department of the Treasury Bureau of the Fiscal Service (BFS) processes tax refunds and runs the federal Treasury Offset Program. BFS is not part of the IRS.

If you owe any of the following types of debts, the creditor agency can notify BFS to add your debt to its database of delinquent debts:

• Child support
• Spousal support
• State income tax
• Federally insured student loans
• Debts owed to federal agencies such as the Small Business Administration
• Unemployment compensation debts

The IRS can deduct unpaid federal income taxes from refunds, but this is not part of the Treasury Offset Program.

A refund offset shouldn’t be a surprise, because you must be given notice before it occurs. The agency involved must send you a notice of intent to offset the debt at the name and address on file, at least 60 days before referring the debt to BFS (65 days for school loans).

Once you receive such a notice, you must act quickly to avoid the refund offset. You can prevent a refund offset by paying what you owe or entering into a payment plan with the creditor agency. You can request a review by the agency if you believe you don’t owe the debt or the amount owed is incorrect (you must submit evidence proving this). 

Contact the agency that imposed the offset, not the IRS or BFS. Neither the IRS nor BFS has the authority or the necessary information to help you. Contact the IRS only if your original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return.

If you filed a joint tax return and the debt was owed by your spouse, not you, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. The IRS will compute your share of the tax refund and pay it to you.

The easiest way to avoid an offset is to have no tax refund (or a small refund). To avoid a refund while also avoiding penalties for underpaying your taxes, you must be sure that your withholding and/or estimated tax payments match the amount of tax you owe for the year. This isn’t always possible, but it should be your goal. 

In any event, large refunds are not good tax planning—they are an interest-free loan to the IRS.

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

• By Leon Clinton
• October 29, 2024

Do you have a health savings account (HSA)? 

If so, you have one of the best tax-advantaged accounts. HSAs provide a unique triple tax benefit: 

• Pre-tax contributions are tax-deductible. 
• The money in the HSA is invested and grows tax-free (just like in an IRA). 
• Withdrawals to pay medical bills are tax-free. 

Indeed, there is only one thing wrong with HSAs: you cannot make contributions after you enroll in Medicare (usually at age 65). 

If you love HSAs as much as we do, you probably would like to continue contributing to your HSA after age 65. Here’s good news: some people can do so until they are almost 70. 

Not everyone can do this, but if you can, you should consider it seriously. You may be able to make after-age-65 HSA contributions of more than $42,725.

You can continue your HSA so long as three things remain true:

1. You are (or your spouse is) covered under an employer-provided high deductible health plan (HDHP).
2. You have no other health coverage.
3. You are not enrolled in Medicare.

Your (or your spouse’s) health plan must be a large employer plan for 20 or more employees. This eliminates you if you’re self-employed or working for a small employer, unless you’re covered by your spouse’s qualifying large employer plan.

You must not enroll in Medicare when you reach age 65. Once you enroll in Medicare, you can’t make any more HSA contributions.

In addition to not enrolling in Medicare at age 65, you must not apply for Social Security. When you enroll in Social Security, you automatically enroll in Medicare and can no longer contribute to your HSA. 

You can delay collecting Social Security until the month you turn 70. Doing so enables you to make HSA contributions and increases the Social Security benefits you’ll receive when you collect them.

You must start collecting Social Security the month you turn 70. This means you won’t be able to contribute to your HSA past age 70. In fact, you’ll have to stop contributing at least six months before you apply for Social Security because your Part A Medicare coverage is deemed to begin six months before the date you apply. 

All this means you’ll be able to contribute to your HSA for a maximum of four and one-half years after you turn 65. This will amount to over $42,725. The exact amount depends on future inflation adjustments to HSA contributions. Of course, you could stop contributing to your HSA sooner if you wish.

If you want to discuss this HSA strategy, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 22, 2024

As you may be aware, the qualified business income (QBI) deduction introduced by the Tax Cuts and Jobs Act provides a valuable tax-saving opportunity for business owners like yourself. 

Unfortunately, the QBI benefit expires after 2025, so there is a limited window of time to maximize this deduction.

The QBI deduction can be as much as 20 percent of qualified business income for eligible business entities, including sole proprietors, partnerships, S corporations, and certain LLCs. However, there are limitations, particularly for high-income earners or those in specified service trades or businesses (where the tax code for high-income phases out the deduction completely).

To help you make the most of this deduction, I recommend considering the following strategies:

• Business aggregation. If you own multiple businesses, combining them for QBI purposes may increase your deduction.
• Carefully manage depreciation. Adjusting your approach to depreciation deductions can impact your taxable income and QBI.
• Review retirement contributions. Large deductible retirement plan contributions can reduce your QBI deduction.
• Filing separately. In certain cases, filing as “married filing separately” may result in a higher QBI deduction, but it requires careful evaluation.

Consider the above strategies to maximize the QBI deduction before it sunsets in 2025.

If you want to discuss your QBI strategies, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 18, 2024