Tax

All small-business owners with one to 49 employees should have a medical plan for their business.

Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should.

When you have 49 or fewer employees, most medical plan tax rules are straightforward.

Here are six opportunities for you to consider:

1. Make sure to file amended returns for your 2021 sick and family leave payments to claim up to $32,220 in federal tax credits for yourself. You can also claim an equal amount for your employees. It’s likely that you made payments that qualify for at least some of the credits.
2. If you have a Section 105 plan in place and have not been reimbursing expenses monthly, do a reimbursement now to get your 2024 deductions, and then put yourself on a monthly reimbursement schedule in 2025.
3. If you want to implement a qualified small employer health reimbursement arrangement (QSEHRA), but you have not yet done so, make sure to get that done correctly now. You are late, so you could suffer that $50-per-employee penalty should your lateness be found out. 
4. But if you are thinking of the QSEHRA and want to help your employees with more money and flexibility, consider the individual coverage health reimbursement arrangement (ICHRA) instead. It’s got more advantages.
5. If you operate your business as an S corporation and want an above-the-line tax deduction for the cost of your health insurance, you need the S corporation to (a) pay for or reimburse you for the health insurance, and (b) put that insurance cost on your W-2. Make sure the reimbursement happens before December 31 and you have the reimbursement set up to show on the W-2.
6. Claim the tax credit for the group health insurance you give your employees. If you recently provided your employees with group health insurance, see whether your pay structure and number of employees put you in a position to claim a 50 percent tax credit for some or all of the monies you paid for health insurance in 2024 and possibly in prior years.

If you need more insights into the opportunities described above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 3, 2024

The clock continues to tick. Your retirement is one year closer.

You have time before December 31 to take steps that will help you fund the retirement you desire. Here are five things to consider.

1. Establish Your 2024 Retirement Plan

First, a question: Do you have your (or your corporation’s) retirement plan in place?  

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2024.

For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a sole proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.

2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of up to $15,000

By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of

• $500 or
• the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

The law bases your credit on your “qualified start-up costs.” For the retirement start-up credit, your qualified start-up costs are the ordinary and necessary expenses you pay or incur in connection with

• the establishment or administration of the plan, and
• the retirement-related education of employees for such plan.

3. Claim the New Small Employer Pension Contribution Tax Credit (up to $3,500 per Employee)

The SECURE 2.0 Act, passed in 2022, added an additional credit for your employer retirement plan contributions on behalf of your employees. The new up-to-$1,000-per-employee tax credit begins with the plan start date. 

The new credit is effective for 2023 and later.

Exception. The new $1,000 credit is not available for employer contributions to a defined benefit plan or elective deferrals under Section 402(g)(3).

In the year you establish the plan, you qualify for a credit of up to 100 percent of your employer contribution, limited to $1,000 per employee. In subsequent years, the dollar limit remains at $1,000 per employee, but your credit is limited as follows:

• 100 percent in year 2
• 75 percent in year 3
• 50 percent in year 4
• 25 percent in year 5
• No credit in year 6 and beyond

Example. You establish your retirement plan this year and contribute $1,000 to each of your 30 employees’ retirement. You earn a tax credit of $30,000 ($1,000 x 30).

If you have between 51 and 100 employees, you reduce your credit by 2 percent per employee in this range. With more than 100 employees, your credit is zero.

Also, you earn no credit for employees with wages in excess of $100,000 adjusted for inflation in increments of $5,000 in years after 2023.

4. Claim the New Automatic-Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)

The first SECURE Act added a non-refundable credit of $500 per year for up to three years, beginning with the first taxable year (2020 or later) in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.

The new $500 auto-contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You just need to add the auto-enrollment feature (which does contain a provision that allows employees to opt out).

5. Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

You first need to answer this question: How much tax will you have to pay to convert your existing plan to a Roth IRA? With this answer, you now know how much cash you need on hand to pay the extra taxes.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.
2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (But if you make that conversion withdrawal within five years of the conversion, you pay a 10 percent penalty. Each conversion has its own five-year period.)
3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.
4. Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 73—or to put this another way, you can keep your Roth IRA intact and earning money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)

If you would like my help with any of the above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 26, 2024

When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2024 income taxes. 

The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies. 

Here’s the gist:

• Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
• Lower the taxes to zero—or if you can’t do that, lower them to 23.8 percent or less by making the profits subject to long-term capital gains taxes.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent. 

To avoid higher rates, here are seven possible tax planning strategies.

Strategy 1

Examine your portfolio for stocks you want to unload, and make sales where you offset short-term gains subject to a high tax rate, such as 40.8 percent, with long-term losses (up to 23.8 percent). 

In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income. 

Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule. 

Under the wash-sale loss rule, if you sell a stock or other security and then purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the tax code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2024, you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.

If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Strategy 5

If you give money to your parents to assist them with their retirement or living expenses, or to your children (specifically, children not subject to the kiddie tax), consider giving them appreciated stock instead.

Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by 

• gifting them stock, 
• having them sell the stock, and then
• having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to donate to a charity and you itemize your deductions, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit.

It works like this: 

• Benefit 1. You deduct the fair market value of the stock as a charitable donation.
• Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. If you give it to a 501(c)(3) charity, the following happens:

• You get a tax deduction for $11,000. 
• You pay no taxes on the $10,000 profit.

Two rules to know:

1. Your deductions for donating appreciated stocks to your church and other 501(c)(3) organizations may not exceed 30 percent of your adjusted gross income.
2. If your publicly traded stock donation exceeds the 30 percent, no problem. Tax law allows you to carry forward the excess until used, for up to five years.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity.

Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

These seven stock strategies have a long history in tax planning. If you need my help with any of them, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 19, 2024