News & Tech Tips

Estate Planning & Social Security Workshop – Anne Treasure & David Reiniger

Here is a comprehensive overview of the key considerations for Estate Planning and Social Security based on our workshop.

Estate Planning:

  • Unified Credit: The unified credit for 2024 remains at $13.6 million per individual, but is set to decrease significantly in the coming years. This means that more individuals may be subject to estate taxes.
  • Estate Tax Exemption: The potential reduction of the estate tax exemption to $3.5 million per person and the increase in the maximum rate to 55% could significantly impact estate planning strategies.
  • Estate Planning Strategies: Consider strategies like living trusts, gifting, and charitable contributions to minimize estate taxes.
  • Professional Advice: Consulting with an attorney is essential to create a personalized estate plan that addresses your unique needs and goals.

Social Security:

  • Understanding Benefits: Familiarize yourself with the current social security rules, especially if you were born in 1955 or later.
  • Coordination of Benefits: Plan for how to coordinate social security benefits if you are married.
  • Retirement Planning: Consider your other assets and create a comprehensive retirement plan.

Financial Planning:

  • Create a Financial Plan: Develop a personalized financial plan to ensure a comfortable retirement.
  • Tax Optimization: Utilize tax strategies to minimize your tax liability.
  • Stay Informed: Keep up-to-date on tax law changes and their potential impact on your financial situation.

Key Takeaways:

  • Proactive Estate Planning: It’s essential to have a well-thought-out estate plan to protect your assets and ensure a smooth transition for your loved ones.
  • Understanding Social Security: Familiarize yourself with the current social security rules and how they may affect your retirement income.
  • Comprehensive Financial Planning: Create a comprehensive financial plan that addresses your unique needs and goals, including estate planning and retirement planning.
  • Professional Advice: Consulting with an attorney and financial planner can help you navigate the complexities of estate planning and social security.

Contact us for more help. 

Maximize your year-end giving with gifts that offer tax benefits – federal gift taxes

As the end of the year approaches, many people start to think about their finances and tax strategies. One effective way to reduce potential estate taxes and show generosity to loved ones is by giving cash gifts before December 31. Under tax law, you can gift a certain amount each year without incurring gift taxes or requiring a gift tax return. Taking advantage of this rule can help you reduce the size of your taxable estate while benefiting your family and friends.

Taxpayers can transfer substantial amounts, free of gift taxes, to their children or other recipients each year through the proper use of the annual exclusion. The exclusion amount is adjusted for inflation annually, and in 2024 is $18,000. It covers gifts that an individual makes to each recipient each year. So a taxpayer with three children can transfer $54,000 ($18,000 × 3) to the children this year, free of federal gift taxes. If the only gifts during a year are made this way, there’s no need to file a federal gift tax return. If annual gifts exceed $18,000 per recipient, the exclusion covers the first $18,000, and only the excess is taxable.

Note: This discussion isn’t relevant to gifts made to a spouse because they’re gift-tax-free under separate marital deduction rules.

Married taxpayers can split gifts

If you’re married, gifts made during a year can be treated as split between the spouses, even if the cash or asset is given to an individual by only one of you. Therefore, by gift splitting, up to $36,000 a year can be transferred to each recipient by a married couple because two exclusions are available. For example, a married couple with three married children can transfer $216,000 ($36,000 × 6) each year to their children and the children’s spouses.

If gift splitting is involved, both spouses must consent to it. This is indicated on the gift tax return (or returns) that the spouses file. (If more than $18,000 is being transferred by a spouse, a gift tax return must be filed, even if the $36,000 exclusion covers the total gifts.)

More rules to consider

Even gifts that aren’t covered by the exclusion may not result in a tax liability. That’s because a tax credit wipes out the federal gift tax liability on the first taxable gifts you make in your lifetime, up to $13.61 million in 2024. However, to the extent you use this credit against a gift tax liability, it reduces or eliminates the credit available for use against the federal estate tax at your death.

For a gift to qualify for the annual exclusion, it must be a “present interest” gift, meaning you can’t postpone the recipient’s enjoyment of the gift to the future. Other rules may apply. Contact us with questions. We can also prepare a gift tax return for you if you give more than $18,000 (or $36,000 if married) to a single person this year or make a split gift.

Eyes on the income statement

When reviewing their income statements, business owners tend to focus on profits (or losses). However, focusing solely on the bottom line can lead to mismanagement and missed opportunities. Instead, you should analyze this financial report from top to bottom for deeper insights.

Think like an auditor

Review your company’s income statement with an auditor’s mindset. External auditors are trained to have professional skepticism, ask questions continually and evaluate evidence without bias. They pay close attention to details and rely on data to identify risks and formulate evidence-based conclusions.
This approach can improve your knowledge of your company’s financial health and help you make more strategic decisions based on the key drivers of profitability — revenue and expenses. It can also help expose fraud and waste before they spiral out of control.

Start with revenue

Revenue (or sales) is the money generated from selling goods or services before any expenses are deducted. It’s the top line of your income statement.

Compare revenue for the current accounting period to the previous period and your budget. Has revenue grown, declined, or held steady? Did your company meet the sales goals you set at the beginning of the year? If not, investigate what happened. Perhaps management’s goals were unrealistic. Alternatively, the cause might relate to internal issues (such as the loss of a key salesperson or production delays) or external issues (such as the emergence of a new competitor or weak customer demand). Pinpointing the reasons behind lackluster sales is critical. View internal mistakes as opportunities to learn and improve performance in the future.

Evaluating revenue can be particularly challenging for cyclical or seasonal businesses. These businesses should compare results for one time period to those from the same period the previous year. Or they may need to look back more than just one year to evaluate revenue trends over an entire business cycle.

It also may be helpful to look at industry trends to gauge your business’s performance. If your industry is growing but your company is faltering, the cause is likely internal.

If your business offers more than one type of product or service, break down the composition of revenue to see what’s selling — and what’s not. Variances in sales composition over time may reveal changes in customer demand. This analysis can lead to modifications in marketing, sales, production and purchasing strategies.

Move on to cost of sales

The next line item on your company’s income statement is the cost of sales (or cost of goods sold). It includes direct labor, direct materials, and overhead. These are costs incurred to make products and provide services. The difference between revenue and cost of sales is your gross profit.

Look at how the components of cost of sales have changed as a percentage of revenue over time. The relationship between revenue and direct costs generally should be stable. Changes may relate to the cost of inputs or your company’s operations. For example, hourly wages might have increased over time due to inflation or regulatory changes. You might decide to counter increasing labor costs by purchasing automation equipment that makes your company less reliant on human capital or adding a shift to reduce overtime wages.

Changes in your revenue base can also affect cost of sales. For instance, if your company is doing more custom work than before, the components of direct costs as a percentage of revenue will likely differ from past results. Evaluating gross profit on a product or job basis can help you understand what’s most profitable so you can pivot to sell more high-margin items.

It’s also helpful to compare the components of your company’s cost of sales against industry benchmarks. This can help evaluate whether you’re operating as efficiently as possible. For instance, compute your company’s direct materials as a percentage of total revenue. If your ratio is significantly higher than the industry average, you might need to negotiate lower prices with suppliers or take steps to minimize waste and rework.

Monitor operating expenses

Operating expenses are ongoing costs related to running your business’s day-to-day operations. They’re necessary for a company to generate revenue but aren’t directly tied to producing goods or services. Examples of operating expenses include:

  • Compensation for managers, salespeople, and administrative staff,
  • Rent,
  • Insurance,
  • Office supplies,
  • Facilities maintenance and utilities,
  • Advertising and marketing,
  • Professional fees,
  • Travel and entertainment, and
  • Depreciation and amortization.

Many operating expenses are fixed over the short run. That is, they aren’t affected by changes in revenue. For instance, rent and the marketing director’s salary usually don’t vary based on revenue. Compare the total amount spent on fixed costs in the current accounting period to the amount spent in the previous period. Auditors review individual operating expenses line by line and inquire about any change that’s, say, greater than $10,000 or 10% of the cost from the prior period. This approach can help you ask targeted questions to find the root causes of significant cost increases and make improvements.

To illustrate, let’s say your company’s maintenance costs increased by 20% this year. After further investigation, you might discover that you incurred significant, nonrecurring charges to clean up and repair damages from a major storm — or maybe you discover that your payables clerk is colluding with a friend who works at the landscaping company to bilk your company for excessive fees. You won’t know the reason for a cost increase without digging into the details like an auditor would.

Use the income statement as a management tool

Your company’s income statement contains valuable information if you take the time to review it thoroughly. Adopting an auditor’s mindset can help business owners identify trends quickly, detect problems and anomalies early, and make better-informed decisions. Contact us for help interpreting your company’s historical results and using them to improve its future performance.

Tax Strategies: Make year-end tax planning moves before it’s too late!

With the arrival of fall, it’s an ideal time to begin implementing tax strategies that could reduce your tax burden for both this year and next.

One of the first planning steps is to ascertain whether you’ll take the standard deduction or itemize deductions for 2024. You may not itemize because of the high 2024 standard deduction amounts ($29,200 for joint filers, $14,600 for singles and married couples filing separately, and $21,900 for heads of household). Also, many itemized deductions have been reduced or suspended under current law.

If you do itemize, you can deduct medical expenses that exceed 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest on a restricted amount of debt, but these deductions won’t save taxes unless they’re more than your standard deduction.

The benefits of bunching

You may be able to work around these deduction restrictions by applying a “bunching” strategy to pull or push discretionary medical expenses and charitable contributions into the year, where they’ll do some tax good. For example, if you can itemize deductions for this year but not next, you may want to make two years’ worth of charitable contributions this year.

Here are some other ideas to consider:

  • Postpone income until 2025 and accelerate deductions into 2024 if doing so enables you to claim larger tax breaks for 2024 that are phased out over various levels of AGI. These include deductible IRA contributions, the Child Tax Credit, education tax credits, and student loan interest deductions. Postponing income may also be desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to accelerate income into 2024 — for example, if you expect to be in a higher tax bracket next year.
  • Contribute as much as you can to your retirement account, such as a 401(k) plan or IRA, which can reduce your taxable income.
  • High-income individuals must be careful of the 3.8% net investment income tax (NIIT) on certain unearned income. The surtax is 3.8% of the lesser of: 1) net investment income (NII), or 2) the excess of modified AGI (MAGI) over a threshold amount. That amount is $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separately, and $200,000 for others. As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax depends on your estimated MAGI and NII for the year. Keep in mind that NII doesn’t include distributions from IRAs or most retirement plans.
  • Sell investments that are underperforming to offset gains from other assets.
  • If you’re age 73 or older, take the required minimum distributions from retirement accounts to avoid penalties.
  • Spend any remaining money in a tax-advantaged flexible spending account before December 31 because the account may have a “use it or lose it” feature.
  • It could be advantageous to arrange with your employer to defer a bonus that may be coming your way until early 2025.
  • If you’re age 70½ or older by the end of 2024, consider making 2024 charitable donations via qualified charitable distributions from a traditional IRA — especially if you don’t itemize deductions. These distributions are made directly to charities from your IRA, and the contribution amount isn’t included in your gross income or deductible on your return.
  • Make gifts sheltered by the annual gift tax exclusion before year-end. In 2024, the exclusion applies to gifts of up to $18,000 made to each recipient. These transfers may save your family taxes if income-earning property is given to relatives in lower-income tax brackets who aren’t subject to the kiddie tax.

These are just some of the year-end tax strategies that may help reduce your taxes. Contact us to tailor a plan that works best for you.

Cutoffs: When to report revenue and expenses

Timing is critical in financial reporting. Under accrual-basis accounting, the end of the accounting period serves as a “cutoff” for when companies recognize revenue and expenses. However, some companies may be tempted to play timing games, especially at year-end, to boost financial results or lower taxes.

Observing the end-of-period cutoffs

Under U.S. Generally Accepted Accounting Principles (GAAP), revenue should be recognized in the accounting period it’s earned, even if the cash is received in a subsequent period. Likewise, expenses should be recognized in the period they’re incurred, not necessarily when they’re paid. And expenses should be matched with the revenue they generate, so businesses should record expenses in the period they were incurred to earn the corresponding revenue.

However, some companies may interpret the cutoff rules loosely to present their financial results more favorably. For example, suppose a calendar-year car dealer allows a customer to take home a vehicle on December 28, 2024, to test drive for a few days. The sales manager has verbally negotiated a deal with the customer, but the customer still needs to discuss the purchase with his spouse. He plans to return on January 2 to close the deal or return the vehicle and walk away. Under accrual-basis accounting, should the sale be reported in 2024 or 2025?

Alternatively, consider a calendar-year, accrual-basis retailer that pays January’s rent on December 31, 2024. Rent is due on the first day of the month. Under accrual-basis accounting, can the store deduct an extra month’s rent from this year’s taxable income?

As tempting as it might be to inflate revenue to impress stakeholders or defer taxable income to lower the current year’s tax bill, the cutoff for a calendar-year, accrual-basis business is December 31. So, in both examples, the transaction should be reported in 2025.

Auditing cutoffs

Auditors use several procedures to test for compliance with cutoff rules. For example, to ensure revenue is recorded in the correct accounting period, auditors may review:

  • Shipping documents and customer invoices,
  • Sales transactions near the cutoff date, and
  • Returns and allowances near the cutoff date.

Similarly, to ensure expenses are recorded in the correct accounting period, auditors may inspect contracts and invoices near the cutoff date. They also check that expenses are matched with the revenue they help generate, in accordance with the matching principle. An accrual (a liability) is recorded for expenses incurred in the current period that still need to be paid later. Conversely, prepaid assets represent expenses paid in the current period that will be reported later when they’re used to generate future revenue. Auditors also may perform analytical procedures that compare expenses as a percentage of sales from period to period to identify timing errors and other anomalies.

It’s important to note that updated guidance for reporting revenue went into effect for calendar-year public companies in 2018 and for calendar-year private businesses starting in 2019. Under Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, revenue should be recognized “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”

Although this guidance has been in effect for several years, implementation questions linger, especially among smaller private entities. The guidance requires management to make judgment calls each reporting period about identifying performance obligations (promises) in contracts, allocating transaction prices to these promises, and estimating variable consideration. The risk of misstatement and the need for expanded disclosures have caused auditors to focus greater attention on companies’ recognition practices for revenue from long-term contracts. During audit fieldwork, expect detailed questions about your company’s cutoff policies and extensive testing procedures to confirm compliance with the accounting rules.

Now or later?

As year-end approaches, you may have questions about the cutoff rules for reporting revenue and expenses. Contact us for answers. We can help you comply with the rules and minimize audit adjustments.