Good news: You just found out that your high school senior son or daughter will be receiving a sizeable scholarship at a prestigious university next fall. But what are the tax consequences? In most cases, scholarships awarded to students are exempt from federal income tax, assuming certain conditions are met. Comparable rules apply to fellowships for doctorate programs. However, there are some situations where a scholarship or fellowship results in taxable income that students must report on their federal income tax returns. The Basics Generally, your child won't have to pay any tax on a scholarship that goes toward obtaining a college education. It doesn't matter if the money is coming from the school itself or another source. To qualify for the tax exemption, the following three requirements must be met: The child is a degree candidate at an eligible educational institution. This is an institution with a regular faculty and curriculum and a regularly enrolled body of students. The scholarship is used to pay for qualified expenses. This includes tuition and fees, books and related costs like supplies or equipment required for specific classes. However, it doesn't cover room and board, travel and research costs. The award doesn't represent wages for teaching, research or other work. In some cases, only a portion of the scholarship is exempt from tax. For instance, suppose your child receives a $25,000 award, where $15,000 goes to tuition and $10,000 to room and board. In this case, only $15,000 is excluded from tax. The remaining $10,000 is treated as taxable income. For these purposes, a "degree candidate" is defined as someone who: Attends a primary or secondary school or is pursuing a degree at a college or university, or Attends an educational institution that 1) provides a program that's acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation, and 2) is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. Scholarships are fully taxable to the student who isn't a degree candidate at an eligible institution. A scholarship or fellowship is also taxable if it represents compensation. For example, suppose your child in graduate school is required to serve as a teaching assistant to qualify for a $20,000 award. In this situation, the entire amount is taxable, even if part or all of the money goes to tuition. The university will generally provide Form W-2 to the student, stating the income amount that must be reported on their federal income tax return. What about athletic and music-performance scholarships? The rules in this area are continuing to evolve, but currently these amounts are generally exempt from tax, even if the school reasonably expects the student to participate in a particular activity. Generally, the scholarship must continue even if the recipient is injured or simply chooses not to participate. Exceptions There are, however, a few exceptions to the general rules requiring taxation of scholarships and fellowships when the student renders services in exchange. Notably, the IRS has said that payments made through the GI Bill aren't considered to be scholarships, so they don't constitute taxable income. Moreover, if your child participates in the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, the payments are generally exempt from tax if the amounts are used to pay qualified expenses. There's also an exception for qualified tuition reductions received by employees of an educational organization. Graduate students who receive tuition reductions or waivers in exchange for teaching or research activities need not report these benefits as income. Similarly, tuition reductions enjoyed by an educational organization's employees or their family members are tax-free, provided the program doesn't discriminate in favor of highly compensated employees. Keep in mind that student loans clearly aren't scholarships. Therefore, loans are subject to a different set of rules. Kiddie Tax Complications The kiddie tax may throw an extra wrinkle in the rules for taxing scholarships. Be careful to avoid adverse tax consequences. Briefly stated, the kiddie tax applies to "unearned income" above an annual threshold that's received by a dependent child under age 19 or a full-time student under age 24. The annual income threshold for 2022 is $2,300, up from $2,200 in 2021. If the kiddie tax comes into play, the excess is taxed at the top tax rate of the child's parents — not the child's tax rate — regardless of the source of the income. Currently, the top federal tax rate on ordinary income is 37%. Clearly, if income is received by a student for a fellowship where their services are compensated and are reported on Form W-2, the grant constitutes taxable "earned income" and doesn't cause any kiddie tax problems. However, if a scholarship is used for purposes other than for qualified expenses, the amount is generally considered to be unearned income. This may occur, for example, if your child is awarded a scholarship for room and board. Don't forget to factor this into your tax calculations for the year. Also, be aware that taxable scholarships may actually increase a higher education credit. Bottom Line The federal tax rules for scholarship awards can be confusing. Before you start counting on your student's apparent good fortune, you may want to meet with your professional tax advisor to determine the tax ramifications for your family. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Have you compiled a list of New Year's resolutions for your small business in 2022? Resolutions don't have to be limited to your personal life. Consider how you can improve in the upcoming year in your role as a small business owner. Of course, everyone's list will be different. But here are eight common aspirations that usually make good business sense. 1. Learn to Do Something New The skills and talents you bring to the table have helped you get to where you are today. But that doesn't mean that there's no room for improvement. Stepping outside your comfort zone by learning a new skill could serve your business well. It could be a managerial attribute or a function relating to your industry or profession. For example, an owner with a background in sales or engineering might benefit from an accounting or tax seminar put on by the company's CPA firm. This also sends a strong signal to your employees that you're not above self-improvement. Practice what you preach. Plus, while taking outside classes, you may make contacts — such as a lender, an investment advisor or a prospective new employee — that could benefit your business down the road. 2. Delegate Small Stuff to Other Employees Are you the kind of leader who tries to do too much? Wearing too many hats for too long can lead to financial and emotional distress. Instead, delegate some tasks to qualified staff members. Here are several helpful hints: Provide instructions. You can't expect your workers to be mind readers. Assign jobs to the best people. Don't just give the work to the first person you see in the hallway. Establish goals. Not only outline your objectives, but also inform employees about your expectations for how the job gets done. Show some trust. Let employees know you have their backs. Keep the lines of communication open. Allow some leeway. Don't insist that it must be "your way or the highway." Employees may be motivated by their increased responsibilities. Thus, delegating work can turn into a win-win situation. 3. Promote Your Business All Year Long Did you finish out 2021 on a high note? Whether you've continued an existing operation during the pandemic or pivoted to a new undertaking, keep the pedal to the metal. That means you should keep promoting your business in a variety of ways. Focus on activities that can improve the bottom line both now and in the future. Some small businesses don't have a dedicated marketing department. If that's the case, consider hiring an outside marketing expert. Then coordinate your in-house and external resources. 4. Review Your Business Plan Regularly You've probably spent a lot of time working on your business plan for 2022. Don't just let your hard work languish in a desk drawer or hard drive until next year end. Review it regularly to determine whether you're accomplishing your objectives. Consider implementing a "rolling" approach. This allows for adjustments based on what's happening in your business and marketplace — and it makes the process more adaptable, accurate and timely. Companies with rolling budgets typically prepare their budgets four quarters ahead. Then, at the end of each quarter, they update the numbers for the next three quarters and add a new fourth quarter. With a rolling budget, you've always got a real-time plan for the next 12 months. So, this approach encourages management to be more forward-looking and responsive. 5. Join a Targeted Networking Group Networking is an ongoing process — especially if your business relies heavily on referrals to generate revenue. Consider taking a more formal approach in 2022 by joining a specific networking group for this purpose. Networking groups are usually targeted to your geographic area or members of a certain industry or profession. The contacts you make within the group can pay off with future referrals or related business activity. What's more, participating in the group may trigger ideas for new product lines, best practices, recruitment efforts or marketing campaigns. 6. Set Realistic Goals When setting financial goals for the new year, owners often put undue pressure on themselves and their employees. If you set the bar too high and fail to reach it, you or your staff my grow frustrated or even angry. On the other hand, you don't want to shoot too low. When that happens, employees will merely go through the motions. Find the proper balance for your company's situation. Be realistic about what you can accomplish. It's OK to issue a challenge that will require some hard work and dedication as long as it's reasonable. 7. Give Back to the Community Not all goals are financially driven. Sometimes business owners strive to make a difference in their local communities or focus on a specific issue that's near and dear to the owner's heart. Your business can play a prominent role in charitable endeavors. Start by finding a nonprofit organization that aligns with your goals. Then join in its efforts — and encourage your employees to follow suit. If you don't have time to volunteer, make a donation that counts. Being charitable also has a side benefit: You'll be sowing seeds of goodwill with the public (including potential customers). Boost the value-added potentials by sharing your charitable endeavors on social media and your company's website. 8. Set Aside Time for Yourself Business owners who are all work and no play risk more than just being dull. You may wake up mid-year feeling burned out and overextended. Give yourself a break. For instance, you may schedule specific time each week to spend with your family. Likewise, engage in extracurricular activities — like joining a tennis club, taking a photography class or reading a book — that give you pleasure. If you're overly consumed by your business, you won't be able to enjoy the fruits of your labor. Make this year about both your company and you. For More Ideas This may be a daunting list. But as the familiar Chinese proverb states, a journey of a thousand miles begins with a single step. Happy New Year! We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

It's almost time to ring in the New Year — and many people are looking forward to putting 2021 in the rearview mirror. While New Year's resolutions often focus on eating less and exercising more, you should also give some thought to your financial fitness. Here are seven ways to introduce more discipline and vigor into your financial regime. 1. Review Your Investment Portfolio Although we've enjoyed a bull market so far in 2021, there are no guarantees that this trend will continue. Given the inherent volatility of equity securities, you can't afford to "rest on your laurels" from this year. Two key principles can help meet your investment objectives: Diversification . Spread investment dollars among different types of categories — such as stocks, bonds, real estate, digital assets, precious metals and cash — to reduce your overall risk. Asset allocation . Divide your holdings based on a set percentage for each category. Since each category features varying returns and risk, they're likely to perform differently over time. Of course, you should also factor in your personal aversion to risk and any potential tax implications. When appropriate, reallocate investments to reflect changing circumstances. 2. Save for Retirement Studies show that many Americans are behind in saving for their retirement — and many people fail to project for their needs long enough into the future. Will you have enough to sustain a comfortable lifestyle through your golden years? You can bolster your nest egg by contributing to retirement plan vehicles, including employer-sponsored 401(k) plans and IRAs. For 2022, you can defer up to $20,500 to a 401(k) ($27,000 if you're age 50 or older). Plus, your employer may provide matching contributions for participants. Alternatively, your company may offer benefits through other plans, such as SEPs, SIMPLEs, or pension or profit-sharing plans. Similarly, for the 2022 tax year, you can contribute up to $6,000 to any combination of traditional or Roth IRAs ($7,000 if you're age 50 or older). These savings can supplement a qualified plan. However, contributions to Roth IRAs are also limited based on your income. 3. Convert a Traditional IRA to a Roth IRA Contributions to a traditional IRA may be wholly or partially tax-deductible, but distributions are taxed at high ordinary income tax rates. Conversely, contributions to a Roth are never deductible, but payments are 100% tax-free from a Roth in existence at least five years. If you expect tax rates to be higher (or the same) when you take distributions than they currently are, a Roth IRA might be a worthwhile long-term strategy. A Roth conversion sets you up for future tax-free payouts. But there's a major downside: If you convert to a Roth IRA, you'll owe tax on the converted amount. In an ideal world, you would execute a conversion in a low tax year to minimize taxes. Alternatively, you could spread out a conversion over a series of years to reduce overall tax liability. If you convert a traditional IRA in stages, you may pay less tax overall because more of the transferred amount will be taxed at lower rates under our graduated tax rate system. Converting a traditional IRA to a Roth IRA isn't an all-or-nothing deal. You can transfer as much or as little of the money in your traditional IRA account as you like. Keep an eye out for potential tax rate changes that could affect your thinking. Today's favorable individual federal income tax rates are set to expire in 2026. However, they could change sooner depending on legislative developments. Important: Certain high-income individuals are prohibited from directly contributing to a Roth IRA. But there's currently no income limit on converting a traditional IRA to a Roth IRA — even billionaires can do it. 4. Start College Savings Programs If you've got children (or grandchildren), the rising cost of college is probably a concern. For the 2021-2022 school year, the College Board estimates that the average annual cost of tuition and fees was $10,740 for in-state students at public four-year universities — and $38,070 for students at private not-for-profit four-year institutions. These estimates don't include room and board, books, supplies, transportation and other expenses a student may incur. Who's going to pay for college in your family — and how? Fortunately, there are several college savings options at your disposal. Significantly, a Section 529 plan offers favorable tax treatment to participants. Other tax breaks may be available on the state level. Investigate your options carefully. 5. Manage Your Debt Carrying a certain amount of debt — such as taking on a mortgage on a principal residence — can be beneficial. But too much leverage — for example, excessive student loans and credit card balances — can prevent you from ever getting ahead. To rein in your debt, start by eliminating irresponsible spending sprees that add to the debt you've already accumulated. Then start chipping away at the debt in a logical fashion. Typically, you should pay off the debts with the highest interest rates first. When it makes sense, you might consolidate debts through one or two loans with reasonable rates. In many cases, you can negotiate a lower rate for a larger consolidated debt than for multiple smaller loans. 6. Trim the Fat from Your Monthly Budget Every household should establish a monthly budget for the year — and stick to it. A budget is especially helpful if you plan to reduce your debt. Budgeting has taken on new meaning as inflation has soared in 2021. The costs of certain essential items, including heat, gas, coffee, meat and other everyday goods, is expected to continue increasing in 2022. Factor rising costs into your budget. Keep track of cash going in and out of your bank accounts through a spreadsheet, ledger or other device. This can pinpoint the types of shortfalls that may have hurt you in the past. Resolve to save more and spend less. 7. Create (or Amend) Your Estate Plan Begin estate planning by inventorying your assets, including: Cash, digital assets and marketable securities, Insurance policies, Business interests, Automobiles and Real estate. Jewelry, artwork and other personal assets also can possess significant monetary (and sentimental) value. The difference between your assets and liabilities is your net taxable estate. After identifying and valuing your assets and liabilities, it's time to draft (or review) your will. If you die without having a will, state laws will govern the distribution of your assets — and the care of any minor children and dependents. That may not coincide with your intentions. Likewise, if you have an outdated will, you might give assets or assign care of dependents to people who are no longer in your life — or you might leave some loved ones out in the cold. So, it's critical to bring your will up to speed in 2022. For instance, your will may have to be revised for: Birth and deaths, Marriages and divorces, Loss of a job or retirement, Moves to a new state, and Changes in federal and state tax laws. Depending on your situation, a short codicil might suffice, or you may have to replace an existing will with a new one. Once you've tackled your will, you can move on to big-picture estate planning objectives. You can transfer as much as $12.06 million in 2022 (up from $11.70 million for 2021) of assets without incurring federal gift or estate tax. That doesn't include the annual gift tax exclusion of $16,000 per year per recipient for 2021 (up from $15,000 for 2021). Estate tax is calculated on the net value of the deceased's assets as of the date of death — or on the alternate valuation date, which is six months later. Federal estate tax rates are currently as high as 40%. Quite a few states also impose estate or inheritance tax at a lower threshold (and possibly with a different lifetime gift exemption or portability provision) than the federal government does. In addition to outright gifts, you can minimize estate tax with other estate planning tools. Examples include qualified terminable interest property (QTIP) trusts, Crummey trusts and family limited partnerships. These tools can also help you achieve other estate planning objectives, such as professional asset management, protection against creditors' claims and preservation of the portability provision in generation-skipping transfers and remarriages. Important: Today's generous $12.06 million exemption is scheduled to be rolled back in 2026. Hope for the Best, Plan for the Worst The last few years have taught us to expect the unexpected. Even if you make good on your New Year's resolutions, health issues, unemployment and other unforeseen events could cause financial trouble. You can lessen the impact by setting up a rainy-day fund equal to at least six months of salary. Start 2022 off right. Contact your financial advisors about setting realistic financial resolutions for your situation. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Many businesses are having trouble recruiting and retaining qualified workers today. Nearly 90% of employers reported difficulty filling open positions, according to a recent survey conducted by the Society for Human Resource Management. The report entitled, "The COVID-19 Labor Shortage: Exploring the disconnect between businesses and unemployed Americans," also found that 73% of respondents have seen a decrease in applications for hard-to-fill positions, including hourly, entry-level and midlevel nonmanagerial positions. Only 6% expect labor shortages to diminish by year end. The hardest hit sectors are manufacturing, hospitality, food service and health care. Labor concerns are expected to worsen in sectors — like retail and food service — that traditionally experience a spike in revenue during the holidays season. If your small business is currently understaffed, you might want to consider hiring your spouse as an official employee, especially if he or she is already familiar with the job. In addition to filling an open position, this move can pay off through various tax-saving benefits. Here are seven ways hiring your spouse can chip in with tax savings. 1. Retirement Savings If certain requirements are met, an employer can deduct contributions made to a qualified retirement plan on behalf of its employees, including your spouse. For instance, if your company has a 401(k) plan in place in 2021, your spouse can elect to defer up to $19,500 ($26,000 if age 50 or older) for the year, in addition to any matching contributions by the company. Typically, a company will match up to 3% of compensation that's deferred. (For 2022, the maximum contribution amounts are increasing to $20,500 ($27,000 if age 50 or older). Contributions compound in the account on a tax-deferred basis until withdrawals are made. This is a good way for your spouse to save for retirement independently. 2. Business Travel Expenses In the normal course of events, you can't deduct travel expenses attributable to a spouse when he or she accompanies you on a business trip. This is a nondeductible personal expense. But the tax outcome changes if your spouse is a bona fide employee of the company and travels with you for business reasons. As a result, your company can write off your spouse's business-related travel expenses, such as airfare or other transportation, lodging and 50% of the cost of meals (100% for restaurant-provided meals in 2021 and 2022). Plus, the benefit is tax-free to your spouse. The same basic rules apply if your spouse goes on a business trip alone. 3. Health Insurance Premiums If you're currently paying to cover your spouse under the company's health insurance plan, you may be able to shift more of the cost to the company if your spouse is an employee. The company can deduct all the health insurance premiums it pays on behalf of your spouse — just like it can for other employees. Similarly, you can deduct 100% of the cost if you operate a self-employed business. 4. Additional Health Care Breaks You might take the tax breaks for health insurance a step further with a Health Reimbursement Arrangement (HRA) if you operate a C corporation or you're self-employed. If certain requirements are met, the company may reimburse your spouse for out-of-pocket medical expenses and health insurance premiums, while the costs are deductible by the company. This is a win-win situation. Likewise, if your spouse is covered by a qualified high-deductible health plan, he or she can contribute pretax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions above the line to the HSA. Your business can also contribute to your spouse's HSA. For 2021, the contribution limits are $3,600 for self-only coverage and $7,200 for family coverage. Your spouse may contribute an additional $1,000 if he or she is age 55 or older. As with an IRA, earnings in the HSA may accumulate without current tax. Withdrawals for qualified medical expenses are tax-free, and unused balances can be carried over from year to year. Alternatively, your spouse can redirect pretax income to an employer-sponsored Flexible Spending Account (FSA) up to an annual limit (not to exceed $2,750 for plan years beginning in 2021). In some cases, your business can also contribute to your spouse's FSA. The plan pays or reimburses qualified medical expenses without any tax. If your spouse has an HSA, an FSA is limited to funding certain permitted expenses. Unused amounts at the plan year's end are generally forfeited, although the plan may provide a 2½-month grace period or a carryover of $550 to next year. 5. EAPs When a spouse joins the team as a bona fide employee, he or she may want to sharpen business skills. This may be particularly true if your spouse has been out of the regular workforce for several years. Your company can send your spouse back to school part-time with an educational assistance plan (EAP). Generally, qualified education expenses of up to $5,250 a year that are paid or reimbursed through the EAP are deductible by the company and tax-free to the employee-spouse. But the plan can't discriminate in favor of the company's higher-ups. 6. Vehicles It's likely that you and your spouse currently drive your own cars. Although you may derive tax benefits for your vehicle's business use, your spouse's expenses are purely personal and nondeductible. However, if your spouse is employed by your company, you may be entitled to business deductions under a complex set of rules, including limits on so-called "luxury car" write-offs. It may even pay to buy a third car. 7. Group-Term Life Insurance An owner's spouse is entitled to the same group-term life insurance coverage as other company employees (typically, equal to three or four times the individual's salary). Under long-standing tax rules, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Plus, any additional coverage is taxable at relatively low rates. Thus, having your spouse work for the company provides more insurance protection for your family. Important: S corporation owners generally can't deduct fringe benefits like group-term life insurance for any employee owning 2% or more of the company. This rule is extended to coverage for an employee-spouse. Other complicated rules apply to partners in a partnership and limited liability companies. Right for Your Business? Before you hire your spouse to work at your company, there are other tax repercussions to consider, including income and payroll taxes your spouse will have to pay on wages and the resulting increase in taxable income on a joint tax return. However, this usually works out to be a good deal overall for a couple where one spouse is the business owner. Meet with your professional tax advisor to discuss whether this strategy would be beneficial for your situation. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

A price increase is sometimes unavoidable — and now might be one of those times as many businesses are dealing with cost increases, supply chain bottlenecks and labor shortages. The key to implementing a price hike with minimal loss of customers is timing. It's hard to be the first one in your industry to raise your prices. If others don't follow suit, your business could be in the embarrassing position of having to rescind price increases and determining other ways to make ends meet. Here are some key considerations when weighing the pros and cons of increasing your prices. Customer Loyalty The first step is to gauge customer loyalty. Some companies have built a base of loyal customers who are willing to pay a premium for their brands. Others have a customer base that's made up of bargain hunters who would be willing to switch brands to save a few dollars. How do you know how loyal your customers are? Ideally, you've been monitoring their purchasing patterns over the years, and watching how they respond if you or a competitor has a "sales event." Depending on the nature of your business and your ability to monitor customer behavior, you can also gauge loyalty by how long customers have been patronizing your business. If there's significant customer turnover and you increase prices, your business could be in a vulnerable position. Another consideration is the nature of what you sell. If it's a basic necessity and you dominate your market, your customers might have little choice but to accept a price increase. And even if you sell "luxury" products and services, you might also be in a good position to raise prices to the extent that your customers have an abundance of disposable income and aren't price sensitive. Of course, that wouldn't hold true for cost-conscious buyers of nonessential products. 4 Questions Once you've laid the groundwork for assessing the likely impact of a price increase, you can move to the next round of analysis by answering these four questions: Which products or services should I raise prices on? How much should prices increase? When should the price increases take affect? Should I notify customers about increases, and, if so, how do I explain the increases? These questions must be considered in light of how much you're being squeezed in the current business environment. The more urgent the situation, of course, the less flexibility you have. In deciding which items to raise prices on, consider the potential cash flow impact. The most immediate effects will come from increasing prices on high-volume products. However, if you're selling some high-volume, low-priced "loss leader" items to draw in customers who'll also buy more profitable items and that strategy is working, go easy on raising prices on those bargain items. (See "Responsive Pricing" at right.) Generally, gradual, selective price increases are less noticeable to customers than an across-the-board price increase. But in some cases, a one-time "tear-off-the-Band-Aid-quickly" price hike, not to be repeated in the short term, can make sense if accompanied by an explanation that customers can accept. Alternatively, you can refresh your product or service offerings and then charge a premium for "new-and-improved" versions that cost you about the same as the old ones. Now or Later The current attention on inflation and other unfavorable external market conditions may provide a good cover for your business to increase its prices, especially if others in your industry are raising prices, too. By tying your increases to, say, an increase in the consumer price index, or average gas prices, you can help justify a price increase to your customers — and they'll likely appreciate your transparency. Your financial advisors can help evaluate where price increases would be most impactful. They can also recommend alternative or supplemental business moves you can make to keep your business secure in these uncertain times. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

While stock values have mostly gone up so far this year, bull markets don't last forever. And the price of a particular stock can fluctuate up or down, independent from the market's overall trend line. When you make what turns out to be an ill-fated stock investment in a taxable investment account, the saving grace is you can usually claim a tax-saving capital loss deduction (within limits) when you sell. But that's not always the case: The wash sale rule can disallow your tax savings. Here's how the dreaded wash sale rule works. The Basics A loss from selling stock or mutual fund shares is disallowed for federal income tax purposes if you buy substantially identical securities within the 61-day period that begins 30 days before the date of the loss sale and ends 30 days after that date. The theory is that the loss sale and the offsetting purchase of substantially identical securities within the 61-day period amount to an economic "wash." Therefore, you're not entitled to any loss deduction, and the tax savings that would ordinarily result from the loss sale are disallowed. When you have a disallowed wash sale loss, the loss doesn't just vaporize, except when your IRA or controlled corporation acquires the substantially identical securities (explained below). Instead, the general rule is that the disallowed loss is added to the tax basis of the substantially identical securities that triggered the wash sale rule. Then, when you eventually sell those substantially identical securities, the extra basis reduces your tax gain or increases your tax loss. In effect, the disallowed loss becomes a deferred loss that's accounted for when you sell the substantially identical securities. Hypothetical Example To help you understand how the wash sale works, suppose you bought 1,000 Beta Bank shares on July 1, 2021, for $20,000 using your taxable account at a brokerage firm. The value of the stock plummets. You thought you could harvest a tax-saving $8,000 capital loss by selling the shares on December 15, 2021, for $12,000 ($20,000 basis minus $12,000 sales proceeds equals $8,000 loss). You plan to use that loss to shelter an equal amount of 2021 capital gains. After you thought you had secured the tax-saving loss, you then reacquire 1,000 Beta shares on December 19, 2021, for $12,200, because you still like the stock. Sadly, the wash sale rule disallows your anticipated $8,000 capital loss deduction. Instead, the disallowed loss increases the tax basis of the substantially identical securities. Therefore, the tax basis of the Beta shares you acquire on December 19, 2021, increases to $20,200 ($12,200 cost plus $8,000 disallowed wash sale loss). Two Ways to Beat the Rule Avoiding the wash sale rule is only an issue when you want to sell a stock or security to harvest a tax-saving capital loss, but you still want to own the stock or security because you think it will appreciate from the current price. One way to defeat the wash sale rule is with a "double up" strategy. You buy the same number of shares in the stock you want to sell for a loss. Then you wait 31 days to sell the original batch of shares. When all is said and done, you've made your tax-saving loss sale, but you still own the same number of shares as before and can therefore still benefit from the anticipated appreciation. For example, you want to sell the 1,000 Zeta shares that you currently own for a 2021 tax-saving loss. But you don't want to give up on the stock. So, on November 21, you buy 1,000 more Zeta shares. Then you can sell the original batch of 1,000 shares for your tax-saving loss anytime between December 22 and December 31. The wash sale rule is avoided because December 22 is more than 30 days after November 21. You can achieve the same goal with a less expensive alternative approach: Buy a cheap call option on the stock you want to sell for a 2021 tax loss. Then wait more than 30 days to sell the stock. For example, you currently own 1,000 Yazoo shares that you want to sell before year end to harvest a tax-saving 2021 capital loss. But you don't want to give up on the stock. It might only cost $100 to buy a January 2022 call option for 1,000 Yazoo shares, while buying 1,000 actual shares might cost $10,000 or more. Say you buy a call option for 1,000 shares on November 21. You can sell your 1,000 Yazoo shares that you currently own anytime between December 22 and December 31 and claim a tax-saving capital loss on your 2021 return, because you successfully avoided the wash sale rule. Make sure to wait at least 31 days before selling the Yazoo shares, because the call option and the stock are considered substantially identical securities for purposes of the wash sale rule. Important: To use either of these strategies, you must act on or before November 30, 2021, to have enough time to make a 2021 loss sale without triggering the wash sale rule. No Creative Workarounds Some people have tried to come up with creative workarounds for the wash sale rules by purchasing substantially identical securities through an IRA or an account owned by a related party. But the IRS won't fall for these tricks. According to the IRS, using a traditional or Roth IRA to buy substantially identical securities within 30 days before or after a loss sale in your taxable brokerage account will trigger the wash sale rule. Even worse, the IRS says you can't increase the tax basis of your IRA by the disallowed loss. The disallowed loss simply disappears. What happens if you sell stock for a loss, and then your spouse buys identical stock within the forbidden 61-day period? The wash sale rule would clearly apply if you file your tax return jointly. And the IRS has issued guidance that says the wa sh sale rule applies even if you and your spouse file separate returns. The IRS also says the wash sale rule applies if a corporation that you control purchases substantially identical securities. Seek Professional Advice If you're hoping to harvest a tax-saving capital loss before year end and you have questions, please contact us. We can discuss ways to reduce your taxes and reposition your portfolio. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. 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Financially savvy parents of college students should generally take the time to complete the Free Application for Federal Student Aid (FAFSA) each year. Students must file their FAFSA for the 2022–2023 academic year between October 1, 2021, and June 30, 2023. This means there's still time to file a FAFSA for the 2021–2022 school year. Currently, some schools use the College Scholarship Service (CSS) Profile (another financial aid application) to determine who gets what aid from their own financial programs. Although there's been no official word from the College Board, the creator of the CSS Profile, modifications corresponding to the FAFSA changes are expected. Important: The FAFSA asks for financial information, including information from tax forms and balances in savings, checking and certain other accounts. For example, the 2021–22 FAFSA asks for 2019 tax information. However, you may be able to request an adjustment if your family's financial situation has changed significantly from what's reflected on your federal income tax return (for example, a job loss or change in marital status). The FAFSA may result in financial aid for those who need it and benefits more people than you might think. It's generally recommended that you investigate the possibilities, even if you don't expect to receive much federal need-based assistance. In the past, the start date for filing the FAFSA was January 1, but a few years ago it was moved up to accommodate parents facing financial dilemmas. Other major changes related to this form are scheduled to take place for the 2023–2024 school year. However, they may be implemented sooner. Those provisions were part of the Consolidated Appropriations Act (CAA), which was signed into law late in 2020. Here's an overview of some important changes coming your way. Simplified Filing Requirements There's no getting around the requirement for filling out the FAFSA to qualify for aid from the federal government, individual states and many educational institutions. (The student technically files the FAFSA, but parents often are the ones effectively assuming this responsibility.) This form isn't easy to complete. The current version of the FAFSA features 108 questions, often requiring parents to track down information that isn't readily available. But the new-and-improved FAFSA will be much shorter. It's expected to include approximately 36 questions. And it will be far more convenient to fill out, allowing you to electronically import tax return data filed with the IRS. Obviously, that drastically cuts down the number of questions you have to answer about income. Also, students will no longer be required to report any drug-related convictions they've had in the past. Student Aid Index If a student submitting a FAFSA is denied financial aid, the reason can often be traced back to the expected family contribution (EFC) determined under the form. Essentially, this is the amount of money a family is considered to afford to put toward college costs, based on answers to questions on the FAFSA. But critics have argued that the formula for the EFC, as presently calculated, is flawed. Under the CAA, the EFC has been renamed the "student aid index" (SAI). Notably, the new calculation doesn't affect the amount of money families are required to pay for college, rather it's a barometer of their financial picture. To cut through the technicalities, it should become easier for a college to identify those students with the greatest financial needs through the SAI. College aid experts have long maligned the EFC as an inadequate means of helping to measure financial need. But the jury is still out on the potential impact of the newly designated SAI metric. Expansion of Pell Grants Pell Grants, which are based on financial need, can be especially valuable because they don't have be repaid. For the 2021–2022 school year, the maximum Pell Grant is $6,495 per student. This amount is indexed annually. Currently, eligibility for Pell grants is determined by the EFC figured on the FAFSA. But these rules are being revised to reflect family size and adjusted gross income (AGI) in comparison to federal poverty figures. In addition, the new rules will open up more avenues to those in financial need, including students who: Are incarcerated and participating in prison education programs, Have had a drug-related conviction in the past, and Didn't complete a program of studies because of a school closing (for example, due to COVID-19 or financial reasons). The changes will provide more financial aid for more students. In fact, this change is expected to boost eligibility for Pell Grants by more than half a million students. Discretionary Adjustment for Unemployment Many parents were forced out of work or had their hours reduced during the pandemic. Although the economy has been rebounding overall, some workers are still in dire straits. Under the CAA, certain consequences of the pandemic will become a piece of the financial aid puzzle. Specifically, the law allows financial aid administrators to use their professional judgment to adjust the income calculation of a student's family during times of national emergency. In some cases, a student may be able to use the unemployment factor to reduce his or her income to zero. Accordingly, the student may then be in line for a Pell Grant or other aid. Federal Direct Loans Students may benefit from Federal Direct Loans that are subsidized by the federal government while they're still in school. Uncle Sam picks up the interest tab while the student is enrolled in an undergraduate or graduate school program or if the student otherwise qualifies for deferment. However, as things stand now, these loans may be subsidized for only 150% of the length of their education programs. For instance, if the student has embarked on a four-year course of study, the loan may be subsidized for up to six years only. The CAA removes this arbitrary limitation. Beginning with the 2023–2024 school year, the subsidy can last as long as it takes for the student to complete the program. This change will relieve the pressure for many students who have to work during college, often causing them to take longer to wrap up their studies. For More Information These are the highlights of FAFSA-related changes under the CAA. Contact your financial advisor or educational institution for more information about what's in store for the 2022–2023 school year and beyond. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

In many areas, residential real estate markets have surged, and some are still surging. In these sellers' markets, big home-sale gains are likely. That's great news if you're a seller — but will you owe taxes on the profit? If you sell your principal residence for a large profit, you can potentially exclude tax (pay no federal income tax) on a certain amount of profit. Here are the basics of how to take advantage of this tax-saving opportunity. Gain Exclusion Qualification Rules Single taxpayers can exclude home-sale gains up to $250,000, and married joint-filing couples can exclude up to $500,000. However, you must pass the following tests to be eligible: 1. Ownership test . You must have owned the property for at least two years during the five-year period ending on the sale date. Two years means periods aggregating 24 months or 730 days. 2. Use test . You must have used the property as your principal residence for at least two years during the same five-year period. (See "What Counts as a Principal Residence?" at right.) Periods of ownership and use don't need to overlap. For example, you could rent a home and use it as your principal residence for Years 1 and 2, and then buy it and rent it out to others for Years 3 and 4. If you then sell the property in Year 5, you'd pass both the ownership and use tests and qualify for the gain exclusion privilege. Important: To qualify for the larger $500,000 joint-filer exclusion, at least one spouse must pass the ownership test and both spouses must pass the use test. Anti-Recycling Rule There's another qualification rule for the home-sale gain exclusion privilege: It's generally available only if you haven't excluded a gain from any earlier sale occurring within the two-year period ending on the date of the later sale. In other words, the gain exclusion privilege generally can't be "recycled" until two years have passed since you used it last. For married couples, the larger $500,000 joint-filer exclusion is only available when neither spouse excluded a gain from an earlier sale within the two-year period. For example, suppose you sold your previous principal residence on July 1, 2020, and excluded the gain. Before selling that home, you purchased another property and began using it as your new principal residence on January 1, 2020 (six months earlier). You plan to sell the second principal residence for a big profit in March 2022, mistakenly assuming you'll qualify for the gain exclusion break on that sale, too. Why is that assumption wrong? While you'd pass the ownership and use tests, the March 2022 sale date would run afoul of the anti-recycling rule, because it's within two years of the July 2020 sale. Therefore, you'd be ineligible to exclude any gain from the 2022 sale. However, if you can wait until July 2022 to sell your current principal residence, you can claim the gain exclusion break for that sale. Alternatively, if you can't wait that long to sell your current principal residence and the profit from that sale is bigger than the profit from the 2020 sale, you can amend your 2020 tax return. On the amended 2020 return, you could forego the gain exclusion break and, instead, report the profit from the 2020 sale as a taxable gain. Then you can claim the gain exclusion break for the more-profitable 2022 sale. Net Investment Income Tax Does the 3.8% net investment income tax (NIIT) apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn't subject to the NIIT. However, gain that exceeds the exclusion limit is subject to the tax if your income is over a certain amount. The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for unmarried taxpayers and heads of household. Gain from the sale of a vacation home or other second residence, which doesn't qualify for the exclusion, is also subject to the NIIT. Contact a Pro For many homeowners these days, the federal home-sale gain exclusion deal is one of the most valuable personal income tax breaks on the books. But there are numerous rules and restrictions. Your tax professional can help you cash in. As with any major financial transaction, you should consider the federal income tax consequences before closing on a home sale. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Roth IRA and 401(k) accounts were created in 1998. Contributions to Roth accounts are taxed on the front end at ordinary tax rates when made. But withdrawals from these accounts are generally tax-free on the back end . If you began saving for your retirement before 1998, even if you subsequently started contributing to a Roth account, you've probably accumulated a significant nest egg in traditional (non-Roth) retirement savings vehicles. Unlike withdrawals from Roth accounts, most or all of the money you take out of non-Roth plans will be taxed as ordinary income when they're taken. Whether those amounts are taxable depends on the extent to which you took tax deductions for your contributions. It might be a smart move to postpone taxes until you retire and then begin taking retirement plan distributions — or not. Since 2010, everyone, regardless of income, has been eligible to convert some or all non-Roth IRA and 401(k) savings into a Roth account. You can also convert 403(b) and 457(b) plan assets into a Roth IRA with the same tax implications. All distributions from those plans are tax-free, assuming you wait at least five years after the conversion before taking them and are at least 59½. Should you convert your non-Roth accounts into Roth accounts in 2021? Here are some factors to consider. Tax Hit Today The catch to executing a Roth conversion is that you face an immediate and potentially hefty tax hit. But under some circumstances, you'll come out ahead taxwise over the long run. Even if you don't come out ahead, heirs who inherit your Roth account might benefit. The outcome depends on the prevailing tax environment when they begin tapping into those funds. Viewing a conversion as a tax risk insurance policy can bring peace of mind. That is, you'll know that you're shielded from possible tax hikes. That assurance may be worth a price to you — just as life insurance policy premiums are. Traditionally, your current tax rate versus your anticipated future tax rate (when you plan to begin drawing down retirement plan assets) is the key factor determining whether a Roth conversion is a good idea. Specifically, if the tax rate that would apply to the conversion amount today is lower than the rate that will apply to your regular retirement income in the future, you may be better off doing a conversion today. But predicting future tax rates can be challenging. Before you make a decision based on an unknown rate or a higher tax bracket if your earning power is on the rise, find objective support for that belief. What do you see on the horizon that bolsters or refutes your belief about the direction tax rates are likely to take? Timing of Withdrawals Another variable to consider when evaluating a Roth conversion is how many years after the conversion you expect to wait before withdrawing funds. Specifically, retirement plans come with required minimum distributions (RMDs). Previously, the required beginning date (RBD) for RMDs was generally April 1 of the year after the year in which you turn 70½. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act pushed back the RBD to 72 for individuals who reach 70½ after 2019. RMDs don't apply to Roth IRAs while the original owner is alive. After your death, however, beneficiaries of your Roth IRA must take RMDs under the same rules that apply to traditional IRAs. The tax rules for inherited IRAs recently changed under the SECURE Act. Previously, whoever inherited the IRA had to begin taking RMDs right away, regardless of age. But the RMD amounts were based on the inheritor's life expectancy. That meant, for example, that a 55-year-old who inherited a conventional IRA might've had at least 30 years to stretch out those taxable RMDs. Under current law, amounts in inherited IRAs must be distributed (and taxed) beginning right away over a 10-year period. (There are a few exceptions to that rule. For example, it isn't applicable to spouses.) Estimating the Tax Hit A good starting point for evaluating a Roth conversion is locating taxable income on your most recent tax return and adding the amount of a traditional IRA you'd like to convert to a Roth account. Marginal tax bracket tables are available on the Internet or from your tax advisor. Use those tables to determine how much incremental tax you'll pay on the conversion. To illustrate, suppose you had taxable income of $75,000 in 2020 and you expect to earn roughly the same amount of income in 2021. If you convert $225,000 of traditional IRA funds into a Roth IRA, your taxable income would increase to $300,000 this year. Assuming you're unmarried, a large portion of the amount you converted would be taxed at 22% and most of the remainder would be taxed at 24%. Those historically low tax rates were set by the Tax Cuts and Jobs Act (TCJA). But, in 2026, they're scheduled to expire and return to higher pre-TCJA rates. For example, in the previous example, a large chunk of the converted amount would be taxed at 33% if tax rates increase to pre-TCJA levels. That may or may not actually happen — or they may go even higher. Plus, you also need to consider state income taxes, if applicable. Talk to a Trusted Professional You can play "what-if" using online Roth conversion calculators, but your retirement nest egg is too important for this to be a do-it-yourself project. Our tax professionals understand current tax law and has a handle on what changes are currently in the works. Contact us to evaluate whether a Roth conversion makes sense in your situation. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Employment disruptions caused by the COVID-19 economic slowdown have scrambled the retirement saving strategies of many Americans. According to a recent survey, nearly half of employed Americans either reduced or suspended their retirement savings during the pandemic. Moreover, around 30% of those surveyed reported being behind in saving for retirement. Looking on the bright side, at least those people had an idea of how much they needed to save. Unfortunately, many people's estimates are based on faulty assumptions — including the misguided belief that Social Security will cover most of their retirement needs. Assess Your Situation The Internet is loaded with retirement calculators. But before you can use them, you need to address several key questions: What lifestyle are you aiming for when you retire? If you're OK with reducing your current material standard of living, how low can you go? Do you intend to pass on an inheritance to loved ones and/or donate to favored charities? How long will you be willing (and physically able) to work before retiring? Beware: Some people may need to retire sooner than they anticipate for health or other reasons. How much investment risk can you handle? The offset to higher returns is usually greater volatility. Can you count on receiving a substantial amount of money from an inheritance, sale of a second home or other source? The longer you postpone retirement, the less you'll need to accumulate. It's not just that you'll have fewer years to live in retirement, but under current Social Security rules, each year you wait after you reach your full retirement age, 8% is added to the amount of your monthly benefit payment. (After 70, however, those increases stop.) The higher your Social Security benefit, the less you'll need to supplement it with retirement savings. Your Social Security benefit projection statement will help you with the number crunching. Important: When evaluating whether you're saving enough for retirement, remember that inflation can have a corrosive effect. For example, since 2000, the purchasing power of Social Security benefits has dropped by 30% due to inflation, according to a recent analysis by the Senior Citizens League. Do the Math Now it's time to calculate how much you'll need to set aside for retirement. To illustrate how this evaluation might work, suppose that Joan is currently 42, and she plans to retire at 67 (the full retirement age for people born in 1960 and later) with an income that's 75% of what it is today. Further, suppose that she has an average risk tolerance, isn't expecting any big financial windfalls down the road, and isn't planning to leave a large legacy to her loved ones or favorite charities. Using those assumptions, here are five basic steps Joan might follow to determine whether her savings plan is on track: Calculate 75% of current income. Joan currently earns $80,000; 75% of her earnings is $60,000. Estimate how much is needed to maintain her purchasing power in retirement. Joan expects to retire in 25 years. So, she'll need about $126,000 per year (or $10,500 per month) to maintain the purchasing power of $60,000, assuming a 3% inflation rate. (This is the future value of $60,000 at 3% for 25 years, assuming annual compounding.) Subtract projected Social Security benefits and any private pension benefits. Joan estimates she'll receive $5,750 per month from these sources. She'll need enough in retirement savings to make up the $4,750 difference each month ($10,500 – $5,750). That's the equivalent of $57,000 a year. Estimate the total amount of retirement savings needed. This step requires a figure known as a "safe withdrawal rate." That's the percentage of your retirement savings you can take out and spend each year. A simple actuarial rule of thumb is to divide your expected retirement age by 20. For example, Joan currently plans to retire at 67, so her safe withdrawal rate would be 3.35% (67 divided by 20). If you divide the annual retirement-savings income she'll need (from the third step) by her safe withdrawal rate, you'll arrive at a total savings amount of approximately $1.7 million ($57,000 divided by 3.35%). Subtract current retirement savings from the target amount to estimate how much more savings are needed. Joan currently has $700,000 in retirement savings, so her account is $1 million short of what's needed. We can help translate that figure into required monthly savings amounts based on the number of years until you expect to retire and the returns you can safely assume. For example, to accumulate another $1 million in her retirement account, Joan would need to save at least $1,318 per month, assuming a 7% annual return for 25 years. That amount could be reduced if Joan's employer matches her contributions to the company retirement plan. Rough Estimate This exercise will help give you a general idea of where you stand. It will also prepare you for a meaningful conversation with one of our financial professionals who can sharpen the estimates and offer practical suggestions for reaching your goal. Inevitably, there will be a wide margin of error with whatever number you come up with, especially for younger people who won't retire for decades. In addition, taxes can play a significant role in your savings strategy. The effects will vary depending on your tax rate, and whether you decide to use a Roth retirement savings account, a traditional tax-deferred account or a combination of these alternatives. Contact us to help determine what's right for your situation. It's Never Too Late to Save! People who are 50 or over at the end of the calendar year can make annual "catch-up contributions" to certain accounts to save more for retirement. Here are some of the contribution limits for 2021 for those who are younger than age 50 and those who are older: Traditional and Roth IRAs, $6,000 ($7,000 for those over 50), 401(k)s, 403(b)s, 457s and SARSEPs, $19,500 ($26,000 for people 50 and up), SIMPLE accounts, $13,500 ($16,500 for people 50 and up), and Simplified Employee Pension Plan (SEP) accounts, $58,000 (there's no SEP catch-up amount). Whenever possible, it's a good idea to contribute the maximum allowable to your retirement account to secure your future and get the full tax advantage. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

If you were adversely affected by the COVID-19 pandemic, you may have taken a tax-favored coronavirus-related distribution (CVD) from a traditional IRA last year. This privilege was allowed under the CARES Act, which was signed into law on March 27, 2020. What steps can you take now to achieve the optimal federal income tax results? CVD Basics Under the CARES Act, if you were eligible, you could take one or more CVDs from one or more traditional IRAs in 2020, up to a combined limit of $100,000. Then you can recontribute all or part of any CVD amount back into one or more IRAs within three years of the distribution date of the CVD. You can treat each distribution and later recontribution as a federal-income-tax-free IRA rollover transaction. This favorable tax treatment applies equally to CVDs taken from traditional IRAs, SEP-IRAs and SIMPLE-IRAs. There are no restrictions on the use of CVD funds. You can use the money to pay bills or help your adult kids and then recontribute within the three-year window. Or you can keep the CVD money and pay the resulting tax hit, which may be modest depending on your circumstances. So, a CVD can be a useful cash-management tool. Treating an Eligible Distribution as a CVD If you took a CVD from a traditional IRA last year, you should have received from the custodian or trustee a 2020 Form 1099-R that reported the distribution. The IRS also received a copy. So the IRS knows what happened. To treat an eligible IRA distribution as a CVD, IRS Form 8915-E should have been included with your 2020 personal federal income tax return. If you extended your 2020 return, you should include this form when you file by October 15. If you've already filed your 2020 return without the form, you're out of luck. The election to treat a distribution as a CVD can't be made or changed after the timely filing (including any extension) of your 2020 tax return. Beware of Certain Tax Consequences If you recontribute an IRA CVD amount within the three-year window, the ultimate result is the same as a federal-income-tax-free rollover transaction for that amount. However, you may have to put up with awkward interim tax consequences before you arrive at the favorable tax-free-rollover-equivalent outcome. Specifically, the three-year ratable inclusion rule is the default method for how CVDs are taxed. Under that method, the taxable portion of a CVD is spread equally over 2020, 2021 and 2022. So, if you took a $90,000 CVD last year, you would report $30,000 per year on your personal tax returns for 2020, 2021 and 2022. If you don't recontribute any of the CVD amount within the three-year window, those tax results would be the final outcome. Examples of Interim Tax Consequences If you took several CVDs from one or more IRAs (up to the $100,000 combined limit), the interim tax consequences apply separately to each CVD. For example, Zoe took a $90,000 CVD from her traditional IRA in 2020. The $90,000 would be fully taxable under the regular federal income tax rules. After recontributing the entire $90,000 sometime in 2023, before the three-year window closes, she must file amended returns for 2020, 2021 and for 2022 if she already filed her 2022 return to recover the interim federal income tax hits for those years. At the end of the day, the CVD is federal-income-tax-free, but Zoe had to jump through some hoops to get there. Xavier also took a $90,000 CVD from his traditional IRA in 2020. He decides to recontribute the entire amount in December 2022, rather than waiting until 2023. So, Xavier won't be hit with any interim tax for 2022. But he'll need to file amended returns for 2020 and 2021 to get back the interim tax hits for those years based on the $30,000 that was included in income on his tax returns for each of those years. Once again, the CVD ultimately turns out to be federal-income-tax-free. Alternatively, these taxpayers could report the entire $90,000 CVD as income on their 2020 tax returns. They would pay the entire interim tax hit with their 2020 returns. Assuming they recontribute all or part of the $90,000 within the three-year window, Zoe and Xavier would need to file an amended 2020 return to get back all or part of the tax hit for that year. Important: You must treat all the taxable income from CVDs received in 2020 the same way. Either report all the income using the three-year ratable income inclusion method or report all the income on your 2020 tax return. You can't mix and match these methods. How to Handle Recontributions If you recontribute all or part of any CVD amount by the due date of your 2020 federal income tax return (including any extension), don't report the recontributed amount as income on your 2020 return. But you must include Form 8915-E to report your recontribution. If you recontribute all or part of any CVD amount after the due date of your 2020 federal income tax return (including any extension), file an amended 2020 return to remove the recontributed amount from your 2020 income and recover the related tax hit for 2020. The amended return must include Form 8915-E to report the recontribution. As explained earlier, you can spread the income from 2020 CVDs equally over three years, starting with 2020. If you then recontribute any CVD amount within the three-year window before the due date of your federal income tax return for the year of the recontribution (including any extension), the amount of the recontribution reduces the ratable income inclusion amount that's reported on that year's return. For example, suppose you took a $75,000 CVD from your traditional IRA in 2020. You use the three-year ratable income inclusion method to report the CVD income as follows: $25,000 in 2020, $25,000 in 2021, and $25,000 in 2022. On April 10, 2022, you recontribute $25,000. On April 15, 2022, you file your 2021 federal income tax return. The recontribution reduces the amount that must be reported as CVD income for 2021 from $25,000 to $0. Assuming no further recontributions within the three-year window, you must still report $25,000 of CVD income on your 2022 return. So, when all is said and done, you report $25,000 of CVD income in 2020, recontribute $25,000 in 2021 and report the last $25,000 as income in 2022. No Recontribution Privilege for Inherited Accounts Beneficiaries of inherited traditional IRAs can receive CVDs if they're eligible individuals, and they can follow the three-year ratable inclusion rule to report taxable income from CVDs or they can report the entire amount with their 2020 returns. In either case, their CVDs are exempt from the 10% early distribution penalty tax. However, CVDs received by beneficiaries of inherited traditional IRAs (other than the surviving spouse of the IRA owner) can't be recontributed per IRS Notice 2020-50. What's Right for You? The optimal CVD strategy depends on your specific circumstances. For instance, if your 2020 taxable income was much lower than usual due to the COVID-19 economic fallout, there might be only a modest federal income tax hit from CVD income reported in 2020 under the three-year ratable inclusion rule. In this situation, if you took a CVD in 2020, you have extra cash in hand and can eventually get back any interim tax hits for CVD amounts that you recontribute within the three-year window. If you had negative 2020 taxable income because of business losses due to the COVID-19 economic downturn, it might be a good idea to report all the CVD income on your 2020 return. You may be able to shelter most or all that income with business losses. In this situation, you have extra cash in hand and will owe little or no extra federal income tax for 2020. If you have sufficient cash later, you can recontribute all or part of any CVD amount within the three-year window. You'll recover all or part of any extra 2020 tax hit from the CVD — and you'll get the recontributed amount back into tax-favored IRA status. If you extended your 2020 federal income return, you have until October 15, 2021, to make decisions that will determine how any CVD amount that was not already repaid last year will be taxed. CVDs from Retirement Plans If your company retirement plan allowed CVDs to be taken last year, the tax rules and implications are similar to those for CVDs taken from traditional IRAs, as explained in this article. What Happens If CVDs Aren't Recontributed Within Three Years? If you took a tax-favored coronavirus-related distribution (CVD) from a traditional IRA in 2020, you have the option of keeping all or part of it. You'll have taxable income from the CVD amount that you don't recontribute, but you won't owe the 10% early distribution penalty tax that generally applies to IRA distributions taken before age 59½. You can spread the taxable income from the CVD equally over three years under the three-year ratable income inclusion method, or you can elect to report all the CVD income in 2020. If it later turns out that you have enough cash to recontribute within the three-year window, you can always decide to recontribute and recover any related federal income tax. Bottom line: The follow-up on tax-favored CVDs taken in 2020 requires careful consideration. We can help determine the optimal strategy for you. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. 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Payroll Protection Plan (PPP) loans were a lifeline for many small business owners during the worst of the pandemic-driven economic slowdown. In total, the Small Business Administration (SBA) approved nearly 12 million PPP loans, averaging $67,000. The PPP program stopped accepting loan applications on May 31, 2021. However, you still may need to complete the requisite forms to ensure that your loan will be forgiven. You can't afford to miss the deadlines for filing this paperwork. The most urgent deadline is for companies that received PPP loans prior to June 5, 2020. Those generally were loans with a two-year maturity. (Loans made after that date have a five-year maturity.) Borrowers need to apply for loan forgiveness within 10 months of the last day of the "covered period." Forgiveness Application Deadline The covered period refers to the eight to 24 weeks following the funding of the loan during which those funds must be used for approved purposes. For example, if your business applied early in the program, its covered period might have ended on October 30, 2020. So, you'd need to apply for forgiveness by August 30, 2021, to avoid loan repayment responsibilities. Whatever your deadline is, you probably don't want to wait until the last minute in case you encounter delays in the process. You also might discover that you won't be getting forgiveness on as much of the PPP loan as you had assumed — and finding that out early can help you plan for how to repay what's not forgiven. The basic rule for obtaining loan forgiveness is that at least 60% of the loan amount needs to have been used on qualified payroll costs, including: Cash employee compensation (capped at a $100,000 salary), State and local payroll taxes, and Employer contributions to employees' health and retirement plans. Examples of permissible uses of the remaining 40% of loan proceeds — called "nonpayroll" costs — are: Company real estate lease or mortgage interest payments for contracts signed before February 15, 2020, Supplies essential to your business, Utilities for service that began before February 15, 2020, Covered operating expenditures (such as business software, delivery, payroll processing and inventory tracking expenditures), Certain property damage not covered by insurance, and Costs incurred to protect employees and customers from COVID-19. You can download the blank forms you need to complete from the SBA website or ask your lender for a copy. Then you must give the completed forms to your lender for remittance to the SBA. Your lender will also relay the SBA's decision regarding full or partial loan forgiveness. No "Double Dipping" Determining the proper way to complete these forms is trickier if you've taken advantage of other COVID-19 relief programs, such as the employee retention credit and the credits for emergency paid sick leave and expanded family leave. A rule against "double-dipping" prevents you from counting payroll amounts that those tax credits were based on for regular payroll expense loan forgiveness amount purposes. Here's a two-step method to maximize your PPP loan forgiveness for payroll expenses: Add up all nonpayroll expenses that are eligible for forgiveness, and Multiply that figure by 1.5. The result will give you the maximum amount of eligible payroll expenses you can claim, to make the 60/40 formula work. For example, suppose your total eligible nonpayroll expense is $200,000. That amount multiplied by 1.5 is $300,000, which is the most you could claim for payroll-based loan forgiveness. For this formula to work, your loan will need to have been for no less than $500,000. Also, payroll expense can be more than 60% of the total loan, but not less. Important: If your application for loan forgiveness is rejected, then the double-dipping rule doesn't apply — and your ability to use the tax credits is no longer restricted. PPP Audit Exposure Recipients of PPP loans may have another follow-up issue to contend with: A PPP loan audit from the Small Business Administration (SBA). The purpose is to confirm that you've met the eligibility criteria. Loans of $2 million or more will automatically be audited. However, you could still face an audit if you borrowed less than $2 million. Tackling the audit process requires two basic steps. First, compile documentation that the SBA might request — such as financial statements, tax returns and payroll records — to show where the numbers on your application came from. Second, you'll need to prove that you were acting in good faith when you applied for the loan in the first place — that the loan was essential to support your ongoing operations. Proof of good faith and financial need could include: Financial statements showing a significant drop-off in revenue, Cancellation of orders, Supply chain disruptions that cost you sales, and Instructions from a local government authority to curtail your operations for public safety purposes during the pandemic. Retain this documentation after you've been told your loan is forgiven. The PPP guidance states that you're still vulnerable to an audit for up to for six years after your loan is forgiven. Warning: If an audit uncovers impropriety, the borrower may be required to immediately repay the loan, as well as possible civil penalties and prosecution under the False Claims Act. Need Help? PPP loans aren't automatically forgiven — it requires some follow-up on your part. Borrowers need to apply for forgiveness with the SBA before the statutory deadline. We can help you file the appropriate forms and determine which costs may qualify for forgiveness. We are committed to being your most trusted Business Advisor. We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!