Increase to California SDI Starting in 2024 – Opt Out May Be Available

Businesswoman holding mobile phone at office.

By Michael Sands

Senate Bill 951 became effective on January 1, 2024 and provides for increased short-term disability and Paid Family Leave benefits for covered employees. To pay for these benefits, the bill removes the wage cap for California’s State Disability Insurance tax, making all wages subject to SDI tax beginning in 2024.

For 2023, the SDI rate was 0.9% with a maximum wage base of $153,164.  For 2024, the SDI rate is increased to 1.1% with no maximum wage base. To give you an idea of the potential increase, an employee making a $1,000,000 salary would pay additional SDI tax of $9,622 compared to 2023. An employee making a $500,000 salary would pay additional SDI tax of $4,122 compared to 2023.

For most wage earners, the increase is unavoidable, but sole shareholders of private corporations (including married couples who own 100% of a corporation) who are also officers of the corporation may file an election to opt out of SDI coverage and instead purchase private disability insurance that may cost less.

The exemption is made by filing EDD form DE 459 and goes into effect in the calendar quarter filed. It remains irrevocable for the remainder of the year and at least two succeeding calendar years. Thereafter, it remains in effect until withdrawn, although changes in stock ownership or status as a corporate officer may terminate the exemption.

Shareholders who make the election should be aware that they will no longer qualify to receive SDI benefits (including Paid Family Leave) and should consider obtaining alternative disability insurance coverage. They should also notify their payroll companies that the election has been made and that Form DE9C should be coded with plan code “R” to designate the shareholder (and/or spouse) opt-out.   

If you have any questions or are curious to learn more about this planning opportunity, please contact our office.

408-252-1800

Photo Credit to https://www.lyncconf.com/.

Self-Directed IRAs Provide Both Flexibility and Risk

Traditional and Roth IRAs can be relatively “safe” retirement-saving vehicles, though, depending on what they’re invested in, they limit your investment choices. For more flexibility in investment choices but also more risk, another option is a self-directed IRA.

Gaining More Control

A self-directed IRA is simply an IRA that provides greater control over investment decisions. Traditional and Roth IRAs typically offer a selection of stocks, bonds and mutual funds. Self-directed IRAs (available at certain financial institutions) offer greater diversification and potentially higher returns by permitting you to select virtually any type of investment, including real estate, closely held stock, limited liability company and partnership interests, loans, precious metals, and commodities (such as lumber, oil and gas).

A self-directed IRA can be a traditional or Roth IRA. The tax-free growth Roth accounts offer makes them powerful estate planning tools.

Navigating Tax Traps

To avoid pitfalls that can lead to unwanted tax consequences, exercise caution when using self-directed IRAs. The most dangerous traps are the prohibited transaction rules. These rules are designed to limit dealings between an IRA and “disqualified persons,” including account holders, certain members of their families, businesses controlled by account holders or their families, and certain IRA advisors or service providers.

Among other things, disqualified persons can’t sell property or lend money to the IRA, buy property from the IRA, provide goods or services to the IRA, guarantee a loan to the IRA, pledge IRA assets as security for a loan, receive compensation from the IRA, or personally use IRA assets.

The penalty for engaging in a prohibited transaction is severe: The IRA is disqualified, and its assets are deemed to have been distributed on the first day of the year in which the transaction took place, subject to income taxes and, potentially, to penalties. This makes it very difficult to manage a business, real estate or other investments held in a self-directed IRA. Unless you’re prepared to accept a purely passive role with respect to the IRA’s assets, this strategy isn’t for you.

Considering the Option

If you’d like to invest in assets such as real estate, precious metals, or other alternative investments, a self-directed IRA may be worth considering. But it’s critical to understand the risks.

Businesses Can Save Taxes by Acquiring and Placing Assets in Service by Year End

Under Section 179 of the Internal Revenue Code, companies can “expense” the full cost of qualifying fixed assets to reduce their taxable income. This means they can deduct the purchase amount currently rather than having to depreciate the asset over many years. Both new and used fixed assets can qualify. The election is available for qualified property placed in service anytime during the tax year.

If you’d like to reduce your 2023 tax liability and are on a calendar tax year, consider acquiring and placing in service qualified assets by Dec. 31, 2023.

For 2023, the maximum overall deduction allowed is $1.16 million (increasing to $1.22 million for 2024). The total asset purchase limit for 2023 is $2.89 million (increasing to $3.05 million for 2024), after which the deduction for the year is reduced dollar-for-dollar until it’s eliminated. You may be able to claim bonus depreciation (80% for 2023, falling to 60% for 2024) on eligible amounts in excess of your Sec. 179 expensing limit.

Education Benefits Help Attract and Retain Employees While Saving Taxes

Your business can attract and retain employees by providing education benefits that enable team members to improve their skills and gain additional knowledge, all on a tax-advantaged basis. Here’s a closer look at some education benefits options.

Educational Assistance Program

One popular fringe benefit that an employer can offer is an educational assistance program that allows employees to continue learning, and perhaps earn a degree, with financial help from the employer. An employee can receive, on a tax-free basis, up to $5,250 each year under a “qualified educational assistance program.”

For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, as well as courses normally taken by individuals pursuing programs leading to a business, medical, law, or other advanced academic or professional degree.

The educational assistance must be provided under a separate written plan that’s publicized to your employees and meets specific conditions. A plan can’t discriminate in favor of highly compensated employees.

In addition, not more than 5% of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals (including their spouses or dependents) who own 5% or more of the business.

No deduction or credit can be claimed by an employee for any amount excluded from the employee’s income as an education assistance benefit.

If you pay more than $5,250 for educational benefits for an employee during the year, that excess amount must be included in the employee’s wages and the employee must generally pay tax on it.

Job-Related Education

In addition to, or instead of applying, the $5,250 exclusion, an employer can fund an employee’s educational expenses on a nontaxable basis if the educational assistance is job-related. To qualify as job-related, the educational assistance must:

  • Maintain or improve skills required for the employee’s then-current job, or
  • Comply with certain express employer-imposed conditions for continued employment.

“Job-related” employer educational assistance isn’t subject to a dollar limit. To be job-related, the education can’t qualify the employee to meet the minimum educational requirements for his or her employment or other trade or business.

Educational assistance benefits meeting the above “job-related” rules are excludable from employees’ income as working condition fringe benefits.

Assistance with Student Loans

Some employers also offer student loan repayment assistance as a recruitment and retention tool. Starting in 2024, employers can help more.

Under the SECURE 2.0 Act, an employer will be able to make matching contributions to 401(k) and certain other retirement plans with respect to “qualified student loan payments.’ The result of this provision is that employees who can’t afford to save money for retirement because they’re repaying student loan debt can still receive matching contributions from their employers.

Tax-Smart Employee Attraction and Retention

In today’s competitive job market, providing education-related assistance can make a difference in attracting and retaining the best employees. Structured properly, these plans can also save taxes for both your business and your employees.

3 Strategies for Estimated Tax Payments

Many individuals today are self-employed or generate income from interest, rent, dividends and other sources. If you’re in this situation, you could be risking penalties if you don’t pay enough taxes during the year through estimated tax payments and withholding. (The due date for the final estimated payment for 2023 is January 16, 2024.)

Here are three strategies to help you pay enough taxes and avoid underpayment penalties:

  1. Know the minimum payment rules. Your estimated payments and withholding must equal at least:
    • 90% of your tax liability for the year,
    • 110% of your tax for the previous year, or
    • 100% of your tax for the previous year if your adjusted gross income for that year was $150,000 or less ($75,000 or less if married filing separately).
  2. Use the annualized income installment method, if eligible. This method often benefits taxpayers who have large variability in income by month due to bonuses, investment gains and losses, or seasonal income, especially if it’s skewed toward year end. Annualizing calculates the tax due based on factors occurring through each quarterly estimated tax period.
  3. Estimate your tax liability and increase withholding if possible. If you find you’ve underpaid your 2023 taxes, consider having the tax shortfall withheld from your salary or year-end bonus by December 31. Withholding is considered to have been paid ratably throughout the year, so this could allow you to avoid penalties, whereas trying to make up the difference with a larger quarterly tax payment could trigger penalties.

Estimated tax payments can be tricky. Please contact the office for help: (408) 252-1800

Use the Tax Code to Make Business Losses Less Painful

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a Deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

Eligibility for the NOL deduction depends on having deductions for the tax year that exceed your income. The loss generally must be caused by deductions related to your:

  • Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
  • Casualty and theft losses from a federally declared disaster, or
  • Rental property (Schedule E).

The following generally aren’t part of the NOL determination:

  • Capital losses that exceed capital gains,
  • The exclusion for gains from the sale or exchange of qualified small business stock,
  • Nonbusiness deductions that exceed nonbusiness income,
  • The NOL deduction itself, and
  • The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can calculate individual NOLs using their separate shares of business income and deductions.

Limitations

Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers could carry back NOLs for two years and carry them forward 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits NOL deductions to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

If your NOL carryforward is more than your taxable income for the year you carry it to, you may have an NOL carryover. That’s the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

A Limit on Excess Business Losses

The TCJA also established an “excess business loss” limitation, effective beginning in 2021. For partnerships or S corporations, this limitation applies at the partner or shareholder level, after applying the outside basis, at-risk and passive activity loss limitations.Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000, or $578,000 if married filing jointly. For 2024, the thresholds are $305,000 and $610,000, respectively. Remaining losses are treated as an NOL carryforward to the next tax year. That is, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning Ahead

The tax rules regarding business losses are complex, especially the interaction between NOLs and other potential tax breaks.

Contact the office for help charting the best course forward: (408) 252-1800

Make 2023 Annual Exclusion Gifts by Dec. 31

One of the most effective estate-tax-saving techniques is also one of the simplest: making use of the gift tax annual exclusion. It allows you to give to an unlimited number of family or friends cash or property valued up to a “specified” amount each year without owing gift tax or using up any of your lifetime gift and estate tax exemption. For 2023, the annual exclusion amount is $17,000.

The annual exclusion amount is subject to inflation adjustments. For 2024, the amount will increase to $18,000 per recipient. It’s notable because the amount had been stagnant at $15,000 for several years (2018-2021) but, beginning in 2022, it has increased $1,000 each year due to higher inflation.

Each year you need to use your annual exclusion by Dec. 31. The exclusion doesn’t carry over from year to year. For example, if you don’t make an annual exclusion gift to your granddaughter this year, you can’t add your $17,000 unused 2023 exclusion to your $18,000 2024 exclusion to make a $35,000 tax-free gift to her next year.

Contact the office with questions: (408) 252-1800

Important Update about our Watsonville Office

wheeler accountants team

Dear Clients,

As we are rounding the corner towards the end of this year’s tax season, we are reaching out to inform you that the Wheeler management team has made the difficult decision to close our Watsonville office, located at 17 Aspen Way, as of October 31, 2023.

Our firm has evolved steadily over the years, adapting to factors both internally and in the world. In recent years our team has experienced a series of changes, new additions and departures, and an ever-diversifying client base. In light of this, and in order to serve our clients most effectively in the future, we have determined that it will be best to concentrate our presence at the San Jose office.

Wheeler has greatly enjoyed being part of the Watsonville community for the last 6 years since opening the office in 2017. Though we will not have a physical presence in Watsonville moving forward, we are happy to continue providing services to clients in Watsonville and outer areas. Current technology allows us to efficiently and effectively serve clients spread around the U.S. and world. We will continue with our mission of creating success through collaboration, working with you to meet all your accounting needs.

Please feel free to reach out to email@wheelercpa.com, if you have any questions.

Sincerely,
Wheeler Accountants

Congratulations to Natalie Nguyen on Passing Her CPA Exams!

Wheeler is excited to congratulate Natalie Nguyen on passing her final CPA exam, bringing her one step closer to becoming a licensed CPA. She shared that as soon as that final exam result came in, she felt an overwhelming sense of relief and accomplishment. “All the hard work, dedication, and sacrifices had finally paid off.”

The toughest part of this process was balancing her full-time job and overtime with the rigorous demands of the CPA study schedule. In order to make this happen, Natalie had to regularly communicate with project managers to ensure deadlines were manageable, allowing her to focus on her studies. She says, “a part of my success was from the firm support, which I am truly grateful for.” Their flexibility in adjusting assignments was instrumental in reducing work pressure during exam preparation, which goes to show how critical proactive communication can be.

We asked Natalie to share her best advice for people still working on passing the exams. She encourages people to, “stay persistent and not get discouraged by setbacks. Tailor your study method to what works best for you. If working full-time (like me), seek support from management regarding work schedules and assignments. Although you may experience a temporary dip in work performance, obtaining your license will more than compensate for this in the long run. Remember, ‘One step back for two steps forward.’”

Now that the exams are DONE, she’s looking forward to applying the knowledge she’s gained in a practical setting and taking on new challenging projects without the added pressure of studying.

Now, with all the necessary hours for licensure under her belt and 4 passing exam scores, Natalie is working to complete her Masters in Taxation Program to meet the 150 unit requirement. She looks forward to finalizing her CPA license after the Fall 2024 semester and the passing of the remaining ethics exam. Congratulations again, Natalie, we’re proud to have you on the team!

One-Time Thing: IRA to HSA transfer

Did you know that you can transfer funds directly from your IRA to a Health Savings Account (HSA) without taxes or penalties? Under current law, you’re permitted to make one such “qualified HSA funding distribution” during your lifetime.

Typically, if you have an IRA and an HSA, it’s a good idea to contribute as much as possible to both to maximize their tax benefits. But if you’re hit with high medical expenses and have an insufficient balance in your HSA, transferring funds from your IRA may be a solution.

Photo by Direct Media from Freerange Stock

Calling in the Cavalry

An HSA is a savings account that can be used to pay qualified medical expenses with pre-tax dollars. It’s generally available to individuals with eligible high-deductible health plans. For 2023, the annual limit on tax-deductible or pre-tax contributions to an HSA is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, the limits are $4,850 and $8,750, respectively. Those same limits apply to an IRA-to-HSA transfer, reduced by any contributions already made to the HSA during the year.

Here’s an example illustrating the potential benefits of a qualified HSA funding distribution from an IRA: Joe is 58 years old, with a self-only, high-deductible health plan. In 2023, he needs surgery for which he incurs $5,000 in out-of-pocket costs. Joe is strapped for cash, has made no contributions to his HSA in 2023 and has only $500 left in his HSA, but he does have a $50,000 balance in his traditional IRA. Joe may move up to $4,850 from his IRA to his HSA tax- and penalty-free.

Considering Other Factors

If you decide to transfer funds from your IRA to your HSA, keep in mind that the distribution must be made directly by the IRA trustee to the HSA trustee, and, again, the transfer counts toward your maximum annual HSA contribution for the year.

Also, funds transferred to the HSA in this case aren’t tax deductible. But, because the IRA distribution is excluded from your income, the effect is the same (at least for federal tax purposes).

Exploring the Opportunity

IRA-to-HSA transfers are literally a once-in-a-lifetime opportunity, but that doesn’t mean they’re the right move for everyone. If you’re interested, contact the office to explore whether taking this step makes sense in the context of your tax and financial circumstances.

(408) 252-1800