An IRA Withdrawal Strategy with Tax-Reducing Power

Money and coins coming out of a wallet.

As the year winds to a close, your chance to lower your 2024 tax bill also winds down. If you’re age 70½ or older, you may want to make a qualified charitable distribution (QCD) from your IRA before year end. Normally, distributions from a traditional IRA are taxable. But the amount of your QCD is removed from your taxable income, which may preserve your eligibility for other tax breaks. It also can fulfill your annual required minimum distribution, if applicable.

A QCD can’t be claimed as a charitable contribution deduction. But, depending on your other potential itemized deductions, the standard deduction may save you more tax.

If you’re eligible, you can make a QCD up to $105,000 in 2024. For your QCD to be tax-free, it must be paid from your IRA custodian or trustee directly to an IRS-approved charity. Don’t take chances. Contact the office to nail down the details.

408-252-1800

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Are You Aware of the Business Credits and Other Tax Benefits Available?

women researching business credits for their business

It’s a challenging time for many businesses. Therefore, any help you can get, such as tax incentives and sales tax exemptions, can make a big difference. Unfortunately, these benefits often go unclaimed because businesses don’t know about them or erroneously think they’re ineligible.

1. Statutory Incentives

Some credits are available “as of right.” That is, if your business meets the specified requirements, you just need to claim the benefit on a timely filed tax return to receive it.

State and federal tax credits and exemptions are designed as incentives for businesses to engage in certain activities or invest in specific economically distressed areas. Here are a few:

Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities. Other steps must also be taken, such as completing paperwork.

State and federal research and development tax credits. These credits may be available to an eligible business that invests in developing new products or techniques, improving processes, or developing software for internal use, regardless of size. The federal “increasing research activities” credit is generally equal to 20% of the amount by which the business increases qualified research expenditures, compared to a base amount.

The credit is available even to businesses with no income tax liability and may be carried forward to offset taxable income in future years. If eligible, a start-up company can claim the federal research credit against up to $500,000 in employer-paid payroll taxes.

Empowerment zone incentives. Certain tax breaks are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each eligible employee.

Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. Jurisdictions may also offer investment tax credits for capital investments within their borders.

2. Discretionary Incentives

Discretionary tax breaks must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in or relocate to a certain state or locality.

To secure these incentives, a business must show it’ll bring benefits to the jurisdiction, such as job creation and revenue generation. Discretionary incentives may include income and payroll tax credits, property tax abatements and utility rate reductions.

3. Sales Tax Exemptions

States with sales taxes provide exemptions for some business purchases. Common exemptions include purchases by:

  • Retailers for the purpose of resale,
  • Manufacturers of equipment, raw materials or components used in the manufacturing process,
  • Specific tax-exempt entities, and
  • Agricultural businesses that buy such items as farming equipment and fuel, feed, seeds, fertilizer, and chemical sprays.

Businesses should familiarize themselves with the exemptions available where they do business and what it takes to qualify. For example, they may need to prove to the sellers that they have a resale or exemption certificate.

Don't Miss These Opportunities

Every year, a vast amount of tax credits and incentives aren’t claimed because businesses are unaware of them or erroneously believe they’re ineligible. Many more examples exist. Contact the office for help ensuring that your business receives all the tax breaks it deserves.

(408) 252-1800

The Advantages of Hiring Your Minor Children for Summer Jobs

Successful businessman in office

If you’re a small-business owner and you hire your children this summer, you may be able to secure tax breaks and other nontax benefits. The kids can gain bona fide on-the-job experience, save for college and learn how to manage money. You may be able to shift some of your high-taxed income into tax-free or low-taxed income, and, depending on the situation, you may realize payroll tax savings. Perhaps best of all, your kids will spend time with you.

A Legitimate Job and Tax Savings, Too

If you hire your child, you’ll get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill and possibly your self-employment tax bill and your state income tax bill if they apply. However, for the wages to be a deductible business expense, the work performed by the child must be legitimate and the child’s pay must be reasonable.

Let’s say you operate as a sole proprietor in the 37% tax bracket. You hire your 16-year-old daughter to help with office work full-time during the summer and part-time in the fall. She earns $10,000 during 2024 and doesn’t have any other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter. That’s because she can use her $14,600 standard deduction for 2024 to completely shelter her earnings.

Your family’s taxes are lower even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to her beginning at a rate of 10% instead of being taxed at your higher rate.

Reduced Payroll Taxes

If your business isn’t incorporated and certain conditions are met, your child’s wages are exempt from Social Security, Medicare and federal unemployment taxes. Your child must be under age 18 for this to apply (or under age 21 for the federal unemployment tax exemption). Contact the office to learn how this works.

Be aware that there’s no payroll tax exemption for employing your child if your business is incorporated or is a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Extra Time to Make Your Child’s Retirement Garden Grow

An early start on saving for retirement can be key to building wealth. A child who earns income from a job can contribute to a traditional IRA or a Roth IRA and begin funding a nest egg. For the 2024 tax year, a working child can contribute the lesser of his or her earned income or $7,000 to a traditional or Roth IRA. And the money may be tapped penalty-free for certain eligible reasons, such as paying education costs and making a down payment of up to $10,000 on a first home.

What if your business has a retirement plan? Depending on its terms, your child may qualify to begin earning retirement benefits that can grow for many decades.

The Importance of Accurate Records

Hiring your child can be a tax-smart idea. Be sure to keep the same records (such as timesheets and job descriptions) as you would for other employees to substantiate the hours worked and duties performed. Also issue your child a Form W-2. Contact the office with questions about how these rules apply to your situation.

408-252-1800

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How to Secure a Tax Benefit with the QBI Deduction

QBI may sound like the name of a TV quiz show. But it’s actually the acronym for “qualified business income,” which can trigger a tax deduction for some small business owners or self-employed individuals. The QBI deduction was authorized by the Tax Cuts and Jobs Act (TCJA), and it took effect in 2018.

How It Works

The deduction is still available to owners of pass-through entities – such as S corporations, partnerships and limited liability companies – as well as self-employed individuals. But it is scheduled to expire after 2025 unless Congress acts to extend it.

The maximum deduction is equal to 20% of QBI. Generally, QBI refers to your net profit, excluding capital gains and losses, dividends and interest income, employee compensation and guaranteed payments to partners. The deduction can be claimed whether or not you itemize.

Notably, the QBI deduction is subject to a phaseout based on your income. If your total taxable income is below the lowest threshold, you may be entitled to the full 20% deduction, although other limitations do apply:

  • For 2023, the thresholds are $182,100 for single filers and $364,200 for joint filers.
  • For 2024, the thresholds are $191,950 for single filers and $383,900 for joint filers.

But things get tricky if your income exceeds the applicable threshold. In that case, your ability to claim the QBI deduction depends on the nature of your business.

Specifically, the rules are different for regular business owners of pass-through entities, sole proprietors and those who are in “specified service trades or businesses” (SSTBs). This covers most businesspeople who provide personal services to the public, such as physicians, attorneys, financial planners and accountants. (Engineers and architects are excluded.) Professionals in this group forfeit the QBI deduction entirely if income exceeds another set of limits:

  • For 2023, these upper limits are $232,100 for single filers and $464,200 for joint filers.
  • For 2024, these upper limits are $241,950 for single filers and $483,900 for joint filers.

If your income falls between the thresholds stated above, your QBI deduction may be reduced, regardless of whether you’re in an SSTB or not. For taxpayers who are in SSTBs, the deduction is phased out until it disappears at the upper income threshold. For other taxpayers, the deduction is limited to the lesser of 20% of QBI or the greater of 1) 50% of the wages paid to employees on W-2s, or 2) 25% of wages plus 2.5% of the unadjusted basis of the qualified property owned by the business.

Available for a Limited Time

The QBI deduction provides a valuable tax break for small business owners, so if it expires, their taxes are likely to go up. It’s unclear at this time what the chance is of the deduction being extended. Contact the office for guidance in determining the best strategy for your personal situation.

408-252-1800

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