As we enter the last quarter of the year and look forward to next year, here are some tax tips for how to maximize your income while minimizing the tax bite, including steps you can take now and plans you can make for the future.
First, it’s worth mentioning the dreaded “I” word: “inflation.” While Social Security recipients will applaud what is projected to be the largest annual cost of living increase in more than 40 years, everyone will want to pay attention to the inflation adjustments to federal income tax brackets, typically announced in late fall. The inflation updates for 2023 are expected to be in the 7 percent range, according to projections, which is more than twice the 3 percent adjustment in 2022.
The government adjusts the standard deduction and income tax brackets each year for inflation to avoid “bracket creep.” Before brackets were adjusted for inflation, taxpayer incomes creeped up into higher tax brackets where it was taxed at a higher tax rate only because inflation raised incomes along with the costs of living. No one felt any richer because their standard of living was unchanged, but their taxes were higher. By adjusting for inflation, the brackets are increased as salaries rise with inflation, so taxpayers remain in the same tax bracket unless they increase their income above and beyond inflation.
The government also adjusts for inflation the contribution limits for retirement savings and other accounts such as health savings accounts.
Here are some strategies and tax tips to implement now or next year to maximize your income and minimize taxes.
Record keeping is one of the most important parts of claiming tax deductions and one of the most important tax tips we have. It’s important to claim every tax deduction you’re entitled to and that happens when it’s as easy and convenient as possible.
Tracking mileage can be onerous so we recommend our clients use MileIQ, a great app that runs on your phone. Every time you drive your vehicle or stop it, an alert asks whether this was personal or business travel. At the end of the week, month, or quarter – however you choose to set it up – the app will send you a report of your business and personal mileage.
There are other ways people track and/or estimate mileage but these run the risk of under-estimating actual mileage and claiming less of a deduction than they’re entitled to receive. We believe the MileIQ app is the easiest way to get an accurate calculation of your mileage, with ironclad numbers for your business and personal miles.
Expense deductions can also be tracked easily with another great app called Shoeboxed that helps manage and organize receipts. Years ago, clients stored receipts in shoeboxes which accountants had to sort through. The Shoeboxed app snaps a photo of receipts, extracts the data, organizes receipts by vendors and dates, and creates reports.
Documentation is a large part of end-of-year tax planning so if any issues are found later you are prepared with all the supporting documentation for strategies you have implemented.
The Accountable Plan is one of the most important documents we recommend. It is required by the Internal Revenue Service for any business that reimburses business expenses. In the absence of an accountable reimbursement plan, any cash given to an employee is a form of compensation. If you reimburse an employee’s mileage and you don’t have an accountable plan, the IRS can add those monies to the employee’s wages and charge them and you for FICA and Medicare. The IRS also can charge you a penalty because your quarterly returns will be considered incorrect for the periods of these reimbursements.
The accountable plan protects you and your employees. S-Corporation owners are employees, as well as owners. The accountable plan makes it clear an expense reimbursement is not income to the employee.
Employing your children is an excellent tax strategy providing they’re paid by the end of the year. We strongly recommend using a payroll service to avoid expensive mistakes and penalties. Relying on memory to pay your children at the end of the year is a risk. Set it and forget it by utilizing one of the many payroll services available such as ADP, Gusto, or Paychex.
If you already have an employee payroll service, adding your children is simple. If you are a Schedule C or Subchapter S company, a partnership, or a sole proprietorship and have no payroll service, we suggest you join the more than 100,000 other small businesses who use Gusto. This inexpensive, user-friendly service will help you avoid problems for $10 per employee monthly and delegates complicated payroll tasks to an experienced vendor.
Younger children are eligible to work in your business as a corporate model. Many clients have images of their children on their business websites and social media. These children have technically been working as corporate models but not getting paid. When you add the child to your payroll, you can pay a catch-up payment to cover previous services rendered and then pay them monthly or however you choose. Be sure to pay them by December 31st.
As children grow older, they can earn more salary, particularly children living away at college. Having them work remotely, as a social media manager or in some online capacity, can help offset expenses you’re paying for college by turning them into a substantiated business need since the child is on the payroll. Money your children earn working in the business belongs to them. Children under 18 need a custodial bank account in which to deposit salaries. Parents control the money until the child turns 18 and can spend the funds in the child’s best interest. Dance or music lessons, 529 plans, and private school all meet the definition of the child’s best interest. Keep a record of what you spend the money on so, if needed, you can show compliance with the intent behind the custodial account.
Children who earn less than the standard deduction of $12,950. will not owe federal income tax. Depending on your business structure, there may be a need to pay FICA and Medicare for children under 18.
Life changing events can have a big impact on taxes. In early October, many taxpayers are finalizing their tax returns for 2021 as their six-month extensions expire October 15th. At this time, we are working on projections and plans for 2023. We expect some clients have experienced life-changing events we are not aware of yet. Did you get married this year or divorced? Changes in marital status are important because we need to use a different tax table to compute your savings and returns. If you were blessed with a new child this year, we want to know that too. If you’ve become financially responsible for another family member, such as a parent or sibling, these also may be opportunities for tax planning.
If you acquired a new business or sold an existing one this year, we want to know. If you bought or sold a new home or any real estate, please tell us, particularly if it’s a commercial property that might provide opportunities for cost segregation.
If you’re planning to retire soon, we want to know. For several years, we’ve been working on converting traditional individual retirement accounts to Roth IRAs to lock in current relatively lower tax rates. If you have not been able to do a Roth conversion because your 401(k) or your 403(b) wouldn’t allow it, that will change when you retire (or separate from that employer), giving you the chance to roll those funds into a traditional IRA where we can implement a Roth conversion plan.
The Home Office is another substantial deduction for business owners and a tax tip we recommend to all business owners. It is a way to recapture some expenses you are paying on the part of your home used for business purposes. If you reimburse yourself for these expenses through your S-Corporation, the reimbursement documentation becomes your invoice to substantiate the payment the company paid to you and documents that it’s not a shareholder distribution but a reimbursement for costs associated with your home office.
Add up expenses for internet and other utilities, cleaning services, etc. and calculate the percentage of the expenses you can attribute to your home office. Be sure all your reimbursement checks are issued prior to December 31st, 2022, for all of those payments to be considered office expenses for this year.
Tax-free rent is available to eligible taxpayers who execute lease agreements to use parts of their home for corporate meetings. The lease agreement is a formal document between the business and the homeowner. An appropriate rental rate needs to be set each year based on costs at nearby conference centers for similar spaces and services. These could include a conference room with internet and audio/visual services, for example. Meeting minutes need to document the meetings, attendance, related travel costs, and other expenses. Expenses must be paid by December 31st.
Annual meetings may be required yearly for your small business but there’s no law saying the meeting must take place where you’re based. The annual meeting is a great way to add business to a personal trip to produce a business deduction. Your client relationship manager will review for you what business needs to be transacted to be sure the meeting complies with requirements for the business deduction.
Travel expenses also are deductible for college age employees if they need to travel for their annual review and/or any corporate modeling shoots. As the holidays near, this tax tip can take the edge off the high price of airline flights if those travel expenses are deductible.
Achievement Awards are probably one of the least used deductions because they seem complicated to business owners. If you’re already giving employees some type of bonus or incentive, this program is a great way to shift some of that expense and your advisor will brief you on the rules and award limits.
The difference between a $400 bonus and a $400 achievement award means the employer does not have to pay FICA and Medicare. For employees, the difference is that not only do they not have FICA and Medicare withheld, but they also do not have to include the award as part of taxable wages for the year.
Accelerating expenses into the current year while deferring income into next year is the general rule of thumb in tax planning. This almost always is true except when tax rates are expected to be higher than they are currently. If this is the case, you pull income into this year to pay at the lower tax rate and push expenses into next year. Because the Form 3115 adjustment resulting from a cost segregation study is typically taken on the personal tax return, we will do cost segregation studies for clients who bought or built buildings this year to determine if the client should take the deduction this year or next.
This rule applies for equipment purchases. Your CPA may suggest taking an immediate Section 179 business expense deduction or claim bonus depreciation. Some years it may be better to depreciate the equipment over seven years instead of writing it all off this year. These kinds of tax law provisions are part of why we ask to review your S-Corp or partnership returns before you or your accountant files them. It’s easier to fix a return before it’s filed then to amend it afterwards.
At TSP Family Office, we are working very hard between now and year’s end on projecting client income and preparing for the next tax year. We will ask for your year-to-date profit and loss statements, balance sheets, and prior year tax returns. Having these in hand before we speak with you enables us to quickly brief you on your projected year-end results and set up your plans for next year. If you have any questions on how to implement any of these end-of-year tax tips or what you need to do before December 31st, please contact your client relationship manager or call us at (772) 257-7888.