The Social Security Administration announced a 3.2% boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2024, a big drop from last year’s increase of 8.7%. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2023.

For those contributing to Social Security through wages, the potential maximum income subject to Social Security taxes is increasing to $168,600. This represents a 5% increase in your Social Security taxes! Here’s a recap of the key dollar amounts:

2024 Social Security Benefits – Key Information

What it means for you

• Up to $168,600 in wages will be subject to Social Security taxes, an increase of $8,400 from 2023. This amounts to $10,453.20 in maximum annual employee Social Security payments (an increase of $520!), so plan accordingly. Any excess Social Security taxes paid because of having multiple employers can be returned to you as a credit on your tax return.
• For all retired workers receiving Social Security retirement benefits, the estimated average monthly benefit will be $1,907 per month in 2024, an average increase of $80 per month.
• SSI is the standard payment for people in need. To qualify for this payment, you must have little income and few resources ($2,000 if single, $3,000 if married).
• A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2023 to 2024. The rates are 6.20 percent for Social Security and 1.45 percent for Medicare. There is also a 0.9 percent Medicare wages surtax for single taxpayers with wages above $200,000 ($250,000 for joint filers) that is not reflected in these figures. Please note that your employer also pays a 6.2 percent Social Security tax and a 1.45 percent Medicare tax on your behalf. These amounts are reflected in the self-employment tax rate of 15.3%, as self-employed individuals pay both halves of the tax rate.

One of the more unpleasant surprises that can hit a taxpayer occurs when you sell personal property, rental property or assets from your small business. This tax surprise is often associated with depreciation recapture rules.

Defined

Depreciation recapture refers to reducing the cost of an asset sold by prior period’s depreciation expense to determine whether taxes are owed on the sale of an asset and to determine the type of tax that must be paid on the sale of the asset.

When you have business property with a useful life of over one year, you often have the ability to deduct part of the cost of that property over the estimated useful life (recovery period) of that property. The most common users of these depreciation rules are small businesses and rental property owners.

When the asset is later sold the IRS wants you to determine if any tax is due as either ordinary income or as a capital gain.

A simplified example: Assume you run a small business out of your home. You purchase a new computer used 100% by your small business. The cost of the computer is $3,500. IRS rules determine you may recover the cost of this type of asset over five years. So each year you can deduct $700 as depreciation (1/5 of the cost of the computer assuming straight-line depreciation is used) on your business tax return.

Next assume the computer was sold at the end of year three for $2,000. This will result in a taxable event that includes depreciation recapture.

* This example is simplified for clarity. Actual depreciation methods used will vary from this example. The ordinary income must be claimed on your tax return and is caused because of the depreciation taken in prior years. This illustrates the recapture of prior period depreciation.

When does depreciation recapture occur?

Look for the possibility of depreciation recapture when:

1. You sell rental property
2. You sell your home that you have used as a home office
3. You sell any property used within a small business

Warning: Understand the allowed or allowable trap

One of the land mines surrounding depreciation recapture rules is the concept of “allowed or allowable.” When calculating whether you owe deprecation recapture related taxes, the tax code requires that you adjust for depreciation whether or not you actually took the depreciation expense in prior years. So if you have assets that should be depreciated on your tax return, but are not, please call for a review of your situation.

What you should know

First and foremost, many unsuspecting landlords forget that years of depreciation on their property can impact their tax obligation when the property is sold. This can occur even if the sales price is less than what they paid for the property.

Secondly, the tax code applies different tax rates on ordinary income versus depreciation recapture versus long-term capital gains. The maximum tax rates on each are noted here:

Personal income tax: 37.0%

Depreciation recapture: 25.0%

Long-term capital gains: 20.0%

(excludes the impact of possible Affordable Care Act surtax)

Unfortunately, the tax laws in this area are fairly complex. The amount due can be impacted by;

• Different depreciation methods
• Use of Section 179 and bonus depreciation rules
• Improvements made to property
• Like-kind exchange rules
• Asset class designations

Thankfully, you do not need to understand the complexities surrounding depreciation recapture rules. You simply need to know they exist and ask for assistance.

Suppose you take your best client out to dinner to celebrate your business relationship. If you own a business, are self-employed or run a side business, can you deduct any of the cost?

Here are some tips to stay on the right side of the new rules:

Make clear it’s a business meal

In the past, small businesses could deduct 50 percent of the costs of both business meals and entertainment with clients. Now, the meal deduction remains but entertainment costs are no longer deductible.

The problem is that separating a business meal from client entertainment is not always clear-cut. If you treat your best clients every year to dinner and tickets to a sporting event, the tickets are not deductible, but the meal may be.

If you use the meal to discuss business, you should be safe to take the deduction. But if it’s just a social event and business is not discussed, the deduction is now harder to justify. That means it’s up to you to make clear it’s a business meal.

Document it

The easiest way to do this is to keep a business log for your meal expenses that includes a field labeled business purpose. In addition to recording the time, date, place, and cost of the meal, list each attendee, their company affiliation and professional title. Then add a short description of the specific business purpose, such as: Discussed new products and competitive price structure.

For the strongest defense of your deduction, try to define the purpose of the meeting as something that could have an impact on your bottom line. Simply chatting about trends in your industry may not pass muster if you are audited under the new rules.

Avoid luxury meals

Deductions for extravagant expenses on meals and entertainment will always be hard to defend. So if you are having a serious business discussion over dinner, make sure it’s not at a luxury restaurant that will give you a huge dinner bill.

Remember, business meals are still deductible, but must be properly documented. If done correctly this deduction should withstand any audit risk.

The tax code uses jargon that can be confusing for the unwary. One of them that impacts most of us is the term unearned income. Unearned income is often defined as anything that is not earned income. If you find this kind of definition a little too vague, here is some clarity.

Tax code definition

Before providing the definition of unearned income, take a quick look at what is typically included in both earned and unearned income.

Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Employees will typically see this recorded in an annual W-2 tax form.

Unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Much of this income is often (but not always) recorded using 1099 tax forms.

Why does it matter?

If the tax code was simple, it wouldn’t matter one bit whether your income was earned income or unearned income. But this isn’t the case. Here are some things to consider:

Different tax rates. While most earned income is subject to ordinary income tax rates up to 37%, unearned income can be subject to different tax rates. Long term capital gains and certain dividends, for instance, are generally subject to lower capital gains tax rates. These tax rates can max out at 20% before a potential net investment income tax of 3.8% is applied.

Kiddie tax rules. The tax code limits the amount of unearned income that can be taxed at your dependent’s (usually lower) income tax rate. Amounts over this limit are taxed at the parent’s rate. The amount is $2,500 in 2023.

Tax benefit limits. Many tax credits and deductions will limit the amount of unearned income you may have and still qualify for a tax break. As an example, the Earned Income Tax Credit limits disqualified (unearned) income to $11,000 in 2023.

Timing matters. Sometimes the timing of an event can shift unearned income from ordinary income tax rates to preferential gain tax rates. This is the case with investment sales. Hold an investment for one year or less before selling it and your unearned investment gain is taxed as ordinary income. Hold it longer than one year and the unearned income is taxed at capital gains tax rates.

It’s all in the details

It’s important to understand how all elements of income apply to different aspects of the tax code. This is where working with someone familiar with the code can help.

If you contribute too much money into your IRA during the year, how do you correct the problem without facing a tax penalty? Here are some tips.

Remember the annual limits

2023 Annual IRA contribution limits

• $6,500 per individual
• $7,500 per individual if age 50 or older ($1,000 catch up provision)

This limit applies to the combination of contributions to both Traditional IRAs and Roth IRAs.

What causes excess contributions

Excess contributions can be caused by:

1. Combined total problem. This occurs when you have more than one IRA. Remember the annual limit is a combined total of all accounts. (Traditional IRA and Roth IRA combined)
2. Contributions without income. A contribution can only be made if you have income. Contributions made above your income but below the account limits are still considered excess contributions.
3. Whether your spouse is covered by a plan.
4. You are subject to a phaseout of your contribution. There are income limits that allow you to contribute each year. If you exceed the limit, all your contribution is deemed excessive. However, sometimes you can contribute to an IRA, but not the full annual amount because the allowed contribution can phase out with excess income.

Note: Age limits no longer apply. Remember you now contribute to Traditional IRAs at any age. The old rules required you to stop contributions in the year you reach age 70 1/2 or later.

Corrective action and penalty

If you place too much money into your retirement account you have until the tax filing deadline including any extensions to remove the excess contribution. Any excess amount will be subject to a 6% penalty for each year the excess contribution remains in your account. You may also owe tax on contributions and earnings created by the excess contribution.

In addition:

Traditional IRAs. You will need to account for the additional income on your tax return. So if you discover the problem after you file your income tax return, you may need to file an amended tax return.

Roth IRAs. You can move excess contributions into the next year as long as IRA contributions in the following year are below the maximum allowed. Any earnings made during the time the excess contributions were in your account is taxable.

Some ideas

What can you do to minimize the risk of excess contributions?

Make it automatic. Set up an automatic withdrawal from your checking account to fund your IRA. Conduct the math to ensure you will never contribute too much.

Make a lump sum contribution. Make a one-time contribution at the beginning or end of each year. Want to wait for your refund? Remember you have until April 15th of the following year to fund your IRA. Consider taking advantage of this additional time.

Rollovers are not contributions. Remember rollovers ARE NOT contributions so the annual contribution limits do not apply. If you wish to roll funds from a qualified plan into your IRA, the excess contribution limits will not impact you as long as the rollover is handled correctly. It is a good idea to seek expert help in this area to ensure your rollover is compliant with tax code. For instance, there are usually tax obligations if the rollover is from a traditional IRA into a Roth IRA.

Many clients like to keep their Federal Tax withholdings as low as possible to avoid the IRS having their funds interest-free throughout the year. Other taxpayers, especially those with non-payroll income, must make quarterly payments to the IRS. As long as these quarterly payments are made timely and the amount of the payments is sufficient in the eyes of the IRS you will not be subjected to underpayment penalties. However, if under paid, the IRS applies late payment penalties in addition to the income tax owed. This penalty applies even if you file your 1040 tax return on or before April 15th.

The Safe Harbor rule

The tax code has a basic set of rules to determine if you owe a late tax payment penalty. The rule is call The Safe Harbor Rule. Here is a recap of the rule. If you follow the rules, you can avoid any penalties.

1. If your federal tax obligation is less than $1,000 no underpayment penalties apply.
2. You withhold at least 90% of this year’s federal tax obligation.
3. You withhold at least 100% of last year’s tax obligation
4. If your gross income is greater than $150,000 ($75,000 if you are married filing separately) you must withhold the smaller of 90% of this year’s tax obligation OR 110% of the tax shown on last year’s tax return.

If you find federal tax withholdings made so far this year to be too low, what can you do?

Late Payment Penalty Avoidance Tip

If you are an employee there may be a way to avoid a penalty if you underpaid or neglected to pay your estimated tax payment for a quarter. Increase your payroll withholdings in later months of the year to build up your federal withholdings to cover the shortfall. Trying to catch up by paying more on your next estimated quarterly tax payment wouldn’t work since the prior quarter’s shortfall remains per IRS penalty calculations.

For whatever reason, in calculating a potential underpayment penalty, payroll withholdings are treated as if they were all made at the beginning of the year, while quarterly tax payments (form 1040-ES) are tracked by the date received.

To increase your withholdings simply provide your employer with a revised W-4. Just be careful that you leave enough in your paycheck to avoid other financial hardships.

When you win a prize, there are really two winners: you and the taxing authorities. Should you be fortunate enough to win that trip of a lifetime to the French Riviera in your new yacht, here is what you need to know.

Prizes and taxes

Prizes are taxable. Almost all prizes are taxable income. You report them on your income tax return as other income. This is the case whether your prize is cash, merchandise, or free services.

The prize may be reported to the IRS. Prizes valued at $600 or more must be reported to the IRS. Prize values below this reporting threshold may also be reported at the discretion of the sponsor of the prize. As the winner, you should look to receive the proper Form 1099-MISC.

Employee awards are different. When you receive a prize or something of value from your employer, different rules apply. These fall under business expense, fringe benefits, and award rules. Things like a holiday turkey or occasional service awards are often (but not always) a non-taxable award. On the other hand, a bonus or prize points for merchandise as a sales award usually needs to be reported as income.

Gifts and prizes have different tax rules. A different part of the tax code applies to gifts. In short, gifts received from someone that are less than the annual gift threshold ($17,000 in 2023 or $34,000 for a married couple) are not deemed prizes.

Other considerations and tips

Should you receive a prize during the year, here are some tips to consider:

Donate to charity. If you wish to avoid paying tax on the prize you can refuse the prize or opt to donate the prize to a charity. It is best to sign appropriate paperwork to assign ownership of the prize to the charity and have the prize sent directly to them as you cannot use the prize before donating it.

Establish fair market value. Should you win property, like a car or vacation trip, establish the fair market value (FMV) of what you won. Hosts of prize contests often over-value the prize to aid in marketing their contest. You do not want to pay tax on an over-inflated value. So if you win merchandise, get copies of advertisements for the item. If it is a trip, document hotel rates, transportation costs and cost of meals to build a case for a lower FMV. If there is a discrepancy with the value received, show your documentation to the provider of the prize and get your Form 1099 value corrected.

Keep good records. When you win a prize, fill out a sheet outlining the details of the event. Record the identity of the sponsor, the date, a detailed description of what was won, copies of documentation, photos of the items won, and the approximate retail value assigned to the prize by the sponsor.

Plan for the tax. Using the value provided to you by the sponsor, determine if you will be able to pay the tax for the prize. You may need to plan to make an estimated tax payment to avoid any surprises when you file your tax return.

Remember should you be lucky enough to win a prize, ask for help to determine what steps need to be taken to manage your tax obligation.

The IRS recently announced a major policy change that it will end most unannounced revenue officer visits to taxpayers.

This announcement is being picked up by all the major news outlets, but as is usually the case, it lacks context. Here is what you need to know.

Background

The IRS has revenue agents, revenue officers, and criminal investigation employees.

Revenue agents. Revenue agents are the auditors. The ones that review your tax return. This announcement does not impact their activities. And rarely do they visit unannounced. Most audit activity is now done via the mail and is commonly referred to as a correspondence audit.

Revenue officers. This group is responsible for collections of tax debt. Most smaller debts are often handled by collection agencies. The debts handled by revenue officers are typically in excess of $100,000.

Criminal investigation agents. This group within the IRS is the only group that can carry weapons and you can think of them as one of the largest law enforcement agencies in the United States. They are usually investigating criminal activity.

Current Situation

The recent announcement only refers to revenue officers. The reason for the change is two-fold.

1. Unannounced visits to collect a tax debt is putting IRS employees at risk. They are unarmed and can walk into uncertain situations that are truly unsafe.

2. IRS scams are an increasing problem. If you know the IRS will not show up unannounced, you can be more certain that when someone does show up claiming to be from the IRS, it is probably a scam.

Action

If you are ever contacted by the IRS either by phone, mail or in person, your first call should be to ask for professional help. This is the best way to avoid scams AND ensure resolution to any outstanding problem does not increase your tax obligation.

Source: IR 2023-133

There’s usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.

Errors in the IRS’s favor

Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a Form 1099 or Form W-2. Remember, information is being reported to the IRS and matching programs will typically catch the error.

Errors that result in lower tax

If correcting the error or omission results in a large, additional refund, the answer is usually obvious. File the amended return! But this isn’t always the case.

1. Your tax return is now open for a longer period of time. Federal tax returns are typically subject to audit for three years after the original tax return due date OR the date the return was filed whichever is later. If you file an amended tax return, the audit clock may change based on the amended return filing date and degree of change requested. It may trigger a request from the IRS to extend the audit review period. The refund also resets the IRS erroneous refund recovery statute, adding two to five years of possible review based upon the date of the latest tax return refund.

2. The amended return may be examined. Amending a tax return could put a spotlight on your tax return. The IRS has certain topics that often trigger individual examination when amended returns are file. Amended tax returns based on things like the Earned Income Tax Credit, Small Business Income and the Research Tax Credit for small businesses, could result in a visit from your local IRS examiner.

3. Amending one tax return may require amending others. Making a minor change in one year may require you to make changes in other tax years. Is it worth it?

4. Other taxing authorities take an interest. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor at the federal level will necessarily be in your favor on the state and local level.

5. Don’t expect the refund to be timely. Amended tax returns can take a long period of time to be reviewed. There have been cases where the IRS has delayed initial review of an amended return for more than a year, then decided to examine the return. While not typical, the process could take up to 1 1/2 years to resolve.

6. Timing is important. Remember, there is also a time limit to request a change in your tax return and receive an additional refund. This limit is typically three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.

7. You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, you should still keep the documentation. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax.

While finding an error or omission on your tax return can be unsettling, rest assured that there are ways to fix the problem, but it is often worth taking a balanced approach to determining the best solution.

While the maximum capital gain tax rate can be as high as 23.8 percent, most taxpayers pay 15 percent. But there is the possibility to have your capital gains go tax-free…yes, zero percent! In fact, this tax break has been around for more than a decade and comes into play more often than you may think. Here is what you should know:

Qualifying for the 0% capital gains rate

You qualify for long-term gain treatment if you sell stocks, bonds or real estate (and other capital assets) you’ve owned longer than a year.

For 2023, the zero percent rate applies to long-term capital gains for single taxpayers with taxable income up to $46,625 and married filing joint taxpayers up to $89,250. This zero percent rate can apply if you’re having a low income tax year due to:

• Temporary job loss
• A tax loss passed through to you from an S corporation or partnership
• Income fluctuation for a commission-based job
• Retirement
• Moving to part-time employment

But you could also have a higher income and qualify for this zero percent rate. For example, if a married couple earns $116,950 in 2023, their taxable income would equal the $89,250 zero percent rate threshold after subtracting the $27,700 standard deduction for a married couple.

Awareness is the key

While you may not always have the zero percent capital gains tax rate available to you, it is important to note when it comes into play.

Here’s an example: Adam and Eve Johnson recently retire. They have a number of mutual funds they’ve owned for years and have retirement savings accounts. Their current income is $58,700. Should they withdraw money from a retirement account or sell some of their mutual funds? Because they’re aware of the zero percent capital gains, they decide to sell mutual funds with $25,000 in capital gains to get the money tax free!

Plan your own tax moves

So keep the zero percent capital gains rate in mind as the year winds down. Know your projected income for the year and depending on your situation, you might realize capital gains that are subject to no or lower tax rates. Remember other factors often come into play, including the taxability of Social Security Benefits, so call if you would like a review of your situation.